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EX-31.1 - CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 302 - GLADSTONE INVESTMENT CORPORATION\DEd474659dex311.htm
EX-32.1 - CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 906 - GLADSTONE INVESTMENT CORPORATION\DEd474659dex321.htm
EX-31.2 - CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 302 - GLADSTONE INVESTMENT CORPORATION\DEd474659dex312.htm
EX-32.2 - CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 906 - GLADSTONE INVESTMENT CORPORATION\DEd474659dex322.htm

 

 

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 QUARTER ENDED DECEMBER 31, 2012

 

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

COMMISSION FILE NUMBER: 814-00704

 

 

GLADSTONE INVESTMENT CORPORATION

(Exact name of registrant as specified in its charter)

 

 

 

DELAWARE   83-0423116

(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)

(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   ¨    Smaller reporting company   ¨

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. The number of shares of the issuer’s Common Stock, $0.001 par value per share, outstanding as of January 25, 2013, was 26,475,958.

 

 

 


GLADSTONE INVESTMENT CORPORATION

TABLE OF CONTENTS

 

PART I.   FINANCIAL INFORMATION:   
Item 1.   Financial Statements (Unaudited)   
  Condensed Consolidated Statements of Assets and Liabilities as of December 31, 2012 and March 31, 2012      3   
  Condensed Consolidated Statements of Operations for the three and nine months ended December 31, 2012 and 2011      4   
  Condensed Consolidated Statements of Changes in Net Assets for the nine months ended December 31, 2012 and 2011      5   
  Condensed Consolidated Statements of Cash Flows for the nine months ended December 31, 2012 and 2011      6   
  Condensed Consolidated Schedules of Investments as of December 31, 2012 and March 31, 2012      7   
  Notes to Condensed Consolidated Financial Statements      12   
Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations      30   
  Overview      30   
  Results of Operations      34   
  Liquidity and Capital Resources      44   
Item 3.   Quantitative and Qualitative Disclosures About Market Risk      53   
Item 4.   Controls and Procedures      53   
PART II.   OTHER INFORMATION:   
Item 1.   Legal Proceedings      53   
Item 1A.   Risk Factors      53   
Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds      54   
Item 3.   Defaults Upon Senior Securities      54   
Item 4.   Mine Safety Disclosures      54   
Item 5.   Other Information      54   
Item 6.   Exhibits      54   
SIGNATURES      55   

 

2


GLADSTONE INVESTMENT CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES

(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

(UNAUDITED)

 

     December 31,
2012
    March 31,
2012
 

ASSETS

    

Investments at fair value

    

Control investments (Cost of $258,596 and $186,743, respectively)

   $ 226,287      $ 157,544   

Affiliate investments (Cost of $54,679 and $70,015, respectively)

     38,986        58,831   

Non-Control/Non-Affiliate investments (Cost of $10,283 and $9,637, respectively)

     7,987        9,277   
  

 

 

   

 

 

 

Total investments at fair value (Cost of $323,558 and $266,395, respectively)

     273,260        225,652   

Cash and cash equivalents

     56,328        91,546   

Restricted cash

     631        1,928   

Interest receivable

     1,019        1,250   

Due from custodian

     11,329        1,527   

Deferred financing costs

     2,444        2,792   

Other assets

     861        602   
  

 

 

   

 

 

 

TOTAL ASSETS

   $ 345,872      $ 325,297   
  

 

 

   

 

 

 

LIABILITIES

    

Borrowings:

    

Short-term loan at fair value (Cost of $44,512 and $76,005, respectively)

   $ 44,512      $ 76,005   

Line of credit at fair value (Cost of $24,500 and $0, respectively)

     25,104        —     

Secured borrowing (Cost of $5,000 and $0, respectively)

     5,000        —     
  

 

 

   

 

 

 

Total borrowings (Cost of $74,012 and $76,005, respectively)

     74,616        76,005   

Mandatorily redeemable preferred stock, $0.001 par value per share, $25 liquidation preference per share; 1,610,000 shares authorized, 1,600,000 shares issued and outstanding at December 31 and March 31, 2012

     40,000        40,000   

Accounts payable and accrued expenses

     535        506   

Fees due to Adviser(A)

     1,074        496   

Fee due to Administrator(A)

     191        218   

Other liabilities

     386        856   
  

 

 

   

 

 

 

TOTAL LIABILITIES

     116,802        118,081   
  

 

 

   

 

 

 

Commitments and contingencies(B)

    

NET ASSETS

   $ 229,070      $ 207,216   
  

 

 

   

 

 

 

ANALYSIS OF NET ASSETS

    

Common stock, $0.001 par value per share, 100,000,000 shares authorized and 26,475,958 and 22,080,133 shares issued and outstanding at December 31 and March 31, 2012, respectively

   $ 26      $ 22   

Capital in excess of par value

     288,224        257,131   

Cumulative net unrealized depreciation of investments

     (50,298     (40,743

Cumulative net unrealized depreciation of other

     (631     (68

Net investment income in excess of distributions

     321        321   

Accumulated net realized loss

     (8,572     (9,447
  

 

 

   

 

 

 

TOTAL NET ASSETS

   $ 229,070      $ 207,216   
  

 

 

   

 

 

 

NET ASSET VALUE PER COMMON SHARE AT END OF PERIOD

   $ 8.65      $ 9.38   
  

 

 

   

 

 

 

 

(A) 

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

(B) 

Refer to Note 11—Commitments and Contingencies for additional information.

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

 

3


GLADSTONE INVESTMENT CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

(UNAUDITED)

 

     Three Months Ended
December 31,
    Nine Months Ended
December 31,
 
     2012     2011     2012     2011  

INVESTMENT INCOME

        

Interest income

        

Control investments

   $ 4,681      $ 3,515      $ 12,659      $ 9,075   

Affiliate investments

     1,456        1,226        4,800        3,958   

Non-Control/Non-Affiliate investments

     344        343        990        1,148   

Cash and cash equivalents

     1        1        4        7   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income

     6,482        5,085        18,453        14,188   

Other income

        

Control investments

     702        25        1,208        1,201   

Affiliate investments

     —          —          401        —     

Non-Control/Non-Affiliate investments

     —          59        —          77   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other income

     702        84        1,609        1,278   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total investment income

     7,184        5,169        20,062        15,466   
  

 

 

   

 

 

   

 

 

   

 

 

 

EXPENSES

        

Base management fee(A)

     1,440        1,140        3,939        3,212   

Incentive fee(A)

     589        —          1,130        19   

Administration fee(A)

     191        182        564        468   

Interest expense on borrowings

     289        185        865        550   

Dividend expense on mandatorily redeemable preferred stock

     712        —          2,137        —     

Amortization of deferred financing fees

     194        106        597        321   

Professional fees

     29        139        400        453   

Other general and administrative expenses

     277        320        978        1,262   
  

 

 

   

 

 

   

 

 

   

 

 

 

Expenses before credits from Adviser

     3,721        2,072        10,610        6,285   

Credits to fees from Adviser(A)

     (489     (345     (1,189     (1,071
  

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses net of credits

     3,232        1,727        9,421        5,214   
  

 

 

   

 

 

   

 

 

   

 

 

 

NET INVESTMENT INCOME

     3,952        3,442        10,641        10,252   
  

 

 

   

 

 

   

 

 

   

 

 

 

REALIZED AND UNREALIZED GAIN (LOSS)

        

Net realized gain (loss):

        

Control investments

     96        (105     848        5,087   

Non-Control/Non-Affiliate investments

     —          —          —          4   

Other

     —          —          (41     (40
  

 

 

   

 

 

   

 

 

   

 

 

 

Total net realized gain (loss)

     96        (105     807        5,051   

Net unrealized appreciation (depreciation):

        

Control investments

     4,244        3,433        (3,110     4,368   

Affiliate investments

     (2,935     (1,708     (4,508     2,033   

Non-Control/Non-Affiliate investments

     (1,263     44        (1,937     652   

Other

     605        389        (563     21   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total net unrealized appreciation (depreciation)

     651        2,158        (10,118     7,074   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net realized and unrealized gain (loss)

     747        2,053        (9,311     12,125   
  

 

 

   

 

 

   

 

 

   

 

 

 

NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS

   $ 4,699      $ 5,495      $ 1,330      $ 22,377   
  

 

 

   

 

 

   

 

 

   

 

 

 

NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS PER COMMON SHARE

        

Basic and diluted

   $ 0.18      $ 0.25      $ 0.06      $ 1.01   
  

 

 

   

 

 

   

 

 

   

 

 

 

WEIGHTED AVERAGE SHARES OF COMMON STOCK OUTSTANDING:

        

Basic and diluted

     26,147,157        22,080,133        23,440,737        22,080,133   

 

(A) 

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

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

 

4


GLADSTONE INVESTMENT CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS

(IN THOUSANDS)

(UNAUDITED)

 

     Nine Months Ended December 31,  
     2012     2011  

Operations:

    

Net investment income

   $ 10,641      $ 10,252   

Net realized gain on investments

     848        5,091   

Net realized loss on other

     (41     (40

Net unrealized (depreciation) appreciation of investments

     (9,555     7,053   

Net unrealized (appreciation) depreciation of other

     (563     21   
  

 

 

   

 

 

 

Net increase in net assets from operations

     1,330        22,377   

Equity capital activity:

    

Issuance of common stock, net of expenses

     31,100        —     

Distributions to common stockholders

     (10,576     (9,605
  

 

 

   

 

 

 

Net equity capital activity

     20,524        (9,605

Total increase in net assets

     21,854        12,772   

Net assets at beginning of period

     207,216        198,829   
  

 

 

   

 

 

 

Net assets at end of period

   $ 229,070      $ 211,601   
  

 

 

   

 

 

 

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

 

5


GLADSTONE INVESTMENT CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN THOUSANDS)

(UNAUDITED)

 

     Nine Months Ended December 31,  
     2012     2011  

CASH FLOWS FROM OPERATING ACTIVITIES

    

Net increase in net assets resulting from operations

   $ 1,330      $ 22,377   

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

    

Purchase of investments

     (80,639     (86,327

Principal repayments of investments

     21,137        16,953   

Proceeds from the sale of investments

     3,187        8,032   

Net realized gain on investments

     (848     (5,091

Net realized loss on other

     41        40   

Net unrealized depreciation (appreciation) of investments

     9,555        (7,053

Net unrealized appreciation (depreciation) of other

     563        (21

Amortization of deferred financing costs

     597        321   

Decrease in restricted cash

     1,297        2,539   

Decrease (increase) in interest receivable

     231        (405

(Increase) decrease in due from custodian

     (9,802     137   

(Increase) decrease in other assets

     (260     183   

Increase in accounts payable and accrued expenses

     132        290   

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

     578        (312

(Decrease) Increase in administration fee payable to Administrator(A)

     (27     12   

Decrease in other liabilities

     (470     (551
  

 

 

   

 

 

 

Net cash used in operating activities

     (53,398     (48,876

CASH FLOWS FROM FINANCING ACTIVITIES

    

Proceeds from issuance of common stock, net of expenses

     31,100        —     

Proceeds from borrowings

     312,047        231,202   

Repayments on borrowings

     (314,040     (165,901

Purchase of derivatives

     —          (29

Deferred financing costs

     (351     (901

Distributions paid to common stockholders

     (10,576     (9,605
  

 

 

   

 

 

 

Net cash provided by financing activities

     18,180        54,766   
  

 

 

   

 

 

 

NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS

     (35,218     5,890   

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD

     91,546        80,580   
  

 

 

   

 

 

 

CASH AND CASH EQUIVALENTS, END OF PERIOD

   $ 56,328      $ 86,470   
  

 

 

   

 

 

 

 

(A) 

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

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

 

6


GLADSTONE INVESTMENT CORPORATION

CONDENSED CONSOLIDATED SCHEDULE OF INVESTMENTS

DECEMBER 31, 2012

(DOLLAR AMOUNTS IN THOUSANDS)

(UNAUDITED)

 

Company(A)

  

Industry

  

Investment(B)

   Principal      Cost      Fair Value  

CONTROL INVESTMENTS:

        

Acme Cryogenics, Inc.

  

Chemicals, Plastics, and Rubber

  

Senior Subordinated Term Debt (11.5%, Due 3/2015)

   $ 14,500       $ 14,500       $ 14,500   
     

Preferred Stock (898,814 shares)(C)(F)

        6,984         11,047   
     

Common Stock (418,072 shares)(C)(F)

        1,045         1,780   
     

Common Stock Warrants (452,683 shares)(C)(F)

        25         560   
           

 

 

    

 

 

 
              22,554         27,887   

ASH Holdings Corp.

  

Automobile

  

Revolving Credit Facility, $350 available (3.0%, Due 3/2013)(G)

     7,150         7,093         —     
     

Senior Subordinated Term Debt (2.0%, Due 3/2013)(G)

     6,250         6,050         —     
     

Preferred Stock (4,644 shares)(C)(F)

        2,500         —     
     

Common Stock (1 share)(C)(F)

        —           —     
     

Common Stock Warrants (73,599 shares)(C)(F)

        4         —     
     

Guarantee ($500)

        
           

 

 

    

 

 

 
              15,647         —     

Country Club Enterprises, LLC

  

Automobile

  

Senior Subordinated Term Debt (18.6%, Due 11/2014)

     4,000         4,000         4,000   
     

Preferred Stock (7,304,792 shares)(C)(F)

        7,725         4,662   
     

Guarantee ($2,000)

        
     

Guarantee ($1,049)

        
           

 

 

    

 

 

 
              11,725         8,662   

Danco Acquisition Corp.(I)

  

Diversified/Conglomerate Manufacturing

  

Revolving Credit Facility, $0 available (10.0%, Due 4/2013)(D)

     2,250         2,250         675   
     

Senior Term Debt (10.0%, Due 4/2013)(D)

     2,575         2,575         772   
     

Senior Term Debt (6.3%, Due 4/2013)(D)

     8,796         8,796         2,639   
     

Senior Term Debt (5.0%, Due 8/2015)(D)

     700         700         210   
     

Senior Term Debt (5.0%, Due 8/2015)(D)(E)

     350         350         105   
     

Senior Term Debt (5.0%, Due 8/2015)(D) (E)

     100         100         30   
     

Preferred Stock (25 shares)(C)(F)

        2,500         —     
     

Common Stock Warrants (1,170 shares)(C)(F)

        2         —     
           

 

 

    

 

 

 
              17,273         4,431   

Drew Foam Companies, inc.

  

Chemicals, Plastics and Rubber

  

Senior Term Debt (13.5%, Due 8/2017)

     10,913         10,913         10,913   
     

Preferred Stock (34,045 shares)(C)(F)

        3,375         3,445   
     

Common Stock (5,372 shares)(C)(F)

        63         1,916   
           

 

 

    

 

 

 
              14,351         16,274   

Frontier Packaging, inc.

  

Containers, Packaging, and Glass

  

Revolving Credit Facility, $1,500 available (10.0%, Due 12/2013)(H)

     1,000         1,000         1,000   
     

Senior Term Debt (12.0%, Due 12/2017)(H)

     12,500         12,500         12,500   
     

Preferred Stock (1,373 shares)(C)(F)(H)

        1,373         1,373   
     

Common Stock (152 shares)(C)(F)(H)

        152         152   
           

 

 

    

 

 

 
              15,025         15,025   

Galaxy Tool Holding Corp.

  

Aerospace and Defense

  

Senior Subordinated Term Debt (13.5%, Due 8/2013)

     3,220         3,220         3,220   
     

Preferred Stock (4,111,907 shares)(C)(F)

        19,658         10,725   
     

Common Stock (48,093 shares)(C)(F)

        48         —     
           

 

 

    

 

 

 
              22,926         13,945   

Ginsey Holdings, Inc.

  

Home and Office Furnishings, Housewares and Durable Consumer Products

  

Senior Subordinated Term Debt (13.5%, Due 1/2018)(J)

     13,050         13,050         13,050   
     

Preferred Stock (18,898 shares)(C)(F)

        9,394         9,768   
     

Common Stock (63,747 shares)(C)(F)

        8         417   
           

 

 

    

 

 

 
              22,452         23,235   

Mathey Investments, Inc.

  

Machinery

  

Senior Term Debt (10.0%, Due 3/2014)

     1,375         1,375         1,375   
     

Senior Term Debt (12.0%, Due 3/2014)

     3,727         3,727         3,727   
     

Senior Term Debt (12.5%, Due 3/2014)(E)

     3,500         3,500         3,500   
     

Common Stock (29,102 shares)(C)(F)

        777         7,937   
           

 

 

    

 

 

 
              9,379         16,539   

Mitchell Rubber Products, Inc.

  

Chemicals, Plastics and Rubber

  

Subordinated Term Debt (13.0%, Due 10/2016)(D)

     13,560         13,560         13,543   
     

Preferred Stock (27,900 shares)(C)(F)

        2,790         2,457   
     

Common Stock (27,900 shares)(C)(F)

        28         —     
           

 

 

    

 

 

 
              16,378         16,000   

Precision Southeast, Inc.

  

Diversified/Conglomerate Manufacturing

  

Senior Term Debt (14.0%, Due 12/2015)

     7,775         7,775         7,775   
     

Preferred Stock (19,091 shares)(C)(F)

        1,909         2,228   
     

Common Stock (90,909 shares)(C)(F)

        91         1,417   
           

 

 

    

 

 

 
              9,775         11,420   

 

7


GLADSTONE INVESTMENT CORPORATION

CONDENSED CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

DECEMBER 31, 2012

(DOLLAR AMOUNTS IN THOUSANDS)

(UNAUDITED)

 

Company(A)

  

Industry

  

Investment(B)

   Principal      Cost      Fair Value  

CONTROL INVESTMENTS (Continued):

        

SBS, Industries, LLC

  

Machinery

  

Senior Term Debt (14.0%, Due 8/2016)

   $ 11,355       $ 11,355       $ 11,355   
     

Preferred Stock (19,935 shares)(C)(F)

        1,994         2,211   
     

Common Stock (221,500 shares)(C)(F)

        221         4,962   
           

 

 

    

 

 

 
              13,570         18,528   

SOG Specialty K&T, LLC

  

Leisure, Amusement, Motion Pictures, Entertainment

  

Senior Term Debt (13.3%, Due 8/2016)

     6,200         6,200         6,200   
     

Senior Term Debt (14.8%, Due 8/2016)

     12,199         12,199         12,199   
     

Preferred Stock (9,749 shares)(C)(F)

        9,749         11,966   
           

 

 

    

 

 

 
              28,148         30,365   

Tread Corp.

  

Oil and Gas

  

Revolving Credit Facility, $1,453 available (12.5%, Due 6/2013)(D)(G)

     1,296         1,296         —     
     

Senior Subordinated Term Debt (12.5%, Due 5/2013)(D)(G)

     5,000         5,000         —     
     

Senior Subordinated Term Debt (12.5%, Due 5/2013)(D)(G)

     2,750         2,750         —     
     

Senior Subordinated Term Debt (12.5%, Due 2/2015)(D)(G)

     1,000         1,000         —     
     

Senior Subordinated Term Debt (12.5%, Due On Demand)(D)(G)

     510         510         —     
     

Preferred Stock (3,332,765 shares)(C)(F)

        3,333         —     
     

Common Stock (7,716,320 shares)(C)(F)

        501         —     
     

Common Stock Warrants (2,372,727 shares)(C)(F)

        3         —     
           

 

 

    

 

 

 
              14,393         —     

Venyu Solutions, Inc.

  

Electronics

  

Senior Subordinated Term Debt (11.3%, Due 10/2015)

     7,000         7,000         7,000   
     

Senior Subordinated Term Debt (14.0%, Due 10/2015)

     12,000         12,000         12,000   
     

Preferred Stock (5,400 shares)(C)(F)

        6,000         4,976   
           

 

 

    

 

 

 
              25,000         23,976   

Total Control Investments (represents 82.8% of total investments at fair value)

      $ 258,596       $ 226,287   
           

 

 

    

 

 

 

AFFILIATE INVESTMENTS:

        

Cavert II Holding Corp.

  

Containers, Packaging and Glass

  

Senior Subordinated Term Debt (11.8%, Due 4/2016)(D)

   $ 4,700       $ 4,700       $ 4,806   
     

Subordinated Term Debt (13.0%, Due 4/2016)(D)

     4,671         4,671         4,787   
     

Preferred Stock (18,446 shares)(C)(F)

        1,844         2,752   
           

 

 

    

 

 

 
              11,215         12,345   

Channel Technologies Group, LLC

  

Diversified/Conglomerate Manufacturing

  

Revolving Credit Facility, $500 available (7.0%, Due 2/2013)(D)

     750         750         748   
     

Senior Term Debt (8.3%, Due 12/2014)(D)

     5,706         5,706         5,692   
     

Senior Term Debt (12.3%, Due 12/2016)(D)

     10,750         10,750         10,723   
     

Preferred Stock (1,599 shares)(C)(F)

        1,599         352   
     

Common Stock (1,598,616 shares)(C)(F)

        —           —     
           

 

 

    

 

 

 
              18,805         17,515   

Noble Logistics, Inc.

  

Cargo Transport

  

Revolving Credit Facility, $0 available (10.5%, Due 1/2013)(D)

     800         800         400   
     

Senior Term Debt (11.0%, Due 1/2013)(D)

     7,227         7,227         3,614   
     

Senior Term Debt (10.5%, Due 1/2013)(D)

     3,650         3,650         1,825   
     

Senior Term Debt (10.5%, Due 1/2013)(D)(E)

     3,650         3,650         1,825   
     

Preferred Stock (1,075,000 shares)(C)(F)

        1,750         —     
     

Common Stock (1,682,444 shares)(C)(F)

        1,683         —     
           

 

 

    

 

 

 
              18,760         7,664   

Packerland Whey Products, Inc.

  

Beverage, Food and Tobacco

  

Subordinated Term Debt (13.8%, Due 6/2018) (D)(K)

     2         2         2   
     

Preferred Stock (248 shares)(C)(F)

        2,479         505   
     

Common Stock (247 shares)(C)(F)

        21         —     
           

 

 

    

 

 

 
              2,502         507   

Quench Holdings Corp.

  

Home and Office Furnishings, Housewares and Durable Consumer Products

  

Preferred Stock (388 shares)(C)(F)

        2,950         955   
     

Common Stock (35,242 shares)(C)(F)

        447         —     
           

 

 

    

 

 

 
              3,397         955   
           

 

 

    

 

 

 

Total Affiliate Investments (represents 14.3% of total investments at fair value)

      $ 54,679       $ 38,986   
           

 

 

    

 

 

 

NON-CONTROL/NON-AFFILIATE INVESTMENTS:

        

B-Dry, LLC

  

Buildings and Real Estate

  

Revolving Credit Facility, $50 available (6.5%, Due 5/2014)(D)

   $ 700       $ 700       $ 560   
     

Senior Term Debt (14.0%, Due 5/2014)(D)

     6,443         6,443         5,155   
     

Senior Term Debt (14.0%, Due 5/2014)(D)

     2,840         2,840         2,272   
     

Common Stock Warrants (55 shares)(C)(F)

        300         —     
           

 

 

    

 

 

 
              10,283         7,987   
           

 

 

    

 

 

 

 

8


GLADSTONE INVESTMENT CORPORATION

CONDENSED CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

DECEMBER 31, 2012

(DOLLAR AMOUNTS IN THOUSANDS)

(UNAUDITED)

 

Total Non-Control/Non-Affiliate Investments (represents 2.9% of total investments at fair value)

      $ 10,283       $ 7,987   
           

 

 

    

 

 

 

TOTAL INVESTMENTS

      $ 323,558       $ 273,260   
           

 

 

    

 

 

 

 

(A) 

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

(B) 

Percentages represent the weighted average cash interest rates in effect at December 31, 2012, and due date represents the contractual maturity date.

(C) 

Security is non-income producing.

(D) 

Fair value based primarily on opinions of value submitted by Standard & Poor’s Securities Evaluations, Inc. as of December 31, 2012.

(E) 

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

(F) 

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) or aggregates all warrants to purchase shares of such class of stock owned without regard to specific series of such class of stock such warrants allow us to purchase.

(G) 

Debt security is on non-accrual status.

(H) 

New proprietary portfolio investment valued at cost, as it was determined that the price paid during the three months ended December 31, 2012, best represents fair value as of December 31, 2012.

(I) 

In August 2012, we received warrants in connection with our senior term note C debt investment in Danco, which resulted in Danco being reclassified as a Control investment during the three months ended September 30, 2012.

(J) 

$5.0 million of the debt security participated to a third party, but accounted for as collateral for a secured borrowing for in accordance with accounting principles generally accepted in the U.S. (“GAAP”).

(K) 

Security was paid off, at par, subsequent to December 31, 2012, and was valued based on the payoff.

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

 

9


GLADSTONE INVESTMENT CORPORATION

CONDENSED CONSOLIDATED SCHEDULES OF INVESTMENTS

MARCH 31, 2012

(DOLLAR AMOUNTS IN THOUSANDS)

(UNAUDITED)

 

Company(A)

  

Industry

  

Investment(B)

   Principal      Cost      Fair Value  

CONTROL INVESTMENTS:

        

Acme Cryogenics, Inc.

  

Chemicals, Plastics, and Rubber

  

Senior Subordinated Term Debt (11.5%, Due 3/2015)

   $ 14,500       $ 14,500       $ 14,500   
     

Preferred Stock (898,814 shares)(C)(F)

        6,984         10,994   
     

Common Stock (418,072 shares)(C)(F)

        1,045         2,132   
     

Common Stock Warrants (452,683 shares)(C)(F)

        25         675   
           

 

 

    

 

 

 
              22,554         28,301   

ASH Holdings Corp.

  

Automobile

  

Line of Credit, $570 available (3.0%, Due 3/2013)(G)

     6,430         6,388         —     
     

Senior Subordinated Term Debt (2.0%, Due 3/2013)(G)

     6,250         6,060         —     
     

Preferred Stock (4,644 shares)(C)(F)

        2,500         —     
     

Common Stock (1 share)(C)(F)

        —           —     
     

Common Stock Warrants (73,599 shares)(C)(F)

        4         —     
     

Guarantee ($750)

        
           

 

 

    

 

 

 
              14,952         —     

Country Club Enterprises, LLC

  

Automobile

  

Senior Subordinated Term Debt (14.0%, Due 11/2014)(G)

     4,000         4,000         —     
     

Preferred Stock (7,304,792 shares)(C)(F)

        7,725         —     
     

Guarantee ($2,000)

        
     

Guarantee ($1,998)

        
           

 

 

    

 

 

 
              11,725         —     

Galaxy Tool Holding Corp.

  

Aerospace and Defense

  

Senior Subordinated Term Debt (13.5%, Due 8/2013)

     5,220         5,220         5,220   
     

Preferred Stock (4,111,907 shares)(C)(F)

        19,658         1,493   
     

Common Stock (48,093 shares)(C)(F)

        48         —     
           

 

 

    

 

 

 
              24,926         6,713   

Mathey Investments, Inc.

  

Machinery

  

Senior Term Debt (10.0%, Due 3/2013)

     2,375         2,375         2,375   
     

Senior Term Debt (12.0%, Due 3/2014)

     3,727         3,727         3,727   
     

Senior Term Debt (2.5%, Due 3/2014)(E)

     3,500         3,500         3,500   
     

Common Stock (29,102 shares)(C)(F)

        777         4,164   
           

 

 

    

 

 

 
              10,379         13,766   

Mitchell Rubber Products, Inc.

  

Chemicals, Plastics and Rubber

  

Subordinated Term Debt (13.0%, Due 10/2016)(D)

     13,560         13,560         13,679   
     

Preferred Stock (27,900 shares)(C)(F)

        2,790         2,954   
     

Common Stock (27,900 shares)(C)(F)

        28         1,858   
           

 

 

    

 

 

 
              16,378         18,491   

Precision Southeast, Inc.

  

Diversified/Conglomerate Manufacturing

  

Line of Credit, $251 available (7.5%, Due 9/2012)

     749         749         749   
     

Senior Term Debt (14.0%, Due 12/2015)

     7,775         7,775         7,775   
     

Preferred Stock (19,091 shares)(C)(F)

        1,909         1,634   
     

Common Stock (90,909 shares)(C)(F)

        91         —     
           

 

 

    

 

 

 
              10,524         10,158   

SBS, Industries, LLC

  

Machinery

  

Senior Term Debt (14.0%, Due 8/2016)

     11,355         11,355         11,355   
     

Preferred Stock (19,935 shares)(C)(F)

        1,994         2,087   
     

Common Stock (221,500 shares)(C)(F)

        221         3,563   
           

 

 

    

 

 

 
              13,570         17,005   

SOG Specialty K&T, LLC

  

Leisure, Amusement, Motion Pictures, Entertainment

  

Senior Term Debt (13.3%, Due 8/2016)

     6,200         6,200         6,200   
     

Senior Term Debt (14.8%, Due 8/2016)

     12,199         12,199         12,199   
     

Preferred Stock (9,749 shares)(C)(F)

        9,749         11,697   
           

 

 

    

 

 

 
              28,148         30,096   

Tread Corp.

  

Oil and Gas

  

Senior Subordinated Term Debt (12.5%, Due 5/2013)

     7,750         7,750         7,750   
     

Preferred Stock (832,765 shares)(C)(F)

        833         1,080   
     

Common Stock (129,067 shares)(C)(F)

        1         96   
     

Common Stock Warrants (1,247,727 shares)(C)(F)

        3         758   
           

 

 

    

 

 

 
              8,587         9,684   

Venyu Solutions, Inc.

  

Electronics

  

Senior Subordinated Term Debt (11.3%, Due 10/2015)

     7,000         7,000         7,000   
     

Senior Subordinated Term Debt (14.0%, Due 10/2015)

     12,000         12,000         12,000   
     

Preferred Stock (5,400 shares)(C)(F)

        6,000         4,330   
           

 

 

    

 

 

 
              25,000         23,330   
           

 

 

    

 

 

 

Total Control Investments (represents 69.8% of total investments at fair value)

  

   $ 186,743       $ 157,544   
           

 

 

    

 

 

 

 

10


GLADSTONE INVESTMENT CORPORATION

CONDENSED CONSOLIDATED SCHEDULES OF INVESTMENTS (Continued)

MARCH 31, 2012

(DOLLAR AMOUNTS IN THOUSANDS)

(UNAUDITED)

 

Company(A)

  

Industry

  

Investment(B)

  

Principal

    

Cost

    

Fair Value

 

AFFILIATE INVESTMENTS:

              

Cavert II Holding Corp.

  

Containers, Packaging and Glass

  

Senior Term Debt (10.0%, Due 4/2016)(D)(E)

   $ 1,050       $ 1,050       $ 1,067   
     

Senior Subordinated Term Debt (11.8%, Due 4/2016)(D)

     5,700         5,700         5,771   
     

Subordinated Term Debt (13.0%, Due 4/2016)(D)

     4,671         4,671         4,741   
     

Preferred Stock (18,446 shares)(C)(F)

        1,844         2,596   
           

 

 

    

 

 

 
              13,265         14,175   

Channel Technologies Group, LLC

  

Diversified/Conglomerate Manufacturing

  

Line of Credit, $400 available (7.0%, Due 12/2012)(D)

     850         850         843   
     

Senior Term Debt (8.3%, Due 12/2014)(D)

     5,926         5,926         5,875   
     

Senior Term Debt (12.3%, Due 12/2016)(D)

     10,750         10,750         10,642   
     

Preferred Stock (1,599 shares)(C)(F)

        1,599         1,631   
     

Common Stock (1,598,616 shares)(C)(F)

        —           75   
           

 

 

    

 

 

 
              19,125         19,066   

Danco Acquisition Corp.

  

Diversified/Conglomerate Manufacturing

  

Line of Credit, $450 available (10.0%, Due 10/2012)(D)

     1,800         1,800         1,350   
     

Senior Term Debt (10.0%, Due 10/2012)(D)

     2,575         2,575         1,931   
     

Senior Term Debt (12.5%, Due 4/2013)(D)(E)

     8,891         8,891         6,669   
     

Preferred Stock (25 shares)(C)(F)

        2,500         —     
     

Common Stock Warrants (420 shares)(C)(F)

        3         —     
           

 

 

    

 

 

 
              15,769         9,950   

Noble Logistics, Inc.

  

Cargo Transport

  

Line of Credit, $0 available (10.5%, Due 1/2013)(D)

     500         500         315   
     

Senior Term Debt (11.0%, Due 1/2013)(D)

     7,227         7,227         4,553   
     

Senior Term Debt (10.5%, Due 1/2013)(D)

     3,650         3,650         2,300   
     

Senior Term Debt (10.5%, Due 1/2013)(D)(E)

     3,650         3,650         2,299   
     

Preferred Stock (1,075,000 shares)(C)(F)

        1,750         3,550   
     

Common Stock (1,682,444 shares)(C)(F)

        1,682         —     
           

 

 

    

 

 

 
              18,459         13,017   

Quench Holdings Corp.

  

Home and Office Furnishings, Housewares and Durable Consumer Products

  

Preferred Stock (388 shares)(C)(F)

        2,950         2,623   
     

Common Stock (35,242 shares)(C)(F)

        447         —     
           

 

 

    

 

 

 
              3,397         2,623   
           

 

 

    

 

 

 

Total Affiliate Investments (represents 26.1% of total investments at fair value)

  

   $ 70,015       $ 58,831   
           

 

 

    

 

 

 

NON-CONTROL/NON-AFFILIATE INVESTMENTS:

        

B-Dry, LLC

  

Buildings and Real Estate

  

Senior Term Debt (12.3%, Due 5/2014)(D)

     6,477         6,477         6,356   
     

Senior Term Debt (12.3%, Due 5/2014)(D)

     2,860         2,860         2,806   
     

Common Stock Warrants (55 shares)(C)(F)

        300         115   
           

 

 

    

 

 

 
              9,637         9,277   
           

 

 

    

 

 

 

Total Non-Control/Non-Affiliate Investments (represents 4.1% of total investments at fair value)

  

   $ 9,637       $ 9,277   
           

 

 

    

 

 

 

TOTAL INVESTMENTS

  

   $ 266,395       $ 225,652   
           

 

 

    

 

 

 

 

(A) 

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

(B) 

Percentages represent the weighted average interest rates in effect at March 31, 2012, and due date represents the contractual maturity date.

(C) 

Security is non-income producing.

(D) 

Fair value based primarily on opinions of value submitted by Standard & Poor’s Securities Evaluations, Inc. as of March 31, 2012.

(E) 

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

(F) 

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) or aggregates all warrants to purchase shares of such class of stock owned without regard to specific series of such class of stock such warrants allow us to purchase.

(G) 

Debt security is on non-accrual status.

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

 

11


GLADSTONE INVESTMENT CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2012

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

NOTE 1. ORGANIZATION

Gladstone Investment Corporation (“Gladstone Investment”) was incorporated under the General Corporation Law of the State of Delaware on February 18, 2005, and completed an initial public offering on June 22, 2005. The terms “the Company,” “we,” “our” and “us” all refer to Gladstone Investment and its consolidated subsidiaries. We are a 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 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.”). Debt investments primarily come in the form of three types of loans: senior term loans, senior subordinated loans and junior subordinated debt. Equity investments take the form of preferred or common equity (or warrants or options to acquire the foregoing), often in connection with buyouts and other recapitalizations. To a much lesser extent, we also invest in senior and subordinated syndicated loans. Our investment objectives are (a) to achieve and grow current income by investing in debt securities of established businesses that we believe will provide stable earnings and cash flow to pay expenses, make principal and interest payments on our outstanding indebtedness and make distributions to stockholders that grow over time and (b) to 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. We aim to maintain a portfolio consisting of approximately 80% debt investment and 20% equity investment, at cost.

Gladstone Business Investment, LLC (“Business Investment”), a wholly-owned subsidiary of ours, was established on August 11, 2006, for the sole purpose of owning our portfolio of investments in connection with our line of credit. The financial statements of Business Investment are consolidated with those of Gladstone Investment.

We are externally managed by Gladstone Management Corporation (the “Adviser”), an affiliate of ours.

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Unaudited Interim Financial Statements and Basis of Presentation

We prepare our interim financial statements in accordance with GAAP for interim financial information and pursuant to the requirements for reporting on Form 10-Q and Article 10 of Regulation S-X under the Securities Act of 1933, as amended (the “Securities Act”). 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 under the Securities Act, and the authoritative accounting guidance provided by the American Institute of Certified Public Accountants (“AICPA”) Audit and Accounting Guide for Investment Companies, we are not permitted to consolidate any portfolio company investments, including those in which we have a controlling interest. In our opinion, all adjustments, consisting solely of normal recurring accruals, necessary for the fair statement of financial statements for the interim periods have been included. The results of operations for the three and nine months ended December 31, 2012, are not necessarily indicative of results that ultimately may be achieved for the 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 March 31, 2012, as filed with the U.S. Securities and Exchange Commission (the “SEC”) on May 21, 2012.

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

Reclassifications

Certain amounts in the prior period’s financial statements have been reclassified to conform to the presentation for the three and nine months ended December 31, 2012, with no effect to net increase in net assets resulting from operations.

 

12


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 (the “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 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 publicly traded securities 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 restricted securities that are 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 December 31 and March 31, 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 (“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. At December 31 and March 31 2012, we had no syndicated investments.

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.

 

13


(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 together. Applying the liquidity waterfall approach to all of the investments of 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, our 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 value provided by the non-control fund. At December 31 and March 31, 2012, we had no non-control equity securities of other funds.

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.

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

 

14


Interest Income Recognition

Interest income, adjusted for amortization of premiums and acquisition costs, the accretion of discounts and the amortization of amendment fees, 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 such that the interest income is deemed to be collectible. At December 31, 2012, loans to two portfolio companies, ASH Holdings Corp. (“ASH”) and Tread Corporation (“Tread”), were on non-accrual. These non-accrual loans had an aggregate cost basis of $23.7 million, or 10.4% of the cost basis of all debt investments in our portfolio, and an aggregate fair value of $0. During the three months ended December 31, 2012, we placed Tread on non-accrual and took Country Club Enterprises, LLC (“CCE”) off non-accrual. At March 31, 2012, ASH and CCE were on non-accrual with an aggregate debt cost basis of $16.4 million, or 8.6% of the cost basis of debt investments in our portfolio, and an aggregate fair value of $0.

We did not hold any loans in our portfolio that contained a PIK provision at December 31, 2012, and no PIK income was recorded during the three and nine months ended December 31, 2012. During the three and nine months ended December 31, 2011, we recorded PIK income of $0 and $7, respectively. PIK interest, computed at the contractual rate specified in the loan agreement, is added to the principal balance of the loan and recorded as interest income. To maintain our status as a RIC, this non-cash source of income must be included in our calculation of distributable income for purposes of complying with our distribution requirements, even though we have not yet collected the cash. The sole loan with a PIK provision was paid off, at par, during the quarter ended September 30, 2011.

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 $0 and $0.8 million of success fees during the three and nine months ended December 31, 2012, respectively, representing prepayments received from Mathey Investments, Inc. (“Mathey”) and Cavert II Holding Corp. (“Cavert”). During the three and nine months ended December, 31, 2011, we recorded success fees of $0 and $0.4 million, respectively, representing prepayments received from Mathey and Cavert. As of December 31, 2012, we have an off-balance sheet success fee receivable of approximately $12.3 million.

We accrue dividend income on preferred and common equity securities to the extent that such amounts are expected to be collected and if we have the option to collect such amounts in cash. We recorded $0.7 and $0.8 million in dividend income during the three and nine months ended December 31, 2012, on accrued preferred shares of Acme Cryogenics, Inc. (“Acme”) and Drew Foam Companies, Inc. (“Drew Foam”). We recorded $0 and $0.7 million in dividend income during the three and nine months ended December 31, 2011, on accrued preferred shares in connection with the recapitalization of Cavert.

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

Recent Accounting Pronouncements

In May 2011, the FASB issued 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 IFRSs” (“ASU 2011-04”), which results in a consistent definition of fair value and common requirements for measurement of and disclosure about fair value between GAAP and IFRS. ASU 2011-04 is effective for interim and annual periods beginning after December 15, 2011. The adoption of ASU 2011-04 did not have a significant impact on our financial position or results of operations.

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 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

 

15


   

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.

We transfer investments in and out of Level 1, 2 and 3 securities 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 three and nine months ended December 31, 2012 and 2011, there were no transfers in or out of Level 1, 2 and 3.

The following table presents the financial assets carried at fair value as of December 31 and March 31, 2012, by caption on our accompanying Condensed Consolidated Statements of Assets and Liabilities and by security type for each of the three applicable levels of hierarchy established by ASC 820 that we used to value our financial assets:

 

     December 31, 2012      March 31, 2012  
     Level 1      Level 3      Total Recurring Fair
Value Measurement
Reported in 
Condensed
Consolidated Statements
of Assets and Liabilities
     Level 1      Level 3      Total Recurring Fair
Value Measurement
Reported in 
Condensed
Consolidated Statements
of Assets and Liabilities
 

Control Investments

                 

Senior debt

   $ —         $ 74,975       $ 74,975       $ —         $ 47,880       $ 47,880   

Senior subordinated debt

     —           67,313         67,313         —           60,149         60,149   

Preferred equity

     —           64,856         64,856         —           36,269         36,269   

Common equity/equivalents

     —           19,143         19,143         —           13,246         13,246   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Control investments

     —           226,287         226,287         —           157,544         157,544   

Affiliate Investments

                 

Senior debt

     —           24,827         24,827         —           37,844         37,844   

Senior subordinated debt

     —           9,595         9,595         —           10,512         10,512   

Preferred equity

     —           4,564         4,564         —           10,400         10,400   

Common equity/equivalents

     —           —           —           —           75         75   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Affiliate investments

     —           38,986         38,986         —           58,831         58,831   

Non-Control/Non-Affiliate Investments

                 

Senior debt

     —           7,987         7,987         —           9,162         9,162   

Common equity/equivalents

     —           —           —           —           115         115   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Non-Control/Non-Affiliate Investments

     —           7,987         7, 987         —           9,277         9,277   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Investments at fair value

   $ —         $ 273,260       $ 273,260       $ —         $ 225,652       $ 225,652   

Cash Equivalents

     50,000         —           50,000         85,000         —           85,000   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Investments and Cash Equivalents

   $ 50,000       $ 273,260       $ 323,260       $ 85,000       $ 225,652       $ 310,652   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

In accordance with ASU 2011-04, the following table provides quantitative information about our Level 3 fair value measurements of our investments as of December 31, 2012. In addition to the techniques and inputs noted in the table below, according to our valuation policy, the Adviser may also use other valuation techniques and methodologies when determining our fair value measurements. The below table 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.

 

16


     Quantitative Information about Level 3 Fair Value Measurements  

Valuation Technique/Methodology

   Fair Value as of
December 31,
2012
    Unobservable Input    Range    Weighted
Average
 

TEV

   $ 212,879 (A)     EBITDA  multiples(C)    4.0x – 8.3x      5.9x   
     EBITDA(C)    ($2,674) – $6,965    $ 3,733   

SPSE(B)

     60,381      EBITDA(C)    ($11) – $5,654    $ 2,497   
     Risk Ratings(D)    2.8 – 6.9      5.0   
  

 

 

         

Total Fair Value for Level 3 Investments

   $ 273,260           
  

 

 

         

 

(A) 

Includes one new portfolio company investment which was valued at cost, as it was determined that the price paid during the three months ended December 31, 2012, best represents fair value as of December 31, 2012.

(B) 

SPSE makes an independent assessment of the data our 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 (D) 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.

(C) 

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 estimation of where market participants might price these investments. For our bundled debt and equity investments, the EBITDA and EBITDA multiples impact the TEV fair value determination and the value of the issuer’s debt, equity, or equity-like securities are valued in accordance with the Adviser’s liquidity waterfall approach.

(D) 

As part of the Adviser’s valuation procedures, it risk rates all of our investments in debt securities. The Adviser uses 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.

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 measurement. Per our valuation policy, the Adviser generally uses an indexed EBITDA multiple. 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, 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 month periods ended December 31, 2012 and 2011 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.

 

17


Fair Value Measurements of Investments Using Significant Unobservable Inputs (Level 3)

 

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

Three months ended December 31, 2012:

          

Fair value as of September 30, 2012

   $ 97,257      $ 93,740      $ 64,300      $ 11,389      $ 266,686   

Total (losses) gains:

          

Net realized gains(A)(D)

     —          —          —          96        96   

Net unrealized (depreciation) appreciation(B)

     (3,471     (9,631     5,514        7,634        46   

New investments, repayments and settlements(C):

          

Issuances / Originations

     14,650        1,500        1,373        153        17,676   

Settlements / Repayments

     (647     (8,701     —          —          (9,348

Sales(D)

     —          —          (1,767     (129     (1,896
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Fair value as of December 31, 2012

   $ 107,789      $ 76,908      $ 69,420      $ 19,143      $ 273,260   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Nine months ended December 31, 2012:

          

Fair value as of March 31, 2012

   $ 94,886      $ 70,661      $ 46,669      $ 13,436      $ 225,652   

Total (losses) gains:

          

Net realized gains(A)(D)

     —          —          —          848        848   

Net unrealized (depreciation) appreciation(B)

     (11,547     (6,601     3,630        4,963        (9,555

New investments, repayments and settlements(C):

          

Issuances / Originations

     33,120        28,315        18,926        278        80,639   

Settlements / Repayments

     (8,670     (12,467     —          —          (21,137

Sales(D)

     —          —          (2,305     (882     (3,187

Transfers(E)

     —          (3,000     2,500        500        —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Fair value as of December 31, 2012

   $ 107,789      $ 76,908      $ 69,420      $ 19,143      $ 273,260   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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

Three months ended December 31, 2011:

          

Fair value as of September 30, 2011

   $ 85,075      $ 80,085      $ 47,452      $ 5,444      $ 218,056   

Total (losses) gains:

          

Net realized losses(A)(D)

     —          —          —          (105     (105

Net unrealized (depreciation) appreciation(B)

     (1,521     2,477        (5,606     6,328        1,678   

Reversal of previously-recorded depreciation upon realization(B)

     30        —          —          61        91   

New investments, repayments and settlements(C):

          

Issuances / Originations

     17,350        —          1,599        —          18,949   

Settlements / Repayments

     (3,393     (8,000     —          —          (11,393

Sales(D)

     —          —          —          (505     (505

Transfers(F)

     —          (4,000     4,000        —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Fair value as of December 31, 2011

   $ 97,541      $ 70,562      $ 47,445      $ 11,223      $ 226,771   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Nine months ended December 31, 2011:

          

Fair value as of March 31, 2011

   $ 58,627      $ 62,806      $ 25,398      $ 6,454      $ 153,285   

Total (losses) gains:

          

Net realized (losses) gains(A)(D)

     (1     5        —          5,087        5,091   

Net unrealized appreciation (depreciation) (B)

     (734     (1,705     4,868        10,645        13,074   

Reversal of previously-recorded depreciation (appreciation) upon realization(B)

     126        (14     (686     (5,447     (6,021

New investments, repayments and settlements(C):

          

Issuances / Originations

     47,561        22,385        16,131        250        86,327   

Settlements / Repayments

     (8,038     (8,915     —          —          (16,953

Sales(D)

     —          —          (2,266     (5,766     (8,032

Transfers(F)

     —          (4,000     4,000        —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Fair value as of December 31, 2011

   $ 97,541      $ 70,562      $ 47,445      $ 11,223      $ 226,771   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

18


(A) 

Included in Net realized (loss) gain on our accompanying Condensed Consolidated Statements of Operations for the periods ended December 31, 2012 and 2011.

(B) 

Included in Net unrealized appreciation (depreciation) on our accompanying Condensed Consolidated Statements of Operations for the periods ended December 31, 2012 and 2011.

(C) 

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

(D) 

Included in Net realized gains (losses) and Sales are post-closing adjustments recorded in the current period related to exits from prior periods.

(E) 

Transfers represent $3.0 million of senior subordinated term debt of Tread, at cost as of June 30, 2012, that was converted into preferred and common equity during the quarter ended September 30, 2012.

(F) 

Transfers represent $4.0 million of senior subordinated term debt of CCE, at cost as of September 30, 2011, that was converted to preferred equity during the quarter ended December 31, 2011.

Investment Activity

During the nine months ended December 31, 2012, the following significant transactions occurred:

 

   

In May 2012, we invested $9.5 million in a new Affiliate investment, Packerland Whey Products, Inc. (“Packerland”), through a combination of debt and equity. Packerland, headquartered in Luxemburg, Wisconsin, is a processor of raw fluid whey, specializing in the production of protein supplements for dairy and beef cattle. In December 2012, our $7.0 million debt investment was paid off at par.

 

   

In July 2012, we invested $21.3 million in a new Control investment, Drew Foam, through a combination of debt and equity. Drew Foam, headquartered in Monticello, Arkansas, is an expanded polystyrene foam molder and fabricator for a variety of applications in construction and packaging. In September 2012, $4.0 million of the debt and the line of credit was refinanced with a third-party. In December 2012, $1.8 million of our equity investment was sold to a third-party at cost.

 

   

In July 2012, we invested $22.5 million in a new Control investment, Ginsey Holdings, Inc. (“Ginsey”), through a combination of debt and equity. Ginsey, headquartered in Bellmawr, New Jersey, designs and markets a broad line of branded juvenile and adult bath products. In August 2012, we participated out $5.0 million of the debt to a third-party.

 

   

In August 2012, we restructured our investment in Tread, converting $3.0 million of senior subordinated debt into preferred and common shares of Tread in a non-cash transaction.

 

   

In November 2012, we invested $16.5 million in a new Control investment, Frontier Packaging, Inc. (“Frontier”), through a combination of debt and equity. Frontier, headquartered in Seattle, Washington, is a supplier of a range of time sensitive packaging materials to the Alaskan seafood market, adding value through its expertise in product consolidation and logistics.

Investment Concentrations

As of December 31, 2012, our investment portfolio consisted of investments in 21 portfolio companies located in 15 states across 13 different industries with an aggregate fair value of $273.3 million, of which SOG Specialty K&T, LLC (“SOG”), Acme Cryogenics, Inc. (“Acme”), and Venyu Solutions, Inc. (“Venyu”), collectively, comprised approximately $82.2 million, or 30.1%, of our total investment portfolio at fair value. The following table outlines our investments by security type at December 31 and March 31, 2012:

 

     December 31, 2012     March 31, 2012  
     Cost     Fair Value     Cost     Fair Value  

Senior debt

   $ 134,924         41.7   $ 107,789         39.5   $ 110,475         41.5   $ 94,886         42.0

Senior subordinated debt

     93,310         28.8        76,908         28.1        80,461         30.2        70,661         31.3   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total debt

     228,234         70.5        184,697         67.6        190,936         71.7        165,547         73.3   

Preferred equity

     89,905         27.8        69,420         25.4        71,084         26.6        46,669         20.7   

Common equity/equivalents

     5,419         1.7        19,143         7.0        4,375         1.7        13,436         6.0   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total equity/equivalents

     95,324         29.5        88,563         32.4        75,459         28.3        60,105         26.7   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total investments

   $ 323,558         100.0   $ 273,260         100.0   $ 266,395         100.0   $ 225,652         100.0
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

19


Investments at fair value consisted of the following industry classifications at December 31 and March 31, 2012:

 

     December 31, 2012     March 31, 2012  
     Fair Value      Percentage of
Total Investments
    Fair Value      Percentage of
Total Investments
 

Chemicals, Plastics, and Rubber

   $ 60,161         22.0 %    $ 46,793         20.7

Machinery

     35,068         12.8        30,770         13.6   

Diversified/Conglomerate Manufacturing

     33,366         12.2        29,017         12.9   

Leisure, Amusement, Motion Pictures, Entertainment

     30,365         11.1        30,096         13.3   

Containers, Packaging, and Glass

     27,370         10.0        24,332         10.8   

Home and Office Furnishings, Housewares, and Durable Consumer Products

     24,190         8.9        2,623         1.2   

Electronics

     23,976         8.8        23,330         10.3   

Aerospace and Defense

     13,945         5.1        6,713         3.0   

Automobile

     8,662         3.2        —           —     

Buildings and Real Estate

     7,986         2.9        9,277         4.1   

Cargo Transport

     7,664         2.8        13,017         5.8   

Beverage, Food, and Tobacco

     507         0.2        —           —     

Oil and Gas

                          9,684         4.3   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total Investments

   $ 273,260         100.0 %    $ 225,652         100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

The investments, at fair value, were included in the following geographic regions of the U.S. as of December 31 and March 31, 2012:

 

     December 31, 2012     March 31, 2012  
     Fair Value      Percentage of
Total Investments
    Fair Value      Percentage of
Total Investments
 

South

   $ 114,731         42.0   $ 128,902         57.1

West

     83,337         30.5        59,112         26.2   

Northeast

     60,740         22.2        30,924         13.7   

Midwest

     14,452         5.3        6,714         3.0   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total Investments

   $ 273,260         100.0   $ 225,652         100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

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

Investment Principal Repayments

The following table summarizes the contractual principal repayments and maturity of our investment portfolio by fiscal year, assuming no voluntary prepayments, at December 31, 2012:

 

          Amount  

For the remaining three months ending March 31:

  

2013

   $ 29,479   

For the fiscal year ending March 31:

  

2014

     36,380   
  

2015

     34,809   
  

2016

     27,925   
  

2017

     63,435   
  

Thereafter

     36,462   
     

 

 

 
  

Total contractual repayments

   $ 228,490   
  

Investments in equity securities

     95,324   
  

Adjustments to cost basis on debt securities

     (256
     

 

 

 
  

Total cost basis of investments held at December 31, 2012:

   $ 323,558   
     

 

 

 

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 December 31 and March 31, 2012, we had gross receivables from portfolio companies of $0.5 million and $0.3 million, respectively. The allowance for uncollectible receivables was $0 at both December 31 and March 31, 2012.

 

20


NOTE 4. RELATED PARTY TRANSACTIONS

Investment Advisory and Management Agreement

We entered into 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 10, 2012, our Board of Directors approved the renewal of the Advisory Agreement through August 31, 2013.

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

 

     Three Months Ended
December 31,
    Nine Months Ended
December 31,
 
     2012     2011     2012     2011  

Average total assets subject to base management fee

   $ 288,000      $ 228,000      $ 262,600      $ 214,133   

Multiplied by prorated annual base management fee of 2%

     0.5     0.5     1.5     1.5
  

 

 

   

 

 

   

 

 

   

 

 

 

Base management fee(A)

     1,440        1,140        3,939        3,212   

Reduction for loan servicing fees

     (972     (811     (2,789     (2,204
  

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted base management fee

   $ 468      $ 329      $ 1,150      $ 1,008   

Credit for fees received by Adviser from the portfolio companies

     (268     (291     (968     (1,017
  

 

 

   

 

 

   

 

 

   

 

 

 

Net base management fee

   $ 200      $ 38      $ 182      $ (9
  

 

 

   

 

 

   

 

 

   

 

 

 

Incentive fee(A)

     589        —          1,130        19   

Credit from waiver issued by Adviser’s board of directors(B)

     (221     (54     (221     (54
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Incentive fee

   $ 368      $ (54   $ 909      $ (35
  

 

 

   

 

 

   

 

 

   

 

 

 

Total credits to fees:

        

Credit for fees received by Adviser from the portfolio companies

     (268     (291     (968     (1,017

Credit from waiver issued by Adviser’s board of directors(B)

     (221     (54     (221     (54
  

 

 

   

 

 

   

 

 

   

 

 

 

Credit to fees from Adviser(A)

     (489     (345     (1,189     (1,071
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(A) 

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

(B) 

The credit to the incentive fee for the three months ended December 31, 2011, is due to a payment of the incentive fee during the three months ended June 30, 2010, in relation to the dividend income recognized based on a best-efforts valuation of Neville Limited (“Neville”), the property received in connection with the A. Stucki Holding Corp. (“A. Stucki”) sale in June 2010. This property was sold during November 2011, resulting in an exit at a lower amount than the dividend recognized during the three months ended June 30, 2010. The Adviser determined to retroactively apply the exit value to the incentive fee calculation for the three months ended June 30, 2010, resulting in an additional credit of $54, which was recorded during the three months ended December 31, 2011.

Base Management Fee

The base management fee is payable quarterly and 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. Average total assets 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. 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 Investment, in return for which it receives a 2.0% 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.

 

   

Portfolio Company Fees

Under the Advisory Agreement, the Adviser has also provided, and continues to provide, managerial assistance and other services to our portfolio companies and may receive fees for services other than managerial assistance. 50% of certain of these fees and 100% of other fees are credited against the base management fee that we would otherwise be required to pay to the Adviser.

 

21


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 three months ended December 31, 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, 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 December 31, 2012, 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 December 31, 2012.

As a BDC, we make available significant managerial assistance to our portfolio companies and provide other services to such portfolio companies. Although neither we nor the Adviser receive fees in connection with managerial assistance, the Adviser provides other services to our portfolio companies and receives fees for these other services.

Administration Agreement

We have entered into an administration agreement (the “Administration Agreement”) with Gladstone Administration, LLC (the “Administrator”), an affiliate of ours and the Adviser, whereby we pay separately for administrative services. 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 and treasurer, chief compliance officer, internal counsel 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

 

22


assets at the beginning of the quarter in comparison to the total assets at the beginning of the quarter of all companies managed by the Adviser under similar agreements. On July 10, 2012, our Board of Directors approved the renewal of the Administration Agreement through August 31, 2013.

Related Party Fees Due

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

 

     December 31, 2012      March 31, 2012  

Base management fee due to Adviser

   $ 431       $ 513   

Incentive fee due to (from) Adviser

     368         (54

Other due to Adviser

     275         37   
  

 

 

    

 

 

 

Total fees due to Adviser

   $ 1,074       $ 496   
  

 

 

    

 

 

 

Fee due to Administrator

   $ 191       $ 218   
  

 

 

    

 

 

 

Total related party fees due

   $ 1,265       $ 714   
  

 

 

    

 

 

 

NOTE 5. BORROWINGS

Line of Credit

On April 14, 2009, through our wholly-owned subsidiary, Business Investment, we entered into a second amended and restated credit agreement providing for a $50.0 million revolving line of credit (the “Credit Facility”) arranged by Branch Banking and Trust Company (“BB&T”) as administrative agent. Key Equipment Finance Inc. also joined our Credit Facility as a committed lender.

On April 13, 2010, we entered into a third amended and restated credit agreement, which extended the maturity date of our Credit Facility to April 13, 2012. Advances under our Credit Facility generally bear interest at the 30-day London Interbank Offered Rate (“LIBOR”) (subject to a minimum rate of 2.0%), plus 4.5% per annum, with a commitment fee of 0.50% per annum on undrawn amounts when advances outstanding are above 50.0% of the commitment and 1.0% on undrawn amounts if the advances outstanding are below 50.0% of the commitment.

On October 26, 2011, we entered into a fourth amended and restated credit agreement to increase the commitment amount under our Credit Facility to $60.0 million, reduce the interest rate and extend the maturity date. Subject to certain terms and conditions, our Credit Facility may be expanded up to a total of $175.0 million through the addition of other committed lenders to the facility. Advances under our Credit Facility will generally bear interest at 30-day LIBOR, plus 3.75% per annum, with an unused fee of 0.50% on undrawn amounts.

On October 5, 2012, we entered into Amendment No. 1 (the “Amendment”) to our the fourth amended and restated credit agreement, which extended the maturity date of our Credit Facility by one year. As a result of the Amendment, our Credit Facility is now scheduled to mature on October 25, 2015 (the “Extended Maturity Date”) and, if not renewed or extended by the Extended Maturity Date, all principal and interest will be due and payable on or before October 25, 2016 (one year after the Extended Maturity Date). There remains a one-year extension option to be agreed upon by all parties, which may be exercised on or before October 26, 2013. All other terms of our Credit Facility remained the same.

The following tables summarize noteworthy information related to our Credit Facility:

 

     December 31, 2012      March 31, 2012  

Commitment amount

   $ 60,000       $ 60,000   

Borrowings outstanding at cost

     24,500         —     

Availability

     32,250         58,399   

 

     For the Three Months Ended
December 31,
    For the Nine Months Ended
December 31,
 
     2012     2011     2012     2011  

Weighted average borrowings outstanding

   $ 11,924      $ 7,591      $ 17,305      $ 4,852   

Effective interest rate(A)

     6.1     9.2     5.3     14.4

Commitment (unused) fees incurred

   $ 61      $ 77      $ 163      $ 314   

 

(A) 

Excludes the impact of deferred financing fees.

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

 

23


The administrative agent also requires that any interest or principal payments on pledged loans be remitted directly by the borrower into a lockbox account with The Bank of New York Mellon Trust Company, N.A as custodian. BB&T is the trustee of the account and remits the collected funds to us monthly.

Generally, our Credit Facility contains covenants that require Business Investment to, among other things, maintain its status as a separate legal entity, prohibit certain significant corporate transactions (such as mergers, consolidations, liquidations or dissolutions) and restrict certain material changes to our credit and collection policies without the lenders’ consent. Our Credit Facility also limits payments on distributions to the aggregate net investment income for each of the twelve-month periods ending March 31, 2013, 2014, 2015 and 2016. Business Investment is also subject to certain limitations on the type of loan investments it can apply toward availability credit in the borrowing base, including restrictions on geographic concentrations, sector concentrations, loan size, dividend payout, payment frequency and status, average life and lien property. Our Credit Facility further requires Business Investment to comply with other financial and operational covenants, which obligate Business Investment to, among other things, maintain certain financial ratios, including asset and interest coverage and a minimum number of obligors required in the borrowing base of the credit agreement. Additionally, we are subject to a performance guaranty that requires us to maintain (i) a minimum net worth (defined in our Credit Facility to include our mandatorily redeemable preferred stock) of $155.0 million plus 50% of all equity and subordinated debt raised after October 26, 2011, (ii) “asset coverage” with respect to “senior securities representing indebtedness” of at least 200%, in accordance with Section 18 of the 1940 Act and (iii) our status as a BDC under the 1940 Act and as a RIC under the Code. As of December 31, 2012, and as defined in the performance guaranty of our Credit Facility, we had a minimum net worth of $269.1 million, an asset coverage of 292% and an active status as a BDC and RIC. Our Credit Facility requires a minimum of 12 obligors in the borrowing base, and, as of December 31, 2012, Business Investment had 16 obligors. As of December 31, 2012, we were in compliance with all of our Credit Facility covenants.

Short-Term Loan

Similar to previous quarter ends, to maintain our status as a RIC, we purchased $50.0 million of short-term U.S. Treasury Bills (“T-Bills”) through Jefferies & Company, Inc. (“Jefferies”) on December 27, 2012. As these T-Bills have a maturity of less than three months, we consider them to be cash equivalents and include them in cash and cash equivalents on our accompanying Condensed Consolidated Statement of Assets and Liabilities as of December 31, 2012. The T-Bills were purchased on margin using $5.5 million in cash and the proceeds from a $44.5 million short-term loan from Jefferies with an effective annual interest rate of approximately 1.44%. On January 3, 2013, when the T-Bills matured, we repaid the $44.5 million loan from Jefferies and we received back the $5.5 million margin payment sent to Jefferies to complete the transaction.

Secured Borrowing

In August 2012, we entered into a participation agreement with a third-party related to $5.0 million of our senior subordinated term debt investment in Ginsey. We evaluated whether the transaction should be accounted for as a sale or a financing-type transaction under the applicable guidance of ASC 860. Based on the terms of the participation agreement, we are required to treat the participation as a financing-type transaction. Specifically, the third-party has a senior claim to our remaining investment in the event of default by Ginsey which, in part, resulted in the loan participation bearing a rate of interest lower than the contractual rate established at origination. Therefore, our accompanying Condensed Consolidated Statements of Assists and Liabilities reflects the entire senior subordinated term debt investment in Ginsey and a corresponding $5.0 million secured borrowing liability. The secured borrowing has a stated interest rate of 7% and a maturity date of January 3, 2018.

Fair Value

We elected to apply ASC 825, “Financial Instruments,” specifically for our Credit Facility and short-term loan, which was consistent with the application of ASC 820 to our investments. Generally, we estimate the fair value of our Credit Facility using estimates of value provided by an independent third party and our own assumptions in the absence of observable market data, including estimated remaining life, counterparty credit risk, current market yield and interest rate spreads of similar securities as of the measurement date. Additionally, due to the eight-day duration of the short-term loan, cost was deemed to approximate fair value. At each of December 31 and March 31, 2012, all of our borrowings were valued using Level 3 inputs. The following tables present the short-term loan and Credit Facility carried at fair value as of December 31 and March 31, 2012, by caption on our accompanying Condensed Consolidated Statements of Assets and Liabilities for Level 3 of the hierarchy established by ASC 820 and a roll-forward of the changes in fair value during the three and nine months ended December 31, 2012 and 2011:

 

     Level 3 – Borrowings  
     Total Recurring Fair Value Measurement
Reported in
Condensed Consolidated
Statements of Assets and Liabilities
 
     December 31, 2012      March 31,
2012
 

Short-Term Loan

   $ 44,512       $ 76,005   

Credit Facility

     25,104         —     
  

 

 

    

 

 

 

Total

   $ 69,616       $ 76,005   
  

 

 

    

 

 

 

 

24


Fair Value Measurements of Borrowings Using Significant Unobservable Inputs (Level 3)

 

 
     Short-Term
Loan
    Credit
Facility
    Total  

Three months ended December 31, 2012:

      

Fair value at September 30, 2012

   $ 71,525      $ 57,209      $ 128,734   

Borrowings

     44,512        24,000        68,512   

Repayments

     (71,525     (55,500     (127,025

Net unrealized depreciation(A)

     —          (605     (605
  

 

 

   

 

 

   

 

 

 

Fair value at December 31, 2012

   $ 44,512      $ 25,104      $ 69,616   
  

 

 

   

 

 

   

 

 

 

Nine months ended December 31, 2012:

      

Fair value at March 31, 2012

   $ 76,005      $ —        $ 76,005   

Borrowings

     192,047        115,000        307,047   

Repayments

     (223,540     (90,500     (314,040

Net unrealized appreciation(A)

     —          604        604   
  

 

 

   

 

 

   

 

 

 

Fair value at December 31, 2012

   $ 44,512      $ 25,104      $ 69,616   
  

 

 

   

 

 

   

 

 

 
     Short-Term
Loan
    Credit
Facility
    Total  

Three months ended December 31, 2011:

      

Fair value at September 30, 2011

   $ 62,501      $ 21,405      $ 83,906   

Borrowings

     76,001        31,200        107,201   

Repayments

     (62,501     (22,900     (85,401

Net unrealized depreciation(A)

     —          (405     (405
  

 

 

   

 

 

   

 

 

 

Fair value at December 31, 2011

   $ 76,001      $ 29,300      $ 105,301   
  

 

 

   

 

 

   

 

 

 

Nine months ended December 31, 2011:

      

Fair value at March 31, 2011

   $ 40,000      $ —        $ 40,000   

Borrowings

     178,502        52,700        231,202   

Repayments

     (142,501     (23,400     (165,901
  

 

 

   

 

 

   

 

 

 

Fair value at December 31, 2011

   $ 76,001      $ 29,300      $ 105,301   
  

 

 

   

 

 

   

 

 

 

 

(A) 

Included in net unrealized (depreciation) appreciation on our accompanying Condensed Consolidated Statement of Operations for periods ended December 31, 2012.

The fair value of the collateral under our Credit Facility was approximately $261.6 million and $228.3 million at December 31 and March 31, 2012, respectively. The fair value of the collateral under the short-term loan was approximately $50.0 million and $85.0 million at December 31 and March 31, 2012, respectively.

NOTE 6. INTEREST RATE CAP AGREEMENTS

We have entered into multiple interest rate cap agreements with BB&T that effectively limit the interest rate on a portion of our borrowings under the line of credit pursuant to the terms of our Credit Facility. The agreements provide that the interest rate on a portion of our borrowings is capped at a certain interest rate when 30-day LIBOR is in excess of that certain interest rate. The fair value of the interest rate cap agreements is recorded in other assets on our accompanying Condensed Consolidated Statements of Assets and Liabilities. We record changes in the fair value of the interest rate cap agreements quarterly based on the current market valuations at quarter end as net unrealized appreciation (depreciation) of other on our accompanying Condensed Consolidated Statements of Operations. Generally, we will estimate the fair value of our interest rate caps using estimates of value provided by the counterparty and our own assumptions in the absence of observable market data, including estimated remaining life, counterparty credit risk, current market yield and interest rate spreads of similar securities as of the measurement date. At both December 31 and March 31, 2012, our interest rate cap agreement(s) were valued using Level 3 inputs. The following table summarizes the key terms of each interest rate cap agreement:

 

Interest

Rate Cap(A)

   Notional
Amount
     LIBOR Cap    

Effective Date

  

Maturity Date

   December 31, 2012      March 31, 2012  
              Cost     Fair Value      Cost      Fair Value  

April 2010

   $ 45,000         6.0   May 2011    May 2012    $ —   (B)    $ —         $ 41       $ —     

December 2011

     50,000         6.0      May 2012    October 2013      29        1         29         2   

 

(A) 

Indicates date we entered into the interest rate cap agreement with BB&T.

(B) 

In May 2012, upon expiration of the April 2010 cap, we recognized a realized loss of $41.

 

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The use of a cap agreement involves risks that are different from those associated with ordinary portfolio securities transactions. Cap agreements may be considered to be illiquid. Although we will not enter into any such agreements unless we believe that the other party to the transaction is creditworthy, we bear the risk of loss of the amount expected to be received under such agreements in the event of default or bankruptcy of the agreement counterparty.

NOTE 7. MANDATORILY REDEEMABLE PREFERRED STOCK

On March 6, 2012, we completed a public offering of 1,400,000 shares of 7.125% Series A Cumulative Term Preferred Stock (our “Term Preferred Stock”) at a public offering price of $25.00 per share. Gross proceeds totaled $35.0 million and net proceeds, after deducting underwriting discounts and offering expenses borne by us, were $33.2 million, a portion of which was used to repay borrowings under our Credit Facility, with the remaining proceeds being held to make additional investments and for general corporate purposes. In connection with the offering, the underwriters exercised their option to purchase an additional 200,000 shares of our Term Preferred Stock to cover over-allotments, which resulted in gross proceeds of $5.0 million and net proceeds, after deducting underwriting discounts, of $4.8 million. We incurred $2.0 million in total offering costs related to these transactions, which have been recorded as deferred financing costs on our accompanying Condensed Consolidated Statements of Assets and Liabilities and will be amortized over the redemption period ending February 28, 2017.

The shares have a redemption date of February 28, 2017, and are traded under the ticker symbol GAINP on the NASDAQ Global Select Market. The Term Preferred Stock is not convertible into our common stock or any other security. The Term Preferred Stock provides for a fixed dividend equal to 7.125% per year, payable monthly (which equates to approximately $2.9 million per year). We are required to redeem all of the outstanding Term Preferred Stock on February 28, 2017, for cash at a redemption price equal to $25.00 per share, plus an amount equal to accumulated but unpaid dividends, if any, to, but excluding, the date of redemption. In addition, there are three other potential redemption triggers: 1) upon the occurrence of certain events that would constitute a change in control of us, we would be required to redeem all of the outstanding Term Preferred Stock, 2) if we fail to maintain an asset coverage ratio of at least 200%, we are required to redeem a portion of the outstanding Term Preferred Stock or otherwise cure the ratio redemption trigger and 3) at our sole option, at any time on or after February 28, 2016, we may redeem some or all of the Term Preferred Stock.

Our Board of Directors declared and paid the following monthly distributions to preferred stockholders for the nine months ended December 31, 2012:

 

Fiscal Year

  

Time Period

  

Declaration Date

  

Record Date

  

Payment Date

   Distribution per Term
Preferred Share
 

2013

   April 1 – 30    April 11, 2012    April 20, 2012    April 30, 2012    $ 0.1484375   
   May 1 – 31    April 11, 2012    May 18, 2012    May 31, 2012      0.1484375   
   June 1 – 30    April 11, 2012    June 20, 2012    June 29, 2012      0.1484375   
   July 1 – 31    July 10, 2012    July 20, 2012    July 31, 2012      0.1484375   
   August 1 – 31    July 10, 2012    August 22, 2012    August 31, 2012      0.1484375   
   September 1 – 30    July 10, 2012    September 19, 2012    September 28, 2012      0.1484375   
   October 1 – 31    October 10, 2012    October 22, 2012    October 31, 2012      0.1484375   
   November 1 – 30    October 10, 2012    November 19, 2012    November 30, 2012      0.1484375   
   December 1 – 31    October 10, 2012    December 19, 2012    December 31, 2012      0.1484375   
              

 

 

 

Nine months ended December 31, 2012:

   $ 1.3359375   
              

 

 

 

In accordance with ASC 480, “Distinguishing Liabilities from Equity,” mandatorily redeemable financial instruments should be classified as liabilities on the balance sheet and, therefore, the related dividend payments are treated as dividend expense on our accompanying Condensed Consolidated Statements of Operations at the ex-dividend date. The fair value of the Term Preferred Stock based on the last reported closing price as of December 31 and March 31, 2012, was approximately $41.3 million and $40.0 million, respectively.

Aggregate Term Preferred Stock distributions declared and paid for the three and nine months ended December 31, 2012, were approximately $0.7 million and $2.1 million, respectively. The tax character of distributions paid by us to preferred stockholders is from ordinary income.

NOTE 8. COMMON STOCK

We filed a registration statement on Form N-2 (File No. 333-181879) with the SEC on June 4, 2012, and subsequently filed a Pre-effective Amendment No. 1 to the registration statement on July 17, 2012, which the SEC declared effective on July 26, 2012. The registration statement permits us to issue, through one or more transactions, up to an aggregate of $300.0 million in securities, consisting of common stock, preferred stock, subscription rights, debt securities and warrants to purchase common stock, including through a combined offering of two or more of such securities.

On October 5, 2012, we completed a public offering of 4.0 million shares of our common stock at a public offering price of $7.50 per share, which was below our then current net asset value (“NAV”) per share. Gross proceeds totaled $30.0 million and net proceeds,

 

26


after deducting underwriting discounts and offering expenses borne by us, were $28.3 million, which was used to repay borrowings under our Credit Facility. In connection with the offering, the underwriters exercised their option to purchase an additional 395,825 shares at the public offering price to cover over-allotments, which resulted in gross proceeds of $3.0 million and net proceeds, after deducting underwriting discounts, of $2.8 million.

NOTE 9. NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS PER COMMON SHARE

The following table sets forth the computation of basic and diluted net increase in net assets resulting from operations per weighted average common share for the three and nine months ended December 31, 2012 and 2011:

 

     Three Months Ended December 31,      Nine Months Ended December 31,  
     2012      2011      2012      2011  

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

   $ 4,699       $ 5,495       $ 1,330       $ 22,377   

Denominator for basic and diluted weighted average common shares

     26,147,157         22,080,133         23,440,737         22,080,133   
  

 

 

    

 

 

    

 

 

    

 

 

 

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

   $ 0.18       $ 0.25       $ 0.06       $ 1.01   
  

 

 

    

 

 

    

 

 

    

 

 

 

NOTE 10. DISTRIBUTIONS TO COMMON STOCKHOLDERS

We are required to pay out as distributions 90% of our ordinary income and short-term capital gains for each taxable year in order to be taxed as a RIC under Subtitle A, Chapter 1 of Subchapter M of the Code. The amount to be paid out as a distribution is determined by our Board of Directors each quarter and is based on our estimated taxable income by management. Based on that estimate, three monthly distributions are declared each quarter. For calendar years ended December 31, 2012, 2011 and 2010, 100% of our common distributions during these periods were deemed to be paid from ordinary income for 1099 shareholder reporting purposes.

Our Board of Directors declared the following monthly distributions to common stockholders for the nine months ended December 31, 2012 and 2011:

 

Fiscal

Year

  

Declaration Date

  

Record Date

  

Payment Date

   Distribution
per Common Share
 

2013

   April 11, 2012    April 20, 2012    April 30, 2012    $ 0.050   
   April 11, 2012    May 18, 2012    May 31, 2012      0.050   
   April 11, 2012    June 20, 2012    June 29, 2012      0.050   
   July 10, 2012    July 20, 2012    July 31, 2012      0.050   
   July 10, 2012    August 22, 2012    August 31, 2012      0.050   
   July 10, 2012    September 19, 2012    September 28, 2012      0.050   
   October 10, 2012    October 22, 2012    October 31, 2012      0.050   
   October 10, 2012    November 19, 2012    November 30, 2012      0.050   
   October 10, 2012    December 19, 2012    December 31, 2012      0.050   
           

 

 

 

Nine months ended December 31, 2012:

   $ 0.450   
           

 

 

 

2012

   April 12, 2011    April 22, 2011    April 29, 2011    $ 0.045   
   April 12, 2011    May 20, 2011    May 31, 2011      0.045   
   April 12, 2011    June 20, 2011    June 30, 2011      0.045   
   July 12, 2012    July 22, 2012    July 29, 2012      0.050   
   July 12, 2012    August 19, 2012    August 31, 2012      0.050   
   July 12, 2012    September 22, 2012    December 31, 2012