FORM 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

 

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

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2013

 

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

FOR THE TRANSITION PERIOD FROM              TO             

COMMISSION FILE NUMBER: 814-00237

 

 

GLADSTONE CAPITAL CORPORATION

(Exact name of registrant as specified in its charter)

 

 

 

MARYLAND   54-2040781

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

1521 WESTBRANCH DRIVE, SUITE 200

MCLEAN, VIRGINIA

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

(703) 287-5800

(Registrant’s telephone number, including area code)

 

 

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

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

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

 

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. The number of shares of the issuer’s common stock, $0.001 par value per share, outstanding as of July 30, 2013 was 21,000,160.

 

 

 


Table of Contents

GLADSTONE CAPITAL CORPORATION

TABLE OF CONTENTS

 

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements (Unaudited)

 

Condensed Consolidated Statements of Assets and Liabilities as of June 30, 2013 and September 30, 2012

    3   

Condensed Consolidated Statements of Operations for the three and nine months ended June 30, 2013 and 2012

    4   

Condensed Consolidated Statements of Changes in Net Assets for the nine months ended June 30, 2013 and 2012

    5   

Condensed Consolidated Statements of Cash Flows for the nine months ended June 30, 2013 and 2012

    6   

Condensed Consolidated Schedules of Investments as of June 30, 2013 and September 30, 2012

    7   

Notes to Condensed Consolidated Financial Statements

    15   

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

    36   

Overview

    36   

Results of Operations

    41   

Liquidity and Capital Resources

    51   

Item 3. Quantitative and Qualitative Disclosures About Market Risk

    61   

Item 4. Controls and Procedures

    62   

PART II. OTHER INFORMATION

 

Item 1. Legal Proceedings

    62   

Item 1A. Risk Factors

    62   

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

    62   

Item 3. Defaults Upon Senior Securities

    62   

Item 4. Mine Safety Disclosures

    62   

Item 5. Other Information

    63   

Item 6. Exhibits

    63   

SIGNATURES

    64   

 

2


Table of Contents

GLADSTONE CAPITAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES

(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

(UNAUDITED)

 

     June 30,
2013
    September 30,
2012
 

ASSETS

    

Investments at fair value

    

Non-Control/Non-Affiliate investments (Cost of $237,644 and $268,500, respectively)

   $ 201,071      $ 237,135   

Control investments (Cost of $116,137 and $96,521, respectively)

     54,200        36,825   
  

 

 

   

 

 

 

Total investments at fair value (Cost of $353,781 and $365,021, respectively)

     255,271        273,960   
  

 

 

   

 

 

 

Cash and cash equivalents

     16,987        10,155   

Restricted cash and cash equivalents

     850        507   

Interest receivable

     2,909        2,696   

Due from custodian

     1,030        2,177   

Deferred financing fees

     3,393        2,957   

Other assets

     713        950   
  

 

 

   

 

 

 

TOTAL ASSETS

   $ 281,153      $ 293,402   
  

 

 

   

 

 

 

LIABILITIES

    

Borrowings at fair value (Cost of $58,600 and $58,800, respectively)

   $ 59,531      $ 62,451   

Mandatorily redeemable preferred stock, $0.001 par value per share, $25 liquidation preference per share; 4,000,000 shares authorized and 1,539,882 shares issued and outstanding at June 30, 2013 and September 30, 2012, respectively

     38,497        38,497   

Accounts payable and accrued expenses

     381        475   

Interest payable

     138        185   

Fees due to Adviser(A)

     1,089        1,830   

Fee due to Administrator(A)

     183        174   

Other liabilities

     656        1,226   
  

 

 

   

 

 

 

TOTAL LIABILITIES

   $ 100,475      $ 104,838   
  

 

 

   

 

 

 

Commitments and contingencies(B)

    

NET ASSETS

   $ 180,678      $ 188,564   
  

 

 

   

 

 

 

ANALYSIS OF NET ASSETS

    

Common stock, $0.001 par value per share, 46,000,000 shares authorized and 21,000,160 shares issued and outstanding at June 30, 2013 and September 30, 2012, respectively

   $ 21      $ 21   

Capital in excess of par value

     324,714        324,714   

Notes receivable from employees(A)

     (1,224     (3,024

Cumulative net unrealized depreciation of investments

     (98,510     (91,061

Cumulative net unrealized appreciation of borrowings

     (931     (3,651

Overdistributed net investment income

     (474     (474

Accumulated net realized losses

     (42,918     (37,961
  

 

 

   

 

 

 

TOTAL NET ASSETS

   $ 180,678      $ 188,564   
  

 

 

   

 

 

 

NET ASSET VALUE PER COMMON SHARE AT END OF PERIOD

   $ 8.60      $ 8.98   
  

 

 

   

 

 

 

 

(A) 

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

(B)

Refer to Note 10—Commitments and Contingencies for additional information.

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

 

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Table of Contents

GLADSTONE CAPITAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

(UNAUDITED)

 

     Three Months Ended June 30,     Nine Months Ended June 30,  
     2013     2012     2013     2012  

INVESTMENT INCOME

        

Interest income:

        

Non-Control/Non-Affiliate investments

   $ 6,777      $ 8,093      $ 20,926      $ 23,822   

Control investments

     1,551        827        3,908        3,236   

Cash and cash equivalents

     1        1        2        7   

Notes receivable from employees(A)

     22        62        118        192   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income

     8,351        8,983        24,954        27,257   

Other income:

        

Non-Control/Non-Affiliate investments

     200        978        1,848        3,020   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total investment income

     8,551        9,961        26,802        30,277   
  

 

 

   

 

 

   

 

 

   

 

 

 

EXPENSES

        

Base management fee(A)

     1,382        1,561        4,233        4,655   

Incentive fee(A)

     998        1,217        3,167        3,556   

Administration fee(A)

     183        175        521        579   

Interest expense on borrowings

     756        1,167        2,415        3,305   

Dividend expense on mandatorily redeemable preferred stock

     686        686        2,057        1,806   

Amortization of deferred financing fees

     313        252        898        987   

Professional fees

     181        135        473        790   

Other general and administrative expenses

     197        281        754        1,054   
  

 

 

   

 

 

   

 

 

   

 

 

 

Expenses before credits from Adviser

     4,696        5,474        14,518        16,732   

Credits to fees from Adviser(A)

     (555     (382     (1,395     (956
  

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses net of credits

     4,141        5,092        13,123        15,776   
  

 

 

   

 

 

   

 

 

   

 

 

 

NET INVESTMENT INCOME

     4,410        4,869        13,679        14,501   
  

 

 

   

 

 

   

 

 

   

 

 

 

NET REALIZED AND UNREALIZED GAIN (LOSS)

        

Net realized gain (loss):

        

Non-Control/Non-Affiliate investments

     468        150        (142     (8,062

Control investments

     (2,856     —          (5,264     —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Total net realized (loss) gain

     (2,388     150        (5,406     (8,062

Net unrealized (depreciation) appreciation:

        

Non-Control/Non-Affiliate investments

     (5,960     (5,128     (7,818     (1,862

Control investments

     1,259        (5,994     369        (14,186

Borrowings

     620        (4,477     2,720        (3,865
  

 

 

   

 

 

   

 

 

   

 

 

 

Net unrealized depreciation

     (4,081     (15,599     (4,729     (19,913
  

 

 

   

 

 

   

 

 

   

 

 

 

Net realized and unrealized loss

     (6,469 )      (15,449     (10,135 )      (27,975
  

 

 

   

 

 

   

 

 

   

 

 

 

NET (DECREASE) INCREASE IN NET ASSETS RESULTING FROM OPERATIONS

   $ (2,059   $ (10,580   $ 3,544      $ (13,474
  

 

 

   

 

 

   

 

 

   

 

 

 

NET (DECREASE) INCREASE IN NET ASSETS RESULTING FROM OPERATIONS PER COMMON SHARE:

        

Basic and Diluted

   $ (0.10   $ (0.50   $ 0.17      $ (0.64
  

 

 

   

 

 

   

 

 

   

 

 

 

WEIGHTED AVERAGE SHARES OF COMMON STOCK OUTSTANDING:

        

Basic and Diluted

     21,000,160        21,000,160        21,000,160        21,014,805   

 

(A) 

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

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

 

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Table of Contents

GLADSTONE CAPITAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS

(DOLLAR AMOUNTS IN THOUSANDS)

(UNAUDITED)

 

     Nine Months Ended June 30,  
     2013     2012  

OPERATIONS

    

Net investment income

   $ 13,679      $ 14,501   

Net realized loss on investments

     (5,406     (8,062

Net unrealized depreciation of investments

     (7,449     (16,048

Net unrealized depreciation (appreciation) of borrowings

     2,720        (3,865
  

 

 

   

 

 

 

Net increase (decrease) in net assets resulting from operations

     3,544        (13,474
  

 

 

   

 

 

 

DISTRIBUTIONS

    

Distributions to common stockholders

     (13,230     (13,240
  

 

 

   

 

 

 

CAPITAL TRANSACTIONS

    

Stock redemption for repayment of principal on employee notes(A)

     —          (332

Repayment of principal on employee notes(A)

     1,800        338   
  

 

 

   

 

 

 

Net increase in net assets from capital transactions

     1,800        6   
  

 

 

   

 

 

 

NET DECREASE IN NET ASSETS

     (7,886     (26,708

NET ASSETS, BEGINNING OF PERIOD

     188,564        213,721   
  

 

 

   

 

 

 

NET ASSETS, END OF PERIOD

   $ 180,678      $ 187,013   
  

 

 

   

 

 

 

 

(A) 

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

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

 

5


Table of Contents

GLADSTONE CAPITAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(DOLLAR AMOUNTS IN THOUSANDS)

(UNAUDITED)

 

     Nine Months Ended June 30,  
     2013     2012  

CASH FLOWS FROM OPERATING ACTIVITIES

    

Net increase (decrease) in net assets resulting from operations

   $ 3,544      $ (13,474

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

    

Purchase of investments

     (70,857     (66,254

Principal repayments on investments

     69,424        39,980   

Proceeds from sale of investments

     6,557        6,459   

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

     (133     —     

Net change in premiums, discounts and amortization

     357        (115

Net realized loss on investments

     5,892        8,242   

Net unrealized depreciation of investments

     7,449        16,048   

Net unrealized (depreciation) appreciation of borrowings

     (2,720     3,865   

Increase in restricted cash and cash equivalents

     (343     (1,175

Amortization of deferred financing fees

     898        987   

(Increase) decrease in interest receivable

     (213     133   

Decrease (increase) in due from custodian

     1,147        (2,863

Decrease in other assets

     237        620   

Decrease in accounts payable and accrued expenses

     (94     (175

Decrease in interest payable

     (47     (64

Decrease in fees due to Adviser(A)

     (741     (19

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

     9        (34

(Decrease) increase in other liabilities

     (570     819   
  

 

 

   

 

 

 

Net cash provided by (used in) operating activities

     19,796        (7,020
  

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES

    

Proceeds from borrowings

     68,500        69,900   

Repayments on borrowings

     (68,700     (82,000

Proceeds from issuance of mandatorily redeemable preferred stock

     —          38,497   

Deferred financing fees

     (1,334     (3,548

Distributions paid to common stockholders

     (13,230     (13,240

Receipt of principal on employee notes

     1,800        6   
  

 

 

   

 

 

 

Net cash (used in) provided by financing activities

     (12,964     9,615   
  

 

 

   

 

 

 

NET INCREASE IN CASH AND CASH EQUIVALENTS

     6,832        2,595   

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD

     10,155        6,732   
  

 

 

   

 

 

 

CASH AND CASH EQUIVALENTS, END OF PERIOD

   $ 16,987      $ 9,327   
  

 

 

   

 

 

 

NON-CASH ACTIVITIES(B)

   $ —        $ 332   
  

 

 

   

 

 

 

 

(A) 

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

(B) 

Redemption of 39,082 shares of common stock to reduce the principal balance of an employee loan by $332. Refer to Note 4—Related Party Transactions for additional information.

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

 

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Table of Contents

GLADSTONE CAPITAL CORPORATION

CONDENSED CONSOLIDATED SCHEDULE OF INVESTMENTS

AS OF JUNE 30, 2013

(DOLLAR AMOUNTS IN THOUSANDS)

(UNAUDITED)

 

Company(A)

  

Industry

  

Investment(B)

   Principal      Cost      Fair Value  

NON-CONTROL/NON-AFFILIATE INVESTMENTS:

        

Non-syndicated investments:

              

AG Transportation Holdings, LLC

  

Cargo Transport

   Senior Subordinated Term Debt (13.3%, Due 3/2018)(D)    $ 13,000       $ 12,798       $ 12,903   
      Member Profit Participation (18.0% ownership)(F) (G)         1,000         6   
      Profit Participation Warrants (7.0% ownership)(F) (G)         244         —     
           

 

 

    

 

 

 
              14,042         12,909   

Allen Edmonds Shoe Corporation

  

Personal and non-durable consumer products

   Senior Subordinated Term Debt (11.3%, Due 12/2015)(D)      19,483         19,483         19,531   

Allison Publications, LLC

  

Printing and publishing

   Senior Term Debt (10.5% and 2.0% PIK, Due 9/2013)(D)      7,240         7,240         6,960   

BAS Broadcasting

  

Broadcasting and entertainment

   Senior Term Debt (11.5%, Due 7/2013)(D)      7,465         7,465         747   

Chinese Yellow Pages Company

  

Printing and publishing

   Line of Credit, $147 available (7.3%, Due 11/2013)(D)      303         303         184   

CMI Acquisition, LLC

  

Mining, steel, iron and non-precious metals

   Senior Subordinated Term Debt (14.0%, Due 12/2016)(D)      14,265         14,265         12,838   
              

FedCap Partners, LLC

  

Private equity fund – aerospace and defense

   Class A Membership Units (80 units)(G) (J)         2,000         3,347   
              

Francis Drilling Fluids, Ltd.

  

Oil and gas

   Senior Subordinated Term Debt (12.0%, Due 11/2017)(D)      15,000         15,000         14,325   
      Preferred Units (999 units)(F) (G)         999         —     
      Common Units (999 units)(F) G)         1         —     
           

 

 

    

 

 

 
              16,000         14,325   

Funko, LLC

  

Personal and non-durable consumer products

  

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

     7,501         7,501         7,501   
      Preferred Units (1,250 units)(G) (I)         1,250         1,250   
           

 

 

    

 

 

 
              8,751         8,751   

GFRC Holdings, LLC

  

Buildings and real estate

   Senior Term Debt (10.5%, Due 12/2013)(D)      5,024         5,024         1,884   
      Senior Subordinated Term Debt (13.0%, Due 12/2013)(D)      6,598         6,598         2,474   
           

 

 

    

 

 

 
              11,622         4,358   

Heartland Communications Group

  

Broadcasting and entertainment

   Line of Credit, $0 available (5.0%, Due 3/2014)(D)      100         100         30   
      Line of Credit, $0 available (10.0%, Due 3/2014)(D)      100         100         30   
      Senior Term Debt (5.0%, Due 3/2014)(D)      4,343         4,342         1,303   
      Common Stock Warrants (8.8% ownership)(F) (G)         66         —     
           

 

 

    

 

 

 
              4,608         1,363   

International Junior Golf Training Acquisition Company

  

Leisure, amusement, motion

   Line of Credit, $0 available (11.0%, Due 5/2014)(D)      2,250         2,250         1,463   
  

pictures and entertainment

   Senior Term Debt (10.5%, Due 5/2014)(D)      361         361         235   
      Senior Term Debt (12.5%, Due 5/2014)(C) (D)      2,500         2,500         1,625   
           

 

 

    

 

 

 
              5,111         3,323   

Leeds Novamark Capital I, L.P.

  

Private equity fund – healthcare, education and childcare

  

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

        253         253   

Legend Communications of Wyoming, LLC

  

Broadcasting and entertainment

   Senior Term Debt (12.0%, Due 12/2013)(D)      6,874         6,874         1,719   

North American Aircraft Services, LLC

  

Aerospace and defense

   Senior Term Debt (7.5%, Due 8/2016)(D)      3,234         3,234         3,230   
      Senior Subordinated Term Debt (11.8%, Due 8/2016)(D)      4,750         4,750         4,744   
      Senior Subordinated Term Debt (12.5%, Due 8/2016)(D)      2,820         2,820         2,816   
      Common Stock Warrants (35,000 shares)(F) (G)         350         425   
           

 

 

    

 

 

 
              11,154         11,215   

Ohana Media Group

  

Broadcasting and entertainment

   Senior Term Debt (10.0%, Due 10/2016)(D)      1,492         1,492         1,444   

 

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Table of Contents

GLADSTONE CAPITAL CORPORATION

CONDENSED CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

AS OF JUNE 30, 2013

(DOLLAR AMOUNTS IN THOUSANDS)

(UNAUDITED)

 

Company(A)

  

Industry

  

Investment(B)

   Principal      Cost      Fair Value  

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

  

POP Radio, LLC

  

Broadcasting and entertainment

   Senior Term Debt (11.8%, Due 5/2017)(D)    $ 9,709       $ 9,709       $ 9,722   
      Junior Subordinated Term Debt (11.0% PIK, Due 11/2017)(D)      556         491         555   
      Participation Unit (2.4% ownership)(F) (G)         75         —     
           

 

 

    

 

 

 
              10,275         10,277   

Precision Acquisition Group Holdings, Inc.

  

Machinery

   Equipment Note (11.0%, Due 3/2014)(D)      1,000         1,000         730   
      Senior Term Debt (11.0%, Due 3/2014)(D)      4,125         4,125         3,011   
      Senior Term Debt (11.0%, Due 3/2014)(C) (D)      4,053         4,053         2,959   
           

 

 

    

 

 

 
              9,178         6,700   

PROFIT Systems Acquisition Co.

  

Electronics

   Senior Term Debt (10.5%, Due 7/2014)(C) (D)      2,100         2,100         2,084   

Saunders & Associates

  

Electronics

   Line of Credit, $0 available (11.3%, Due 5/2013)(D)      917         917         752   
      Senior Term Debt (11.3%, Due 5/2013)(D)      8,947         8,947         7,336   
           

 

 

    

 

 

 
              9,864         8,088   

Sunburst Media—Louisiana, LLC

  

Broadcasting and entertainment

   Senior Term Debt (10.5%, Due 11/2013)(D)      6,000         6,000         1,500   

Thibaut Acquisition Co.

  

Home and office furnishings, housewares and durable consumer products

   Line of Credit, $350 available (9.0%, Due 1/2014)(D)      650         650         650   
      Senior Term Debt (12.0%, Due 1/2014)(C) (D)      2,631         2,631         2,631   
           

 

 

    

 

 

 
              3,281         3,281   

Westland Technologies, Inc.

  

Diversified/conglomerate manufacturing

   Senior Term Debt (7.5%, Due 4/2016)(D)      1,050         1,050         977   
      Senior Term Debt (12.5%, Due 4/2016)(D)      4,000         4,000         3,720   
      Common Stock Warrants (77,287 shares)(F) (G)         350         154   
           

 

 

    

 

 

 
              5,400         4,851   
           

 

 

    

 

 

 

Subtotal – Non-syndicated investments

         $ 176,761       $ 140,048   
           

 

 

    

 

 

 

Syndicated Investments:

              

Allied Security Holdings, LLC

  

Personal, food and miscellaneous services

   Senior Subordinated Term Debt (9.8%, Due 2/2018)(E)    $ 1,000       $ 992       $ 1,007   

Ameriqual Group, LLC

  

Beverage, food and tobacco

   Senior Term Debt (9.0%, Due 3/2016)(E)      7,350         7,259         7,203   

Ardent Medical Services, Inc.

  

Healthcare, education and childcare

   Senior Subordinated Term Debt (11.0%, Due 1/2019)(E)      4,000         3,925         4,050   

Ascend Learning, LLC

  

Healthcare, education and childcare

   Senior Subordinated Term Debt (11.5%, Due 12/2017)(E)      1,000         979         1,000   

Autoparts Holdings Limited

  

Automobile

   Senior Term Debt (10.5%, Due 1/2018)(E)      1,000         996         950   

First American Payment Systems, L.P.

  

Finance

   Senior Subordinated Term Debt (10.8%, Due 4/2019)(E)      4,500         4,468         4,511   

John Henry Holdings, Inc.

  

Containers, packaging and glass

   Senior Subordinated Term Debt (10.3%, Due 5/2019)(E)      5,000         4,882         5,050   

National Surgical Hospitals, Inc.

  

Healthcare, education and childcare

   Senior Term Debt (8.3%, Due 2/2017)(E)      1,622         1,599         1,589   

PLATO Learning, Inc.

  

Healthcare, education and childcare

   Senior Subordinated Term Debt (11.3%, Due 5/2019)(E)      5,000         4,911         4,850   

RP Crown Parent, LLC

  

Diversified/conglomerate service

   Senior Subordinated Term Debt (11.3%, Due 12/2019)(E)      2,000         1,962         2,040   

Sensus USA, Inc.

  

Electronics

   Senior Term Debt (8.5%, Due 5/2018)(E)      500         496         495   

SumTotal Systems, Inc.

  

Electronics

   Senior Subordinated Term Debt (10.3%, Due 5/2019)(E)      4,000         3,925         3,960   

Targus Group International, Inc.

  

Textiles and leather

   Senior Term Debt (11.0%, Due 5/2016)(E)      9,800         9,672         9,604   

 

8


Table of Contents

GLADSTONE CAPITAL CORPORATION

CONDENSED CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

AS OF JUNE 30, 2013

(DOLLAR AMOUNTS IN THOUSANDS)

(UNAUDITED)

 

Company(A)

  

Industry

  

Investment(B)

   Principal      Cost      Fair Value  

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

  

Vision Solutions, Inc.

  

Electronics

   Senior Term Debt (9.5%, Due 7/2017)(E)    $ 11,000       $ 10,936       $ 10,986   

W3, Co.

  

Oil and Gas

   Senior Subordinated Term Debt (9.3%, Due 9/2020)(E)      499         494         504   

Wall Street Systems Holdings, Inc.

  

Electronics

   Senior Term Debt (9.3%, Due 10/2020)(E)      3,000         2,943         3,015   

WP Evenflo Group Holdings, Inc.

  

Diversified/conglomerate manufacturing

   Senior Preferred Equity (333 shares)(F) (G)         333         209   
      Junior Preferred Equity (111 shares)(F) (G)         111         —     
      Common Stock (1,874 shares)(F) (G)         —           —     
           

 

 

    

 

 

 
              444         209   
           

 

 

    

 

 

 

Subtotal—Syndicated investments

         $ 60,883       $ 61,023   
           

 

 

    

 

 

 

Total Non-Control/Non-Affiliate Investments (represented 78.8% of total investments at fair value)

      $ 237,644       $ 201,071   
           

 

 

    

 

 

 

CONTROL INVESTMENTS:

              

Defiance Integrated Technologies, Inc.

  

Automobile

   Senior Term Debt (11.0%, Due 4/2016)(C) (F)    $ 6,945       $ 6,945       $ 6,945   
      Common Stock (15,500 shares)(F) (G)         1         1,245   
           

 

 

    

 

 

 
              6,946         8,190   

Lindmark Acquisition, LLC

  

Broadcasting and entertainment

   Senior Subordinated Term Debt (11.0%, Due 10/2017)(D)(H)      10,000         10,000         250   
      Senior Subordinated Term Debt (13.0%, Due 10/2017)(D)(H)      2,000         2,000         50   
     

Senior Subordinated Term Debt (13.0%, Due Upon
Demand)(D) (H)

     2,365         2,365         59   
      Common Stock (100 shares)(F) (G)         317         —     
           

 

 

    

 

 

 
              14,682         359   

LocalTel, LLC

  

Printing and publishing

   Line of credit, $11 available (10.0%, Due 6/2014)(F) (H)      3,139         3,139         736   
      Line of Credit, $1,830 available (4.7%, Due 6/2014)(F) (H)      1,170         1,170         —     
      Senior Term Debt (12.5%, Due 6/2014)(F) (H)      325         325         —     
      Senior Term Debt (8.5%, Due 6/2014)(F) (H)      2,688         2,688         —     
      Senior Term Debt (10.5%, Due 6/2014)(C) (F) (H)      2,750         2,750         —     
      Common Stock Warrants (4,000 shares)(F) (G)         —           —     
           

 

 

    

 

 

 
              10,072         736   

Midwest Metal Distribution, Inc.

  

Mining, steel, iron and non-precious metals

   Senior Subordinated Term Debt (12.0%, Due 7/2013)(D)(M)      18,281         18,280         17,687   
      Common Stock (501 shares)(F) (G)         138         —     
           

 

 

    

 

 

 
              18,418         17,687   

Reliable Biopharmaceutical Holdings, Inc.

  

Healthcare, education and childcare

   Line of Credit, $0 available (9.0%, Due 6/2014)(F)      4,000         4,000         4,000   
      Mortgage Note (9.5%, Due 12/2014)(F)      6,995         6,995         6,995   
      Senior Term Debt (12.0%, Due 12/2014)(C) (F)      11,392         11,392         10,823   
      Senior Subordinated Term Debt (12.5%, Due 12/2014)(F)      6,000         6,000         —     
      Preferred Stock (1,999,000 shares)(F) (G)         1,999         —     
      Common Stock (1,000 shares)(F) (G)         370         —     
           

 

 

    

 

 

 
              30,756         21,818   

Sunshine Media Holdings

  

Printing and publishing

   Line of credit, $400 available (4.8%, Due 8/2014)(D) (H)      1,600         1,600         295   
      Senior Term Debt (4.8%, Due 5/2016)(D) (H)      16,948         16,948         3,135   
      Senior Term Debt (5.5%, Due 5/2016)(C) (D) (H)      10,700         10,700         1,980   
      Preferred Equity (15,270 shares)(F) (G)(L)         5,275         —     
      Common Stock (1,867 shares)(F) (G)         740         —     
      Common Stock Warrants (72 shares)         —           —     
           

 

 

    

 

 

 
              35,263         5,410   
           

 

 

    

 

 

 

Total Control Investments (represented 21.2% of total investments at fair value)

  

   $ 116,137       $ 54,200   
           

 

 

    

 

 

 

Total Investments

            $ 353,781       $ 255,271   
           

 

 

    

 

 

 

 

(A) 

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

(B) 

Percentages represent cash interest rates in effect at June 30, 2013, and due dates represent the contractual maturity date. If applicable, paid-in-kind (“PIK”) interest rates are noted separately from the cash interest rates. Senior debt securities generally take the form of first priority liens on the assets of the underlying businesses.

 

9


Table of Contents

GLADSTONE CAPITAL CORPORATION

CONDENSED CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

AS OF JUNE 30, 2013

(DOLLAR AMOUNTS IN THOUSANDS)

(UNAUDITED)

 

(C) 

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

(D) 

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

(E) 

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

(F) 

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

(G) 

Security is non-income producing.

(H) 

Debt security is on non-accrual status.

(I)

New proprietary portfolio investment valued at cost, as it was determined that the price paid during the three months ended June 30, 2013, best represents fair value as of June 30, 2013.

(J) 

There are certain limitations on our ability to transfer our units owned prior to dissolution of the entity, which must occur no later than May 3, 2020.

(K) 

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

(L) 

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

(M) 

Subsequent to June 30, 2013, maturity date was extended to July 31, 2015.

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

 

10


Table of Contents

GLADSTONE CAPITAL CORPORATION

CONDENSED CONSOLIDATED SCHEDULE OF INVESTMENTS

SEPTEMBER 30, 2012

(DOLLAR AMOUNTS IN THOUSANDS)

 

Company(A)

  

Industry

  

Investment(B)

   Principal      Cost      Fair
Value
 

NON-CONTROL/NON-AFFILIATE INVESTMENTS:

  

  

Non-syndicated investments:

              

Access Television Network, Inc.

  

Broadcasting and entertainment

   Senior Term Debt (14.0%, Due 2/2011)(D) (H)    $ 903       $ 903       $ —     

Allison Publications, LLC

  

Printing and publishing

   Senior Term Debt (10.5%, Due 9/2013)(D)      7,864         7,864         7,510   

BAS Broadcasting

  

Broadcasting and entertainment

   Senior Term Debt (11.5%, Due 7/2013)(D)      7,465         7,465         1,866   

Chinese Yellow Pages Company

  

Printing and publishing

   Line of Credit, $12 available (7.3%, Due 11/2012)(D)      438         438         285   

CMI Acquisition, LLC

  

Mining, steel, iron and non-precious metals

   Senior Subordinated Term Debt (14.0%, Due 12/2016)(D)      14,265         14,265         13,766   

FedCap Partners, LLC

  

Private equity fund – aerospace and defense

   Class A Membership Units (80 units)(G) (J)         2,000         2,964   

Francis Drilling Fluids, Ltd.

  

Oil and gas

   Senior Subordinated Term Debt (12.0%, Due 11/2017)(D)      15,000         15,000         14,906   
      Preferred Units (999 units)(F) (G)         999         479   
      Common Units (999 units)(F) G)         1         —     
           

 

 

    

 

 

 
              16,000         15,385   

GFRC Holdings, LLC

  

Buildings and real estate

   Senior Term Debt (10.5%, Due 12/2013)(D)      5,124         5,124         2,587   
      Senior Subordinated Term Debt (13.0%, Due 12/2013)(D)      6,598         6,598         3,332   
           

 

 

    

 

 

 
              11,722         5,919   

Heartland Communications Group

  

Broadcasting and entertainment

   Line of Credit, $0 available (5.0%, Due 3/2013)(D)      100         100         40   
      Line of Credit, $55 available (10.0%, Due 3/2013)(D)      45         45         18   
      Senior Term Debt (5.0%, Due 3/2013)(D)      4,342         4,333         1,737   
      Common Stock Warrants (8.8% ownership)(F) (G)         66         —     
           

 

 

    

 

 

 
              4,544         1,795   

International Junior Golf Training Acquisition Company

  

Leisure, amusement, motion pictures and entertainment

   Line of Credit, $225 available (11.0%, Due 5/2014)(D)      2,025         2,025         1,154   
      Senior Term Debt (10.5%, Due 5/2014)(D)      461         461         263   
      Senior Term Debt (12.5%, Due 5/2014)(C) (D)      2,500         2,500         1,425   
           

 

 

    

 

 

 
              4,986         2,842   

Legend Communications of Wyoming, LLC

  

Broadcasting and entertainment

   Senior Term Debt (12.0%, Due 6/2013)(D)      8,661         8,661         4,547   

North American Aircraft Services, LLC

  

Aerospace and defense

   Line of Credit, $500 available (6.5%, Due 10/2012)(D)      1,500         1,500         1,489   
      Senior Term Debt (7.5%, Due 8/2016)(D)      4,265         4,265         4,233   
      Senior Subordinated Term Debt (11.8%, Due 8/2016)(D)      4,750         4,750         4,714   
      Senior Subordinated Term Debt (12.5%, Due 8/2016)(D)      2,820         2,820         2,799   
      Common Stock Warrants (35,000 shares)(F) (G)         350         399   
           

 

 

    

 

 

 
              13,685         13,634   

Northstar Broadband, LLC

  

Broadcasting and entertainment

   Senior Term Debt (0.7%, Due 12/2012)(D)      20         18         20   

Ohana Media Group

  

Broadcasting and entertainment

   Senior Term Debt (10.0%, Due 10/2016)(D)      1,590         1,590         1,463   

POP Radio, LLC

  

Broadcasting and entertainment

   Senior Term Debt (11.8%, Due 5/2017)(D)      11,500         11,500         11,486   
     

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

     500         428         498   
      Participation Unit (2.4% ownership)(F) (G)         75         —     
           

 

 

    

 

 

 
              12,003         11,984   

Precision Acquisition Group Holdings, Inc.

  

Machinery

   Equipment Note (13.0%, Due 3/2013)(D)      1,000         1,000         830   
      Senior Term Debt (13.0%, Due 3/2013)(D)      4,125         4,125         3,424   
      Senior Term Debt (13.0%, Due 3/2013)(C) (D)      4,053         4,053         3,364   
           

 

 

    

 

 

 
              9,178         7,618   

PROFIT Systems Acquisition Co.

  

Electronics

   Senior Term Debt (10.5%, Due 7/2014)(C) (D)      2,550         2,550         2,486   

 

11


Table of Contents

GLADSTONE CAPITAL CORPORATION

CONDENSED CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

AS OF SEPTEMBER 30, 2012

(DOLLAR AMOUNTS IN THOUSANDS)

 

Company(A)

  

Industry

  

Investment(B)

   Principal      Cost      Fair
Value
 

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

  

Reliable Biopharmaceutical Holdings, Inc.

  

Healthcare, education and childcare

   Line of Credit, $1,100 available (9.0%, Due 1/2013)(D)    $ 2,900       $ 2,900       $ 2,690   
      Mortgage Note (9.5%, Due 12/2014)(D)      7,074         7,074         6,562   
      Senior Term Debt (12.0%, Due 12/2014)(C) (D)      11,452         11,452         10,622   
      Senior Subordinated Term Debt (12.5%, Due 12/2014)(D)      6,000         6,000         5,565   
      Common Stock Warrants (764 shares)(F) (G)         209         —     
           

 

 

    

 

 

 
              27,635         25,439   

Saunders & Associates

  

Electronics

   Line of Credit, $0 available (11.3%, Due 5/2013)(D)      917         917         807   
      Senior Term Debt (11.3%, Due 5/2013)(D)      8,947         8,947         7,873   
           

 

 

    

 

 

 
              9,864         8,680   

Sunburst Media—Louisiana, LLC

  

Broadcasting and entertainment

   Senior Term Debt (10.5%, Due 11/2013)(D)      6,000         6,000         2,250   

Thibaut Acquisition Co.

  

Home and office furnishings housewares and durable consumer products

   Line of Credit, $650 available (9.0%, Due 1/2014)(D)      350         350         347   
      Senior Term Debt (8.5%, Due 1/2014)(I)      25         25         25   
      Senior Term Debt (12.0%, Due 1/2014)(C) (D)      3,000         3,000         2,985   
           

 

 

    

 

 

 
              3,375         3,357   

Westlake Hardware, Inc.

  

Retail store

   Senior Subordinated Term Debt (12.3%, Due 1/2014)(D)      12,000         12,000         11,640   
      Senior Subordinated Term Debt (13.5%, Due 1/2014)(D)      8,000         8,000         7,720   
           

 

 

    

 

 

 
              20,000         19,360   

Westland Technologies, Inc.

  

Diversified/conglomerate manufacturing

   Senior Term Debt (7.5%, Due 4/2016)(D)      1,650         1,650         1,617   
      Senior Term Debt (12.5%, Due 4/2016)(D)      4,000         4,000         3,920   
      Common Stock Warrants (77,287 shares)(F) (G)         350         228   
           

 

 

    

 

 

 
              6,000         5,765   
           

 

 

    

 

 

 

Subtotal – Non-syndicated investments

         $ 190,746       $ 158,935   
           

 

 

    

 

 

 

Syndicated Investments:

              

Airvana Network Solutions, Inc.

  

Telecommunications

   Senior Term Debt (10.0%, Due 3/2015)(E)    $ 1,071       $ 1,036       $ 1,070   

Allied Security Holdings, LLC

  

Personal, food and miscellaneous services

   Senior Subordinated Term Debt (9.0%, Due 2/2018)(E)      1,000         992         990   

Ameriqual Group, LLC

  

Beverage, food and tobacco

   Senior Term Debt (9.0%, Due 3/2016)(E)      7,406         7,295         7,258   

Applied Systems, Inc.

  

Insurance

   Senior Subordinated Term Debt (9.5%, Due 6/2017)(E)      1,000         992         995   

Ascend Learning, LLC

  

Healthcare, education and childcare

   Senior Subordinated Term Debt (11.5%, Due 12/2017)(E)      1,000         975         998   

Autoparts Holdings Limited

  

Automobile

   Senior Term Debt (10.5%, Due 1/2018)(E)      1,000         996         870   

Blue Coat Systems, Inc.

  

Electronics

   Senior Subordinated Term Debt (11.5%, Due 8/2018)(E) (I)      8,500         8,497         8,500   

HGI Holding, Inc.

  

Personal and non-durable consumer products

   Senior Term Debt (6.8%, Due 10/2016)(E)      1,566         1,539         1,574   

Hubbard Radio, LLC

  

Broadcasting and entertainment

   Senior Subordinated Term Debt (8.8%, Due 4/2018)(E)      500         496         508   

Keypoint Government Solutions, Inc.

  

Personal, food and miscellaneous services

   Senior Term Debt (10.0%, Due 12/2015)(E)      6,364         6,340         6,364   

Mood Media Corporation

  

Electronics

   Senior Term Debt (10.3%, Due 11/2018)(E) (I)      8,000         7,930         8,000   

National Surgical Hospitals, Inc.

  

Healthcare, education and childcare

   Senior Term Debt (8.3%, Due 2/2017)(E)      1,662         1,596         1,581   

PLATO Learning, Inc.

  

Healthcare, education and childcare

   Senior Subordinated Term Debt (11.3%, Due 5/2019)(E)      5,000         4,903         4,850   

Sensus USA, Inc.

  

Electronics

   Senior Term Debt (8.5%, Due 5/2018)(E)      500         496         500   

 

12


Table of Contents

GLADSTONE CAPITAL CORPORATION

CONDENSED CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

AS OF SEPTEMBER 30, 2012

(DOLLAR AMOUNTS IN THOUSANDS)

 

Company(A)

  

Industry

  

Investment(B)

   Principal      Cost      Fair
Value
 

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

  

Springs Window Fashions, LLC

  

Personal and non-durable consumer products

   Senior Term Debt (11.3%, Due 11/2017)(E)    $ 7,000       $ 6,853       $ 6,825   

SRAM, LLC

  

Leisure, amusement, motion pictures and entertainment

   Senior Term Debt (8.5%, Due 12/2018)(E)      2,500         2,478         2,538   

Targus Group International, Inc.

  

Textiles and leather

   Senior Term Debt (11.0%, Due 5/2016)(E)      9,875         9,719         9,776   

Vision Solutions, Inc.

  

Electronics

   Senior Term Debt (9.5%, Due 7/2017)(E)      11,000         10,926         10,945   

Wall Street Systems Holdings, Inc.

  

Electronics

   Senior Term Debt (9.0%, Due 6/2018)(E) (I)      3,000         2,974         3,000   

WP Evenflo Group Holdings, Inc.

  

Diversified/conglomerate manufacturing

   Senior Term Debt (8.0%, Due 2/2013)(E)      277         277         274   
      Senior Preferred Equity (333 shares)(F) (G)         333         460   
      Junior Preferred Equity (111 shares)(F) (G)         111         164   
      Common Stock (1,874 shares)(F) (G)         —           160   
           

 

 

    

 

 

 
              721         1,058   
           

 

 

    

 

 

 

Subtotal—Syndicated investments

         $ 77,754       $ 78,200   
           

 

 

    

 

 

 

Total Non-Control/Non-Affiliate Investments (represented 86.6% of total investments at fair value)

      $ 268,500       $ 237,135   
           

 

 

    

 

 

 

CONTROL INVESTMENTS:

              

Defiance Integrated Technologies, Inc.

  

Automobile

   Senior Term Debt (11.0%, Due 4/2016)(C) (F)    $ 7,185       $ 7,185       $ 7,185   
      Common Stock (15,500 shares)(F) (G)         1         4,113   
           

 

 

    

 

 

 
              7,186         11,298   

Kansas Cable Holdings, Inc.

  

Broadcasting and entertainment

   Line of Credit, $56 available (10.0%, Due 10/2012)(D) (H)      919         910         8   
      Senior Term Debt (10.0%, Due 10/2012)(D) (H)      1,500         1,444         13   
      Senior Term Debt (10.0%, Due 10/2012)(D) (H)      1,039         1,000         9   
      Common Stock (100 shares)(F) (G)         —           —     
           

 

 

    

 

 

 
              3,354         30   

Lindmark Acquisition, LLC

  

Broadcasting and entertainment

   Senior Subordinated Term Debt (11.0%, Due 10/2017)(D)(H)      10,000         10,000         750   
      Senior Subordinated Term Debt (13.0%, Due 10/2017)(D)(H)      2,000         2,000         150   
      Senior Subordinated Term Debt (13.0%, Due Upon Demand(D)(H)      1,909         1,909         143   
      Common Stock (100 shares) (F) (G)         317         —     
           

 

 

    

 

 

 
              14,226         1,043   

LocalTel, LLC

  

Printing and publishing

   Line of credit, $226 available (10.0%, Due 6/2013)(F) (H)      2,624         2,624         548   
      Line of Credit, $1,830 available (4.7%, Due 6/2013)(F) (H)      1,170         1,170         —     
      Senior Term Debt (12.5%, Due 6/2013)(F) (H)      325         325         —     
      Senior Term Debt (8.5%, Due 6/2013)(F) (H)      2,688         2,688         —     
      Senior Term Debt (10.5%, Due 6/2013)(C) (F) (H)      2,750         2,750         —     
      Common Stock Warrants (4,000 shares)(F) (G)         —           —     
           

 

 

    

 

 

 
              9,557         548   

Midwest Metal Distribution, Inc.

  

Mining, steel, iron and non-precious metals

   Senior Subordinated Term Debt (12.0%, Due 7/2013)(D)      18,281         18,272         17,824   
      Common Stock (501 shares)(F) (G)         138         —     
           

 

 

    

 

 

 
              18,410         17,824   

Sunshine Media Holdings

  

Printing and publishing

   Line of credit, $200 available (4.8%, Due 8/2014)(D) (H)      1,800         1,800         270   
      Senior Term Debt (4.8%, Due 5/2016)(D) (H)      16,948         16,948         2,542   
      Senior Term Debt (5.5%, Due 5/2016)(C) (D) (H)      10,700         10,700         1,605   
      Preferred Equity (15,270 shares)(F) (G) (K)         5,275         —     
      Common Stock (1,867 shares)(F) (G)         740         —     
           

 

 

    

 

 

 
              35,463         4,417   

 

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GLADSTONE CAPITAL CORPORATION

CONDENSED CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

AS OF SEPTEMBER 30, 2012

(DOLLAR AMOUNTS IN THOUSANDS)

 

Company(A)

  

Industry

  

Investment(B)

   Principal      Cost      Fair
Value
 

CONTROL INVESTMENTS (Continued):

  

  

Viapack, Inc.

  

Chemicals, plastics and rubber

   Line of Credit, $0 available (6.5%, Due 3/2013)(D)    $ 3,800       $ 3,800       $ 760   
      Senior Real Estate Term Debt (5.0%, Due 3/2014)(D)      600         600         120   
      Senior Term Debt (6.2%, Due 3/2014)(C) (D) (H)      3,925         3,925         785   
      Preferred Equity (100 shares)(F) (G)         —           —     
      Guarantee ($300)         
           

 

 

    

 

 

 
              8,325         1,665   
           

 

 

    

 

 

 

Total Control Investments (represented 13.4% of total investments at fair value)

  

   $ 96,521       $ 36,825   
           

 

 

    

 

 

 

Total Investments(L)

            $ 365,021       $ 273,960   
           

 

 

    

 

 

 

 

(A) 

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

(B) 

Percentages represent cash interest rates in effect at September 30, 2012, and due dates represent the contractual maturity date. If applicable, PIK interest rates are noted separately from the cash interest rates. Senior debt securities generally take the form of first priority liens on the assets of the underlying businesses.

(C) 

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

(D) 

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

(E) 

Security valued based on the indicative bid price on or near September 30, 2012, offered by the respective syndication agent’s trading desk or secondary desk.

(F) 

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

(G) 

Security is non-income producing.

(H) 

Debt security is on non-accrual status.

(I) 

Security was paid off, at par, subsequent to September 30, 2012, and was valued based on the payoff.

(J) 

There are certain limitations on our ability to transfer our units owned prior to dissolution of the entity, which must occur no later than May 3, 2020.

(K) 

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

(L)

Cumulative gross unrealized depreciation for federal income tax purposes is $98.7 million; cumulative gross unrealized appreciation for federal income tax purposes is $6.1 million. Cumulative net unrealized depreciation is $92.6 million, based on a tax cost of $366.6 million.

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

 

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GLADSTONE CAPITAL CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

JUNE 30, 2013

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

NOTE 1. ORGANIZATION

Gladstone Capital Corporation was incorporated under the General Corporation Law of the State of Maryland on May 30, 2001, and completed an initial public offering on August 23, 2001. The terms “the Company,” “we,” “our,” and “us” all refer to Gladstone Capital Corporation and its consolidated subsidiaries. We are an externally-managed, closed-end, non-diversified management investment company that has elected to be treated as a business development company (“BDC”) under the Investment Company Act of 1940, as amended (the “1940 Act”). In addition, we have elected to be treated for federal income tax purposes as a regulated investment company (“RIC”) under the Internal Revenue Code of 1986, as amended (the “Code”). We were established for the purpose of investing in debt and equity securities of established private businesses in the United States (“U.S.”). Our investment objectives are to (1) achieve and grow current income by investing in debt securities of established small and medium-sized businesses in the U.S. that we believe will provide stable earnings and cash flow to pay expenses, make principal and interest payments on our outstanding indebtedness and make distributions to stockholders that grow over time; and (2) provide our stockholders with long-term capital appreciation in the value of our assets by investing in equity securities of established businesses that we believe can grow over time to permit us to sell our equity investments for capital gains.

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

Gladstone Financial Corporation (“Gladstone Financial”), a wholly-owned subsidiary of ours, was established on November 21, 2006, for the purpose of holding a license to operate as a Specialized Small Business Investment Company. Gladstone Financial (previously known as Gladstone SSBIC Corporation) acquired this license in February 2007. The license enables us, through this subsidiary, to make investments in accordance with the United States Small Business Administration guidelines for specialized small business investment companies.

The financial statements of the foregoing two subsidiaries are consolidated with those of ours.

We are externally managed by our investment adviser, Gladstone Management Corporation (the “Adviser”), a Securities and Exchange Commission (the “SEC”) registered investment adviser and an affiliate of ours, pursuant to an investment advisory and management agreement.

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Unaudited Interim Financial Statements and Basis of Presentation

We prepare our interim financial statements in accordance with accounting principles generally accepted in the U.S. (“GAAP”) for interim financial information and pursuant to the requirements for reporting on Form 10-Q and Articles 6 and 10 of Regulation S-X. Accordingly, we have omitted certain disclosures accompanying annual financial statements prepared in accordance with GAAP. The accompanying Condensed Consolidated Financial Statements include our accounts and those of our wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated. Under Article 6 of Regulation S-X, and the authoritative accounting guidance provided by the American Institute of Certified Public Accountants Audit and Accounting Guide for Investment Companies, we are not permitted to consolidate any portfolio company investments, including those in which we have a controlling interest. In our opinion, all adjustments, consisting solely of normal recurring accruals, necessary for the fair presentation of financial statements for the interim periods have been included. The results of operations for the three and nine months ended June 30, 2013, are not necessarily indicative of results that ultimately may be achieved for the fiscal year. The interim financial statements and notes thereto should be read in conjunction with the financial statements and notes thereto included in our annual report on Form 10-K for the fiscal year ended September 30, 2012, as filed with the SEC on November 13, 2012.

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

 

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Investment Valuation Policy

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

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

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

Publicly traded securities: The Adviser determines the value of a publicly traded security based on the closing price for the security on the exchange or securities market on which it is listed and primarily traded on the valuation date. To the extent that we own a restricted security that is not freely tradable, but for which a public market otherwise exists, the Adviser will use the market value of that security adjusted for any decrease in value resulting from the restrictive feature. As of June 30, 2013 and September 30, 2012, we did not have any investments in publicly traded securities.

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

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

As of June 30, 2013 and September 30, 2012, the Adviser determined that the IBPs were reliable indicators of fair value for our syndicate investments. However, because of the private nature of this marketplace (meaning actual transactions are not publicly reported), the Adviser determined that these valuation inputs were classified as Level 3 within the fair value hierarchy as defined in ASC 820.

Securities for which no market exists: The valuation methodology for securities for which no market exists falls into four categories: (A) portfolio investments comprised solely of debt securities; (B) portfolio investments in controlled companies comprised of a bundle of securities, which can include debt and equity securities; (C) portfolio investments in non-controlled companies comprised of a bundle of investments, which can include debt and equity securities; and (D) portfolio investments comprised of non-publicly traded, non-control equity securities of other funds.

 

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(A) Portfolio investments comprised solely of debt securities: Debt securities that are not publicly traded on an established securities market, or for which a market does not exist (“Non-Public Debt Securities”), and that are issued by portfolio companies in which we have no equity or equity-like securities, are fair valued utilizing opinions of value submitted to us by Standard & Poor’s Securities Evaluations, Inc. (“SPSE”). The Adviser may also submit paid-in-kind (“PIK”) interest to SPSE for its evaluation when it is determined that PIK interest is likely to be received.

 

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

 

   

the issuer’s ability to make payments;

 

   

the earnings of the issuer;

 

   

recent sales to third parties of similar securities;

 

   

the comparison to publicly traded securities; and

 

   

DCF or other pertinent factors.

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

 

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

 

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

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

 

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

Interest Income Recognition

Interest income, adjusted for amortization of premiums, acquisition costs, and amendment fees and the accretion of discounts, 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 until the borrower has demonstrated the ability and intent to pay contractual amounts due. However, we remain contractually entitled to this interest. Interest payments received on non-accrual loans may be recognized as income or applied to the cost basis, depending upon management’s judgment. Generally, non-accrual loans are restored to accrual status when past due principal and interest are paid and, in management’s judgment, are likely to remain current, or, due to a restructuring, the interest income is deemed to be collectable. At June 30, 2013, three portfolio companies were on non-accrual with an aggregate debt cost basis of approximately $53.7 million, or 15.9% of the cost basis of all debt investments in our portfolio, and an aggregate fair value of approximately $6.5 million, or 2.6% of the fair value of all debt investments in our portfolio. At September 30, 2012, six portfolio companies were either fully or partially on non-accrual with an aggregate debt cost basis of approximately $61.1 million, or 17.3% of the cost basis of all debt investments in our portfolio, and an aggregate fair value of approximately $6.8 million, or 2.6% of the fair value of all debt investments in our portfolio.

As of June 30, 2013 and September 30, 2012, we had 19 and 24 original issue discount (“OID”) loans, respectively, primarily from the syndicated investments in our portfolio. We recorded OID income of $69 and $0.2 million for the three and nine months ended June 30, 2013, respectively, as compared to $0.1 million and $0.3 million for the three and nine months ended June 30, 2012. The unamortized balance of OID investments as of June 30, 2013 and September 30, 2012 totaled $1.1 million.

As of June 30, 2013, we had three investments which had a PIK interest component, and as of September 30, 2012, we had one investment which had a PIK interest component. PIK interest, computed at the contractual rate specified in a loan agreement, is added to the principal balance of a loan and recorded as income. To maintain our status as a RIC, this non-cash source of income must be paid out to common stockholders in the form of distributions, even though we have not yet collected the cash. We recorded PIK income of $62 and $0.2 million for the three and nine months ended June 30, 2013, respectively as compared to $6 of PIK income during the three and nine months ended June 30, 2012, respectively. We collected $0 PIK interest in cash during the nine months ended June 30, 2013 and 2012, respectively.

Other Income Recognition

We generally record success fees upon receipt of cash. Success fees are contractually due upon a change of control in a portfolio company. We recorded $1.1 million of success fees during the nine months ended June 30, 2013, which resulted from our exit of Westlake Hardware, Inc. at par in December 2012. We recorded an aggregate of $2.8 million in success fees during the nine months ended June 30, 2012, which resulted from our exits of Global Materials Technologies, Inc., RCS Management Holding Co. and Northern Contours, Inc., all at par during the period. As of June 30, 2013, we have an aggregate off-balance sheet success fee receivable of approximately $13.6 million on our accruing debt investments.

During the nine months ended June 30, 2013, we recorded an aggregate of $0.7 million in prepayment fees, which resulted from the early payoffs of seven of our syndicated investments at par during the period. We recorded an aggregate of $0.2 million in prepayment fees during the nine months ended June 30, 2012, which resulted from the early payoffs of four of our syndicated investments at par during the period.

Both success and prepayment fees are recorded in other income in our accompanying Condensed Consolidated Statements of Operations.

Recent Accounting Pronouncements

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

 

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NOTE 3. INVESTMENTS

ASC 820 defines fair value, establishes a framework for measuring fair value and expands disclosures about assets and liabilities measured at fair value. ASC 820 provides a consistent definition of fair value that focuses on exit price in the principal, or most advantageous, market and prioritizes, within a measurement of fair value, the use of market-based inputs over entity-specific inputs. ASC 820 also establishes the following three-level hierarchy for fair value measurements based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date.

 

   

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

 

   

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

 

   

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

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

The following table presents the investments carried at fair value as of June 30, 2013 and September 30, 2012, by caption on our accompanying Condensed Consolidated Statements of Assets and Liabilities and by security type, all of which are valued using Level 3 inputs:

 

     Total Recurring Fair Value Measurements
Reported in

Condensed Consolidated Statements of
Assets and Liabilities Using Significant
Unobservable Inputs (Level 3)
 
     June 30, 2013      September 30, 2012  

Non-Control/Non-Affiliate Investments

     

Senior debt

   $ 98,265       $ 150,500   

Senior subordinated debt

     96,605         81,282   

Junior subordinated debt

     555         498   

Preferred equity

     1,460         1,103   

Common equity/equivalents

     4,186         3,752   
  

 

 

    

 

 

 

Total Non-Control/Non-Affiliate Investments

   $ 201,071       $ 237,135   
  

 

 

    

 

 

 

Control Investments

     

Senior debt

   $ 34,909       $ 13,845   

Senior subordinated debt

     18,046         18,867   

Common equity/equivalents

     1,245         4,113   
  

 

 

    

 

 

 

Total Control Investments

   $ 54,200       $ 36,825   
  

 

 

    

 

 

 
Total Investments    $ 255,271       $ 273,960   
  

 

 

    

 

 

 

In accordance with ASU 2011-04, which was effective for us beginning January 1, 2012, the following table provides quantitative information about our Level 3 fair value measurements of our investments as of June 30, 2013 and September 30, 2012. In addition to the techniques and inputs noted in the table below, according to our Policy, the Adviser may also use other valuation techniques and methodologies when determining our fair value measurements. The table below is not intended to be all-inclusive, but rather provides information on the significant Level 3 inputs as they relate to our fair value measurements. The weighted average calculations in the table below are based on the principal balances for all debt related calculations and on the cost basis for all equity-related calculations for the particular input.

 

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Quantitative Information about Level 3 Fair Value Measurements

 

     Fair Value
as of
June 30,
2013
     Fair Value
as of
September 30,
2012
     Valuation
Technique/

Methodology
  

Unobservable
Input

   Range / Weighted
Average as of

June 30,
2013
     Range / Weighted
Average as of

September 30,
2012
 

Senior debt(G)

   $ 133,174       $ 164,345       SPSE(A)    EBITDA(B)     

 

$130 - $5,180 /

$1,466

  

  

    
 
($1,164) -$4,886 /
$987
  
  
           

Risk

Ratings(C)

     4.0 – 10.0/6.0         2.0–10.0/5.4   
         Market
Quotes
   IBP(D)     

 

95.0% -100.5% /

98.7%

  

  

    
 
87.0% - 101.5% /
98.8%
  
  
         TEV   

Revenue

multiples(B)

     0.3x-1.9x / 1.4x         0.2x   
            Revenue(B)     
 
$2,658 - $11,589 /
$8,818
  
  
     $2,474   

Senior subordinated debt(E)(G)

     115,206         100,647       SPSE(A)    EBITDA(B)     
 
$1,050 -$15,520 /
$6,201
  
  
    
 
$723 - $14,055 /
$6,418
  
  
           

Risk

Ratings(C)

     2.0–6.0/3.6         2.0–7.0/4.7   
         Market
Quotes
   IBP(D)     
 
97.0% -102.0% /
99.9%
  
  
    
 
97.0% - 101.5% /
98.1%
  
  

Preferred and common equity /
equivalents
(E)(F)

     6,891         8,968       TEV    EBITDA multiples(B)     

 

3.7x – 10.4x /

5.3x

  

  

    

 

4.2x – 9.2x /

5.9x

  

  

            EBITDA(B)     

 

$130 - $11,589 /

$2,294

  

  

    
 
($1,164) - $10,967 /
$1,333
  
  
         TEV   

Revenue

multiples(B)

    

 

0.3x – 1.9x /

1.9x

  

  

    

 

0.2x – 2.2x /

0.2x

  

  

            Revenue(B)     
 
$2,658 - $11,589 /
$11,588
  
  
    
 
$1,057 - $2,474 /
$2,469
  
  
  

 

 

    

 

 

             

Total Investments

   $ 255,271       $ 273,960               
  

 

 

    

 

 

             

 

(A) 

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

(B) 

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

(C) 

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

(D) 

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

(E)

Includes a new bundled debt and equity investment, which was valued at cost, as it was determined that the price paid during the three months ended June 30, 2013, best represents fair value as of June 30, 2013.

(F) 

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

(G) 

As of September 30, 2012, senior debt includes two syndicated investments and senior subordinated debt includes one syndicated investment, which subsequently paid off at par, and were valued based on the payoff.

A portfolio company’s EBITDA and EBITDA multiples are the significant unobservable inputs generally included in the Adviser’s internally assessed TEV models used to value our proprietary debt and equity investments. Holding all other factors constant, increases (decreases) in the EBITDA and/or the EBITDA multiples inputs would result in a higher (lower) fair value

 

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measurement. Per our Policy, the Adviser generally uses an indexed EBITDA multiple in these TEVs. EBITDA and EBITDA multiple inputs do not have to directionally correlate since EBITDA is a company performance metric and EBITDA multiples can be influenced by market, industry, company size and other factors.

Changes in Level 3 Fair Value Measurements of Investments

The following tables provide the changes in fair value, broken out by security type, during the three and nine month periods ended June 30, 2013 and 2012 for all investments for which we determine fair value using unobservable (Level 3) factors. When a determination is made to classify a financial instrument within Level 3 of the valuation hierarchy, such determination is based upon the significance of the unobservable factors to the overall fair value measurement. However, Level 3 financial instruments typically include, in addition to the unobservable, or Level 3, inputs, observable inputs (that is, components that are actively quoted and can be validated to external sources). In these cases, we categorize the fair value measurement in its entirety in the same level of the fair value hierarchy as the lowest level input that is significant to the entire measurement. Accordingly, the gains and losses in the tables below include changes in fair value, due in part to observable factors that are part of the valuation methodology.

Fair Value Measurements Using Significant Unobservable Inputs (Level 3)

FISCAL YEAR 2013:

 

Three months ended June 30, 2013

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

Fair value as of March 31, 2013

   $ 143,437      $ 117,454      $ 256      $ 6,333      $ 267,480   

Total (losses) gains:

          

Net realized (loss) gain(B)

     (2,753     7        —          —          (2,746

Net unrealized depreciation(C)

     (4,306     (1,917     (46     (1,155     (7,424

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

     2,730        (7     —          —          2,723   

New investments, repayments and settlements:(D)

          

Issuances/originations

     7,992        630        1,250        253        10,125   

Settlements/repayments

     (13,287     (961     —          —          (14,248

Sales

     (639     —          —          —          (639
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Fair value as of June 30, 2013

   $ 133,174      $ 115,206      $ 1,460      $ 5,431      $ 255,271   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

           Senior           Common        
     Senior     Subordinated     Preferred     Equity/        

Nine months ended June 30, 2013

   Debt     Debt(A)     Equity     Equivalents     Total  

Fair value as of September 30, 2012

   $ 164,345      $ 100,647      $ 1,103      $ 7,865      $ 273,960   

Total (losses) gains:

          

Net realized (loss) gain(B)

     (5,905     13        —          —          (5,892

Net unrealized depreciation(C)

     (2,665     (8,550     (2,892     (4,091     (18,198

Reversal of prior period net depreciation on realization(C)

     10,131        618        —          —          10,749   

New investments, repayments and settlements:(D)

          

Issuances/originations

     13,090        52,994        3,249        1,657        70,990   

Settlements/repayments

     (39,265     (30,516     —          —          (69,781

Sales

     (6,557     —          —          —          (6,557
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Fair value as of June 30, 2013

   $ 133,174      $ 115,206      $ 1,460      $ 5,431      $ 255,271   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

FISCAL YEAR 2012:

 

Three months ended June 30, 2012

   Senior
Debt
    Senior
Subordinated
Debt
    Preferred
Equity
    Common
Equity/
Equivalents
    Total  

Fair value as of March 31, 2012

   $ 180,000      $ 95,697      $ 595      $ 11,875      $ 288,167   

Total gains (losses):

          

Net realized gain(B)

     87        34        —          —          121   

Net unrealized depreciation(C)

     (6,411     (2,003     (1,186     (1,510     (11,110

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

     (108     96        —          —          (12

New investments, repayments and settlements:(D)

          

Issuances/originations

     13,945        20,500        1,200        1,000        36,645   

Settlements/repayments

     (11,105     (4,119     —          —          (15,224
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Fair value as of June 30, 2012

   $ 176,408      $ 110,205      $ 609      $ 11,365      $ 298,587   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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           Senior           Common         
     Senior     Subordinated     Preferred     Equity/         

Nine months ended June 30, 2012

   Debt     Debt     Equity     Equivalents      Total  

Fair value as of September 30, 2011

   $ 200,145      $ 92,148      $ 566      $ 10,088       $ 302,947   

Total (losses) gains:

           

Net realized (loss) gain(B)

     (8,276     34        —          —           (8,242

Net unrealized (depreciation) appreciation (C)

     (21,539     (4,032     (2,758     277         (28,052

Reversal of prior period net depreciation on realization(C)

     11,463        541        —          —           12,004   

New investments, repayments and settlements:(D)

           

Issuances/originations

     30,633        31,820        2,801        1,000         66,254   

Settlements/repayments

     (29,559     (10,306     —          —           (39,865

Sales

     (6,459     —          —          —           (6,459
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Fair value as of June 30, 2012

   $ 176,408      $ 110,205      $ 609      $ 11,365       $ 298,587   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

 

(A) 

Includes a junior subordinated debt investment totaling $0.6 million and $0.5 million in fair value as of June 30, 2013 and September 30, 2012, respectively. There were no junior subordinated debt investments as of June 30, 2012 or September 30, 2011, respectively.

(B)

Included in net realized gain (loss) on Non-Control/Non-Affiliate and Control investments on our accompanying Condensed Consolidated Statements of Operations for the three and nine months ended June 30, 2013 and 2012.

(C) 

Included in net unrealized (depreciation) appreciation of Non-Control/Non-Affiliate and Control investments on our accompanying Condensed Consolidated Statements of Operations for the three and nine months ended June 30, 2013 and 2012.

(D) 

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

Non-Syndicated Investments

As of June 30, 2013 and September 30, 2012, we held 29 and 30 non-syndicated investments with an aggregate fair value of $194.2 million and $195.8 million, respectively. During the nine months ended June 30, 2013, we invested in four new non-syndicated investments for an aggregate of $42.7 million; sold two non-syndicated investments for an aggregate realized loss of $5.3 million; wrote off one non-syndicated investment for a realized loss of $0.9 million; and had one non-syndicated investment pay off early at par, for which we received a principal payment of $20.0 million and a success fee of $1.1 million. Additionally, during the nine months ended June 30, 2013, we funded $5.1 million in the aggregate to existing non-syndicated portfolio companies through revolver draws and add-on investments, while scheduled and unscheduled principal repayments totaled $9.5 million in the aggregate from existing non-syndicated portfolio companies (exclusive of the aforementioned $20.0 million early payoff at par). The following significant non-syndicated investment transactions occurred during the nine months ended June 30, 2013:

 

   

Viapack, Inc. – In November 2012, we sold our investment in Viapack, Inc. (“Viapack”) for net proceeds of $5.9 million, which resulted in a realized loss of $2.4 million recorded in the three months ended December 31, 2012. Viapack had partially been on non-accrual status at the time of the sale.

 

   

AG Transportation Holdings, LLC. – In December 2012, we invested $14.0 million in AG Transportation Holdings, LLC (“AG Trucking”) through a combination of senior subordinated term debt and equity. AG Trucking, headquartered in Goshen, Indiana, is a regional food-grade liquid and dry bulk carrier providing a variety of bulk transportation services, including liquid transportation, dry bulk dumps, freight brokering, private fleet conversion and project runs to large international agricultural and food manufacturing firms.

 

   

Allen Edmonds Shoe Corporation – In December 2012, we invested $19.5 million in Allen Edmonds Shoe Corporation (“Allen Edmonds”) through senior subordinated term debt that we purchased from one of Allen Edmonds’ existing lenders. Allen Edmonds, headquartered in Port Washington, Wisconsin, manufactures premium men’s footwear and accessories, which it sells through its retail stores, catalogs and internet site and also through its wholesale and e-commerce channels.

 

   

Reliable Biopharmaceutical Holdings, Inc. – In March 2013, we acquired a controlling equity position in Reliable Biopharmaceutical Holdings, Inc. (“Reliable”) and infused $2.0 million in additional equity capital in the form of preferred equity. In addition, we invested $1.1 million in line of credit draws to Reliable during the nine months ended June 30, 2013. As of June 30, 2013, Reliable was classified as a Control portfolio company on our accompanying Condensed Consolidated Schedule of Investments.

 

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Kansas Cable Holdings, Inc. - In April 2013, we sold our investment in Kansas Cable Holdings, Inc. (“KCH”) for net proceeds of $0.6 million, which resulted in a realized loss of $2.9 million recorded in the three months ended June 30, 2013. KCH had been on non-accrual status at the time of the sale.

 

   

Funko, LLC – In May 2013, we invested $8.8 million in Funko, LLC (“Funko”), through a combination of senior term debt and equity. Funko, headquartered in Lynnwood, WA, is a designer, importer and marketer of pop-culture collectibles. This was our first co-investment with our affiliate fund, Gladstone Investment Corporation (“Gladstone Investment”), pursuant to an exemptive order granted by the SEC in July 2012. Gladstone Investment invested an additional $8.8 million in Funko under the same terms as us.

Syndicated Investments

We held a total of 17 syndicate investments with an aggregate fair value of $61.0 million, or 23.9% of our total investment portfolio, as of June 30, 2013, as compared to 20 syndicate investments with an aggregate fair value of $78.2 million, or 28.5% of our total investment portfolio, as of September 30, 2012. During the nine months ended June 30, 2013, we invested in seven new syndicated investments for a combined total of $23.0 million and had ten early payoffs of syndicated investments at par for a combined total of $38.7 million. We received an aggregate of $0.7 million in prepayment fees related to seven of these early payoffs of syndicated investments at par during the nine months ended June 30, 2013.

Investment Concentrations

As of June 30, 2013, our investment portfolio consisted of investments in 46 companies located in 29 states across 21 different industries, with an aggregate fair value of $255.3 million. The five largest investments at fair value as of June 30, 2013, totaled $86.3 million, or 33.8% of our total investment portfolio, as compared to the five largest investments at fair value as of September 30, 2012, which totaled $91.8 million, or 33.5% of our total investment portfolio. As of June 30, 2013, our average investment by obligor was $7.7 million at cost, compared to $7.3 million at cost as of September 30, 2012. The following table outlines our investments by security type as of June 30, 2013 and September 30, 2012:

 

     June 30, 2013     September 30, 2012  
     Cost     Fair Value     Cost     Fair Value  

Senior debt

   $ 196,522         55.6   $ 133,174         52.2   $ 235,158         64.4   $ 164,345         60.0

Senior subordinated debt

     140,896         39.8        114,651         44.9        118,469         32.5        100,149         36.5   

Junior subordinated debt

     491         0.1        555         0.2        428         0.1        498         0.2   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total Debt Investments

     337,909         95.5        248,380         97.3        354,055         97.0        264,992         96.7   

Preferred equity

     9,967         2.8        1,460         0.6        6,719         1.8        1,103         0.4   

Common equity/equivalents

     5,905         1.7        5,431         2.1        4,247         1.2        7,865         2.9   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total Equity Investments

     15,872         4.5        6,891         2.7        10,966         3.0        8,968         3.3   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total Investments

   $ 353,781         100.0   $ 255,271         100.0   $ 365,021         100.0   $ 273,960         100.0
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

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Investments at fair value consisted of the following industry classifications at June 30, 2013 and September 30, 2012:

 

     June 30, 2013     September 30, 2012  

Industry Classification

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

Healthcare, education and childcare

   $ 33,560         13.1   $ 32,867         12.0

Mining, steel, iron and non-precious metals

     30,525         12.0        31,590         11.5   

Electronics

     28,629         11.2        42,111         15.4   

Personal and non-durable consumer products

     28,282         11.1        8,399         3.1   

Broadcast and entertainment

     17,407         6.8        25,505         9.3   

Oil and gas

     14,829         5.8        15,386         5.6   

Aerospace and defense

     14,563         5.7        16,597         6.0   

Printing and publishing

     13,290         5.2        12,760         4.6   

Cargo Transportation

     12,909         5.0        —           —     

Textiles and leather

     9,604         3.8        9,776         3.6   

Automobile

     9,140         3.6        12,168         4.4   

Beverage, food and tobacco

     7,203         2.8        7,258         2.6   

Machinery

     6,700         2.6        7,618         2.8   

Diversified/conglomerate manufacturing

     5,060         2.0        6,824         2.5   

Containers, packaging and glass

     5,050         2.0        —           —     

Finance

     4,511         1.8        —           —     

Buildings and real estate

     4,358         1.7        5,920         2.2   

Leisure, amusement, motion pictures and entertainment

     3,322         1.3        5,380         2.0   

Home and office furnishing, housewares and durable consumer goods

     3,281         1.3        3,357         1.2   

Personal, food and miscellaneous services

     1,008         0.4        7,354         2.7   

Retail store

     —           —          19,360         7.1   

Other, < 1%(A)

     2,040         0.8        3,730         1.4   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total Investments

   $ 255,271         100.0   $ 273,960         100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

 

(A) 

No individual industry within this category exceeds 1% of the total fair value as of the respective periods.

Investments at fair value were included in the following geographic regions of the U.S. at June 30, 2013 and September 30, 2012:

 

     June 30, 2013     September 30, 2012  

Geographic Region

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

Midwest

   $ 116,633         45.7   $ 127,179         46.4

South

     68,330         26.8        62,677         22.9   

West

     56,268         22.0        66,268         24.2   

Northeast

     14,040         5.5        9,836         3.6   

Outside continental U.S.

     —           —          8,000         2.9   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total Investments

   $ 255,271         100.0   $ 273,960         100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

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

 

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Table of Contents

Investment Principal Repayments

The following table summarizes the contractual principal repayments and maturity of our investment portfolio by fiscal year, assuming no voluntary prepayments, at June 30, 2013:

 

          Amount  

For the remaining three months ending September 30:

   2013    $ 53,398   

For the fiscal year ending September 30:

   2014      58,624   
   2015      27,023   
   2016      83,931   
   2017      34,112   
   Thereafter      81,920   
     

 

 

 
  

Total contractual repayments

   $ 339,008   
   Equity investments      15,872   
  

Adjustments to cost basis on debt investments

     (1,099
     

 

 

 
  

Total cost basis of investments held at June 30, 2013:

   $ 353,781   
     

 

 

 

Receivables from Portfolio Companies

Receivables from portfolio companies represent non-recurring costs that we incurred on behalf of portfolio companies and are included in other assets on our accompanying Condensed Consolidated Statements of Assets and Liabilities. We maintain an allowance for uncollectible receivables from portfolio companies, which is determined based on historical experience and management’s expectations of future losses. We charge the accounts receivable to the established provision when collection efforts have been exhausted and the receivables are deemed uncollectible. As of June 30, 2013 and September 30, 2012, we had gross receivables from portfolio companies of $0.6 million and $0.8 million, respectively. The allowance for uncollectible receivables was $0.2 million and $0.4 million as of June 30, 2013 and September 30, 2012, respectively. In addition, the allowance for uncollectible interest receivable was $0 and $21 as of June 30, 2013 and September 30, 2012, respectively.

NOTE 4. RELATED PARTY TRANSACTIONS

Investment Advisory and Management Agreement

We have an investment advisory and management agreement with the Adviser (the “Advisory Agreement”). The Adviser is controlled by our chairman and chief executive officer. In accordance with the Advisory Agreement, we pay the Adviser certain fees as compensation for its services, such fees consisting of a base management fee and an incentive fee. On July 9, 2013, our Board of Directors approved the annual renewal of the Advisory Agreement through August 31, 2014.

The following table summarizes the management fees, incentive fees and associated credits reflected in our accompanying Condensed Consolidated Statements of Operations:

 

     Three Months Ended
June 30,
    Nine Months Ended
June 30,
 
     2013     2012     2013     2012  
Average total assets subject to base management fee(A)    $ 276,400      $ 312,200      $ 282,200      $ 310,300   

Multiplied by prorated annual base management fee of 2.0%

     0.5     0.5     1.5     1.5
  

 

 

   

 

 

   

 

 

   

 

 

 
Base management fee(B)    $ 1,382      $ 1,561      $ 4,233      $ 4,655   

Reduction for loan servicing fees

     (941     (867     (2,707     (2,690
  

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted base management fee

     441        694        1,526        1,965   

Credit for fees received by Adviser from the portfolio companies

     (95     (280     (235     (333

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

     (42     (102     (146     (345
  

 

 

   

 

 

   

 

 

   

 

 

 

Net base management fee

   $ 304      $ 312      $ 1,145      $ 1,287   
  

 

 

   

 

 

   

 

 

   

 

 

 

Incentive fee(B)

     998        1,217        3,167        3,556   

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

     (418     —          (1,014     (278
  

 

 

   

 

 

   

 

 

   

 

 

 

Net incentive fee

   $ 580      $ 1,217      $ 2,153      $ 3,278   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents
     Three Months Ended
June  30,
    Nine Months Ended
June  30,
 
     2013     2012     2013     2012  

Credit for fees received by Adviser from the portfolio companies

     (95     (280     (235     (333

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

     (42     (102     (146     (345

Incentive fee credit

     (418     —          (1,014     (278
  

 

 

   

 

 

   

 

 

   

 

 

 

Credit to fees from Adviser(B)

   $ (555   $ (382   $ (1,395   $ (956
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(A) 

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

(B)

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

Base Management Fee

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

 

   

Loan Servicing Fees

The Adviser also services the loans held by Business Loan, in return for which it receives a 1.5% annual fee, based on the monthly aggregate outstanding balance of loans pledged under our line of credit. Since we own these loans, all loan servicing fees paid to the Adviser are treated as reductions directly against the 2.0% base management fee under the Advisory Agreement.

 

   

Senior Syndicated Loan Fee Waiver

Our Board of Directors accepted an unconditional and irrevocable voluntary waiver from the Adviser to reduce the annual 2.0% base management fee on senior syndicated loan participations to 0.5%, to the extent that proceeds resulting from borrowings were used to purchase such senior syndicated loan participations, for the nine months ended June 30, 2013 and 2012.

 

   

Portfolio Company Fees

As a BDC, we make available significant managerial assistance to our portfolio companies, which the Adviser provides pursuant to the Advisory Agreement. The Adviser also provides other services to such portfolio companies and may receive fees for such other services. 50% of certain of these fees, and 100% of others, are credited against the base management fee that we would otherwise be required to pay to the Adviser.

Incentive Fee

The incentive fee consists of two parts: an income-based incentive fee and a capital gains-based incentive fee. The income-based incentive fee rewards the Adviser if our quarterly net investment income (before giving effect to any incentive fee) exceeds 1.75% of our net assets (the “hurdle rate”). We will pay the Adviser an income-based incentive fee with respect to our pre-incentive fee net investment income in each calendar quarter as follows:

 

   

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

 

   

100% of our pre-incentive fee net investment income with respect to that portion of such pre-incentive fee net investment income, if any, that exceeds the hurdle rate but is less than 2.1875% in any calendar quarter (8.75% annualized); and

 

   

20% of the amount of our pre-incentive fee net investment income, if any, that exceeds 2.1875% in any calendar quarter (8.75% annualized).

Our Board of Directors accepted an unconditional and irrevocable voluntary waiver from the Adviser to reduce the income-based incentive fee to the extent net investment income did not 100% cover distributions to common stockholders for the nine months ended June 30, 2013 and 2012.

The second part of the incentive fee is a capital gains-based incentive fee that will be determined and payable in arrears as of the end of each fiscal year (or upon termination of the Advisory Agreement, as of the termination date) and equals 20% of our realized capital gains as of the end of the fiscal year. In determining the capital gains-based incentive fee payable to the Adviser,

 

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we will calculate the cumulative aggregate realized capital gains and cumulative aggregate realized capital losses since our inception, and the aggregate net unrealized capital depreciation as of the date of the calculation, as applicable, with respect to each of the investments in our portfolio. For this purpose, cumulative aggregate realized capital gains, if any, equals the sum of the differences between the net sales price of each investment, when sold, and the original cost of such investment since our inception. Cumulative aggregate realized capital losses equals the sum of the amounts by which the net sales price of each investment, when sold, is less than the original cost of such investment since our inception. Aggregate net unrealized capital depreciation equals the sum of the difference, if negative, between the valuation of each investment as of the applicable calculation date and the original cost of such investment. At the end of the applicable year, the amount of capital gains that serves as the basis for our calculation of the capital gains-based incentive fee equals the cumulative aggregate realized capital gains less cumulative aggregate realized capital losses, less aggregate net unrealized capital depreciation, with respect to our portfolio of investments. If this number is positive at the end of such year, then the capital gains-based incentive fee for such year equals 20% of such amount, less the aggregate amount of any capital gains-based incentive fees paid in respect of our portfolio in all prior years. No capital gains-based incentive fee has been recorded since our inception through June 30, 2013, as cumulative net unrealized capital depreciation has exceeded cumulative realized capital gains net of cumulative realized capital losses.

Additionally, in accordance with GAAP, a capital gains-based incentive fee accrual is calculated using the aggregate cumulative realized capital gains and losses and aggregate cumulative unrealized capital depreciation included in the calculation of the capital gains-based incentive fee plus the aggregate cumulative unrealized capital appreciation. If such amount is positive at the end of a period, then GAAP requires us to record a capital gains-based incentive fee equal to 20% of such amount, less the aggregate amount of actual capital gains-based incentive fees paid in all prior years. If such amount is negative, then there is no accrual for such year. GAAP requires that the capital gains-based incentive fee accrual consider the cumulative aggregate unrealized capital appreciation in the calculation, as a capital gains-based incentive fee would be payable if such unrealized capital appreciation were realized. There can be no assurance that such unrealized capital appreciation will be realized in the future. No GAAP accrual for a capital gains-based incentive fee has been recorded since our inception through June 30, 2013.

Administration Agreement

We have an administration agreement (the “Administration Agreement”) with Gladstone Administration, LLC (the “Administrator”), an affiliate of the Adviser, whereby we pay separately for administrative services. The Administration Agreement provides for payments equal to our allocable portion of the Administrator’s overhead expenses in performing its obligations under the Administration Agreement, including, but not limited to, rent and the salaries and benefits expenses of our chief financial officer, treasurer, chief compliance officer, internal counsel and secretary and their respective staffs. Our allocable portion of administrative expenses is generally derived by multiplying the Administrator’s total allocable expenses by the percentage of our total assets at the beginning of the quarter in comparison to the total assets at the beginning of the quarter of all funds managed by the Adviser and administered by the Administrator under similar agreements. On July 9, 2013, our Board of Directors approved the annual renewal of the Administration Agreement through August 31, 2014.

Related Party Fees Due

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

 

                                                       
     June 30, 2013      September 30, 2012  

Base management fee due to Adviser

   $ 509       $ 695   

Incentive fee due to Adviser

     580         1,135   
  

 

 

    

 

 

 

Total fees due to Adviser

     1,089         1,830   
  

 

 

    

 

 

 

Fee due to Administrator

     183         174   
  

 

 

    

 

 

 

Total related party fees due

   $ 1,272       $ 2,004   
  

 

 

    

 

 

 

In addition, there were other expenses due to the Adviser as of June 30, 2013 and September 30, 2012 that totaled $33 and $19, respectively, which have been included in other liabilities on the Condensed Consolidated Statements of Assets and Liabilities.

Notes to Former Employees

We have outstanding notes receivable to certain of our former employees, who are now employees of the Adviser. The notes were for the exercise of options granted under the Amended and Restated 2001 Equity Incentive Plan, which has since been terminated. The notes require the quarterly payment of interest at the market rate in effect at the date of issuance, have varying terms not exceeding ten years and have been recorded as a reduction of net assets. The notes are evidenced by full recourse notes that are due upon maturity or 60 days following termination of employment with the Adviser and the shares of common stock purchased with the proceeds of the notes are posted as collateral. We received $1.8 million and $3 of principal repayments during the nine months ended June 30, 2013 and 2012, respectively. As part of the principal payments made during the fiscal year ended

 

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September 30, 2012, one employee redeemed 39,082 common shares (20,000 in December 2011 and 19,082 in January 2012) and liquidated additional collateral to pay off an aggregate of $0.3 million of principal on his outstanding note during the nine months ended June 30, 2012. There were no redemptions of common shares held by employees during the nine months ended June 30, 2013. We recognized interest income from all employee notes receivable of $22 and $0.1 million for the three and nine months ended June 30, 2013, respectively, and $62 and $0.2 million for the three and nine months ended June 30, 2012, respectively.

The following table is a summary of all outstanding notes issued to employees of the Adviser for the exercise of stock options as of June 30, 2013 and September 30, 2012:

 

Issue Date

   Original
Amount of
Employee
Notes
    Outstanding
Balance of
Employee Notes
At June 30, 2013
     Outstanding
Balance of
Employee Notes
At September 30, 2012
     Maturity
Date
     Original
Interest
Rate on
Note
    Current
Interest
Rate
On Note
 

Aug-01

   $ 5,900 (A)    $ 949       $ 2,749         Aug-10         4.90     6.90 %(B) 

Jul-06

     275 (A)      275         275         Jul-15         8.26        8.26   
  

 

 

   

 

 

    

 

 

         

Total

   $ 6,175      $ 1,224       $ 3,024           
  

 

 

   

 

 

    

 

 

         

 

(A)

On September 7, 2010, we entered into redemption agreements (the “Redemption Agreements”) with David Gladstone, our Chairman and Chief Executive Officer, and Laura Gladstone, a Managing Director of the Adviser and the daughter of Mr. Gladstone, in connection with the maturity of secured promissory notes executed by Mr. Gladstone on August 23, 2001, in the principal amount of $5.9 million and by Ms. Gladstone on July 13, 2006, in the principal amount $0.3 million (collectively, the “Notes”). Mr. and Ms. Gladstone originally executed the Notes to facilitate their payment of the exercise price of certain stock options (the “Options”) to acquire shares of our common stock. Concurrently with the execution of the Notes, we, together with Mr. and Ms. Gladstone entered into stock pledge agreements (collectively, the “Pledge Agreements”), pursuant to which Mr. and Ms. Gladstone granted to us a first priority security interest in the Pledged Collateral (as defined in the respective Pledge Agreements), which included 393,334 and 18,334 shares, respectively, of our common stock that Mr. and Ms. Gladstone acquired pursuant to the exercise of the Options (collectively, the “Pledged Shares”). The Redemption Agreements provide that, pursuant to the terms and conditions thereof, we will automatically accept and retire the Pledged Shares in partial or full satisfaction, as applicable, of Mr. and Ms. Gladstone’s obligations to us under the Notes at such time, if ever, that the trading price of our common stock reaches $15 per share. In entering into the Redemption Agreements, we reserved all of our existing rights under the Notes and the Pledge Agreements, including, but not limited to, the ability to foreclose on the Pledged Collateral at any time. On March 30, 2011, June 27, 2011 and September 26, 2011, Mr. Gladstone paid down an aggregate amount of $3.2 million of the principal balance of his Note, leaving a principal balance of $2.7 million outstanding as of September 30, 2012. In addition, on February 12, 2013 and March 26, 2013, Mr. Gladstone paid down an aggregate of $1.8 million of the principal balance of his Note, leaving a principal balance of $0.9 million outstanding as of June 30, 2013. In connection with these aggregated principal payments totaling $5.0 million made over the last two years, we released our first priority security interest on 210,000 common shares of Mr. Gladstone’s Pledged Shares, leaving a balance of 183,334 common shares of the Company in Pledged Collateral from Mr. Gladstone as of June 30, 2013.

(B) 

An event of default was triggered under this Note by virtue of Mr. Gladstone’s failure to repay the amount outstanding within five business days of August 23, 2010. As such, we charged a default rate of an additional 2% per annum under this Note for all periods following default.

In accordance with ASC 505, “Equity,” receivables from employees for the issuance of capital stock to employees prior to the receipt of cash payment should be reflected in the balance sheet as a reduction to stockholders’ equity. Therefore, our recourse notes totaling, in aggregate, $1.2 million as of June 30, 2013 were recorded as notes to employees and are included in the net assets section of our accompanying Condensed Consolidated Statements of Assets and Liabilities. As of June 30, 2013, we determined that these notes were still recourse.

See Note 12 – “Subsequent Events” for further information on Mr. Gladstone’s note.

NOTE 5. BORROWINGS

Revolving Credit Facility

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

Prior to the April 26, 2013 amendment, on January 29, 2013, we, through Business Loan, amended our Credit Facility to remove the London Interbank Offered Rate (“LIBOR”) minimum of 1.5% on advances. In addition, on January 19, 2012, we, through Business Loan, amended our Credit Facility to extend the then current maturity date of our revolving line of credit from March

 

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15, 2012 to January 19, 2015, which has subsequently been amended to January 19, 2016, as described above. We incurred fees of $0.6 million in January 2013 and $1.5 million in January 2012 in connection with these amendments, which are being amortized through the Maturity Date of our Credit Facility. All other terms of our Credit Facility remained generally unchanged at the time of these amendments.

The following tables summarize noteworthy information related to our Credit Facility (at cost) as of June 30, 2013 and September 30, 2012:

 

     June 30, 2013      September 30, 2012  

Commitment amount

   $ 137,000       $ 137,000   

Borrowings outstanding

     58,600         58,800   

Availability

     52,500         54,700   

 

  &