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EX-31.1 - SECTION 302 CEO CERTIFICATION - GLADSTONE CAPITAL CORPd475115dex311.htm
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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

 

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

FOR THE QUARTER ENDED DECEMBER 31, 2012

 

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

COMMISSION FILE NUMBER: 814-00237

 

 

GLADSTONE CAPITAL CORPORATION

(Exact name of registrant as specified in its charter)

 

 

 

MARYLAND   54-2040781

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

1521 WESTBRANCH DRIVE, SUITE 200

MCLEAN, VIRGINIA 22102

(Address of principal executive office)

(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 28, 2013 was 21,000,160.

 

 

 


Table of Contents

GLADSTONE CAPITAL CORPORATION

TABLE OF CONTENTS

 

PART I.  

FINANCIAL INFORMATION

  

Item 1.

 

Financial Statements (Unaudited)

  
 

Condensed Consolidated Statements of Assets and Liabilities as of December 31, 2012 and September 30, 2012

     3   
 

Condensed Consolidated Statements of Operations for the three months ended December 31, 2012 and 2011

     4   
 

Condensed Consolidated Statements of Changes in Net Assets for the three months ended December 31, 2012 and 2011

     5   
 

Condensed Consolidated Statements of Cash Flows for the three months ended December 31, 2012 and 2011

     6   
 

Condensed Consolidated Schedules of Investments as of December 31, 2012 and September 30, 2012

     7   
 

Notes to Condensed Consolidated Financial Statements

     13   
Item 2.  

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

     32   
 

Overview

     32   
 

Results of Operations

     36   
 

Liquidity and Capital Resources

     40   
Item 3.  

Quantitative and Qualitative Disclosures About Market Risk

     50   
Item 4.  

Controls and Procedures

     51   
PART II.  

OTHER INFORMATION

  
Item 1.  

Legal Proceedings

     51   
Item 1A.  

Risk Factors

     51   
Item 2.  

Unregistered Sales of Equity Securities and Use of Proceeds

     51   
Item 3.  

Defaults Upon Senior Securities

     51   
Item 4.  

Mine Safety Disclosures

     51   
Item 5.  

Other Information

     52   
Item 6.  

Exhibits

     52   

SIGNATURES

     53   

 

2


Table of Contents

GLADSTONE CAPITAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES

(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

(UNAUDITED)

 

     December 31,
2012
    September 30,
2012
 

ASSETS

    

Investments at fair value

    

Non-Control/Non-Affiliate investments (Cost of $268,204 and $268,500, respectively)

   $ 236,753      $ 237,135   

Control investments (Cost of $88,485 and $96,521, respectively)

     33,760        36,825   
  

 

 

   

 

 

 

Total investments at fair value (Cost of $356,689 and $365,021, respectively)

     270,513        273,960   

Cash and cash equivalents

     11,555        10,155   

Restricted cash

     1,488        507   

Interest receivable

     2,664        2,696   

Due from custodian

     2,865        2,177   

Deferred financing costs

     2,700        2,957   

Other assets

     696        950   
  

 

 

   

 

 

 

TOTAL ASSETS

   $ 292,481      $ 293,402   
  

 

 

   

 

 

 

LIABILITIES

    

Borrowings at fair value (Cost of $55,800 and $58,800, respectively)

   $ 57,781      $ 62,451   

Mandatorily redeemable preferred stock, $0.001 par value per share, $25 liquidation preference per share; 4,000,000 shares authorized; 1,539,882 shares issued and outstanding at December 31 and September 30, 2012, respectively

     38,497        38,497   

Accounts payable and accrued expenses

     395        475   

Interest payable

     173        185   

Fees due to Adviser(A)

     1,784        1,830   

Fee due to Administrator(A)

     150        174   

Other liabilities

     1,181        1,226   
  

 

 

   

 

 

 

TOTAL LIABILITIES

   $ 99,961      $ 104,838   
  

 

 

   

 

 

 

Commitments and contingencies(B)

    

NET ASSETS

   $ 192,520      $ 188,564   
  

 

 

   

 

 

 

ANALYSIS OF NET ASSETS

    

Common stock, $0.001 par value per share, 46,000,000 shares authorized; 21,000,160 shares issued and outstanding at December 31 and September 30, 2012, respectively

   $ 21      $ 21   

Capital in excess of par value

     324,714        324,714   

Notes receivable from employees(A)

     (3,024     (3,024

Cumulative net unrealized depreciation on investments

     (86,176     (91,061

Cumulative net unrealized appreciation on borrowings

     (1,981     (3,651

Overdistributed net investment income

     (474     (474

Accumulated net realized losses

     (40,560     (37,961
  

 

 

   

 

 

 

TOTAL NET ASSETS

   $ 192,520      $ 188,564   
  

 

 

   

 

 

 

NET ASSET VALUE PER COMMON SHARE AT END OF PERIOD

   $ 9.17      $ 8.98   
  

 

 

   

 

 

 

 

(A) 

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

 

(B)

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

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

 

3


Table of Contents

GLADSTONE CAPITAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

(UNAUDITED)

 

     Three Months Ended
December 31,
 
   2012     2011  

INVESTMENT INCOME

    

Interest income

    

Non-Control/Non-Affiliate investments

   $ 7,314      $ 7,889   

Control investments

     812        1,358   

Cash and cash equivalents

     1        6   

Notes receivable from employees(A)

     53        67   
  

 

 

   

 

 

 

Total interest income

     8,180        9,320   

Other income

    

Non-Control/Non-Affiliate investments

     1,648        —     
  

 

 

   

 

 

 

Total investment income

     9,828        9,320   
  

 

 

   

 

 

 

EXPENSES

    

Base management fee(A)

     1,432        1,556   

Incentive fee(A)

     1,215        1,035   

Administration fee(A)

     150        195   

Interest expense on borrowings

     856        1,139   

Dividend expense on mandatorily redeemable preferred stock

     686        434   

Amortization of deferred financing fees

     256        457   

Professional fees

     258        292   

Other general and administrative expenses

     317        244   
  

 

 

   

 

 

 

Expenses before credits from Adviser

     5,170        5,352   

Credits to fees from Adviser(A)

     (201     (450
  

 

 

   

 

 

 

Total expenses net of credits

     4,969        4,902   
  

 

 

   

 

 

 

NET INVESTMENT INCOME

     4,859        4,418   
  

 

 

   

 

 

 

REALIZED AND UNREALIZED GAIN (LOSS)

    

Net realized loss:

    

Non-Control/Non-Affiliate investments

     (641     (8,249

Control investments

     (2,407     —     
  

 

 

   

 

 

 

Total net realized loss

     (3,048     (8,249

Net unrealized (depreciation) appreciation:

    

Non-Control/Non-Affiliate investments

     (86     6,618   

Control investments

     4,971        (4,375

Borrowings

     1,670        299   
  

 

 

   

 

 

 

Total net unrealized appreciation

     6,555        2,542   
  

 

 

   

 

 

 

Net realized and unrealized gain (loss)

     3,507        (5,707
  

 

 

   

 

 

 

NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS

   $ 8,366      $ (1,289
  

 

 

   

 

 

 

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

    

Basic and diluted

   $ 0.40      $ (0.06
  

 

 

   

 

 

 

WEIGHTED AVERAGE SHARES OF COMMON STOCK OUTSTANDING

    

Basic and diluted

     21,000,160        21,038,590   

 

(A) 

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

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

 

4


Table of Contents

GLADSTONE CAPITAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS

(DOLLAR AMOUNTS IN THOUSANDS)

(UNAUDITED)

 

     Three Months Ended
December 31,
 
     2012     2011  

OPERATIONS:

    

Net investment income

   $ 4,859      $ 4,418   

Net realized loss on investments

     (3,048     (8,249

Net unrealized appreciation of investments

     4,885        2,243   

Net unrealized depreciation of borrowings

     1,670        299   
  

 

 

   

 

 

 

Net increase (decrease) in net assets resulting from operations

     8,366        (1,289
  

 

 

   

 

 

 

DISTRIBUTIONS:

    

Distributions to common stockholders

     (4,410     (4,418
  

 

 

   

 

 

 

CAPITAL TRANSACTIONS:

    

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

     —          (155

Repayment of principal on employee notes(A)

     —          158   
  

 

 

   

 

 

 

Net increase in net assets from capital transactions

     —          3   
  

 

 

   

 

 

 

NET INCREASE (DECREASE) IN NET ASSETS

     3,956        (5,704

NET ASSETS, BEGINNING OF PERIOD

     188,564        213,720   
  

 

 

   

 

 

 

NET ASSETS, END OF PERIOD

   $ 192,520      $ 208,016   
  

 

 

   

 

 

 

 

(A) 

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

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

 

5


Table of Contents

GLADSTONE CAPITAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(DOLLAR AMOUNTS IN THOUSANDS)

(UNAUDITED)

 

     Three Months Ended
December 31,
 
     2012     2011  

CASH FLOWS FROM OPERATING ACTIVITIES

    

Net increase (decrease) in net assets resulting from operations

   $ 8,366      $ (1,289

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

    

Purchase of investments

     (51,818     (11,251

Principal repayments on investments

     50,596        10,780   

Proceeds from sale of investments

     5,918        4,489   

Net change in premiums, discounts and amortization

     474        (74

Net realized loss on investments

     3,162        8,400   

Net unrealized appreciation on investments

     (4,885     (2,243

Net unrealized depreciation on borrowings

     (1,670     (299

Increase in restricted cash

     (981     (1,225

Amortization of deferred financing fees

     257        457   

Decrease in interest receivable

     32        132   

(Increase) decrease in due from custodian

     (688     877   

Decrease in other assets

     254        273   

(Decrease) increase in accounts payable and accrued expenses

     (80     11   

Decrease in interest payable

     (12     (84

Decrease in fees due to Adviser(A)

     (46     (346

(Decrease) increase in fee due to Administrator(A)

     (24     1   

(Decrease) increase in other liabilities

     (45     917   
  

 

 

   

 

 

 

Net cash provided by operating activities

     8,810        9,526   
  

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES

    

Proceeds from borrowings

     44,000        11,000   

Repayments on borrowings

     (47,000     (53,500

Proceeds from issuance of mandatorily redeemable preferred stock

     —          38,497   

Deferred financing fees

     —          (2,068

Distributions paid to common stockholders

     (4,410     (4,418

Receipt of principal on employee notes

     —          3   
  

 

 

   

 

 

 

Net cash used in financing activities

     (7,410     (10,486
  

 

 

   

 

 

 

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

     1,400        (960

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD

     10,155        6,732   
  

 

 

   

 

 

 

CASH AND CASH EQUIVALENTS, END OF PERIOD

   $ 11,555      $ 5,772   
  

 

 

   

 

 

 

NON-CASH ACTIVITIES(B)

   $ —        $ 155   
  

 

 

   

 

 

 

 

(A) 

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

(B) 

Redemption of 20,000 shares of common stock as consideration to reduce the principal balance of an employee loan by $155. Refer to Note 4—Related Party Transactions for additional information.

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

 

6


Table of Contents

GLADSTONE CAPITAL CORPORATION

CONDENSED CONSOLIDATED SCHEDULE OF INVESTMENTS

AS OF DECEMBER 31, 2012

(DOLLAR AMOUNTS IN THOUSANDS)

(UNAUDITED)

 

Company(A)

 

Industry

 

Investment(B)

   Principal      Cost      Fair Value  

NON-CONTROL/NON-AFFILIATE INVESTMENTS:

        

Non-syndicated Loans:

            

AG Transportation Holdings, LLC

 

Cargo Transport

 

Senior Subordinated Term Debt (13.3%, Due 3/2018) (I)

   $ 13,000       $ 12,757       $ 12,756   
   

Member Profit Participation (20% ownership) (I) (G)

        1,000         1,000   
   

Profit Participation Warrants (7% ownership) (I) (G)

        244         244   
         

 

 

    

 

 

 
            14,001         14,000   

Allen Edmonds Shoe Corporation

 

Personal and non-durable consumer products

 

Senior Subordinated Term Debt (11.3%, Due 12/2015) (I)

     19,483         19,483         19,483   

Allison Publications, LLC

 

Printing and publishing

 

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

     7,464         7,464         7,165   

BAS Broadcasting

 

Broadcasting and entertainment

 

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

     7,465         7,465         1,493   

Chinese Yellow Pages Company

 

Printing and publishing

 

Line of Credit, $72 available (7.3%, Due 11/2013) (D)

     378         378         227   

CMI Acquisition, LLC

 

Mining, steel, iron and non-precious metals

 

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

     14,265         14,265         13,694   

FedCap Partners, LLC

 

Private equity fund

 

Class A Membership Units (80 units (6.7% ownership)) (G) (J)

        2,000         2,963   

Francis Drilling Fluids, Ltd.

 

Oil and gas

 

Senior Subordinated Term Debt (12.0%, Due 11/2017) (D)

     15,000         15,000         14,925   
   

Preferred Units (999 units) (F) (G)

        999         548   
   

Common Units (999 units) (F) G)

        1         —     
         

 

 

    

 

 

 
            16,000         15,473   

GFRC Holdings, LLC

 

Buildings and real estate

 

Senior Term Debt (10.5%, Due 12/2013) (D)

     5,024         5,024         2,261   
   

Senior Subordinated Term Debt (13.0%, Due 12/2013) (D)

     6,598         6,598         2,969   
         

 

 

    

 

 

 
            11,622         5,230   

Heartland Communications Group

 

Broadcasting and entertainment

 

Line of Credit, $0 available (5.0%, Due 3/2013) (D)

     100         100         42   
   

Line of Credit, $55 available (10.0%, Due 3/2013) (D)

     45         45         19   
   

Senior Term Debt (5.0%, Due 3/2013) (D)

     4,343         4,338         1,824   
   

Common Stock Warrants (8.8% ownership) (F) (G)

        66         —     
         

 

 

    

 

 

 
            4,549         1,885   

International Junior Golf Training Acquisition Company

 

Leisure, amusement, motion pictures and entertainment

 

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

     2,250         2,250         1,508   
   

Senior Term Debt (10.5%, Due 5/2014) (D)

     461         461         309   
   

Senior Term Debt (12.5%, Due 5/2014) (C)(D)

     2,500         2,500         1,675   
         

 

 

    

 

 

 
            5,211         3,492   

Legend Communications of Wyoming, LLC

 

Broadcasting and entertainment

 

Senior Term Debt (12.0%, Due 6/2013) (D)

     8,390         8,390         3,566   

North American Aircraft Services, LLC

 

Aerospace and defense

 

Line of Credit, $500 available (6.5%, Due 1/2013) (D)

     1,500         1,500         1,496   
   

Senior Term Debt (7.5%, Due 8/2016) (D)

     4,014         4,014         4,004   
   

Senior Subordinated Term Debt (11.8%, Due 8/2016) (D)

     4,750         4,750         4,738   
   

Senior Subordinated Term Debt (12.5%, Due 8/2016) (D)

     2,820         2,820         2,813   
   

Common Stock Warrants (35,000 shares) (F) (G)

        350         361   
         

 

 

    

 

 

 
            13,434         13,412   

Northstar Broadband, LLC

 

Broadcasting and entertainment

 

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

     5         5         5   

Ohana Media Group

 

Broadcasting and entertainment

 

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

     1,570         1,570         1,492   

POP Radio, LLC

 

Broadcasting and entertainment

 

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

     11,356         11,356         11,356   
   

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

     500         430         499   
   

Participation Unit (2.4% ownership) (F)(G)

        75         —     
         

 

 

    

 

 

 
            11,861         11,855   

Precision Acquisition Group Holdings, Inc.

 

Machinery

 

Equipment Note (13.0%, Due 3/2013) (D)

     1,000         1,000         823   
   

Senior Term Debt (13.0%, Due 3/2013) (D)

     4,125         4,125         3,393   
   

Senior Term Debt (13.0%, Due 3/2013) (C) (D)

     4,053         4,053         3,334   
         

 

 

    

 

 

 
            9,178         7,550   

PROFIT Systems Acquisition Co.

 

Electronics

 

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

     2,400         2,400         2,376   

Reliable Biopharmaceutical Holdings, Inc.

 

Healthcare, education and childcare

 

Line of Credit, $200 available (9.0%, Due 6/2014) (D)

     3,800         3,800         3,477   
   

Mortgage Note (9.5%, Due 12/2014) (D)

     7,049         7,048         6,449   
   

Senior Term Debt (12.0%, Due 12/2014) (C) (D)

     11,422         11,422         10,451   
   

Senior Subordinated Term Debt (12.5%, Due 12/2014) (D)

     6,000         6,000         5,490   
   

Common Stock Warrants (764 shares) (F) (G)

        209         —     
         

 

 

    

 

 

 
            28,479         25,867   

 

7


Table of Contents

GLADSTONE CAPITAL CORPORATION

CONDENSED CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

AS OF DECEMBER 31, 2012

(DOLLAR AMOUNTS IN THOUSANDS)

(UNAUDITED)

 

Company(A)

 

Industry

 

Investment(B)

   Principal      Cost      Fair Value  

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

        

Saunders & Associates

 

Electronics

 

Line of Credit, $0 available (11.3%, Due 5/2013) (D)

   $ 917       $ 917       $ 797   
   

Senior Term Debt (11.3%, Due 5/2013) (D)

     8,947         8,947         7,784   
         

 

 

    

 

 

 
            9,864         8,581   

Sunburst Media - Louisiana, LLC

 

Broadcasting and entertainment

 

Senior Term Debt (10.5%, Due 11/2013) (D)

     6,000         6,000         2,205   

Thibaut Acquisition Co.

 

Home and office furnishings, housewares and durable consumer products

 

Line of Credit, $850 available (9.0%, Due 1/2014) (D)

     150         150         150   
   

Senior Term Debt (12.0%, Due 1/2014) (C) (D)

     2,894         2,894         2,890   
         

 

 

    

 

 

 
            3,044         3,040   

Westland Technologies, Inc.

 

Diversified/conglomerate manufacturing

 

Senior Term Debt (7.5%, Due 4/2016) (D)

     1,450         1,450         1,428   
   

Senior Term Debt (12.5%, Due 4/2016) (D)

     4,000         4,000         3,940   
   

Common Stock Warrants (77,287 shares) (F) (G)

        350         343   
         

 

 

    

 

 

 
            5,800         5,711   
         

 

 

    

 

 

 

Subtotal – Non-syndicated loans

          $ 202,463       $ 170,765   
         

 

 

    

 

 

 

Syndicated Loans:

            

Airvana Network Solutions, Inc.

 

Telecommunications

 

Senior Term Debt (10.0%, Due 3/2015) (E) (K)

   $ 405       $ 391       $ 405   

Allied Security Holdings, LLC

 

Personal, food and miscellaneous services

 

Senior Subordinated Term Debt (9.0%, Due 2/2018) (E)

     1,000         992         1,000   

Ameriqual Group, LLC

 

Beverage, food and tobacco

 

Senior Term Debt (9.0%, Due 3/2016) (E)

     7,388         7,283         7,240   

Applied Systems, Inc.

 

Insurance

 

Senior Subordinated Term Debt (9.5%, Due 6/2017) (E)

     1,000         992         1,005   

Ascend Learning, LLC

 

Healthcare, education and childcare

 

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

     1,000         976         997   

Autoparts Holdings Limited

 

Automobile

 

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

     1,000         996         950   

First American Payment Systems, L.P.

 

Finance

 

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

     4,500         4,466         4,455   

Hubbard Radio, LLC

 

Broadcasting and entertainment

 

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

     500         496         508   

John Henry Holdings, Inc.

 

Containers, packaging and glass

 

Senior Subordinated Term Debt (10.3%, Due 5/2019) (E)

     5,000         4,875         4,875   

National Surgical Hospitals, Inc.

 

Healthcare, education and childcare

 

Senior Term Debt (8.3%, Due 2/2017) (E)

     1,622         1,597         1,581   

PLATO Learning, Inc.

 

Healthcare, education and childcare

 

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

     5,000         4,906         4,850   

Sensus USA, Inc.

 

Electronics

 

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

     500         496         500   

Springs Window Fashions, LLC

 

Personal and non-durable consumer products

 

Senior Term Debt (11.3%, Due 11/2017) (E)

     7,000         6,858         6,825   

SRAM, LLC

 

Leisure, amusement, motion pictures and entertainment

 

Senior Term Debt (8.5%, Due 12/2018) (E)

     2,500         2,479         2,525   

SumTotal Systems, Inc.

 

Electronics

 

Senior Subordinated Term Debt (10.3%, Due 5/2019) (E)

     4,000         3,921         3,940   

Targus Group International, Inc.

 

Textiles and leather

 

Senior Term Debt (11.0%, Due 5/2016) (E)

     9,850         9,703         9,764   

Vision Solutions, Inc.

 

Electronics

 

Senior Term Debt (9.5%, Due 7/2017) (E)

     11,000         10,929         10,835   

Wall Street Systems Holdings, Inc.

 

Electronics

 

Senior Term Debt (9.0%, Due 6/2018) (E)

     3,000         2,941         2,970   

WP Evenflo Group Holdings, Inc.

 

Diversified/conglomerate manufacturing

 

Senior Preferred Equity (333 shares) (F) (G)

        333         470   
   

Junior Preferred Equity (111 shares) (F) (G)

        111         168   
   

Common Stock (1,874 shares) (F) (G)

        —           125   
         

 

 

    

 

 

 
            444         763   
         

 

 

    

 

 

 

Subtotal - Syndicated loans

          $ 65,741       $ 65,988   
         

 

 

    

 

 

 

Total Non-Control/Non-Affiliate Investments (represented 87.5% of total investments at fair value)

      $ 268,204       $ 236,753   
         

 

 

    

 

 

 

 

8


Table of Contents

GLADSTONE CAPITAL CORPORATION

CONDENSED CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

AS OF DECEMBER 31, 2012

(DOLLAR AMOUNTS IN THOUSANDS)

(UNAUDITED)

 

Company(A)

 

Industry

 

Investment(B)

   Principal      Cost      Fair Value  

CONTROL INVESTMENTS:

        

Defiance Integrated Technologies, Inc.

 

Automobile

 

Senior Term Debt (11.0%, Due 4/2013) (C) (F)

   $ 7,105       $ 7,105       $ 7,105   
   

Common Stock (15,500 shares) (F) (G)

        1         2,916   
         

 

 

    

 

 

 
            7,106         10,021   

Kansas Cable Holdings, Inc.

 

Broadcasting and entertainment

 

Line of Credit, $0 available (10.0%, Due 10/2012) (D) (H) (L)

     975         966         5   
   

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

     1,500         1,444         7   
   

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

     1,039         1,000         5   
   

Common Stock (100 shares) (F) (G)

        —           —     
         

 

 

    

 

 

 
            3,410         17   

Lindmark Acquisition, LLC

 

Broadcasting and entertainment

 

Senior Subordinated Term Debt (11.0%, Due 10/2017)(D)(H)

     10,000         10,000         500   
   

Senior Subordinated Term Debt (13.0%, Due 10/2017)(D) (H)

     2,000         2,000         100   
   

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

     2,109         2,109         105   
   

Common Stock (100 shares) (F) (G)

        317         —     
         

 

 

    

 

 

 
            14,426         705   

LocalTel, LLC

 

Printing and publishing

 

Line of credit, $16 available (10.0%, Due 6/2013) (F) (H)

     2,834         2,834         621   
   

Line of Credit, $1,830 available (4.7%, Due 6/2013) (F) (H)

     1,170         1,170         —     
   

Senior Term Debt (12.5%, Due 6/2013) (F) (H)

     325         325         —     
   

Senior Term Debt (8.5%, Due 6/2013) (F) (H)

     2,688         2,688         —     
   

Senior Term Debt (10.5%, Due 6/2013) (C) (F) (H)

     2,750         2,750         —     
   

Common Stock Warrants (4,000 shares) (F) (G)

        —           —     
         

 

 

    

 

 

 
            9,767         621   

Midwest Metal Distribution, Inc.

 

Mining, steel, iron and non-precious metals

 

Senior Subordinated Term Debt (12.0%, Due 7/2013) (D)

     18,281         18,275         17,847   
   

Common Stock (501 shares) (F) (G)

        138         —     
         

 

 

    

 

 

 
            18,413         17,847   

Sunshine Media Holdings

 

Printing and publishing

 

Line of credit, $300 available (4.8%, Due 8/2014) (D) (H)

     1,700         1,700         263   
   

Senior Term Debt (4.8%, Due 5/2016) (D) (H)

     16,948         16,948         2,627   
   

Senior Term Debt (5.5%, Due 5/2016) (C) (D) (H)

     10,700         10,700         1,659   
   

Junior Preferred Equity (15,270 shares) (F) (G)

        5,275         —     
   

Common Stock (1,867 shares) (F) (G)

        740         —     
         

 

 

    

 

 

 
            35,363         4,549   
         

 

 

    

 

 

 

Total Control Investments (represented 12.5% of total investments at fair value)

  

   $ 88,485       $ 33,760   
         

 

 

    

 

 

 

Total Investments

          $ 356,689       $ 270,513   
         

 

 

    

 

 

 

 

(A) 

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

(B) 

Percentages represent cash interest rates in effect at December 31, 2012, and due dates represent the contractual maturity date. If applicable, paid in kind (“PIK”) interest rates are noted separately from the cash interest rates.

(C) 

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

(D) 

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

(E) 

Security valued based on the indicative bid price on or near December 31, 2012, offered by the respective syndication agent’s trading desk or secondary desk.

(F) 

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

(G) 

Security is non-income producing.

(H) 

Debt security is on non-accrual status.

(I) 

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.

(J) 

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

(K) 

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

(L) 

Subsequent to December 31, 2012, maturity date was extended until March 31, 2013.

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

 

9


Table of Contents

GLADSTONE CAPITAL CORPORATION

CONDENSED CONSOLIDATED SCHEDULE OF INVESTMENTS

SEPTEMBER 30, 2012

(DOLLAR AMOUNTS IN THOUSANDS)

 

Company(A)

 

Industry

 

Investment(B)

   Principal      Cost      Fair Value  

NON-CONTROL/NON-AFFILIATE INVESTMENTS:

        

Non-syndicated Loans:

            

Access Television Network, Inc.

 

Broadcasting and entertainment

 

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

   $ 903       $ 903       $ —     

Allison Publications, LLC

 

Printing and publishing

 

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

     7,864         7,864         7,510   

BAS Broadcasting

 

Broadcasting and entertainment

 

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

     7,465         7,465         1,866   

Chinese Yellow Pages Company

 

Printing and publishing

 

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

     438         438         285   

CMI Acquisition, LLC

 

Mining, steel, iron and non-precious metals

 

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

     14,265         14,265         13,766   

FedCap Partners, LLC

 

Private equity fund

 

Class A Membership Units (80 units (6.7% ownership)) (G)(J)

        2,000         2,964   

Francis Drilling Fluids, Ltd.

 

Oil and gas

 

Senior Subordinated Term Debt (12.0%, Due 11/2017) (D)

     15,000         15,000         14,906   
   

Preferred Units (999 units) (F) (G)

        999         479   
   

Common Units (999 units) (F) (G)

        1         —     
         

 

 

    

 

 

 
            16,000         15,385   

GFRC Holdings, LLC

 

Buildings and real estate

 

Senior Term Debt (10.5%, Due 12/2013) (D)

     5,124         5,124         2,587   
   

Senior Subordinated Term Debt (13.0%, Due 12/2013) (D)

     6,598         6,598         3,332   
         

 

 

    

 

 

 
            11,722         5,919   

Heartland Communications Group

 

Broadcasting and entertainment

 

Line of Credit, $0 available (5.0%, Due 3/2013) (D)

     100         100         40   
   

Line of Credit, $55 available (10.0%, Due 3/2013) (D)

     45         45         18   
   

Senior Term Debt (5.0%, Due 3/2013) (D)

     4,342         4,333         1,737   
   

Common Stock Warrants (8.8% ownership) (F) (G)

        66         —     
         

 

 

    

 

 

 
            4,544         1,795   

International Junior Golf Training Acquisition Company

 

Leisure, amusement, motion pictures and entertainment

 

Line of Credit, $225 available (11.0%, Due 5/2014) (D)

     2,025         2,025         1,154   
   

Senior Term Debt (10.5%, Due 5/2014) (D)

     461         461         263   
   

Senior Term Debt (12.5%, Due 5/2014) (C)(D)

     2,500         2,500         1,425   
         

 

 

    

 

 

 
            4,986         2,842   

Legend Communications of Wyoming, LLC

 

Broadcasting and entertainment

 

Senior Term Debt (12.0%, Due 6/2013) (D)

     8,661         8,661         4,547   

North American Aircraft Services, LLC

 

Aerospace and defense

 

Line of Credit, $500 available (6.5%, Due 10/2012) (D)

     1,500         1,500         1,489   
   

Senior Term Debt (7.5%, Due 8/2016) (D)

     4,265         4,265         4,233   
   

Senior Subordinated Term Debt (11.8%, Due 8/2016) (D)

     4,750         4,750         4,714   
   

Senior Subordinated Term Debt (12.5%, Due 8/2016) (D)

     2,820         2,820         2,799   
   

Common Stock Warrants (35,000 shares) (F) (G)

        350         399   
         

 

 

    

 

 

 
            13,685         13,634   

Northstar Broadband, LLC

 

Broadcasting and entertainment

 

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

     20         18         20   

Ohana Media Group

 

Broadcasting and entertainment

 

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

     1,590         1,590         1,463   

POP Radio, LLC

 

Broadcasting and entertainment

 

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

     11,500         11,500         11,486   
   

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

     500         428         498   
   

Participation Unit (2.4% ownership) (F)(G)

        75         —     
         

 

 

    

 

 

 
            12,003         11,984   

Precision Acquisition Group Holdings, Inc.

 

Machinery

 

Equipment Note (13.0%, Due 3/2013) (D)

     1,000         1,000         830   
   

Senior Term Debt (13.0%, Due 3/2013) (D)

     4,125         4,125         3,424   
   

Senior Term Debt (13.0%, Due 3/2013) (C) (D)

     4,053         4,053         3,364   
         

 

 

    

 

 

 
            9,178         7,618   

PROFIT Systems Acquisition Co.

 

Electronics

 

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

     2,550         2,550         2,486   

Reliable Biopharmaceutical Holdings, Inc.

 

Healthcare, education and childcare

 

Line of Credit, $1,100 available (9.0%, Due 1/2013) (D)

     2,900         2,900         2,690   
   

Mortgage Note (9.5%, Due 12/2014) (D)

     7,074         7,074         6,562   
   

Senior Term Debt (12.0%, Due 12/2014) (C) (D)

     11,452         11,452         10,622   
   

Senior Subordinated Term Debt (12.5%, Due 12/2014) (D)

     6,000         6,000         5,565   
   

Common Stock Warrants (764 shares) (F) (G)

        209         —     
         

 

 

    

 

 

 
            27,635         25,439   

 

10


Table of Contents

GLADSTONE CAPITAL CORPORATION

CONDENSED CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

AS OF SEPTEMBER 30, 2012

(DOLLAR AMOUNTS IN THOUSANDS)

 

Company(A)

 

Industry

 

Investment(B)

  Principal     Cost     Fair Value  

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

     

Saunders & Associates

 

Electronics

 

Line of Credit, $0 available (11.3%, Due 5/2013) (D)

  $ 917      $ 917      $ 807   
   

Senior Term Debt (11.3%, Due 5/2013) (D)

    8,947        8,947        7,873   
       

 

 

   

 

 

 
          9,864        8,680   

Sunburst Media - Louisiana, LLC

 

Broadcasting and entertainment

 

Senior Term Debt (10.5%, Due 11/2013) (D)

    6,000        6,000        2,250   

Thibaut Acquisition Co.

 

Home and office furnishings, housewares and durable consumer products

 

Line of Credit, $650 available (9.0%, Due 1/2014) (D)

    350        350        347   
   

Senior Term Debt (8.5%, Due 1/2014) (I)

    25        25        25   
   

Senior Term Debt (12.0%, Due 1/2014) (C) (D)

    3,000        3,000        2,985   
       

 

 

   

 

 

 
          3,375        3,357   

Westlake Hardware, Inc.

 

Retail store

 

Senior Subordinated Term Debt (12.3%, Due 1/2014) (D)

    12,000        12,000        11,640   
   

Senior Subordinated Term Debt (13.5%, Due 1/2014) (D)

    8,000        8,000        7,720   
       

 

 

   

 

 

 
          20,000        19,360   

Westland Technologies, Inc.

 

Diversified/conglomerate manufacturing

 

Senior Term Debt (7.5%, Due 4/2016) (D)

    1,650        1,650        1,617   
   

Senior Term Debt (12.5%, Due 4/2016) (D)

    4,000        4,000        3,920   
   

Common Stock Warrants (77,287 shares) (F) (G)

      350        228   
       

 

 

   

 

 

 
          6,000        5,765   
       

 

 

   

 

 

 

Subtotal – Non-syndicated loans

        $ 190,746      $ 158,935   
       

 

 

   

 

 

 

Syndicated Loans:

       

Airvana Network Solutions, Inc.

 

Telecommunications

 

Senior Term Debt (10.0%, Due 3/2015) (E)

  $ 1,071      $ 1,036      $ 1,070   

Allied Security Holdings, LLC

 

Personal, food and miscellaneous services

 

Senior Subordinated Term Debt (9.0%, Due 2/2018) (E)

    1,000        992        990   

Ameriqual Group, LLC

 

Beverage, food and tobacco

 

Senior Term Debt (9.0%, Due 3/2016) (E)

    7,406        7,295        7,258   

Applied Systems, Inc.

 

Insurance

 

Senior Subordinated Term Debt (9.5%, Due 6/2017) (E)

    1,000        992        995   

Ascend Learning, LLC

 

Healthcare, education and childcare

 

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

    1,000        975        998   

Autoparts Holdings Limited

 

Automobile

 

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

    1,000        996        870   

Blue Coat Systems, Inc.

 

Electronics

 

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

    8,500        8,497        8,500   

HGI Holding, Inc.

 

Personal and non-durable consumer products

 

Senior Term Debt (6.8%, Due 10/2016) (E)

    1,566        1,539        1,574   

Hubbard Radio, LLC

 

Broadcasting and entertainment

 

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

    500        496        508   

Keypoint Government Solutions, Inc.

 

Personal, food and miscellaneous services

 

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

    6,364        6,340        6,364   

Mood Media Corporation

 

Electronics

 

Senior Term Debt (10.3%, Due 11/2018) (E) (I)

    8,000        7,930        8,000   

National Surgical Hospitals, Inc.

 

Healthcare, education and childcare

 

Senior Term Debt (8.3%, Due 2/2017) (E)

    1,662        1,596        1,581   

PLATO Learning, Inc.

 

Healthcare, education and childcare

 

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

    5,000        4,903        4,850   

Sensus USA, Inc.

 

Electronics

 

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

    500        496        500   

Springs Window Fashions, LLC

 

Personal and non-durable consumer products

 

Senior Term Debt (11.3%, Due 11/2017) (E)

    7,000        6,853        6,825   

SRAM, LLC

 

Leisure, amusement, motion pictures and entertainment

 

Senior Term Debt (8.5%, Due 12/2018) (E)

    2,500        2,478        2,538   

Targus Group International, Inc.

 

Textiles and leather

 

Senior Term Debt (11.0%, Due 5/2016) (E)

    9,875        9,719        9,776   

Vision Solutions, Inc.

 

Electronics

 

Senior Term Debt (9.5%, Due 7/2017) (E)

    11,000        10,926        10,945   

Wall Street Systems Holdings, Inc.

 

Electronics

 

Senior Term Debt (9.0%, Due 6/2018) (E) (I)

    3,000        2,974        3,000   

WP Evenflo Group Holdings, Inc.

 

Diversified/conglomerate manufacturing

 

Senior Term Debt (8.0%, Due 2/2013) (E)

    277        277        274   
   

Senior Preferred Equity (333 shares) (F) (G)

      333        460   
   

Junior Preferred Equity (111 shares) (F) (G)

      111        164   
   

Common Stock (1,874 shares) (F) (G)

      —          160   
       

 

 

   

 

 

 
          721        1,058   
       

 

 

   

 

 

 

Subtotal - Syndicated loans

        $ 77,754      $ 78,200   
       

 

 

   

 

 

 

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

  

  $ 268,500      $ 237,135   
       

 

 

   

 

 

 

 

11


Table of Contents

GLADSTONE CAPITAL CORPORATION

CONDENSED CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

AS OF SEPTEMBER 30, 2012

(DOLLAR AMOUNTS IN THOUSANDS)

 

Company(A)

 

Industry

 

Investment(B)

  Principal     Cost     Fair Value  

CONTROL INVESTMENTS:

     

Defiance Integrated Technologies, Inc.

 

Automobile

 

Senior Term Debt (11.0%, Due 4/2013) (C) (F)

  $ 7,185      $ 7,185      $ 7,185   
   

Common Stock (15,500 shares) (F) (G)

      1        4,113   
       

 

 

   

 

 

 
          7,186        11,298   

Kansas Cable Holdings, Inc.

 

Broadcasting and entertainment

 

Line of Credit, $56 available (10.0%, Due 10/2012) (D) (H)

    919        910        8   
   

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

    1,500        1,444        13   
   

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

    1,039        1,000        9   
   

Common Stock (100 shares) (F) (G)

      —          —     
       

 

 

   

 

 

 
          3,354        30   

Lindmark Acquisition, LLC

 

Broadcasting and entertainment

 

Senior Subordinated Term Debt (11.0%, Due 10/2017)(D)(H)

    10,000        10,000        750   
   

Senior Subordinated Term Debt (13.0%, Due 10/2017)(D) (H)

    2,000        2,000        150   
   

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

    1,909        1,909        143   
   

Common Stock (100 shares) (F) (G)

      317        —     
       

 

 

   

 

 

 
          14,226        1,043   

LocalTel, LLC

 

Printing and publishing

 

Line of credit, $226 available (10.0%, Due 6/2013) (F) (H)

    2,624        2,624        548   
   

Line of Credit, $1,830 available (4.7%, Due 6/2013) (F) (H)

    1,170        1,170        —     
   

Senior Term Debt (12.5%, Due 6/2013) (F) (H)

    325        325        —     
   

Senior Term Debt (8.5%, Due 6/2013) (F) (H)

    2,688        2,688        —     
   

Senior Term Debt (10.5%, Due 6/2013) (C) (F) (H)

    2,750        2,750        —     
   

Common Stock Warrants (4,000 shares) (F) (G)

      —          —     
       

 

 

   

 

 

 
          9,557        548   

Midwest Metal Distribution, Inc.

 

Mining, steel, iron and non-precious metals

 

Senior Subordinated Term Debt (12.0%, Due 7/2013) (D)

    18,281        18,272        17,824   
   

Common Stock (501 shares) (F) (G)

      138        —     
       

 

 

   

 

 

 
          18,410        17,824   

Sunshine Media Holdings

 

Printing and publishing

 

Line of credit, $200 available (4.8%, Due 8/2014) (D) (H)

    1,800        1,800        270   
   

Senior Term Debt (4.8%, Due 5/2016) (D) (H)

    16,948        16,948        2,542   
   

Senior Term Debt (5.5%, Due 5/2016) (C) (D) (H)

    10,700        10,700        1,605   
   

Junior Preferred Equity (15,270 shares) (F) (G)

      5,275        —     
   

Common Stock (1,867 shares) (F) (G)

      740        —     
       

 

 

   

 

 

 
          35,463        4,417   

Viapack, Inc.

 

Chemicals, plastics and rubber

 

Line of Credit, $0 available (6.5%, Due 3/2013) (D)

    3,800        3,800        760   
   

Senior Real Estate Term Debt (5.0%, Due 3/2014) (D)

    600        600        120   
   

Senior Term Debt (6.2%, Due 3/2014) (C) (D) (H)

    3,925        3,925        785   
   

Preferred Equity (100 shares) (F) (G)

      —          —     
   

Guarantee ($300)

     
       

 

 

   

 

 

 
    8,325        1,665   
       

 

 

   

 

 

 

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

  

  $ 96,521      $ 36,825   
       

 

 

   

 

 

 

Total Investments (K)

        $ 365,021      $ 273,960   
       

 

 

   

 

 

 

 

(A) 

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

(B) 

Percentages represent cash interest rates in effect at September 30, 2012, and due dates represent the contractual maturity date. If applicable, PIK interest rates are noted separately from the cash interest rates.

(C) 

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

(D) 

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

(E) 

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

(F) 

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

(G) 

Security is non-income producing.

(H) 

Debt security is on non-accrual status.

(I) 

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

(J) 

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

(K)

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

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

 

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GLADSTONE CAPITAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

DECEMBER 31, 2012

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

NOTE 1. ORGANIZATION

Gladstone Capital Corporation was incorporated under the General Corporation Law of the State of Maryland on May 30, 2001, and completed an initial public offering on August 23, 2001. The terms “the Company,” “we,” “our,” and “us” all refer to Gladstone Capital Corporation and its consolidated subsidiaries. We are 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”). Our investment objectives are to (1) achieve and grow current income by investing in debt securities of established businesses that we believe will provide stable earnings and cash flow to pay expenses, make principal and interest payments on our outstanding indebtedness and make distributions to stockholders that grow over time; and (2) provide our stockholders with long-term capital appreciation in the value of our assets by investing in equity securities of established businesses that we believe can grow over time to permit us to sell our equity investments for capital gains.

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

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

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

We are externally managed by 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 accounting principles generally accepted in the U.S. (“GAAP”) for interim financial information and pursuant to the requirements for reporting on Form 10-Q and 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 Audit and Accounting Guide for Investment Companies, we are not permitted to consolidate any portfolio company investments, including those in which we have a controlling interest. In our opinion, all adjustments, consisting solely of normal recurring accruals, necessary for the fair statement of financial statements for the interim periods have been included. The results of operations for the three months ended December 31, 2012, are not necessarily indicative of results that ultimately may be achieved for the fiscal year. The interim financial statements and notes thereto should be read in conjunction with the financial statements and notes thereto included in our annual report on Form 10-K for the fiscal year ended September 30, 2012, as filed with the Securities and Exchange Commission (the “SEC”) on November 13, 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.

 

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Investment Valuation Policy

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

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

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

Publicly traded securities: The Adviser determines the value of a publicly traded security based on the closing price for the security on the exchange or securities market on which it is listed and primarily traded on the valuation date. To the extent that we own a restricted security that is not freely tradable, but for which a public market otherwise exists, the Adviser will use the market value of that security adjusted for any decrease in value resulting from the restrictive feature. As of December 31 and September 30, 2012, we did not have any investments in publicly traded securities.

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

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

As of December 31 and September 30, 2012, the Adviser determined that the IBPs were reliable indicators of fair value for our syndicate investments. However, because of the private nature of this marketplace (meaning actual transactions are not publicly reported); the Adviser determined that these valuation inputs were classified as Level 3 within the fair value hierarchy as defined in ASC 820.

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

 

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

 

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

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

 

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

Interest Income Recognition

Interest income, adjusted for amortization of premiums 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 collectable. At December 31, 2012, four portfolio companies were on non-accrual with an aggregate debt cost basis of approximately $56.6 million, or 16.4% of the cost basis of all debt investments in our portfolio, and an aggregate fair value of approximately $5.9 million, or 2.3% of the fair value of all debt investments in our portfolio. At September 30, 2012, six portfolio companies were either fully or partially on non-accrual with an aggregate debt cost basis of approximately $61.1 million, or 17.3% of the cost basis of all debt investments in our portfolio, and an aggregate fair value of approximately $6.8 million, or 2.6% of the fair value of all debt investments in our portfolio.

As of December 31 and September 30, 2012, we had 23 and 24 original issue discount (“OID”) loans, respectively, primarily from the syndicated loans in our portfolio. We recorded OID income of $72 and $82 for the three months ended December 31, 2012 and 2011, respectively. The unamortized balance of OID investments as of December 31 and September 30, 2012 totaled $1.4 million and $1.1 million, respectively.

As of December 31, 2012, we had two investments that bore PIK interest and as of September 30, 2012, we had one investment that bore PIK interest. PIK interest, computed at the contractual rate specified in a loan agreement, is added to the principal balance of a loan and recorded as income. To maintain our status as a RIC, this non-cash source of income must be paid out to common stockholders in the form of distributions, even though we have not yet collected the cash. We recorded $53 and $0 of PIK income during the three months ended December 31, 2012 and 2011, respectively. We collected $0 PIK interest in cash for the three months ended December 31, 2012 and 2011, respectively.

Other Income Recognition

We generally record success fees upon receipt of cash. Success fees are contractually due upon a change of control in a portfolio company. We recorded $1.1 million of success fees during the three months ended December 31, 2012, which resulted from our exit of Westlake Hardware, Inc. We did not record any success fees during the three months ended December 31, 2011. As of December 31, 2012, we have an aggregate off-balance sheet success fee receivable of approximately $12.2 million on our accruing debt securities.

During the three months ended December 31, 2012, we recognized an aggregate of $0.5 million in prepayment fees which resulted from the early payoffs of four of our syndicated loans during the period. We did not recognize any prepayment fees for the three months ended December 31, 2011.

Both success and prepayment fees are recorded in other income in our accompanying Condensed Consolidated Statements 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 820 also establishes the following three-level hierarchy for fair value measurements based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date.

 

 

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

 

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

 

   

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

As of December 31 and September 30, 2012, all of our investments were valued using Level 3 inputs. We transfer investments in and out of Level 1, 2 and 3 as of the beginning balance sheet date, based on changes in the use of observable and unobservable inputs utilized to perform the valuation for the period. During the three 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 investments carried at fair value as of December 31 and September 30, 2012, by caption on our accompanying Condensed Consolidated Statements of Assets and Liabilities and by security type, all of which are valued using Level 3 inputs:

 

     Total Recurring Fair Value
Measurements Reported in

Condensed Consolidated
Statements of Assets and  Liabilities
Using Significant Unobservable
Inputs (Level 3)
 
     December 31,
2012
     September 30,
2012
 

Non-Control/Non-Affiliate Investments

     

Senior debt

   $ 131,533       $ 150,500   

Senior subordinated debt

     98,498         81,282   

Junior subordinated debt

     499         498   

Preferred equity

     1,186         1,103   

Common equity/equivalents

     5,037         3,752   
  

 

 

    

 

 

 

Total Non-Control/Non-Affiliate Investments

   $ 236,753       $ 237,135   
  

 

 

    

 

 

 

Control Investments

     

Senior debt

   $ 12,292       $ 13,845   

Senior subordinated debt

     18,552         18,867   

Common equity/equivalents

     2,916         4,113   
  

 

 

    

 

 

 

Total Control Investments

   $ 33,760       $ 36,825   
  

 

 

    

 

 

 

Total Investments at Fair Value

   $ 270,513       $ 273,960   
  

 

 

    

 

 

 

In accordance with ASU 2011-04, which was effective for us beginning January 1, 2012, the following table provides quantitative information about our Level 3 fair value measurements of our investments as of 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.

 

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    Quantitative Information about Level 3 Fair Value Measurements
    Fair Value as of
December 31,
2012
    Valuation
Technique/
Methodology
  Unobservable Input   Range / Weighted Average

Non-syndicated debt only investments

  $ 79,597 (A)    SPSE(B)   EBITDA(C)   $60 - $4,312 / $1,685
      Risk Ratings(D)   2.0 - 10.0 / 5.7

Syndicated debt only investments

    65,225      Market Quotes   IBP(E)   95.0% - 101.5% / 98.4%

Bundled debt and equity investments

    122,728 (F)    SPSE(B)   EBITDA(C)   ($1,416) - $9,577 / $2,175
      Risk Ratings(D)   2.0 - 8.0 / 4.3
    TEV   EBITDA  multiples(C)   4.1 - 9.4 / 5.6
      EBITDA(C)   ($1,416) - $9,577 / $1,965

Fund of fund investments

    2,963      NAV(G)    
 

 

 

       

Total Fair Value for Level 3 Investments

  $ 270,513         
 

 

 

       

 

(A) 

Includes a new non-syndicated debt only investment, which was valued at its cost of $19.5 million, 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 the Adviser submits to them (which includes the financial and operational performance, as well as the Adviser’s internally assessed risk ratings of the portfolio companies – see footnote (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 estimate 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 the Nationally Recognized Statistical Rating Organization’s risk rating system for generally all syndicated loans and a proprietary risk rating system for all other debt securities. The Adviser’s risk rating system uses a scale of 0 to 10, with 10 being the lowest probability of default. The risk rating system covers both qualitative and quantitative aspects of the portfolio company business and the securities we hold.

(E) 

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

(F) 

Includes a new bundled debt and equity investment, which was valued at its cost of $14.0 million, 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.

(G)

The Adviser generally values any uninvested capital of the non-control fund at par value and values any invested capital at the NAV provided by the non-control fund.

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.

 

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Fair Value Measurements Using Significant Unobservable Inputs (Level 3)

 

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

Three months ended December 31, 2012:

          

Fair value as of September 30, 2012

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

Total (losses) gains:

          

Net realized (loss) gain(B)

     (3,165     3        —          —          (3,162

Net unrealized (depreciation) appreciation(C)

     (1,141     (950     83        (1,155     (3,163

Reversal of prior period net depreciation on realization(C)

     7,411        637        —          —          8,048   

New investments, repayments and settlements:(D)

          

Issuances/originations

     4,392        46,183        —          1,243        51,818   

Settlements/repayments

     (22,099     (28,971     —          —          (51,070

Sales

     (5,918     —          —          —          (5,918
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Fair value as of December 31, 2012

   $ 143,825      $ 117,549      $ 1,186      $ 7,953      $ 270,513   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

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

Three months ended December 31, 2011:

          

Fair value as of September 30, 2011

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

Total (losses) gains:

          

Net realized loss(B)

     (8,400     —          —          —          (8,400

Net unrealized (depreciation) appreciation(C)

     (8,836     (1,244     (586     1,352        (9,314

Reversal of prior period net depreciation on realization(C)

     11,113        444        —          —          11,557   

New investments, repayments and settlements(D)

          

Issuances/originations

     7,830        2,820        601        —          11,251   

Settlements/repayments

     (4,542     (6,164     —          —          (10,706

Sales

     (4,489     —          —          —          (4,489
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Fair value as of December 31, 2011

   $ 192,821      $ 88,004      $ 581      $ 11,440      $ 292,846   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(A) 

Includes a junior subordinated debt investment totaling $0.5 million in fair value as of December 31 and September 30, 2012, respectively. There were no junior subordinated debt investments as of December 31 or September 30, 2011, respectively.

(B)

Included in net realized loss on Non-Control/Non-Affiliate and Control investments on our accompanying Condensed Consolidated Statements of Operations for the three months ended December 31, 2012 and 2011.

(C) 

Included in net unrealized appreciation (depreciation) on Non-Control/Non-Affiliate and Control investments on our accompanying Condensed Consolidated Statements of Operations for the three months ended December 31, 2012 and 2011.

(D) 

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

Non-Syndicated Investments

As of December 31 and September 30, 2012, we held 29 and 30 non-syndicated investments with an aggregate fair value of $204.5 million and $195.8 million, respectively. During the three months ended December 31, 2012, we invested in two new non-syndicated investments for an aggregate of $33.7 million; we sold one non-syndicated investment; wrote off one non-syndicated investment for a realized loss of $0.9 million and had one non-syndicated investment pay off early, for which we received a principal payment of $20.0 million and a success fee of $1.1 million. Additionally, during the three months ended December 31, 2012, we funded $1.6 million to existing non-syndicated portfolio companies through revolver draws and add-on investments, while scheduled and unscheduled principal payments totaled $22.2 million from existing non-syndicated portfolio companies. The following significant non-syndicated investment transactions occurred during the three months ended December 31, 2012:

 

   

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

 

   

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

 

   

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

 

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Table of Contents

Syndicated Investments

We held a total of 19 syndicate loans with an aggregate fair value of $66.0 million, or 24.4% of our total investment portfolio, as of December 31, 2012, as compared to 20 syndicate loans with an aggregate fair value of $78.2 million, or 28.5% of our total investment portfolio, as of September 30, 2012. During the three months ended December 31, 2012, we had six early payoffs of syndicated investments for a combined total of $27.7 million and four new syndicated investments for a combined total of $16.5 million. We received an aggregate of $0.5 million in prepayment fees related to four of these early payoffs of syndicated investments during the three months ended December 31, 2012.

Investment Concentrations

As of December 31, 2012, our investment portfolio consisted of loans to 48 companies located in 27 states across 22 different industries, with an aggregate fair value of $270.5 million. The five largest investments at fair value as of December 31, 2012, totaled $92.7 million, or 34.3% of our total investment portfolio, as compared to the five largest investments at fair value as of September 30, 2012, which totaled $91.8 million, or 33.5% of our total investment portfolio. As of December 31, 2012, our average investment by obligor was $7.4 million at cost, compared to $7.3 million at cost as of September 30, 2012. The following table outlines our investments by security type as of December 31 and September 30, 2012:

 

     December 31, 2012     September 30, 2012  
     Cost     Fair Value     Cost     Fair Value  

Senior debt

   $ 208,368         58.4   $ 143,825         53.2   $ 235,158         64.4   $ 164,345         60.0

Senior subordinated debt

     135,681         38.1        117,050         43.3        118,469         32.5        100,149         36.5   

Junior subordinated debt

     430         0.1        499         0.2        428         0.1        498         0.2   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total debt investments

     344,479         96.6        261,374         96.7        354,055         97.0        264,992         96.7   

Preferred equity

     6,719         1.9        1,186         0.4        6,719         1.8        1,103         0.4   

Common equity/equivalents

     5,491         1.5        7,953         2.9        4,247         1.2        7,865         2.9   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total equity investments

     12,210         3.4        9,139         3.3        10,966         3.0        8,968         3.3   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total Investments

   $ 356,689         100.0   $ 270,513         100.0   $ 365,021         100.0   $ 273,960         100.0
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

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Table of Contents

Investments at fair value consisted of the following industry classifications at December 31 and September 30, 2012:

 

     December 31, 2012     September 30, 2012  

Industry Classification

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

Healthcare, education and childcare

   $ 33,297         12.3   $ 32,867         12.0

Mining, steel, iron and non-precious metals

     31,541         11.7        31,590         11.5   

Electronics

     29,202         10.8        42,111         15.4   

Personal and non-durable consumer products

     26,308         9.7        8,399         3.1   

Broadcast and entertainment

     23,730         8.8        25,505         9.3   

Aerospace and defense

     16,375         6.1        16,597         6.0   

Oil and gas

     15,473         5.7        15,386         5.6   

Cargo Transportation

     14,000         5.2        —           —     

Printing and publishing

     12,562         4.6        12,760         4.6   

Automobile

     10,971         4.1        12,168         4.4   

Textiles and leather

     9,764         3.6        9,776         3.6   

Machinery

     7,549         2.8        7,618         2.8   

Beverage, food and tobacco

     7,240         2.7        7,258         2.6   

Diversified/conglomerate manufacturing

     6,475         2.4        6,824         2.5   

Leisure, amusement, motion pictures and entertainment

     6,016         2.2        5,380         2.0   

Buildings and real estate

     5,230         1.9        5,920         2.2   

Containers, packaging and glass

     4,875         1.8        —           —     

Finance

     4,455         1.6        —           —     

Home and office furnishing, housewares and durable consumer goods

     3,040         1.1        3,357         1.2   

Other, < 1%(A)

     1,410         0.5        3,730         1.4   

Personal, food and miscellaneous services

     1,000         0.4        7,354         2.7   

Retail store

     —           —          19,360         7.1   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total Investments

   $ 270,513         100.0   $ 273,960         100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

 

(A) 

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

Investments at fair value were included in the following geographic regions of the U.S. at December 31 and September 30, 2012:

 

     December 31, 2012     September 30, 2012  

Geographic Region

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

Midwest

   $ 138,151         51.1 %    $ 127,179         46.4

South

     67,655         25.0        62,677         22.9   

West

     50,846         18.8        66,268         24.2   

Northeast

     13,861         5.1        9,836         3.6   

Outside continental U.S.

                    8,000         2.9   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total Investments

   $ 270,513         100.0 %    $ 273,960         100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

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

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 nine months ending September 30:

   2013    $ 91,045   

For the fiscal year ending September 30:

   2014      36,096   
   2015      26,868   
   2016      77,906   
   2017      36,349   
   Thereafter      77,609   
     

 

 

 
  

Total contractual repayments

   $ 345,873   
  

Equity investments

     12,210   
  

Adjustments to cost basis on debt investments

     (1,394
     

 

 

 
  

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

   $ 356,689   
     

 

 

 

 

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Table of Contents

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 September 30, 2012, we had gross receivables from portfolio companies of $0.6 million and $0.8 million, respectively. The allowance for uncollectible receivables was $0.4 million as of December 31 and September 30, 2012. In addition, we recorded an allowance for uncollectible interest receivable of $0 and $21 as of December 31 and September 30, 2012, respectively.

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,
 
     2012     2011  

Average total assets subject to base management fee(A)

   $ 286,400      $ 311,200   

Multiplied by prorated annual base management fee of 2.0%

     0.5     0.5
  

 

 

   

 

 

 

Base management fee(B)

   $ 1,432      $ 1,556   

Reduction for loan servicing fees

     (858     (959
  

 

 

   

 

 

 

Adjusted base management fee

     574        597   

Credit for fees received by Adviser from the portfolio companies

     (140     (47

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

     (61     (125
  

 

 

   

 

 

 

Net base management fee

   $ 373      $ 425   
  

 

 

   

 

 

 

Incentive fee(B)

     1,215        1,035   

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

     —          (278
  

 

 

   

 

 

 

Net incentive fee

   $ 1,215      $ 757   
  

 

 

   

 

 

 

Credit for fees received by Adviser from the portfolio companies

     (140     (47

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

     (61     (125

Incentive fee credit

     —          (278
  

 

 

   

 

 

 

Credits to fees from Adviser(B)

   $ (201   $ (450
  

 

 

   

 

 

 

 

(A) 

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

(B)

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

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, which are total assets, including investments made with proceeds of borrowings, less any uninvested cash or cash equivalents resulting from borrowings. In addition, the following three items are adjustments to the base management fee calculation:

 

 

Loan Servicing Fees

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

 

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Table of Contents
 

Senior Syndicated Loan Fee Waiver

Our Board of Directors accepted an unconditional and irrevocable voluntary waiver from the Adviser to reduce the annual 2.0% base management fee on senior syndicated loan participations to 0.5%, to the extent that proceeds resulting from borrowings were used to purchase such senior syndicated loan participations, for the three months ended December 31, 2012 and 2011.

 

 

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 with 50% of certain of these fees, and 100% of others, credited against the base management fee that we would otherwise be required to pay to the Adviser.

Incentive Fee

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

 

 

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

 

 

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

 

 

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

Our Board of Directors accepted an unconditional and irrevocable voluntary waiver from the Adviser to reduce the income-based incentive fee to the extent net investment income did not 100% cover distributions to common stockholders for the three months ended December 31, 2012 and 2011.

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.

 

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Table of Contents

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 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 accounting officer, 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 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
     September 30,
2012
 

Base management fee due to Adviser

   $ 569       $ 695   

Incentive fee due to Adviser

     1,215         1,135   
  

 

 

    

 

 

 

Total fees due to Adviser

     1,784         1,830   
  

 

 

    

 

 

 

Fee due to Administrator

     150         174   
  

 

 

    

 

 

 

Total related party fees due

   $ 1,934       $ 2,004   
  

 

 

    

 

 

 

Notes to Former Employees

We have outstanding loans to certain of our former employees, who are now employees of the Adviser. The notes were for the exercise of options granted under the Amended and Restated 2001 Equity Incentive Plan, which has since been terminated. The notes require the quarterly payment of interest at the market rate in effect at the date of issuance, have varying terms not exceeding ten years and have been recorded as a reduction of net assets. The notes are evidenced by full recourse notes that are due upon maturity or 60 days following termination of employment with the Adviser, and the shares of common stock purchased with the proceeds of the notes are posted as collateral. We received $0 and $3 of principal repayments during the three months ended December 31, 2012 and 2011, respectively. As part of the principal payments made during the fiscal year ended September 30, 2012, one employee redeemed 39,082 common shares (20,000 in December 2011 and 19,082 in January 2012) and liquidated additional collateral to pay off an aggregate of $0.3 million of principal on his outstanding loans during the six months ended March 31, 2012. There were no redemptions of common shares held by employees during the three months ended December 31, 2012. We recognized interest income from all employee loans of $53 and $67 for the three months ended December 31, 2012 and 2011, respectively.

The following table is a summary of all outstanding notes issued to employees of the Adviser for the exercise of stock options as of December 31 and September 30, 2012:

 

Issue Date

   Original
Amount of
Promissory
Note
    Outstanding
Balance of
Employee
Note
     Maturity
Date
     Original
Interest
Rate
on Note
    Current
Interest
Rate
On Note
 

Aug-01

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

Jul-06

     275 (A)      275         Jul-15         8.26        8.26   
  

 

 

   

 

 

         

Total

   $ 6,175      $ 3,024           
  

 

 

   

 

 

         

 

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(A)

On September 7, 2010, we entered into redemption agreements (the “Redemption Agreements”) with David Gladstone, our Chairman and Chief Executive Officer, and Laura Gladstone, a Managing Director of the Adviser and the daughter of Mr. Gladstone, in connection with the maturity of secured promissory notes executed by Mr. Gladstone on August 23, 2001, in the principal amount of $5.9 million and by Ms. Gladstone on July 13, 2006, in the principal amount $0.3 million (collectively, the “Notes”). Mr. and Ms. Gladstone originally executed the Notes to facilitate their payment of the exercise price of certain stock options (the “Options”) to acquire shares of our common stock. Concurrently with the execution of the Notes, we, together with Mr. and Ms. Gladstone entered into stock pledge agreements (collectively, the “Pledge Agreements”), pursuant to which Mr. and Ms. Gladstone granted to us a first priority security interest in the Pledged Collateral (as defined in the respective Pledge Agreements), which included 393,334 and 18,334 shares, respectively, of our common stock that Mr. and Ms. Gladstone acquired pursuant to the exercise of the Options (collectively, the “Pledged Shares”). In addition, a certain amount of Mr. Gladstone’s common shares of Gladstone Land Corporation (“Gladstone Land”) were pledged by Mr. Gladstone to fully collateralize Mr. Gladstone’s Note. The Redemption Agreements provide that, pursuant to the terms and conditions thereof, we will automatically accept and retire the Pledged Shares in partial or full satisfaction, as applicable, of Mr. and Ms. Gladstone’s obligations to us under the Notes at such time, if ever, that the trading price of our common stock reaches $15 per share. In entering into the Redemption Agreements, we reserved all of our existing rights under the Notes and the Pledge Agreements, including, but not limited to, the ability to foreclose on the Pledged Collateral at any time. On March 30, 2011, June 27, 2011 and September 26, 2011, Mr. Gladstone paid down an aggregate amount of $3.2 million of the principal balance of his Note, leaving a principal balance of $2.7 million outstanding as of December 31 and September 30, 2012. In connection with these payments, we released our first priority security interest on 210,000 common shares of Mr. Gladstone’s Pledged Shares, leaving a balance of 183,334 common shares of the Company in Pledged Collateral from Mr. Gladstone as of December 31 and September 30, 2012.

(B) 

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

In accordance with ASC 505, “Equity,” receivables from employees for the issuance of capital stock to employees prior to the receipt of cash payment should be reflected in the balance sheet as a reduction to stockholders’ equity. Therefore, our recourse notes totaling in aggregate $3.0 million as of December 31, 2012 were recorded as notes to employees and are included in the net assets section of our accompanying Condensed Consolidated Statements of Assets and Liabilities. As of December 31, 2012, we determined that these notes were still recourse.

NOTE 5. BORROWINGS

Credit Facility

On January 19, 2012, we, through our wholly-owned subsidiary, Business Loan, entered into Amendment No. 3 to the fourth amended and restated credit agreement (our “Credit Facility”) to extend the maturity date of our $137.0 million revolving line of credit from March 15, 2012 to January 19, 2015 (the “Maturity Date”). Our Credit Facility was arranged by Key Equipment Finance Inc. (“Keybank”) as administrative agent. Branch Banking and Trust Company and ING Capital LLC also joined our Credit Facility as committed lenders. Subject to certain terms and conditions, our Credit Facility may be expanded to a maximum of $237.0 million through the addition of other committed lenders to the facility. If our Credit Facility is not renewed or extended by the Maturity Date, all principal and interest will be due and payable on or before January 19, 2016 (one year after the Maturity Date). The interest rates on advances under our Credit Facility remain unchanged and generally bear interest at a 30-day London Interbank Offered Rate (“LIBOR”) (subject to a minimum rate of 1.5%), plus 3.75% per annum, with a commitment fee of 0.5% per annum on undrawn amounts when our facility is drawn more than 50% and 1.0% per annum on undrawn amounts when our facility is drawn less than 50%. We incurred fees of $1.5 million in January 2012 in connection with this amendment. In January 2013, we amended our Credit Facility to remove the LIBOR minimum of 1.5% on advances. See Note 12—Subsequent Events for further discussion on our January 2013 amendment of our Credit Facility.

The following tables summarize noteworthy information related to our Credit Facility (at cost) as of December 31 and September 30, 2012:

 

     December 31,
2012
     September 30,
2012
 

Commitment amount

   $ 137,000       $ 137,000   

Borrowings outstanding

     55,800         58,800   

Availability

     59,600         54,700   

 

     For the Three Months Ended
December 31,
 
     2012     2011  

Weighted average borrowings outstanding

   $ 46,000      $ 74,263   

Effective interest rate(A)

     6.3     6.0

Commitment (unused) fees incurred

   $ 231      $ 141   

 

(A) 

Excludes the impact of deferred financing fees.

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

 

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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 Keybank as custodian. Keybank, who also serves as the trustee of the account, generally remits the collected funds to us monthly.

Our Credit Facility contains covenants that require Business Loan to maintain its status as a separate legal entity, prohibit certain significant corporate transactions (such as mergers, consolidations, liquidations or dissolutions), and restrict material changes to our credit and collection policies. Our Credit Facility also limits payments on distributions to aggregate net investment income for each of the twelve month periods ending September 30, 2013, 2014 and 2015. Business Loan is also subject to certain limitations on the type of loan investments it can apply as collateral towards the borrowing base in order to receive additional borrowing availability under our Credit Facility, including restrictions on geographic concentrations, sector concentrations, loan size, payment frequency and status, average life and lien property. Our Credit Facility further requires Business Loan to comply with other financial and operational covenants, which obligate Business Loan to, among other things, maintain certain financial ratios, including asset and interest coverage and a minimum number of 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 $190.0 million plus 50.0% of all equity and subordinated debt raised after January 19, 2012, which equates to $231.0 million as of December 31, 2012, (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 $231.0 million, an asset coverage of 305.2% and an active status as a BDC and RIC. Our Credit Facility requires a minimum of 20 obligors in the borrowing base and as of December 31, 2012, Business Loan had 33 obligors. As of December 31, 2012, we were in compliance with all of our Credit Facility covenants.

Fair Value

We elected to apply the fair value option of ASC 825, “Financial Instruments,” specifically for our Credit Facility, which was consistent with our application of ASC 820 to our investments. Generally, 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. At both December 31 and September 30, 2012, our Credit Facility was valued using Level 3 inputs.

The following tables present our Credit Facility carried at fair value as of December 31 and September 30, 2012, by caption on our accompanying Condensed Consolidated Statements of Assets and Liabilities for Level 3 of the hierarchy established by ASC 820 and the changes in fair value of our Credit Facility during the three months ended December 31, 2012 and 2011:

 

     Total Recurring Fair Value
Measurement Reported in
 
     Condensed Consolidated
Statements of
 Assets and  Liabilities
Using Significant Unobservable
Inputs (Level 3)
 
     December 31,
2012
     September 30,
2012
 

Credit Facility

   $ 57,781       $ 62,451   
  

 

 

    

 

 

 

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

 

     Three Months Ended
December 31,
 
     2012     2011  

Fair value as of September 30, 2012 and 2011, respectively

   $ 62,451      $ 100,012   

Net unrealized depreciation(A)

     (1,670     (299

Borrowings

     44,000        11,000   

Repayments

     (47,000     (53,500
  

 

 

   

 

 

 

Fair value as of December 31, 2012 and 2011, respectively

   $ 57,781      $ 57,213   
  

 

 

   

 

 

 

 

(A) 

Included in net unrealized depreciation of borrowings on our accompanying Condensed Consolidated Statements of Operations for the three months ended December 31, 2012 and 2011.

The fair value of the collateral under our Credit Facility was $239.0 million and $236.3 million at December 31 and September 30, 2012, respectively.

 

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NOTE 6. MANDATORILY REDEEMABLE PREFERRED STOCK

In November 2011, we completed a public offering of 1.5 million shares of 7.125% Series 2016 Term Preferred Stock, par value $0.001 per share (“Term Preferred Stock”), at a public offering price of $25.00 per share. Gross proceeds totaled $38.5 million and net proceeds, after deducting underwriting discounts and offering expenses borne by us, were $36.4 million, a portion of which was used to repay a portion of outstanding borrowings under our Credit Facility. We incurred $2.1 million in total offering costs related to these transactions, which have been recorded as deferred financing fees on our Condensed Consolidated Statements of Assets and Liabilities and are being amortized over the redemption period ending December 31, 2016.

The shares of our Term Preferred Stock have a redemption date of December 31, 2016, and are currently traded under the ticker symbol of “GLADP” on the NASDAQ Global Select Market. Our Term Preferred Stock is not convertible into our common stock or any other security and provides for a fixed dividend equal to 7.125% per year, payable monthly (which equates to approximately $2.7 million per year). We are required to redeem all of the outstanding Term Preferred Stock on December 31, 2016 for cash at a redemption price equal to $25.00 per share plus an amount equal to accumulated but unpaid dividends, if any, as of the date of redemption. In addition, there are two other potential redemption triggers: 1) 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 2) at our sole option, at any time on or after December 31, 2012, we may redeem part or all of the Term Preferred Stock. No redemptions of our outstanding Term Preferred Stock were made as of December 31, 2012.

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

 

Fiscal Year

  

Declaration Date

  

Record Date

   Payment Date    Distribution per
Term Preferred
Share
 

2013

   October 10, 2012    October 22, 2012    October 31, 2012    $ 0.14843750   
   October 10, 2012    November 19, 2012    November 30, 2012      0.14843750   
   October 10, 2012    December 19, 2012    December 31, 2012      0.14843750   
           

 

 

 
     

Three Months Ended December 31, 2012:

   $ 0.44531250   
           

 

 

 

2012

   December 6, 2011(A)    December 16, 2011    December 30, 2011    $ 0.13359375   
   December 6, 2011    December 16, 2011    December 30, 2011      0.14843750   
           

 

 

 
     

Three Months Ended December 31, 2011:

   $ 0.28203125   
           

 

 

 

 

(A)

November 2011 was prorated from the time the Term Preferred Stock was issued and outstanding (November 4 – 30, 2011), as per our final prospectus supplement dated October 28, 2011, and was paid on the same date as the December 2011 distribution.

In accordance with ASC 480, “Distinguishing Liabilities from Equity,” mandatorily redeemable financial instruments should be classified as liabilities in the balance sheet. Therefore, the related distribution payments are treated as dividend expense on our statement of operations as of the ex-dividend date. The fair value of the Term Preferred Stock based on the last reported closing price as of December 31 and September 30, 2012, was approximately $39.0 million and $39.1 million, respectively.

Aggregate preferred distributions declared and paid for the three months ended December 31, 2012 and 2011 were approximately $0.7 and $0.4 million, respectively. The tax character of distributions paid by us to preferred stockholders is from ordinary income.

NOTE 7. COMMON STOCK

On November 29, 2012, we filed a registration statement (our “Registration Statement”) on Form N-2 (File No. 333-185191) that was amended on January 17, 2013, and which the SEC declared effective on January 18, 2013. Our Registration Statement permits us to issue, through one or more transactions, up to an aggregate of $300.0 million in securities, consisting of common stock, preferred stock, subscription rights, debt securities and warrants to purchase common stock or preferred stock, including through a combined offering of such securities. See Note 12—Subsequent Events for further discussion.

In addition, in October 2012, we terminated an equity distribution agreement that we and the Adviser entered into with BB&T Capital Markets, a division of Scott & Stringfellow, LLC (the “Agent”) on May 17, 2010 (the “Agreement”), under which we could, from time to time, issue and sell through the Agent, as sales agent, up to 2.0 million shares of our common stock, par value $0.001 per share. No shares were ever issued pursuant to this Agreement. Prepaid costs of $0.2 million related to the origination of this Agreement were expensed in the three months ended September 30, 2012.

 

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

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

 

     Three Months Ended
December 31,
 
     2012      2011  

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

   $ 8,366       $ (1,289

Denominator for basic and diluted weighted average common shares

     21,000,160         21,038,590   
  

 

 

    

 

 

 

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

   $ 0.40       $ (0.06
  

 

 

    

 

 

 

NOTE 9. 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 to be taxed as a RIC under Subtitle A, Chapter 1 of Subchapter M of the Code. It is our policy to pay out as a distribution up to 100% of those amounts. The amount to be paid out as a distributions is determined by our Board of Directors quarterly and is based on the fiscal year earnings estimated by management. Based on that estimate, three monthly distributions are declared each quarter. The tax characteristics of all distributions will be reported to stockholders on Form 1099 at the end of each calendar year. For calendar year ended December 31, 2011, 100% of our common distributions during this period were deemed to be paid from ordinary income. For the calendar year ended December 31, 2012, approximately 92% of our common distributions were deemed to be paid from ordinary income with the remainder of approximately 8% deemed to be from a return of capital. The return of capital resulted primarily resulted from GAAP realized losses being recognized as ordinary losses for tax purposes.

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

&