As filed with the Securities and Exchange Commission on
April 7, 2011
SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C.
20549
1933 Act File
No. 333-162592
Form N-2
REGISTRATION
STATEMENT
UNDER
THE SECURITIES ACT OF
1933
o PRE-EFFECTIVE
AMENDMENT NO.
þ POST-EFFECTIVE
AMENDMENT NO. 2
GLADSTONE CAPITAL
CORPORATION
(Exact name of registrant as
specified in charter)
1521 WESTBRANCH DRIVE, SUITE 200
MCLEAN, VA 22102
(Address of principal executive
offices)
Registrant’s telephone number, including area code:
(703) 287-5800
DAVID GLADSTONE
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
GLADSTONE CAPITAL CORPORATION
1521 WESTBRANCH DRIVE, SUITE 200
MCLEAN, VIRGINIA 22102
(Name and address of agent for
service)
COPIES TO:
THOMAS R. SALLEY
DARREN K. DESTEFANO
CHRISTINA L. NOVAK
COOLEY LLP
ONE FREEDOM SQUARE
RESTON TOWN CENTER
11951 FREEDOM DRIVE
RESTON, VIRGINIA 20190
(703) 456-8000
(703) 456-8100
(facsimile)
Approximate date of proposed public
offering: From time to time after the effective
date of this registration statement.
If any securities being registered on this form will be offered
on a delayed or continuous basis in reliance on Rule 415
under the Securities Act of 1933, as amended, other than
securities offered in connection with a dividend reinvestment
plan, check the following
box. þ
The Registrant hereby amends this Registration Statement on
such date or dates as may be necessary to delay its effective
date until the Registrant shall file a further amendment which
specifically states that this Registration Statement shall
thereafter become effective in accordance with Section 8(a)
of the Securities Act of 1933, as amended, or until this
Registration Statement shall become effective on such date as
the Commission, acting pursuant to Section 8(a), may
determine.
The
information in this prospectus is not complete and may be
changed. We may not sell these securities until the registration
statement filed with the Securities and Exchange Commission is
effective. This prospectus is not an offer to sell these
securities and is not soliciting an offer to buy these
securities in any state where the offer or sale is not
permitted.
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SUBJECT TO COMPLETION, DATED
APRIL 7, 2011
PROSPECTUS
$300,000,000
COMMON
STOCK
SENIOR COMMON STOCK
PREFERRED STOCK
SUBSCRIPTION RIGHTS
WARRANTS
DEBT SECURITIES
We may offer, from time to time, up to $300,000,000 aggregate
initial offering price of our common stock, $0.001 par
value per share, senior common stock, $0.001 par value per
share, preferred stock, $0.001 par value per share,
subscription rights, warrants representing rights to purchase
shares of our common stock, or debt securities, or a combination
of these securities, which we refer to in this prospectus
collectively as our Securities, in one or more offerings. The
Securities may be offered at prices and on terms to be disclosed
in one or more supplements to this prospectus. In the case of
our common stock and warrants or rights to acquire such common
stock hereunder, the offering price per share of our common
stock by us, less any underwriting commissions or discounts,
will not be less than the net asset value per share of our
common stock at the time of the offering except (i) in
connection with a rights offering to our existing stockholders,
(ii) with the consent of the majority of our common
stockholders, or (iii) under such other circumstances as
the Securities and Exchange Commission may permit. You should
read this prospectus and the applicable prospectus supplement
carefully before you invest in our Securities.
Our Securities may be offered directly to one or more
purchasers, including existing stockholders in a rights
offering, through agents designated from time to time by us, or
to or through underwriters or dealers. The prospectus supplement
relating to the offering will identify any agents or
underwriters involved in the sale of our Securities, and will
disclose any applicable purchase price, fee, commission or
discount arrangement between us and our agents or underwriters
or among our underwriters or the basis upon which such amount
may be calculated. See “Plan of Distribution.” We may
not sell any of our Securities through agents, underwriters or
dealers without delivery of a prospectus supplement describing
the method and terms of the offering of such Securities. Our
common stock is traded on The Nasdaq Global Select Market under
the symbol “GLAD.” As of April 5, 2011, the last
reported sales price for our common stock was $11.56.
This prospectus contains information you should know before
investing, including information about risks. Please read it
before you invest and keep it for future reference. Additional
information about us, including our annual, quarterly and
current reports, has been filed with the Securities and Exchange
Commission. This information is available free of charge on our
corporate website located at
http://www.gladstonecapital.com.
See “Additional Information.” This prospectus may not
be used to consummate sales of securities unless accompanied by
a prospectus supplement.
An investment in our Securities involves certain risks,
including, among other things, risks relating to investments in
securities of small, private and developing businesses. We
describe some of these risks in the section entitled “Risk
Factors,” which begins on page 8. Shares of closed-end
investment companies frequently trade at a discount to their net
asset value and this may increase the risk of loss to purchasers
of our Securities. You should carefully consider these risks
together with all of the other information contained in this
prospectus and any prospectus supplement before making a
decision to purchase our Securities.
The Securities being offered have not been approved or
disapproved by the Securities and Exchange Commission or any
state securities commission nor has the Securities and Exchange
Commission or any state securities commission passed upon the
accuracy or adequacy of this prospectus. Any representation to
the contrary is a criminal offense.
,
2011
TABLE OF
CONTENTS
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F-1
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We have not authorized any dealer, salesman or other person
to give any information or to make any representation other than
those contained or incorporated by reference in this prospectus
or any accompanying supplement to this prospectus. You must not
rely upon any information or representation not contained or
incorporated by reference in this prospectus or the accompanying
prospectus supplement as if we had authorized it. This
prospectus and any prospectus supplement do not constitute an
offer to sell or a solicitation of any offer to buy any security
other than the registered securities to which they relate, nor
do they constitute an offer to sell or a solicitation of an
offer to buy any securities in any jurisdiction to any person to
whom it is unlawful to make such an offer or solicitation in
such jurisdiction. The information contained in this prospectus
and any prospectus supplement is accurate as of the dates on
their respective covers only. Our business, financial condition,
results of operations and prospects may have changed since such
dates.
PROSPECTUS
SUMMARY
The following summary contains basic information about this
offering. It likely does not contain all the information that is
important to an investor. For a more complete understanding of
this offering, we encourage you to read this entire document and
the documents to which we have referred. Except where the
context suggests otherwise, the terms “we,”
“us,” “our,” the “Company” and
“Gladstone Capital” refer to Gladstone Capital
Corporation; “Adviser” refers to Gladstone Management
Corporation; “Administrator” refers to Gladstone
Administration, LLC; “Gladstone Commercial” refers to
Gladstone Commercial Corporation; “Gladstone
Investment” refers to Gladstone Investment Corporation;
“Gladstone Land” refers to Gladstone Land Corporation;
“Gladstone Securities” refers to Gladstone Securities,
LLC; and “Gladstone Companies” refers to our Adviser
and its affiliated companies.
GLADSTONE
CAPITAL CORPORATION
General
We were incorporated under the General Corporation Laws of the
State of Maryland on May 30, 2001. Our investment objective
is to achieve a high level of current income by investing in
debt securities, consisting primarily of senior notes, senior
subordinated notes and junior subordinated notes, of established
private businesses that are substantially owned by leveraged
buyout funds, individual investors or are family-owned
businesses, with a particular focus on senior notes. In
addition, we may acquire from other funds existing loans that
meet this profile. We also seek to provide our stockholders with
long-term capital growth through appreciation in the value of
warrants or other equity instruments that we may receive when we
make loans. We operate as a closed-end, non-diversified
management investment company, and we have elected to be treated
as a business development company, or BDC, under the Investment
Company Act of 1940, as amended, which we refer to as the 1940
Act. In addition, for tax purposes we have elected to be treated
as a regulated investment company, or RIC, under the Internal
Revenue Code of 1986, as amended, which we refer to as the Code.
We seek to invest in small and medium-sized private
U.S. businesses that meet certain criteria, including some
but not necessarily all of the following: the potential for
growth in cash flow, adequate assets for loan collateral,
experienced management teams with a significant ownership
interest in the borrower, profitable operations based on the
borrower’s cash flow, reasonable capitalization of the
borrower (usually by leveraged buyout funds or venture capital
funds) and the potential to realize appreciation and gain
liquidity in our equity position, if any. We anticipate that
liquidity in our equity position will be achieved through a
merger or acquisition of the borrower, a public offering of the
borrower’s stock or by exercising our right to require the
borrower to repurchase our warrants, though there can be no
assurance that we will always have these rights. We seek to lend
to borrowers that need funds to finance growth, restructure
their balance sheets or effect a change of control. Our loans
typically range from $5 million to $20 million,
although this investment size may vary proportionately as the
size of our capital base changes, generally mature in no more
than seven years and accrue interest at a fixed or variable rate
that exceeds the prime rate.
Our
Investment Adviser and Administrator
Our Adviser is our affiliate and investment adviser and is led
by a management team which has extensive experience in our lines
of business. Excluding our chief financial officer, all of our
executive officers serve as either directors or executive
officers, or both, of Gladstone Commercial, a publicly traded
real estate investment trust; Gladstone Investment, a publicly
traded BDC and RIC; our Adviser; and our Administrator. Our
treasurer is also an executive officer of Gladstone Securities,
a broker-dealer registered with the Financial Industry
Regulatory Authority, or FINRA. Our Administrator employs our
chief financial officer, chief compliance officer, internal
counsel, controller, treasurer and their respective staffs.
Our Adviser and Administrator also provide investment advisory
and administrative services, respectively, to our affiliates
Gladstone Commercial; Gladstone Investment; Gladstone Partners
Fund, L.P., a private partnership fund formed primarily to
co-invest with us and Gladstone Investment; Gladstone Land, a
private agricultural real estate company owned by David
Gladstone, our chairman and chief executive officer; and
Gladstone Lending
1
Corporation, a private corporation that has filed a registration
statement on
Form N-2
with the Securities and Exchange Commission, or SEC. In the
future, our Adviser and Administrator may provide investment
advisory and administrative services, respectively, to other
funds, both public and private.
We have been externally managed by our Adviser pursuant to a
contractual investment advisory arrangement since
October 1, 2004. Our Adviser was organized as a corporation
under the laws of the State of Delaware on July 2, 2002,
and is a registered investment adviser under the Investment
Advisers Act of 1940, as amended. Our Adviser is headquartered
in McLean, Virginia, a suburb of Washington D.C., and our
Adviser also has offices in New York, New Jersey, Illinois,
Texas, Connecticut and Georgia.
Our
Investment Strategy
We seek to achieve a high level of current income by investing
in debt securities, consisting primarily of senior notes, senior
subordinated notes and junior subordinated notes, of established
private businesses that are substantially owned by leveraged
buyout funds or individual investors or are family-owned
businesses, with a particular focus on senior notes. In
addition, we may acquire from others existing loans that meet
this profile. We also seek to provide our stockholders with
long-term capital growth through the appreciation in the value
of warrants or other equity instruments that we may receive when
we make loans. We seek to invest primarily in three categories
of loans of private companies:
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Senior Loans. We seek to invest a portion of
our assets in senior notes of borrowers. Using its assets and
cash flow as collateral, the borrower typically uses senior
notes to cover a substantial portion of the funding needed to
operate. Senior lenders are exposed to the least risk of all
providers of debt because they command a senior position with
respect to scheduled interest and principal payments and assets
of the borrower. However, unlike senior subordinated and junior
subordinated lenders, these senior lenders typically do not
receive any stock, warrants to purchase stock of the borrowers
or other yield enhancements. As such, they generally do not
participate in the equity appreciation of the value of the
business. Senior notes may include revolving lines of credit,
senior term loans, senior syndicated loans and senior last-out
tranche loans.
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•
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Senior Subordinated Loans. We seek to invest a
portion of our assets in senior subordinated notes, which
include second lien notes. Holders of senior subordinated notes
are subordinated to the rights of holders of senior debt in
their right to receive principal and interest payments or, in
the case of last out tranches of senior debt, liquidation
proceeds from the borrower. As a result, senior subordinated
notes are riskier than senior notes. Although such loans are
sometimes secured by significant collateral (assets of the
borrower), the lender is largely dependent on the
borrower’s cash flow for repayment. Additionally, lenders
may receive warrants to acquire shares of stock in borrowers or
other yield enhancements in connection with these loans. Senior
subordinated notes include second lien loans and syndicated
second lien loans.
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Junior Subordinated Loans. We also seek to
invest a small portion of our assets in junior subordinated
notes, which include mezzanine notes. Holders of junior
subordinated notes are subordinated to the rights of the holders
of senior debt and senior subordinated debt in their rights to
receive principal and interest payments from the borrower and
assets of the borrower. The risk profile of junior subordinated
notes is high, which permits the junior subordinated lender to
obtain higher interest rates and more equity and equity-like
compensation.
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We may also receive yield enhancements in connection with many
of our loans, which may include warrants to purchase stock,
stock or success fees.
THE
OFFERING
We may offer, from time to time, up to $300,000,000 of our
Securities, on terms to be determined at the time of the
offering. Our Securities may be offered at prices and on terms
to be disclosed in one or more prospectus supplements. In the
case of offering of our common stock and warrants or rights to
acquire such common stock hereunder in any offering, the
offering price per share, less any underwriting commissions or
discounts, will not be less than the net asset value per share
of our common stock at the time of the offering except
(i) in connection with a rights offering to our existing
stockholders, (ii) with the consent of the majority of our
common stockholders, or
2
(iii) under such other circumstances as the SEC may
permit. If we were to sell shares of our common stock below our
then current net asset value per share, such sales would result
in an immediate dilution to the net asset value per share. This
dilution would occur as a result of the sale of shares at a
price below the then current net asset value per share of our
common stock and a proportionately greater decrease in a
stockholder’s interest in our earnings and assets and
voting interest in us than the increase in our assets resulting
from such issuance.
Our Securities may be offered directly to one or more
purchasers, including existing stockholders in a rights
offering, by us or through agents designated from time to time
by us, or to or through underwriters or dealers. The prospectus
supplement relating to the offering will disclose the terms of
the offering, including the name or names of any agents or
underwriters involved in the sale of our Securities by us, the
purchase price, and any fee, commission or discount arrangement
between us and our agents or underwriters or among our
underwriters or the basis upon which such amount may be
calculated. See “Plan of Distribution.” We may not
sell any of our Securities through agents, underwriters or
dealers without delivery of a prospectus supplement describing
the method and terms of the offering of our Securities.
Set forth below is additional information regarding the offering
of our Securities:
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The Nasdaq Global Select Market Symbol |
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GLAD |
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Use of Proceeds |
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Unless otherwise specified in a prospectus supplement, we intend
to use the net proceeds from the sale of our Securities first to
pay down existing short-term debt, then to make investments in
small and mid-sized companies in accordance with our investment
objective, with any remaining proceeds to be used for other
general corporate purposes. See “Use of Proceeds.” |
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Dividends and Distributions |
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We have paid monthly distributions to the holders of our common
stock and generally intend to continue to do so. The amount of
the monthly distributions is determined by our Board of
Directors on a quarterly basis and is based on our estimate of
our annual investment company taxable income and net short-term
taxable capital gains, if any. See “Price Range of Common
Stock and Distributions.” Certain additional amounts may be
deemed as distributed to stockholders for income tax purposes.
Other types of securities we might offer will likely pay
distributions in accordance with their terms. |
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Taxation |
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We intend to continue to elect to be treated for federal income
tax purposes as a RIC. So long as we continue to qualify, we
generally will pay no corporate-level federal income taxes on
any ordinary income or capital gains that we distribute to our
stockholders. To maintain our RIC status, we must meet specified
source-of-income
and asset diversification requirements and distribute annually
at least 90% of our taxable ordinary income and realized net
short-term capital gains in excess of realized net long-term
capital losses, if any, out of assets legally available for
distribution. See “Material U.S. Federal Income Tax
Considerations.” |
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Trading at a Discount |
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Shares of closed-end investment companies frequently trade at a
discount to their net asset value. The possibility that our
shares may trade at a discount to our net asset value is
separate and distinct from the risk that our net asset value per
share may decline. We cannot predict whether our shares will
trade above, at or below net asset value, although during the
past two years, our common stock has traded consistently, and at
times significantly, below net asset value. |
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Certain Anti-Takeover Provisions |
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Our Board of Directors is divided into three classes of
directors serving staggered three-year terms. This structure is
intended to |
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provide us with a greater likelihood of continuity of
management, which may be necessary for us to realize the full
value of our investments. A staggered board of directors also
may serve to deter hostile takeovers or proxy contests, as may
certain provisions of Maryland law and other measures we have
adopted. See “Certain Provisions of Maryland Law and of Our
Articles of Incorporation and Bylaws.” |
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Dividend Reinvestment Plan |
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We have a dividend reinvestment plan for our stockholders. This
is an “opt in” dividend reinvestment plan, meaning
that stockholders may elect to have their cash dividends
automatically reinvested in additional shares of our common
stock. Stockholders who do not so elect will receive their
dividends in cash. Stockholders who receive distributions in the
form of stock will be subject to the same federal, state and
local tax consequences as stockholders who elect to receive
their distributions in cash. See “Dividend Reinvestment
Plan.” |
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Management Arrangements |
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Gladstone Management Corporation serves as our investment
adviser, and Gladstone Administration, LLC serves as our
administrator. For a description of our Adviser, our
Administrator, the Gladstone Companies and our contractual
arrangements with these companies, see
“Management — Certain Transactions —
Investment Advisory and Management Agreement,”
“Management — Certain Transactions —
Administration Agreement” and “Management —
Certain Transactions — Loan Servicing Agreement.” |
FEES AND
EXPENSES
The following table is intended to assist you in understanding
the costs and expenses that an investor in this offering will
bear directly or indirectly. We caution you that some of the
percentages indicated in the table below are estimates and may
vary. Except where the context suggests otherwise, whenever this
prospectus contains a reference to fees or expenses paid by
“us” or “Gladstone Capital,” or that
“we” will pay fees or expenses, stockholders will
indirectly bear such fees or expenses as investors in Gladstone
Capital. The following percentages were calculated based on
actual expenses incurred in the quarter ended December 31,
2010 and net assets as of December 31, 2010.
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Stockholder Transaction Expenses:
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Sales load (as a percentage of offering price)
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—
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%
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Dividend reinvestment plan
expenses(1)
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None
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Estimated annual expenses (as a percentage of net assets
attributable to common stock):
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Management
fees(2)
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2.18
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%
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Incentive fees payable under investment advisory and management
agreement (20% of realized capital gains and 20% of
pre-incentive fee net investment
income)(3)
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0.47
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%
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Interest payments on borrowed
funds(4)
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1.23
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%
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Other
expenses(5)
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1.19
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%
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Total annual expenses
(estimated)(2)(3)(5)
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5.07
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%
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(1) |
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The expenses of the reinvestment plan are included in stock
record expenses, a component of “Other expenses.” We
do not have a cash purchase plan. The participants in the
dividend reinvestment plan will bear a pro rata share of
brokerage commissions incurred with respect to open market
purchases, if any. See “Dividend Reinvestment Plan”
for information on the dividend reinvestment plan. |
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Our annual base management fee is 2.0% (0.5% quarterly) of our
average gross assets, which are defined as total assets of
Gladstone Capital, including investments made with proceeds of
borrowings, less any uninvested |
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cash or cash equivalents resulting from borrowings. For the
three months ended December 31, 2010, our Adviser
voluntarily agreed to waive the annual base management fee of
2.0% to 0.5% for those senior syndicated loan participations
that we purchase using borrowings from our credit facility.
Although there can be no guarantee that our Adviser will
continue to waive any portion of the fees due under the Advisory
Agreement, on an annual basis after giving effect to this
waiver, the estimated management fees as a percentage of net
assets attributable to common stock were 2.10% and the total
estimated annual expenses as a percentage of net assets
attributable to common stock were 4.99%. See
“Management — Certain Transactions —
Investment Advisory and Management Agreement” and footnote
3 below. |
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The incentive fee consists of two parts: an income-based fee and
a capital gains-based fee. The income-based fee is payable
quarterly in arrears, and equals 20% of the excess, if any, of
our pre-incentive fee net investment income that exceeds a 1.75%
quarterly (7% annualized) hurdle rate of our net assets, subject
to a
“catch-up”
provision measured as of the end of each calendar quarter. The
“catch-up”
provision requires us to pay 100% of our pre-incentive fee net
investment income with respect to that portion of such income,
if any, that exceeds the hurdle rate but is less than 125% of
the quarterly hurdle rate (or 2.1875%) in any calendar quarter
(8.75% annualized). The
catch-up
provision is meant to provide our Adviser with 20% of our
pre-incentive fee net investment income as if a hurdle rate did
not apply when our pre-incentive fee net investment income
exceeds 125% of the quarterly hurdle rate in any calendar
quarter (8.75% annualized). The income-based incentive fee is
computed and paid on income that may include interest that is
accrued but not yet received in cash. Our pre-incentive fee net
investment income used to calculate this part of the
income-based incentive fee is also included in the amount of our
gross assets used to calculate the 2% base management fee (see
footnote 2 above). The capital gains-based incentive fee equals
20% of our net realized capital gains since our inception, if
any, computed net of all realized capital losses and unrealized
capital depreciation since our inception, less any prior
payments, and is payable at the end of each fiscal year. |
Examples of how the incentive fee would be calculated are as
follows:
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Assuming pre-incentive fee net investment income of 0.55%, there
would be no income-based incentive fee because such income would
not exceed the hurdle rate of 1.75%.
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Assuming pre-incentive fee net investment income of 2.00%, the
income-based incentive fee would be as follows:
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= 100% × (2.00% − 1.75%)
= 0.25%
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Assuming pre-incentive fee net investment income of 2.30%, the
income-based incentive fee would be as follows:
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= (100% ×
(“catch-up”:
2.1875% − 1.75%)) + (20% × (2.30% −
2.1875%))
= (100% × 0.4375%) + (20% × 0.1125%)
= 0.4375% + 0.0225%
= 0.46%
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Assuming net realized capital gains of 6% and realized capital
losses and unrealized capital depreciation of 1%, the capital
gains-based incentive fee would be as follows:
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= 20% × (6% − 1%)
= 20% × 5%
= 1%
For a more detailed discussion of the calculation of the
two-part incentive fee, see “Management — Certain
Transactions — Investment Advisory and Management
Agreement.”
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(4) |
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Includes deferred financing costs. We entered into a revolving
credit facility, effective November 22, 2010, under which
our borrowing capacity is $127 million. We have drawn down
on this credit facility and we expect |
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to borrow additional funds in the future up to an amount so that
our asset coverage, as defined in the 1940 Act, is at least 200%
after each issuance of our senior securities. Assuming that we
borrowed $127 million at an interest rate of 5.25% plus an
additional fee related to borrowings of 0.90%, for an aggregate
rate of 6.15%, interest payments and amortization of deferred
financing costs on borrowed funds would have been 3.16% of our
net assets as of December 31, 2010. |
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Includes our overhead expenses, including payments under the
administration agreement based on our projected allocable
portion of overhead and other expenses incurred by our
Administrator in performing its obligations under the
administration agreement. See “Management —
Certain Transactions — Administration Agreement.” |
Example
The following example demonstrates the projected dollar amount
of total cumulative expenses that would be incurred over various
periods with respect to a hypothetical investment in our
Securities. In calculating the following expense amounts, we
have assumed that our annual operating expenses would remain at
the levels set forth in the table above. In the event that
securities to which this prospectus related are sold to or
through underwriters, a corresponding prospectus supplement will
restate this example to reflect the applicable sales load.
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1 Year
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3 Years
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5 Years
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10 Years
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You would pay the following expenses on a $1,000 investment,
assuming a 5% annual return
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$
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53
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$
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159
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$
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265
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525
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While the example assumes, as required by the SEC, a 5% annual
return, our performance will vary and may result in a return
greater or less than 5%. Additionally, we have assumed that the
entire amount of such 5% annual return would constitute ordinary
income as we have not historically realized positive capital
gains (computed net of all realized capital losses) on our
investments. Because the assumed 5% annual return is
significantly below the hurdle rate of 7% (annualized) that we
must achieve under the investment advisory and management
agreement to trigger the payment of an income-based incentive
fee, we have assumed, for purposes of the above example, that no
income-based incentive fee would be payable if we realized a 5%
annual return on our investments. Additionally, because the
capital gains-based incentive fee is calculated on a cumulative
basis (computed net of all realized capital losses and
unrealized capital depreciation) and because of the significant
capital losses realized to date, we have assumed that we will
not trigger the payment of any capital gains-based incentive fee
in any of the indicated time periods. If we achieve sufficient
returns on our investments, including through the realization of
capital gains, to trigger an incentive fee of a material amount,
our expenses, and returns to our investors after such expenses,
would be higher than reflected in the example. The expenses you
would pay, based on a $1,000 investment and assuming a 5% annual
return resulting entirely from net realized capital gains
(disregarding for purposes of this example all net historical
realized losses and aggregate unrealized depreciation) (and
therefore subject to the capital gains-based incentive fee), and
otherwise making the same assumptions in the example above,
would be: 1 year, $63; 3 years, $186; 5 years,
$306; and 10 years, $593. In addition, while the example
assumes reinvestment of all dividends and distributions at net
asset value, participants in our dividend reinvestment plan will
receive a number of shares of our common stock, determined by
dividing the total dollar amount of the dividend payable to a
participant by the market price per share of our common stock at
the close of trading on the valuation date for the dividend. See
“Dividend Reinvestment Plan” for additional
information regarding our dividend reinvestment plan.
This example and the expenses in the table above should not be
considered a representation of our future expenses, and actual
expenses (including the cost of debt, incentive fees, if any,
and other expenses) may be greater or less than those shown.
ADDITIONAL
INFORMATION
We have filed with the SEC a registration statement on
Form N-2
under the Securities Act of 1933, as amended, which we refer to
as the Securities Act, with respect to the Securities offered by
this prospectus. This prospectus, which is a part of the
registration statement, does not contain all of the information
set forth in the registration statement or exhibits and
schedules thereto. For further information with respect to our
business and our Securities, reference is made to the
registration statement, including the amendments, exhibits and
schedules thereto.
6
We also file reports, proxy statements and other information
with the SEC under the Securities Exchange Act of 1934, as
amended, which we refer to as the Exchange Act. Such reports,
proxy statements and other information, as well as the
registration statement and the amendments, exhibits and
schedules thereto, can be inspected at the public reference
facilities maintained by the SEC at 100 F Street,
N.E., Washington, D.C. 20549. Information about the
operation of the public reference facilities may be obtained by
calling the SEC at
1-800-SEC-0330.
The SEC maintains a website that contains reports, proxy
statements and other information regarding registrants,
including us, that file such information electronically with the
SEC. The address of the SEC’s website is
http://www.sec.gov.
Copies of such material may also be obtained from the Public
Reference Section of the SEC at 100 F Street, N.E.,
Washington, D.C. 20549, at prescribed rates. Our common
stock is listed on The Nasdaq Global Select Market and our
corporate website is located at
http://www.gladstonecapital.com.
The information contained on, or accessible through, our website
is not a part of this prospectus.
We make available free of charge on our website our annual
report on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K,
and all amendments to those reports as soon as reasonably
practicable after such material is electronically filed with or
furnished to the SEC.
We also furnish to our stockholders annual reports, which
include annual financial information that has been examined and
reported on, with an opinion expressed, by our independent
registered public accounting firm. See “Experts.”
7
You should carefully consider the risks described below and all
other information provided and incorporated by reference in this
prospectus (or any prospectus supplement) before making a
decision to purchase our Securities. The risks and uncertainties
described below are not the only ones facing us. Additional
risks and uncertainties not presently known to us, or not
presently deemed material by us, may also impair our operations
and performance. If any of the following risks actually occur,
our business, financial condition or results of operations could
be materially adversely affected. If that happens, the trading
price of our Securities could decline, and you may lose all or
part of your investment.
Risks
Related to the Economy
The
current state of the economy and the capital markets increases
the possibility of adverse effects on our financial position and
results of operations. Continued economic adversity could impair
our portfolio companies’ financial positions and operating
results and affect the industries in which we invest, which
could, in turn, harm our operating results. Continued adversity
in the capital markets could impact our ability to raise capital
and reduce our volume of new investments.
The United States is beginning to recover from the recession
that largely began in late 2007. Despite signs of economic
improvement and stabilization in both the equity and debt
markets, however, conditions within the global credit markets
generally continue to experience dislocation and stress. As a
result, we do not know if adverse conditions will again
intensify, and we are unable to gauge the full extent to which
the disruptions will affect us. The longer these uncertain
conditions persist, the greater the probability that these
factors could continue to increase our costs of, and
significantly limit our access to, debt and equity capital and,
thus, have an adverse effect on our operations and financial
results. Many of our portfolio companies, as well as those
companies that we evaluate for investment, are impacted by these
economic conditions, and if these conditions persist, it may
affect their ability to repay our loans or engage in a liquidity
event, such as a sale, recapitalization or initial public
offering.
The uncertain economic conditions have affected the availability
of credit generally. Our current credit facility limits our
distributions to stockholders and as a result we decreased our
monthly cash distribution rate by 50% starting with the April
2009 distributions in an effort to more closely align our
distributions to our net investment income. We do not know when
market conditions will stabilize, if adverse conditions will
intensify or the full extent to which the disruptions will
continue to affect us. Also, it is possible that persistent
instability of the financial markets could have other unforeseen
material effects on our business.
We may
experience fluctuations in our quarterly and annual results
based on the impact of inflation in the United
States.
The majority of our portfolio companies are in industries that
are directly impacted by inflation, such as consumer goods and
services and manufacturing. Our portfolio companies may not be
able to pass on to customers increases in their costs of
operations which could greatly affect their operating results,
impacting their ability to repay our loans. In addition, any
projected future decreases in our portfolio companies’
operating results due to inflation could adversely impact the
fair value of those investments. Any decreases in the fair value
of our investments could result in future unrealized losses and
therefore reduce our net assets resulting from operations.
Risks
Related to Our External Management
We are
dependent upon our key management personnel and the key
management personnel of our Adviser, particularly David
Gladstone, George Stelljes III and Terry Lee Brubaker, and
on the continued operations of our Adviser, for our future
success.
We have no employees. Our chief executive officer, president and
chief investment officer, chief operating officer and chief
financial officer, and the employees of our Adviser, do not
spend all of their time managing our activities and our
investment portfolio. We are particularly dependent upon David
Gladstone, George Stelljes III and Terry Lee Brubaker in
this regard. Our executive officers and the employees of our
Adviser allocate some, and in some cases a material portion, of
their time to businesses and activities that are not related to
our business. We have no separate facilities and are completely
reliant on our Adviser, which has significant discretion as to
the
8
implementation and execution of our business strategies and
risk management practices. We are subject to the risk of
discontinuation of our Adviser’s operations or termination
of the Advisory Agreement and the risk that, upon such event, no
suitable replacement will be found. We believe that our success
depends to a significant extent upon our Adviser and that
discontinuation of its operations could have a material adverse
effect on our ability to achieve our investment objectives.
Our
incentive fee may induce our Adviser to make certain
investments, including speculative investments.
The management compensation structure that has been implemented
under the Advisory Agreement may cause our Adviser to invest in
high-risk investments or take other risks. In addition to its
management fee, our Adviser is entitled under the Advisory
Agreement to receive incentive compensation based in part upon
our achievement of specified levels of income. In evaluating
investments and other management strategies, the opportunity to
earn incentive compensation based on net income may lead our
Adviser to place undue emphasis on the maximization of net
income at the expense of other criteria, such as preservation of
capital, maintaining sufficient liquidity, or management of
credit risk or market risk, in order to achieve higher incentive
compensation. Investments with higher yield potential are
generally riskier or more speculative. This could result in
increased risk to the value of our investment portfolio.
We may
be obligated to pay our Adviser incentive compensation even if
we incur a loss.
The Advisory Agreement entitles our Adviser to incentive
compensation for each fiscal quarter in an amount equal to a
percentage of the excess of our investment income for that
quarter (before deducting incentive compensation, net operating
losses and certain other items) above a threshold return for
that quarter. When calculating our incentive compensation, our
pre-incentive fee net investment income excludes realized and
unrealized capital losses that we may incur in the fiscal
quarter, even if such capital losses result in a net loss on our
statement of operations for that quarter. Thus, we may be
required to pay our Adviser incentive compensation for a fiscal
quarter even if there is a decline in the value of our portfolio
or we incur a net loss for that quarter. For additional
information on incentive compensation under the Advisory
Agreement with our Adviser, see “Business —
Investment Advisory and Management Agreements —
Management services and fees under the Advisory Agreement.”
Our
Adviser’s failure to identify and invest in securities that
meet our investment criteria or perform its responsibilities
under the Advisory Agreement may adversely affect our ability
for future growth.
Our ability to achieve our investment objectives will depend on
our ability to grow, which in turn will depend on our
Adviser’s ability to identify and invest in securities that
meet our investment criteria. Accomplishing this result on a
cost-effective basis will be largely a function of our
Adviser’s structuring of the investment process, its
ability to provide competent and efficient services to us, and
our access to financing on acceptable terms. The senior
management team of our Adviser has substantial responsibilities
under the Advisory Agreement. In order to grow, our Adviser will
need to hire, train, supervise, and manage new employees
successfully. Any failure to manage our future growth
effectively could have a material adverse effect on our
business, financial condition, and results of operations.
There
are significant potential conflicts of interest which could
impact our investment returns.
Our executive officers and directors, and the officers and
directors of our Adviser, serve or may serve as officers,
directors, or principals of entities that operate in the same or
a related line of business as we do or of investment funds
managed by our affiliates. Accordingly, they may have
obligations to investors in those entities, the fulfillment of
which might not be in the best interests of us or our
stockholders. For example, Mr. Gladstone, our chairman and
chief executive officer, is the chairman of the board and chief
executive officer of our Adviser, Gladstone Investment and
Gladstone Commercial and the sole stockholder of Gladstone Land.
In addition, Mr. Brubaker, our vice chairman, chief
operating officer and secretary is the vice chairman, chief
operating officer and secretary of our Adviser, Gladstone
Investment and Gladstone Commercial. Mr. Stelljes, our
president and chief investment officer, is also the president
and chief investment officer of our Adviser and Gladstone
Commercial and vice chairman and chief investment officer of
Gladstone Investment. Moreover, our Adviser may establish or
9
sponsor other investment vehicles which from time to time may
have potentially overlapping investment objectives with those of
ours and accordingly may invest in, whether principally or
secondarily, asset classes similar to those we target. While our
Adviser generally has broad authority to make investments on
behalf of the investment vehicles that it advises, our Adviser
has adopted investment allocation procedures to address these
potential conflicts and intends to direct investment
opportunities to the Gladstone affiliate with the investment
strategy that most closely fits the investment opportunity.
Nevertheless, the management of our Adviser may face conflicts
in the allocation of investment opportunities to other entities
managed by our Adviser. As a result, it is possible that we may
not be given the opportunity to participate in certain
investments made by other members of the Gladstone Companies or
investment funds managed by investment managers affiliated with
our Adviser.
In certain circumstances, we may make investments in a portfolio
company in which one of our affiliates has or will have an
investment, subject to satisfaction of any regulatory
restrictions and, where required, to the prior approval of our
Board of Directors. As of December 31, 2010, our Board of
Directors has approved the following types of co-investment
transactions:
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Our affiliate, Gladstone Commercial, may lease property to
portfolio companies that we do not control under certain
circumstances. We may pursue such transactions only if
(i) the portfolio company is not controlled by us or any of
our affiliates, (ii) the portfolio company satisfies the
tenant underwriting criteria of Gladstone Commercial, and
(iii) the transaction is approved by a majority of our
independent directors and a majority of the independent
directors of Gladstone Commercial. We expect that any such
negotiations between Gladstone Commercial and our portfolio
companies would result in lease terms consistent with the terms
that the portfolio companies would be likely to receive were
they not portfolio companies of ours.
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We may invest simultaneously with our affiliate Gladstone
Investment in senior syndicated loans whereby neither we nor any
affiliate has the ability to dictate the terms of the loans.
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Additionally, pursuant to an exemptive order granted by the
Securities and Exchange Commission, our Adviser may sponsor a
private investment fund to co-invest with us or Gladstone
Investment in accordance with the terms and conditions of the
order.
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Certain of our officers, who are also officers of our Adviser,
may from time to time serve as directors of certain of our
portfolio companies. If an officer serves in such capacity with
one of our portfolio companies, such officer will owe fiduciary
duties to all stockholders of the portfolio company, which
duties may from time to time conflict with the interests of our
stockholders.
In the course of our investing activities, we will pay
management and incentive fees to our Adviser and will reimburse
our Administrator for certain expenses it incurs. As a result,
investors in our common stock will invest on a “gross”
basis and receive distributions on a “net” basis after
expenses, resulting in, among other things, a lower rate of
return than one might achieve through our investors themselves
making direct investments. As a result of this arrangement,
there may be times when the management team of our Adviser has
interests that differ from those of our stockholders, giving
rise to a conflict. In addition, as a business development
company, we make available significant managerial assistance to
our portfolio companies and provide other services to such
portfolio companies. Although, neither we nor our Adviser
currently receives fees in connection with managerial
assistance, our Adviser provides other services to our portfolio
companies and receives fees for these other services. For
example, certain of our portfolio companies contract directly
with our Adviser for the provision of consulting services. In
addition, Gladstone Securities provides investment banking and
due diligence services to certain of our portfolio companies.
Our
Adviser is not obligated to provide a waiver of the base
management fee, which could negatively impact our earnings and
our ability to maintain our current level of distributions to
our stockholders.
The Advisory Agreement provides for a base management fee based
on our gross assets. Since our 2008 fiscal year, our Board of
Directors has accepted on a quarterly basis voluntary,
unconditional and irrevocable waivers 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 syndicated loan participations, and any
waived fees may not be recouped by our Adviser in the future.
However, our Adviser is not required to issue these or other
10
waivers of fees under the Advisory Agreement, and to the extent
our investment portfolio grows in the future, we expect these
fees will increase. If our Adviser does not issue these waivers
in future quarters, it could negatively impact our earnings and
may compromise our ability to maintain our current level of
distributions to our stockholders, which could have a material
adverse impact on our stock price.
Our
business model is dependent upon developing and sustaining
strong referral relationships with investment bankers, business
brokers and other intermediaries.
We are dependent upon informal relationships with investment
bankers, business brokers and traditional lending institutions
to provide us with deal flow. If we fail to maintain our
relationship with such funds or institutions, or if we fail to
establish strong referral relationships with other funds, we
will not be able to grow our portfolio of loans and fully
execute our business plan.
Risks
Related to Our External Financing
Because
of the limited amount of committed funding under our credit
facility, we will have limited ability to fund new investments
if we are unable to expand the facility.
In recent years, creditors have significantly curtailed their
lending to business development companies, including us. In
March 2010, we entered into a fourth amended and restated credit
agreement providing for a revolving line of credit, which we
refer to as the Credit Facility. Committed funding under the
Credit Facility is $127.0 million. The Credit Facility may
be expanded up to $202.0 million through the addition of
other committed lenders to the facility. However, if additional
lenders are unwilling to join the facility on its terms, we will
be unable to expand the facility and thus will continue to have
limited availability to finance new investments under our line
of credit. The Credit Facility matures on March 15, 2012,
and, if the facility is not renewed or extended by this date,
all principal and interest will be due and payable on
March 15, 2013. As of December 31, 2010, we had
$24.6 million drawn and outstanding under the Credit
Facility.
There can be no guarantee that we will be able to renew, extend
or replace the Credit Facility upon its maturity on terms that
are favorable to us, if at all. Our ability to expand the Credit
Facility, and to obtain replacement financing at the time of
maturity, will be constrained by then-current economic
conditions affecting the credit markets. In the event that we
are not able to expand the Credit Facility, or to renew, extend
or refinance the Credit Facility at the time of its maturity,
this could have a material adverse effect on our liquidity and
ability to fund new investments, our ability to make
distributions to our stockholders and our ability to qualify as
a RIC under the Code.
Our
business plan is dependent upon external financing, which is
constrained by the limitations of the 1940 Act.
Our business requires a substantial amount of cash to operate
and grow. We may acquire such additional capital from the
following sources:
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Senior Securities. We may issue debt
securities, other evidences of indebtedness (including
borrowings under our line of credit) and possibly senior common
stock and preferred stock, up to the maximum amount permitted by
the 1940 Act. The 1940 Act currently permits us, as a business
development company, to issue debt securities, senior common
stock and preferred stock, which we refer to collectively as
senior securities, in amounts such that our asset coverage, as
defined in the 1940 Act, is at least 200% after each issuance of
senior securities. As a result of issuing senior securities, we
will be exposed to the risks associated with leverage. Although
borrowing money for investments increases the potential for
gain, it also increases the risk of a loss. A decrease in the
value of our investments will have a greater impact on the value
of our common stock to the extent that we have borrowed money to
make investments. There is a possibility that the costs of
borrowing could exceed the income we receive on the investments
we make with such borrowed funds. In addition, our ability to
pay distributions or incur additional indebtedness would be
restricted if asset coverage is not at least twice our
indebtedness. If the value of our assets declines, we might be
unable to satisfy that test. If this happens, we may be required
to liquidate a portion of our loan portfolio and repay a portion
of our indebtedness at a time when a sale, to the extent
possible given the limited market for many of
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our investments, may be disadvantageous. Furthermore, any
amounts that we use to service our indebtedness will not be
available for distributions to our stockholders.
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Common Stock. Because we are constrained in
our ability to issue debt for the reasons given above, we are
dependent on the issuance of equity as a financing source. If we
raise additional funds by issuing more common stock or senior
securities convertible into or exchangeable for our common
stock, the percentage ownership of our stockholders at the time
of the issuance would decrease and our common stock may
experience dilution. In addition, any convertible or
exchangeable securities that we issue in the future may have
rights, preferences and privileges more favorable than those of
our common stock. In addition, under the 1940 Act, we will
generally not be able to issue additional shares of our common
stock at a price below net asset value per share to purchasers,
other than to our existing stockholders through a rights
offering, without first obtaining the approval of our
stockholders and our independent directors. If we were to sell
shares of our common stock below our then current net asset
value per share, such sales would result in an immediate
dilution to the net asset value per share. This dilution would
occur as a result of the sale of shares at a price below the
then current net asset value per share of our common stock and a
proportionately greater decrease in a stockholder’s
interest in our earnings and assets and voting interest in us
than the increase in our assets resulting from such issuance.
For example, if we issue and sell an additional 10% of our
common stock at a 5% discount from net asset value, a
stockholder who does not participate in that offering for its
proportionate interest will suffer net asset value dilution of
up to 0.5% or $5 per $1,000 of net asset value. This imposes
constraints on our ability to raise capital when our common
stock is trading at below net asset value, as it has for most of
the last two years.
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A
change in interest rates may adversely affect our
profitability.
We anticipate using a combination of equity and long-term and
short-term borrowings to finance our investment activities. As a
result, a portion of our income will depend upon the difference
between the rate at which we borrow funds and the rate at which
we loan these funds. Higher interest rates on our borrowings
will decrease the overall return on our portfolio.
Ultimately, we expect approximately 80% of the loans in our
portfolio to be at variable rates determined on the basis of the
LIBOR, and approximately 20% to be at fixed rates. As of
December 31, 2010, our portfolio had approximately 84.7% of
the total loan cost value at variable rates with floors,
approximately 5.6% of the total of the loan cost value at
variable rates without a floor or ceiling and approximately 9.7%
of the total loan portfolio cost basis at fixed rates.
In
addition to regulatory limitations on our ability to raise
capital, our Credit Facility contains various covenants which,
if not complied with, could accelerate our repayment obligations
under the facility, thereby materially and adversely affecting
our liquidity, financial condition, results of operations and
ability to pay distributions.
We will have a continuing need for capital to finance our loans.
In order to maintain RIC status, we are required to distribute
to our stockholders at least 90% of our ordinary income and
short-term capital gains on an annual basis. Accordingly, such
earnings will not be available to fund additional loans.
Therefore, we are party to the Credit Facility, which provides
us with a revolving credit line facility of $127.0 million,
of which $82.1 million was available for borrowings as of
December 31, 2010. The Credit Facility permits us to fund
additional loans and investments as long as we are within the
conditions set out in the credit agreement. Current market
conditions have forced us to write down the value of a portion
of our assets as required by the 1940 Act and fair value
accounting rules. These are not realized losses, but constitute
adjustment in asset values for purposes of financial reporting
and for collateral value for the Credit Facility. As assets are
marked down in value, the amount we can borrow on the Credit
Facility decreases.
As a result of the Credit Facility, we are subject to certain
limitations on the type of loan investments we make, including
restrictions on geographic concentrations, sector
concentrations, loan size, dividend payout, payment frequency
and status, and average life. The credit agreement also requires
us to comply with other financial and operational covenants,
which require us to, among other things, maintain certain
financial ratios, including asset and
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interest coverage and a minimum net worth. As of
December 31, 2010, we were in compliance with these
covenants, however, our continued compliance with these
covenants depends on many factors, some of which are beyond our
control. In particular, depreciation in the valuation of our
assets, which valuation is subject to changing market conditions
that remain very volatile, affects our ability to comply with
these covenants. During the year ended September 30, 2010,
net unrealized appreciation on our investments was approximately
$2.3 million, compared to $9.5 million unrealized
appreciation during the prior fiscal year. Given the continued
deterioration in the capital markets, the cumulative unrealized
depreciation in our portfolio may increase in future periods and
threaten our ability to comply with the covenants under the
Credit Facility. Accordingly, there are no assurances that we
will continue to comply with these covenants. Under the Credit
Facility, we are also required to maintain our status as a BDC
under the 1940 Act and as a RIC under the Code. Our failure to
satisfy these covenants could result in foreclosure by our
lenders, which would accelerate our repayment obligations under
the facility and thereby have a material adverse effect on our
business, liquidity, financial condition, results of operations
and ability to pay distributions to our stockholders.
Risks
Related to Our Investments
We
operate in a highly competitive market for investment
opportunities.
A large number of entities compete with us and make the types of
investments that we seek to make in small and mid-sized
companies. We compete with public and private buyout funds,
commercial and investment banks, commercial financing companies,
and, to the extent they provide an alternative form of
financing, hedge funds. Many of our competitors are
substantially larger and have considerably greater financial,
technical and marketing resources than we do. For example, some
competitors may have a lower cost of funds and access to funding
sources that are not available to us. In addition, some of our
competitors may have higher risk tolerances or different risk
assessments, which would allow them to consider a wider variety
of investments and establish more relationships than us.
Furthermore, many of our competitors are not subject to the
regulatory restrictions that the 1940 Act imposes on us as a
business development company. The competitive pressures we face
could have a material adverse effect on our business, financial
condition and results of operations. Also, as a result of this
competition, we may not be able to take advantage of attractive
investment opportunities from time to time and we can offer no
assurance that we will be able to identify and make investments
that are consistent with our investment objective. We do not
seek to compete based on the interest rates we offer, and we
believe that some of our competitors may make loans with
interest rates that will be comparable to or lower than the
rates we offer. We may lose investment opportunities if we do
not match our competitors’ pricing, terms, and structure.
However, if we match our competitors’ pricing, terms, and
structure, we may experience decreased net interest income and
increased risk of credit loss.
Our
investments in small and medium-sized portfolio companies are
extremely risky and could cause you to lose all or a part of
your investment.
Investments in small and medium-sized portfolio companies are
subject to a number of significant risks including the following:
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Small and medium-sized businesses are likely to have greater
exposure to economic downturns than larger
businesses. Our portfolio companies may have
fewer resources than larger businesses. Therefore, current
uncertain economic conditions and any future economic downturns
or recessions are more likely to have a material adverse effect
on them. If one of our portfolio companies is adversely impacted
by a recession, its ability to repay our loan or engage in a
liquidity event, such as a sale, recapitalization or initial
public offering, would be diminished. Moreover, in light of our
current near-term strategy of preserving capital, our inability
to make additional investments in our portfolio companies at a
time when they need capital may increase their exposure to the
risks of current uncertain economic conditions and future
economic downturns.
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Small and medium-sized businesses may have limited financial
resources and may not be able to repay the loans we make to
them. Our strategy includes providing financing to portfolio
companies that typically is not readily available to
them. While we believe that this provides an
attractive opportunity for us to generate profits, this may make
it difficult for the portfolio companies to repay their loans to
us upon maturity. A
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borrower’s ability to repay its loan may be adversely
affected by numerous factors, including the failure to meet its
business plan, a downturn in its industry, or negative economic
conditions. A deterioration in a borrower’s financial
condition and prospects usually will be accompanied by a
deterioration in the value of any collateral and a reduction in
the likelihood of us realizing on any guarantees we may have
obtained from the borrower’s management. As of
December 31, 2010, six investments were on non-accrual.
While we are working with the portfolio companies to improve
their profitability and cash flows, there can be no assurance
that our efforts will prove successful. Although we will
sometimes seek to be the senior, secured lender to a borrower,
in most of our loans we expect to be subordinated to a senior
lender, and our interest in any collateral would, accordingly,
likely be subordinate to another lender’s security interest.
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Small and medium-sized businesses typically have narrower
product lines and smaller market shares than large
businesses. Because our target portfolio
companies are smaller businesses, they will tend to be more
vulnerable to competitors’ actions and market conditions,
as well as general economic downturns. In addition, our
portfolio companies may face intense competition, including
competition from companies with greater financial resources,
more extensive development, manufacturing, marketing, and other
capabilities and a larger number of qualified managerial, and
technical personnel.
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There is generally little or no publicly available
information about these businesses. Because we
seek to invest in privately owned businesses, there is generally
little or no publicly available operating and financial
information about our potential portfolio companies. As a
result, we rely on our officers, our Adviser, and its employees
and consultants to perform due diligence investigations of these
portfolio companies, their operations, and their prospects. We
may not learn all of the material information we need to know
regarding these businesses through our investigations.
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Small and medium-sized businesses generally have less
predictable operating results. We expect that our
portfolio companies may have significant variations in their
operating results, may from time to time be parties to
litigation, may be engaged in rapidly changing businesses with
products subject to a substantial risk of obsolescence, may
require substantial additional capital to support their
operations, to finance expansion or to maintain their
competitive position, may otherwise have a weak financial
position, or may be adversely affected by changes in the
business cycle. Our portfolio companies may not meet net income,
cash flow, and other coverage tests typically imposed by their
senior lenders. A borrower’s failure to satisfy financial
or operating covenants imposed by senior lenders could lead to
defaults and, potentially, foreclosure on its senior credit
facility, which could additionally trigger cross-defaults in
other agreements. If this were to occur, it is possible that the
borrower’s ability to repay our loan would be jeopardized.
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Small and medium-sized businesses are more likely to be
dependent on one or two persons. Typically, the
success of a small or medium-sized business also depends on the
management talents and efforts of one or two persons or a small
group of persons. The death, disability, or resignation of one
or more of these persons could have a material adverse impact on
our borrower and, in turn, on us.
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Small and medium-sized businesses may have limited operating
histories. While we intend to target stable
companies with proven track records, we may make loans to new
companies that meet our other investment criteria. Portfolio
companies with limited operating histories will be exposed to
all of the operating risks that new businesses face and may be
particularly susceptible to, among other risks, market
downturns, competitive pressures and the departure of key
executive officers.
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We may
not be able to replace lost income due to the reduction in the
size of our portfolio and as a result, we may have to reduce our
distributions to stockholders.
Since September 30, 2009, the cost basis of our portfolio
has experienced a net decrease of 18.6%. The decrease in the
size of our portfolio was driven predominantly by repayments and
sales during the year ended September 30, 2010 totaling
approximately $85.6 million. The decrease in our portfolio
has resulted in a reduction of income-producing assets which has
reduced our income and may result in reduced income in future
periods if we are unable to reinvest our cash in comparable
income producing assets. Even though this lost income is
partially offset by a reduction in interest expense due to
reduced borrowings outstanding under our Credit Facility and, to
a lesser extent, reduced operating expenses, we still have
experienced a net decrease in our net investment income as a
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result of these sales. While we intend to reinvest our cash as
quickly as possible into income and capital gain-generating
assets, there is no guarantee that that we will be able to do so
or that we will able to do so at yields comparable to the assets
that we have recently sold. If we are unable to reinvest our
cash and replace our lost income, we may need to reduce our
distributions to stockholders.
Because
a large percentage of the loans we make and equity securities we
receive when we make loans are not publicly traded, there is
uncertainty regarding the value of our privately held securities
that could adversely affect our determination of our net asset
value.
A large percentage of our portfolio investments are, and we
expect will continue to be, in the form of securities that are
not publicly traded. The fair value of securities and other
investments that are not publicly traded may not be readily
determinable. Our Board of Directors has established an
investment valuation policy and consistently applied valuation
procedures used to determine the fair value of these securities
quarterly. These procedures for the determination of value of
many of our debt securities rely on the opinions of value
submitted to us by Standard & Poor’s Securities
Evaluations, Inc., or SPSE, the use of internally developed
discounted cash flow, or DCF, methodologies, or internal
methodologies based on the total enterprise value, or TEV, of
the issuer used for certain of our equity investments. SPSE will
only evaluate the debt portion of our investments for which we
specifically request evaluation, and SPSE may decline to make
requested evaluations for any reason in its sole discretion.
However, to date, SPSE has accepted each of our requests for
evaluation.
Our use of these fair value methods is inherently subjective and
is based on estimates and assumptions of each security. In the
event that we are required to sell a security, we may ultimately
sell for an amount materially less than the estimated fair value
calculated by SPSE, TEV or the DCF methodology.
Our procedures also include provisions whereby our Adviser will
establish the fair value of any equity securities we may hold
where SPSE or third-party agent banks are unable to provide
evaluations. The types of factors that may be considered in
determining the fair value of our debt and equity securities
include some or all of the following:
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the nature and realizable value of any collateral;
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the portfolio company’s earnings and cash flows and its
ability to make payments on its obligations;
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the markets in which the portfolio company does business;
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the comparison to publicly traded companies; and
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discounted cash flow and other relevant factors.
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Because such valuations, particularly valuations of private
securities and private companies, are not susceptible to precise
determination, may fluctuate over short periods of time, and may
be based on estimates, our determinations of fair value may
differ from the values that might have actually resulted had a
readily available market for these securities been available.
A portion of our assets are, and will continue to be, comprised
of equity securities that are valued based on internal
assessment using our own valuation methods approved by our Board
of Directors, without the input of SPSE or any other third-party
evaluator. We believe that our equity valuation methods reflect
those regularly used as standards by other professionals in our
industry who value equity securities. However, determination of
fair value for securities that are not publicly traded, whether
or not we use the recommendations of an independent third-party
evaluator, necessarily involves the exercise of subjective
judgment. Our net asset value could be adversely affected if our
determinations regarding the fair value of our investments were
materially higher than the values that we ultimately realize
upon the disposal of such securities.
The
lack of liquidity of our privately held investments may
adversely affect our business.
We will generally make investments in private companies whose
securities are not traded in any public market. Substantially
all of the investments we presently hold and the investments we
expect to acquire in the future are, and will be, subject to
legal and other restrictions on resale and will otherwise be
less liquid than publicly traded
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securities. The illiquidity of our investments may make it
difficult for us to quickly obtain cash equal to the value at
which we record our investments if the need arises. This could
cause us to miss important investment opportunities. In
addition, if we are required to liquidate all or a portion of
our portfolio quickly, we may record substantial realized losses
upon liquidation. We may also face other restrictions on our
ability to liquidate an investment in a portfolio company to the
extent that we, our Adviser, or our respective officers,
employees or affiliates have material non-public information
regarding such portfolio company.
Due to the uncertainty inherent in valuing these securities, our
determinations of fair value may differ materially from the
values that could be obtained if a ready market for these
securities existed. Our net asset value could be materially
affected if our determinations regarding the fair value of our
investments are materially different from the values that we
ultimately realize upon our disposal of such securities.
Our
financial results could be negatively affected if a significant
portfolio investment fails to perform
as expected.
Our total investment in companies may be significant
individually or in the aggregate. As a result, if a significant
investment in one or more companies fails to perform as
expected, our financial results could be more negatively
affected and the magnitude of the loss could be more significant
than if we had made smaller investments in more companies.
When
we are a debt or minority equity investor in a portfolio
company, which we expect will generally be the case, we may not
be in a position to control the entity, and its management may
make decisions that could decrease the value of our
investment.
We anticipate that most of our investments will continue to be
either debt or minority equity investments in our portfolio
companies. Therefore, we are and will remain subject to risk
that a portfolio company may make business decisions with which
we disagree, and the shareholders and management of such company
may take risks or otherwise act in ways that do not serve our
best interests. As a result, a portfolio company may make
decisions that could decrease the value of our portfolio
holdings. In addition, we will generally not be in a position to
control any portfolio company by investing in its debt
securities.
Our
portfolio companies may incur debt that ranks equally with, or
senior to, our investments in such companies.
We invest primarily in debt securities issued by our portfolio
companies. In some cases portfolio companies will be permitted
to have other debt that ranks equally with, or senior to, the
debt securities in which we invest. By their terms, such debt
instruments may provide that the holders thereof are entitled to
receive payment of interest and principal on or before the dates
on which we are entitled to receive payments in respect of the
debt securities in which we invest. Also, in the event of
insolvency, liquidation, dissolution, reorganization, or
bankruptcy of a portfolio company, holders of debt instruments
ranking senior to our investment in that portfolio company would
typically be entitled to receive payment in full before we
receive any distribution in respect of our investment. After
repaying such senior creditors, such portfolio company may not
have any remaining assets to use for repaying its obligation to
us. In the case of debt ranking equally with debt securities in
which we invest, we would have to share on an equal basis any
distributions with other creditors holding such debt in the
event of an insolvency, liquidation, dissolution,
reorganization, or bankruptcy of a portfolio company.
Prepayments
of our investments by our portfolio companies could adversely
impact our results of operations and reduce our return on
equity.
In addition to risks associated with delays in investing our
capital, we are also subject to the risk that investments that
we make in our portfolio companies may be repaid prior to
maturity. For the year ended September 30, 2010, we
received principal payments prior to maturity of
$59.7 million. We will first use any proceeds from
prepayments to repay any borrowings outstanding on our credit
facility. In the event that funds remain after repayment of our
outstanding borrowings, then we will generally reinvest these
proceeds in government securities, pending their future
investment in new debt
and/or
equity securities. These government securities
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will typically have substantially lower yields than the debt
securities being prepaid and we could experience significant
delays in reinvesting these amounts. As a result, our results of
operations could be materially adversely affected if one or more
of our portfolio companies elects to prepay amounts owed to us.
Additionally, prepayments could negatively impact our return on
equity, which could result in a decline in the market price of
our common stock.
Higher
taxation of our portfolio companies may impact our quarterly and
annual operating results.
The recession’s adverse effect on federal, state, and
municipality revenues may induce these government entities to
raise various taxes to make up for lost revenues. Additional
taxation may have an adverse affect on our portfolio
companies’ earnings and reduce their ability to repay our
loans to them, thus affecting our quarterly and annual operating
results.
Our
portfolio is concentrated in a limited number of companies and
industries, which subjects us to an increased risk of
significant loss if any one of these companies does not repay us
or if the industries experience downturns.
As of December 31, 2010 we had loans outstanding to 41
portfolio companies. A consequence of a limited number of
investments is that the aggregate returns we realize may be
substantially adversely affected by the unfavorable performance
of a small number of such loans or a substantial write-down of
any one investment. Beyond our regulatory and income tax
diversification requirements, we do not have fixed guidelines
for industry concentration and our investments could potentially
be concentrated in relatively few industries. In addition, while
we do not intend to invest 25.0% or more of our total
investments in a particular industry or group of industries at
the time of investment, it is possible that as the values of our
portfolio companies change, one industry or a group of
industries may comprise in excess of 25.0% of the value of our
total investments. As of December 31, 2010, 16.6% were
invested in healthcare, education and childcare companies, 14.3%
of our total investments were invested in broadcast companies,
and 12.8% were invested in printing and publishing companies. As
a result, a downturn in an industry in which we have invested a
significant portion of our total assets could have a materially
adverse effect on us.
Our
investments are typically long term and will require several
years to realize liquidation events.
Since we generally make five to seven year term loans and hold
our loans and related warrants or other equity positions until
the loans mature, you should not expect realization events, if
any, to occur over the near term. In addition, we expect that
any warrants or other equity positions that we receive when we
make loans may require several years to appreciate in value and
we cannot give any assurance that such appreciation will occur.
The
disposition of our investments may result in contingent
liabilities.
Currently, all of our investments involve private securities. In
connection with the disposition of an investment in private
securities, we may be required to make representations about the
business and financial affairs of the underlying portfolio
company typical of those made in connection with the sale of a
business. We may also be required to indemnify the purchasers of
such investment to the extent that any such representations turn
out to be inaccurate or with respect to certain potential
liabilities. These arrangements may result in contingent
liabilities that ultimately yield funding obligations that must
be satisfied through our return of certain distributions
previously made to us.
There
may be circumstances where our debt investments could be
subordinated to claims of other creditors or we could be subject
to lender liability claims.
Even though we have structured some of our investments as senior
loans, if one of our portfolio companies were to go bankrupt,
depending on the facts and circumstances, including the extent
to which we actually provided managerial assistance to that
portfolio company, a bankruptcy court might re-characterize our
debt investments and subordinate all, or a portion, of our
claims to that of other creditors. Holders of debt instruments
ranking senior to our investments typically would be entitled to
receive payment in full before we receive any distributions.
After repaying such senior creditors, such portfolio company may
not have any remaining assets to use to repay its
17
obligation to us. We may also be subject to lender liability
claims for actions taken by us with respect to a borrower’s
business or in instances in which we exercised control over the
borrower. It is possible that we could become subject to a
lender’s liability claim, including as a result of actions
taken in rendering significant managerial assistance.
Portfolio
company litigation could result in additional costs and the
diversion of management time and resources.
In the course of providing significant managerial assistance to
certain of our portfolio companies, our executive officers
sometimes serve as directors on the boards of such companies. To
the extent that litigation arises out of our investments in
these companies, such executive officers may be named as
defendants in such litigation, which could result in additional
costs and the diversion of management time and resources.
We may
not realize gains from our equity investments and other yield
enhancements.
When we make a subordinated loan, we may receive warrants to
purchase stock issued by the borrower or other yield
enhancements, such as success fees. Our goal is to ultimately
dispose of these equity interests and realize gains upon our
disposition of such interests. We expect that, over time, the
gains we realize on these warrants and other yield enhancements
will offset any losses we experience on loan defaults. However,
any warrants we receive may not appreciate in value and, in
fact, may decline in value and any other yield enhancements,
such as success fees, may not be realized. Accordingly, we may
not be able to realize gains from our equity interests or other
yield enhancements and any gains we do recognize may not be
sufficient to offset losses we experience on our loan portfolio.
Any
unrealized depreciation we experience on our investment
portfolio may be an indication of future realized losses, which
could reduce our income available for
distribution.
As a business development company we are required to carry our
investments at market value or, if no market value is
ascertainable, at fair value as determined in good faith by or
under the direction of our Board of Directors. Decreases in the
market values or fair values of our investments will be recorded
as unrealized depreciation. Since our inception, we have, at
times, incurred a cumulative net unrealized depreciation of our
portfolio. Any unrealized depreciation in our investment
portfolio could result in realized losses in the future and
ultimately in reductions of our income available for
distribution to stockholders in future periods.
Risks
Related to Our Regulation and Structure
We
will be subject to corporate-level tax if we are unable to
satisfy Code requirements for RIC qualification.
To maintain our qualification as a RIC, we must meet income
source, asset diversification, and annual distribution
requirements. The annual distribution requirement is satisfied
if we distribute at least 90% of our ordinary income and
short-term capital gains to our stockholders on an annual basis.
Because we use leverage, we are subject to certain asset
coverage ratio requirements under the 1940 Act and could, under
certain circumstances, be restricted from making distributions
necessary to qualify as a RIC. Warrants we receive with respect
to debt investments will create “original issue
discount,” which we must recognize as ordinary income,
increasing the amounts we are required to distribute to maintain
RIC status. Because such warrants will not produce distributable
cash for us at the same time as we are required to make
distributions in respect of the related original issue discount,
we will need to use cash from other sources to satisfy such
distribution requirements. The asset diversification
requirements must be met at the end of each calendar quarter. If
we fail to meet these tests, we may need to quickly dispose of
certain investments to prevent the loss of RIC status. Since
most of our investments will be illiquid, such dispositions, if
even possible, may not be made at prices advantageous to us and,
in fact, may result in substantial losses. If we fail to qualify
as a RIC for any reason and become fully subject to corporate
income tax, the resulting corporate taxes could substantially
reduce our net assets, the amount of income available for
distribution, and the actual amount distributed. Such a failure
would have a material adverse effect on us and our shares. For
additional information regarding asset coverage ratio and RIC
requirements, see “Business — Competitive
Advantages — Leverage” and “Material
U.S. Federal Income Tax
Considerations — Regulated Investment Company
Status.”
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Changes
in laws or regulations governing our operations, or changes in
the interpretation thereof, and any failure by us to comply with
laws or regulations governing our operations may adversely
affect our business.
We and our portfolio companies are subject to regulation by laws
at the local, state and federal levels. These laws and
regulations, as well as their interpretation, may be changed
from time to time. Accordingly, any change in these laws or
regulations, or their interpretation, or any failure by us or
our portfolio companies to comply with these laws or regulations
may adversely affect our business. For additional information
regarding the regulations to which we are subject, see
“Material U.S. Federal Income Tax
Considerations — Regulated Investment Company
Status” and “Regulation as a Business Development
Company.”
We are
subject to restrictions that may discourage a change of control.
Certain provisions contained in our articles of incorporation
and Maryland law may prohibit or restrict a change of control
and adversely impact the price of our shares.
Our Board of Directors is divided into three classes, with the
term of the directors in each class expiring every third year.
At each annual meeting of stockholders, the successors to the
class of directors whose term expires at such meeting will be
elected to hold office for a term expiring at the annual meeting
of stockholders held in the third year following the year of
their election. After election, a director may only be removed
by our stockholders for cause. Election of directors for
staggered terms with limited rights to remove directors makes it
more difficult for a hostile bidder to acquire control of us.
The existence of this provision may negatively impact the price
of our securities and may discourage third-party bids to acquire
our securities. This provision may reduce any premiums paid to
stockholders in a change in control transaction.
Certain provisions of Maryland law applicable to us prohibit
business combinations with:
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any person who beneficially owns 10% or more of the voting power
of our common stock (an “interested stockholder”);
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an affiliate of ours who at any time within the two-year period
prior to the date in question was an interested
stockholder; or
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an affiliate of an interested stockholder.
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These prohibitions last for five years after the most recent
date on which the interested stockholder became an interested
stockholder. Thereafter, any business combination with the
interested stockholder must be recommended by our board of
directors and approved by the affirmative vote of at least 80%
of the votes entitled to be cast by holders of our outstanding
shares of common stock and two-thirds of the votes entitled to
be cast by holders of our common stock other than shares held by
the interested stockholder. These requirements could have the
effect of inhibiting a change in control even if a change in
control were in our stockholders’ interest. These
provisions of Maryland law do not apply, however, to business
combinations that are approved or exempted by our Board of
Directors prior to the time that someone becomes an interested
stockholder.
Our articles of incorporation permit our Board of Directors to
issue up to 50,000,000 shares of capital stock. In
addition, our Board of Directors, without any action by our
stockholders, may amend our articles of incorporation from time
to time to increase or decrease the aggregate number of shares
or the number of shares of any class or series of stock that we
have authority to issue. Our Board of Directors may classify or
reclassify any unissued common stock or preferred stock and
establish the preferences, conversion or other rights, voting
powers, restrictions, limitations as to distributions,
qualifications and terms or conditions of redemption of any such
stock. Thus, our Board of Directors could authorize the issuance
of senior common stock or preferred stock with terms and
conditions that could have a priority as to distributions and
amounts payable upon liquidation over the rights of the holders
of our common stock. Senior common stock or preferred stock
could also have the effect of delaying, deferring or preventing
a change in control of us, including an extraordinary
transaction (such as a merger, tender offer or sale of all or
substantially all of our assets) that might provide a premium
price for holders of our common stock.
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Risks
Related to an Investment in Our Common Stock
We may
experience fluctuations in our quarterly and annual operating
results.
We may experience fluctuations in our quarterly and annual
operating results due to a number of factors, including, among
others, variations in our investment income, the interest rates
payable on the debt securities we acquire, the default rates on
such securities, the level of our expenses, variations in and
the timing of the recognition of realized and unrealized gains
or losses, the level of our expenses, the degree to which we
encounter competition in our markets, and general economic
conditions, including the impacts of inflation. The majority of
our portfolio companies are in industries that are directly
impacted by inflation, such as manufacturing and consumer goods
and services. Our portfolio companies may not be able to pass on
to customers increases in their costs of production which could
greatly affect their operating results, impacting their ability
to repay our loans. In addition, any projected future decreases
in our portfolio companies’ operating results due to
inflation could adversely impact the fair value of those
investments. Any decreases in the fair value of our investments
could result in future realized and unrealized losses and
therefore reduce our net assets resulting from operations. As a
result of these factors, results for any period should not be
relied upon as being indicative of performance in future periods.
There
is a risk that you may not receive distributions.
Our current intention is to distribute at least 90% of our
ordinary income and short-term capital gains to our stockholders
on a quarterly basis by paying monthly distributions. On an
annual basis, we intend to distribute net long-term capital
gains, after giving effect to any prior year realized losses
that are carried forward, by paying a one-time distribution.
However, our Board of Directors may determine in certain cases
to retain net realized long-term capital gains through a
“deemed distribution” to supplement our equity capital
and support the growth of our portfolio.
Distributions
by us have included and may in the future include a return of
capital.
Our Board of Directors declares monthly distributions based on
estimates of net investment income for each fiscal year, which
may differ, and in the past have differed, from actual results.
Because our distributions are based on estimates of net
investment income that may differ from actual results, future
distributions payable to our stockholders may also include a
return of capital. Moreover, to the extent that we distribute
amounts that exceed our accumulated earnings and profits, these
distributions constitute a return of capital. A return of
capital represents a return of a stockholder’s original
investment in shares of our stock and should not be confused
with a distribution from earnings and profits. Although return
of capital distributions may not be taxable, such distributions
may increase an investor’s tax liability for capital gains
upon the sale of our shares by reducing the investor’s tax
basis for such shares. Such returns of capital reduce our asset
base and also adversely impact our ability to raise debt capital
as a result of the leverage restrictions under the 1940 Act,
which could have a material adverse impact on our ability to
make new investments.
The
market price of our shares may fluctuate
significantly.
The trading price of our common stock may fluctuate
substantially. The extreme volatility and disruption that have
affected the capital and credit markets for over a year have
reached unprecedented levels in recent months We have
experienced greater than usual stock price volatility.
The market price and marketability of our shares may from time
to time be significantly affected by numerous factors, including
many over which we have no control and that may not be directly
related to us. These factors include, but are not limited to,
the following:
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general economic trends and other external factors;
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price and volume fluctuations in the stock market from time to
time, which are often unrelated to the operating performance of
particular companies;
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significant volatility in the market price and trading volume of
shares of RICs, business development companies or other
companies in our sector, which is not necessarily related to the
operating performance of these companies;
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changes in regulatory policies or tax guidelines, particularly
with respect to RICs or business development companies;
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loss of business development company status;
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changes in our earnings or variations in our operating results;
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changes in the value of our portfolio of investments;
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any shortfall in our revenue or net income or any increase in
losses from levels expected by securities analysts;
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departure of key personnel;
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operating performance of companies comparable to us;
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short-selling pressure with respect to our shares or business
development companies generally;
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the announcement of proposed, or completed, offerings of our
securities, including a rights offering; and
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loss of a major funding source.
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Fluctuations in the trading prices of our shares may adversely
affect the liquidity of the trading market for our shares and,
if we seek to raise capital through future equity financings,
our ability to raise such equity capital.
The
issuance of subscription rights to our existing stockholders may
dilute the ownership and voting powers by existing stockholders
in our common stock, dilute the net asset value of their shares
and have a material adverse effect on the trading price of our
common stock.
There are significant capital raising constraints applicable to
us under the 1940 Act when our stock is trading below its net
asset value per share. In the event that we issue subscription
rights to our existing stockholders, there is a significant
possibility that the rights offering will dilute the ownership
interest and voting power of stockholders who do not fully
exercise their subscription rights. Stockholders who do not
fully exercise their subscription rights should expect that they
will, upon completion of the rights offering, own a smaller
proportional interest in the Company than would otherwise be the
case if they fully exercised their subscription rights. In
addition, because the subscription price of the rights offering
is likely to be less than the Company’s most recently
determined net asset value per share, our stockholders are
likely to experience an immediate dilution of the per share net
asset value of their shares as a result of the offer. As a
result of these factors, any future rights offerings of our
common stock, or our announcement of our intention to conduct a
rights offering, could have a material adverse impact on the
trading price of our common stock.
Shares
of closed-end investment companies frequently trade at a
discount from net asset value.
Shares of closed-end investment companies frequently trade at a
discount from net asset value. Since our inception, our common
stock has at times traded above net asset value, and at times
traded below net asset value. During the past two years, our
common stock has traded consistently, and at times
significantly, below net asset value. Subsequent to
December 31, 2010, our stock has traded at discounts of up
to 10.2% of our net asset value as of December 31, 2010.
This characteristic of shares of closed-end investment companies
is separate and distinct from the risk that our net asset value
per share will decline. As with any stock, the price of our
shares will fluctuate with market conditions and other factors.
If shares are sold, the price received may be more or less than
the original investment. Whether investors will realize gains or
losses upon the sale of our shares will not depend directly upon
our net asset value, but will depend upon the market price of
the shares at the time of sale. Since the market price of our
shares will be affected by such factors as the relative demand
for and supply of the shares in the market, general market and
economic conditions and other factors beyond our control, we
cannot predict whether the shares will trade at, below or above
our net asset value. Under the 1940 Act, we are generally not
able to issue additional shares of our common stock at a price
below net asset value per share to purchasers other than our
existing stockholders through a rights offering without first
obtaining the approval of our stockholders and our independent
directors. Additionally, at times when our stock is trading
below its net asset value per share, our dividend yield may
exceed the weighted average
21
returns that we would expect to realize on new investments that
would be made with the proceeds from the sale of such stock,
making it unlikely that we would determine to issue additional
shares in such circumstances. Thus, for as long as our common
stock trades below net asset value we will be subject to
significant constraints on our ability to raise capital through
the issuance of common stock. Additionally, an extended period
of time in which we are unable to raise capital may restrict our
ability to grow and adversely impact our ability to increase or
maintain our distributions.
Stockholders
may incur dilution if we sell shares of our common stock in one
or more offerings at prices below the then current net asset
value per share of our common stock.
At our most recent annual meeting, our stockholders approved a
proposal designed to allow us to access the capital markets in a
way that we were previously unable to as a result of
restrictions that, absent stockholder approval, apply to
business development companies under the 1940 Act. Specifically,
our stockholders approved a proposal that authorizes us to sell
shares of our common stock below the then current net asset
value per share of our common stock in one or more offerings for
a period of one year, provided that the number of shares issued
and sold pursuant to such authority does not exceed 25% of our
then outstanding common stock immediately prior to such sale.
During the past two years, our common stock has traded
consistently, and at times significantly, below net asset value.
Any decision to sell shares of our common stock below the then
current net asset value per share of our common stock would be
subject to the determination by our Board of Directors that such
issuance is in our and our stockholders’ best interests.
If we were to sell shares of our common stock below net asset
value per share, such sales would result in an immediate
dilution to the net asset value per share. This dilution would
occur as a result of the sale of shares at a price below the
then current net asset value per share of our common stock and a
proportionately greater decrease in a stockholder’s
interest in our earnings and assets and voting interest in us
than the increase in our assets resulting from such issuance.
The greater the difference between the sale price and the net
asset value per share at the time of the offering, the more
significant the dilutive impact would be. Because the number of
shares of common stock that could be so issued and the timing of
any issuance is not currently known, the actual dilutive effect,
if any, cannot be currently predicted. However, if for example,
we sold an additional 10% of our common stock at a 5% discount
from net asset value, a stockholder who did not participate in
that offering for its proportionate interest would suffer net
asset value dilution of up to 0.5% or $5 per $1,000 of net asset
value.
Other
Risks
We
could face losses and potential liability if intrusion, viruses
or similar disruptions to our technology jeopardize our
confidential information, whether through breach of our network
security or otherwise.
Maintaining our network security is of critical importance
because our systems store highly confidential financial models
and portfolio company information. Although we have implemented,
and will continue to implement, security measures, our
technology platform is and will continue to be vulnerable to
intrusion, computer viruses or similar disruptive problems
caused by transmission from unauthorized users. The
misappropriation of proprietary information could expose us to a
risk of loss or litigation.
Terrorist
attacks, acts of war, or national disasters may affect any
market for our common stock, impact the businesses in which we
invest, and harm our business, operating results, and financial
conditions.
Terrorist acts, acts of war, or national disasters have created,
and continue to create, economic and political uncertainties and
have contributed to global economic instability. Future
terrorist activities, military or security operations, or
national disasters could further weaken the domestic/global
economies and create additional uncertainties, which may
negatively impact the businesses in which we invest directly or
indirectly and, in turn, could have a material adverse impact on
our business, operating results, and financial condition. Losses
from terrorist attacks and national disasters are generally
uninsurable.
22
SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS
All statements contained or incorporated by reference in this
prospectus or any accompanying prospectus supplement, other than
historical facts, may constitute “forward-looking
statements.” These statements may relate to, among other
things, future events or our future performance or financial
condition. In some cases, you can identify forward-looking
statements by terminology such as “may,”
“might,” “believe,” “will,”
“provided,” “anticipate,”
“future,” “could,” “growth,”
“plan,” “intend,” “expect,”
“should,” “would,” “if,”
“seek,” “possible,” “potential,”
“likely” or the negative of such terms or comparable
terminology. These forward-looking statements involve known and
unknown risks, uncertainties and other factors that may cause
our actual results, levels of activity, performance or
achievements to be materially different from any future results,
levels of activity, performance or achievements expressed or
implied by such forward-looking statements. Such factors
include, among others: (1) further adverse changes in the
economy and the capital markets; (2) risks associated with
negotiation and consummation of pending and future transactions;
(3) the loss of one or more of our executive officers, in
particular David Gladstone, Terry Lee Brubaker or George
Stelljes III; (4) changes in our business strategy;
(5) availability, terms and deployment of capital;
(6) changes in our industry, interest rates, exchange rates
or the general economy; (7) the degree and nature of our
competition; and (8) those factors described in the
“Risk Factors” section of this prospectus. We caution
readers not to place undue reliance on any such forward-looking
statements, which speak only as of the date made. We undertake
no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future
events or otherwise, after the date of this prospectus.
USE OF
PROCEEDS
Unless otherwise specified in any prospectus supplement
accompanying this prospectus, we intend to use the net proceeds
from the sale of the Securities for general corporate purposes.
We expect the proceeds to be used first to pay down existing
short-term debt, then to make investments in small and mid-sized
businesses in accordance with our investment objective, with any
remaining proceeds to be used for other general corporate
purposes. Indebtedness under our credit facility currently
accrues interest at the rate of approximately 5.25% and matures
on March 15, 2012. We anticipate that substantially all of
the net proceeds of any offering of Securities will be utilized
in the manner described above within three months of the
completion of such offering. Pending such utilization, we intend
to invest the net proceeds of any offering of Securities
primarily in cash, cash equivalents, U.S. government
securities, and other high-quality debt investments that mature
in one year or less from the date of investment, consistent with
the requirements for continued qualification as a RIC for
federal income tax purposes.
PRICE
RANGE OF COMMON STOCK AND DISTRIBUTIONS
We currently intend to distribute in the form of cash dividends,
a minimum of 90% of our ordinary income and short-term capital
gains, if any, on a quarterly basis to our stockholders in the
form of monthly dividends. We intend to retain long-term capital
gains and treat them as deemed distributions for tax purposes.
We report the estimated tax characteristics of each dividend
when declared while the actual tax characteristics of dividends
are reported annually to each stockholder on Form 1099 DIV.
There is no assurance that we will achieve investment results or
maintain a tax status that will permit any specified level of
cash distributions or
year-to-year
increases in cash distributions. At the option of a holder of
record of common stock, all cash distributions can be reinvested
automatically under our dividend reinvestment plan in additional
whole and fractional shares. A stockholder whose shares are held
in the name of a broker or other nominee should contact the
broker or nominee regarding participation in our dividend
reinvestment plan on the stockholder’s behalf. See
“Risk Factors — We will be subject to
corporate-level tax if we are unable to satisfy Code
requirements for RIC qualification;” “Dividend
Reinvestment Plan;” and “Material U.S. Federal
Income Tax Considerations.”
Our common stock is quoted on The Nasdaq Global Select Market
under the symbol “GLAD.” Our common stock has
historically traded at prices both above and below its net asset
value. There can be no assurance, however, that any premium to
net asset value will be attained or maintained. As of
April 5, 2011, we had 69 stockholders of record, meaning
individuals or entities that we carry in our records as the
registered holder (although not necessarily the beneficial
owner) of our common stock.
23
The following table sets forth the range of high and low closing
sales prices of our common stock as reported on The Nasdaq
Global Select Market and the dividends declared by us for the
last two completed fiscal years and the current fiscal year
through April 5, 2011.
SHARE
PRICE DATA
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Premium
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Discount of
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Closing Sales Price
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(Discount) of
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Low Sales
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Dividend
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High Sales
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Price to
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NAV(1)
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High
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Low
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Declared
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Price to
NAV(2)
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NAV(2)
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Fiscal Year ended September 30, 2009
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First Quarter
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$
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12.04
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$
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15.38
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$
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5.50
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$
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0.42
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28
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%
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(54
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)%
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Second Quarter
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$
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12.10
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$
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10.28
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$
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5.01
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$
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0.42
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(15
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)%
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(59
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)%
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Third Quarter
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$
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11.86
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$
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7.80
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$
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5.49
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$
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0.21
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(34
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)%
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(54
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)%
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Fourth Quarter
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$
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11.81
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$
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10.40
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$
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7.17
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$
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0.21
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(12
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)%
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(39
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)%
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|
Fiscal Year ended September 30, 2010
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|
First Quarter
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$
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11.92
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$
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9.49
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|
|
$
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7.50
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$
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0.21
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|
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(20
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)%
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(37
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)%
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Second Quarter
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$
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12.10
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$
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12.19
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$
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7.19
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$
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0.21
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|
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1
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%
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(41
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)%
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Third Quarter
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$
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11.81
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$
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13.94
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|
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$
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10.09
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$
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0.21
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|
|
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18
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%
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|
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(15
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)%
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|
Fourth Quarter
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$
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11.85
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$
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12.34
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$
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10.30
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$
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0.21
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|
|
|
4
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%
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|
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(13
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)%
|
|
Fiscal Year ending September 30, 2011
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|
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|
|
|
|
|
|
|
First Quarter
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|
$
|
11.74
|
|
|
$
|
12.00
|
|
|
$
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10.91
|
|
|
$
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0.21
|
|
|
|
2
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%
|
|
|
(7
|
)%
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|
Second Quarter
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|
$
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*
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|
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$
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12.05
|
|
|
$
|
10.54
|
|
|
$
|
0.21
|
|
|
|
|
*%
|
|
|
|
*%
|
|
Third Quarter (through April 5, 2011)
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|
$
|
*
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|
|
$
|
11.56
|
|
|
$
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11.34
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|
|
$
|
0.00
|
|
|
|
|
*%
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|
*%
|
|
|
|
|
(1) |
|
Net asset value per share is determined as of the last day in
the relevant quarter and therefore may not reflect the net asset
value per share on the date of the high and low sale price. The
net asset values shown are based on outstanding shares at the
end of each period. |
| |
|
(2) |
|
The premiums set forth in these columns represent the high or
low, as applicable, closing price per share for the relevant
quarter minus the net asset value per share as of the end of
such quarter, and therefore may not reflect the premium to net
asset value per share on the date of the high and low closing
prices. |
| |
|
* |
|
Not yet available, as the net asset value per share as of the
end of this quarter has not yet been determined. |
24
CONSOLIDATED
SELECTED FINANCIAL DATA
The following table summarizes our consolidated selected
financial data and other data. The consolidated selected
financial data as of September 30, 2010 and 2009 and for
the fiscal years ended September 30, 2010, 2009 and 2008 is
derived from our audited consolidated financial statements
included in this prospectus. The consolidated selected financial
data as of and for the three months ended December 31, 2010 and
2009 is derived from our unaudited consolidated financial
statements included in this prospectus. The consolidated
selected financial data as of September 30, 2008, 2007 and
2006 and for the fiscal years ended September 30, 2007 and
2006 is derived from our audited consolidated financial
statements that are not included in this prospectus. The other
data included in the second table is unaudited. You should read
this data together with our consolidated financial statements
and notes thereto presented elsewhere in this prospectus and the
information under “Management’s Discussion and
Analysis of Financial Condition and Results of Operations”
for more information.
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|
|
|
|
|
|
|
Three Months Ended December 31,
|
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|
Year Ended September 30,
|
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|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
(unaudited)
|
|
|
(unaudited)
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(Dollar amounts in thousands, except per share and per unit
data)
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|
Statement of operations data:
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|
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|
|
|
|
|
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|
|
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|
|
|
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Total investment income
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$
|
8,006
|
|
|
$
|
9,804
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|
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$
|
35,539
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|
|
$
|
42,618
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|
|
$
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45,725
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|
|
$
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36,687
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|
|
$
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26,900
|
|
|
Total expenses net of credits from Adviser
|
|
|
3,369
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|
|
|
5,376
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|
|
|
17,780
|
|
|
|
21,587
|
|
|
|
19,172
|
|
|
|
14,426
|
|
|
|
7,447
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
4,637
|
|
|
|
4,428
|
|
|
|
17,759
|
|
|
|
21,031
|
|
|
|
26,553
|
|
|
|
22,261
|
|
|
|
19,351
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) gain on investments
|
|
|
(2,505
|
)
|
|
|
1,898
|
|
|
|
(1,365
|
)
|
|
|
(17,248
|
)
|
|
|
(47,815
|
)
|
|
|
(7,309
|
)
|
|
|
5,079
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Net increase (decrease) in net assets resulting from operations
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|
$
|
2,132
|
|
|
$
|
6,326
|
|
|
$
|
16,394
|
|
|
$
|
3,783
|
|
|
$
|
(21,262
|
)
|
|
$
|
14,952
|
|
|
$
|
24,430
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per share
data(1):
|
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|
|
|
|
|
|
|
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|
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|
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|
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|
|
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Net increase (decrease) in net assets resulting from operations
per common share —
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.10
|
|
|
$
|
0.30
|
|
|
$
|
0.78
|
|
|
$
|
0.18
|
|
|
$
|
(1.08
|
)
|
|
$
|
1.13
|
|
|
$
|
2.15
|
|
|
Diluted
|
|
|
0.10
|
|
|
|
0.30
|
|
|
|
0.78
|
|
|
|
0.18
|
|
|
|
(1.08
|
)
|
|
|
1.13
|
|
|
|
2.10
|
|
|
Net investment income before net gain on investments per common
share —
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
0.22
|
|
|
|
0.21
|
|
|
|
0.84
|
|
|
|
1.00
|
|
|
|
1.35
|
|
|
|
1.69
|
|
|
|
1.70
|
|
|
Diluted
|
|
|
0.22
|
|
|
|
0.21
|
|
|
|
0.84
|
|
|
|
1.00
|
|
|
|
1.35
|
|
|
|
1.69
|
|
|
|
1.67
|
|
|
Cash distributions declared per share
|
|
|
(0.21
|
)
|
|
|
(0.21
|
)
|
|
|
(0.84
|
)
|
|
|
(1.26
|
)
|
|
|
(1.68
|
)
|
|
|
(1.68
|
)
|
|
|
(1.64
|
)
|
|
Statement of assets and liabilities data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
275,497
|
|
|
$
|
270,518
|
|
|
$
|
270,518
|
|
|
$
|
335,910
|
|
|
$
|
425,698
|
|
|
$
|
367,729
|
|
|
$
|
225,783
|
|
|
Net assets
|
|
|
246,960
|
|
|
|
251,449
|
|
|
|
249,246
|
|
|
|
249,076
|
|
|
|
271,748
|
|
|
|
220,959
|
|
|
|
172,570
|
|
|
Net asset value per share
|
|
|
11.74
|
|
|
|
11.92
|
|
|
|
11.85
|
|
|
|
11.81
|
|
|
|
12.89
|
|
|
|
14.97
|
|
|
|
14.02
|
|
|
Common shares outstanding
|
|
|
21,039,242
|
|
|
|
21,087,574
|
|
|
|
21,039,242
|
|
|
|
21,087,574
|
|
|
|
21,087,574
|
|
|
|
14,762,574
|
|
|
|
12,305,008
|
|
|
Weighted common shares outstanding —
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
21,039,242
|
|
|
|
21,087,574
|
|
|
|
21,060,351
|
|
|
|
21,087,574
|
|
|
|
19,699,796
|
|
|
|
13,173,822
|
|
|
|
11,381,378
|
|
|
Diluted
|
|
|
21,039,242
|
|
|
|
21,087,574
|
|
|
|
21,060,351
|
|
|
|
21,087,574
|
|
|
|
19,699,796
|
|
|
|
13,173,822
|
|
|
|
11,615,922
|
|
|
Senior securities data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings under line of
credit(2)
|
|
$
|
25,301
|
|
|
$
|
73,531
|
|
|
$
|
17,940
|
|
|
$
|
83,350
|
|
|
$
|
151,030
|
|
|
$
|
144,440
|
|
|
$
|
49,993
|
|
|
Asset coverage
ratio(3)(4)
|
|
|
1,061
|
%
|
|
|
442
|
%
|
|
|
1,419
|
%
|
|
|
396
|
%
|
|
|
279
|
%
|
|
|
252
|
%
|
|
|
443
|
%
|
|
Asset coverage per
unit(4)
|
|
$
|
10,612
|
|
|
$
|
4,420
|
|
|
$
|
14,187
|
|
|
$
|
3,963
|
|
|
$
|
2,792
|
|
|
$
|
2,294
|
|
|
$
|
4,435
|
|
|
|
|
|
(1) |
|
Per share data for net increase (decrease) in net assets
resulting from operations is based on the weighted common stock
outstanding for both basic and diluted. |
| |
|
(2) |
|
See “Management’s Discussion and Analysis of Financial
Condition and Results of Operations” for more information
regarding our level of indebtedness. |
| |
|
(3) |
|
As a business development company, we are generally required to
maintain an asset coverage ratio of 200% of total consolidated
assets, less all liabilities and indebtedness not represented by
senior securities, to total borrowings and guaranty commitments. |
| |
|
(4) |
|
Asset coverage per unit is the asset coverage ratio expressed in
terms of dollar amounts per one thousand of indebtedness. |
25
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended December 31,
|
|
|
Year Ended September 30,
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
(Dollar amounts in thousands)
|
|
|
|
|
Other unaudited data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of portfolio companies
|
|
|
41
|
|
|
|
46
|
|
|
|
39
|
|
|
|
48
|
|
|
|
63
|
|
|
|
56
|
|
|
|
32
|
|
|
Average size of portfolio company investment at cost
|
|
$
|
7,233
|
|
|
$
|
7,554
|
|
|
$
|
7,647
|
|
|
$
|
7,592
|
|
|
$
|
7,315
|
|
|
$
|
6,352
|
|
|
$
|
6,756
|
|
|
Principal amount of new investments
|
|
|
(11,794
|
)
|
|
|
(2,064
|
)
|
|
|
(23,245
|
)
|
|
|
(24,911
|
)
|
|
|
(176,550
|
)
|
|
|
(261,700
|
)
|
|
|
(135,955
|
)
|
|
Proceeds from loan repayments and investments sold
|
|
|
13,245
|
|
|
|
18,186
|
|
|
|
85,634
|
|
|
|
96,693
|
|
|
|
70,482
|
|
|
|
121,818
|
|
|
|
124,010
|
|
|
Weighted average yield on
investments(1):
|
|
|
11.37
|
%
|
|
|
10.79
|
%
|
|
|
9.88
|
%
|
|
|
9.82
|
%
|
|
|
10.0
|
%
|
|
|
11.22
|
%
|
|
|
12.08
|
%
|
|
Total
return(2)
|
|
|
4.11
|
%
|
|
|
(11.58
|
)%
|
|
|
37.46
|
%
|
|
|
(30.94
|
)%
|
|
|
(13.90
|
)%
|
|
|
(4.40
|
)%
|
|
|
5.21
|
%
|
|
|
|
|
(1) |
|
Weighted average yield on investments equals interest income on
investments divided by the annualized weighted average
investment balance throughout the year. |
|
|
|
|
(2) |
|
Total return equals the increase (decrease) of the ending market
value over the beginning market value plus monthly distributions
divided by the monthly beginning market value. |
26
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(dollar amounts in thousands, except per share data or unless
otherwise indicated)
The following analysis of our financial condition and results of
operations should be read in conjunction with our consolidated
financial statements and the notes thereto contained elsewhere
herein.
OVERVIEW
General
We were incorporated under the General Corporation Laws of the
State of Maryland on May 30, 2001. Our investment objective
is to achieve a high level of current income by investing in
debt securities, consisting primarily of senior notes, senior
subordinated notes and junior subordinated notes, of established
private businesses that are substantially owned by leveraged
buyout funds, individual investors or are family-owned
businesses, with a particular focus on senior notes. In
addition, we may acquire from other funds existing loans that
meet this profile. We also seek to provide our stockholders with
long-term capital growth through the appreciation in the value
of warrants or other equity instruments that we may receive when
we make loans. We operate as a closed-end, non-diversified
management investment company, and have elected to be treated as
a business development company under the 1940 Act. In addition,
for tax purposes we have elected to be treated as a RIC under
the Code.
We seek to invest in small and medium-sized private
U.S. businesses that meet certain criteria, including some
but not necessarily all of the following: the potential for
growth in cash flow, adequate assets for loan collateral,
experienced management teams with a significant ownership
interest in the borrower, profitable operations based on the
borrower’s cash flow, reasonable capitalization of the
borrower (usually by leveraged buyout funds or venture capital
funds) and the potential to realize appreciation and gain
liquidity in our equity position, if any. We anticipate that
liquidity in our equity position will be achieved through a
merger or acquisition of the borrower, a public offering of the
borrower’s stock or by exercising our right to require the
borrower to repurchase our warrants, though there can be no
assurance that we will always have these rights. We lend to
borrowers that need funds to finance growth, restructure their
balance sheets or effect a change of control.
Business
Environment
While economic conditions generally appear to be improving, we
remain cautious about a long-term economic recovery. The recent
recession in general, and the disruptions in the capital markets
in particular, have decreased liquidity for us and increased our
cost of debt and equity capital. The longer these economic
conditions persist, the greater the probability that these
factors could continue to increase our costs of, and
significantly limit our access to, debt and equity capital and,
thus, have an adverse effect on our operations and financial
results. Many of the companies in which we have made investments
are still susceptible to the economic conditions, which may
affect the ability of one or more of our portfolio companies to
repay our loans or engage in a liquidity event, such as a sale,
recapitalization or initial public offering. The economic
conditions could also disproportionately impact some of the
industries in which we have invested, causing us to be more
vulnerable to losses in our portfolio, which could cause the
number of our non-performing assets to increase and the fair
market value of our portfolio to decrease. We do not know when
market conditions will begin to grow again or if adverse
conditions will intensify, and we do not know the full extent to
which the continued recession will affect us. If market
instability persists or intensifies, we may experience
difficulty in raising capital.
Challenges in the current market are intensified for us by
certain regulatory limitations under the Code and the 1940 Act,
as well as contractual restrictions under the agreement
governing our credit facility that further constrain our ability
to access the capital markets. To maintain our qualification as
a RIC, we must satisfy, among other requirements, an annual
distribution requirement to pay out at least 90% of our ordinary
income and short-term capital gains to our stockholders on an
annual basis. Because we are required to distribute our income
in this manner, and because the illiquidity of many of our
investments makes it difficult for us to finance new investments
through the sale of current investments, our ability to make new
investments is highly dependent upon external financing. Our
external financing sources include the issuance of equity
securities, debt securities or other leverage, such as
borrowings under our line of credit. Our ability to seek
external debt financing, to the extent that it is
27
available under current market conditions, is further subject
to the asset coverage limitations of the 1940 Act, which require
us to have at least a 200% asset coverage ratio, meaning
generally that for every dollar of debt, we must have two
dollars of assets.
Market conditions have also affected the trading price of our
common stock and thus our ability to finance new investments
through the issuance of equity. When our stock trades below net
asset value, or NAV, per share, as it has periodically traded
for more than two years, our ability to issue equity is
constrained by provisions of the 1940 Act which generally
prohibit the issuance and sale of our common stock at an
issuance price below NAV per share without stockholder approval
other than through sales to our then-existing stockholders
pursuant to a rights offering. At our annual meeting of
stockholders held on February 17, 2011, stockholders
approved a proposal which authorizes us to sell shares of our
common stock at a price below our then current NAV per share for
a period of one year from the date of approval, provided that
the number of shares issued and sold pursuant to such authority
does not exceed 25% of our then outstanding common stock
immediately prior to each such sale and that our Board of
Directors makes certain determinations prior to any such sale.
On February 4, 2011, the closing market price of our common
stock was $10.80, which price represented a 8% discount to our
December 31, 2010 NAV per share.
Unstable economic conditions may also continue to decrease the
value of collateral securing some of our loans, as well as the
value of our equity investments, which has impacted and may
continue to impact our ability to borrow under our credit
facility. Additionally, our credit facility contains covenants
regarding the maintenance of certain minimum net worth
covenants, which are affected by the decrease in value of our
portfolio. Failure to meet these requirements would result in a
default which, if we are unable to obtain a waiver from our
lenders, would result in the acceleration of our repayment
obligations under our credit facility. As of December 31,
2010, we were in compliance with all of our credit
facility’s covenants.
We expect that, given these regulatory and contractual
constraints in combination with current market conditions, debt
and equity capital may be costly or difficult for us to access.
However, we believe that our $127 million credit facility
with a two-year term increases our ability to make new
investments consistent with our strategy of making conservative
investments in businesses that we believe will weather the
current economic conditions and are likely to produce attractive
long-term returns for our stockholders.
Investment
Highlights
Purchases: During the year ended
September 30, 2010, we extended $10,580 of investments to
three new portfolio companies and $12,665 of investments to
existing portfolio companies through revolver draws or the
additions of new term notes, for total investments of $23,245.
Repayments: During the year ended
September 30, 2010, eight borrowers made unscheduled full
payoffs of $58,731, one borrower made an unscheduled partial
payoff of $950 and we experienced contractual amortization,
revolver repayments and some principal payments received ahead
of schedule for an aggregate of $22,885, for total principal
repayments of $82,566.
Sales: During the year ended
September 30, 2010, we sold three syndicated loans (which
resulted in our exit from three portfolio companies) for an
aggregate of $3,119 in net proceeds. In addition, we wrote off
our investment in Western Directories, which had a cost basis of
$2,865.
Since our initial public offering in August 2001, we have made
283 different loans to, or investments in, 139 companies
for a total of approximately $1,021.8 million, before
giving effect to principal repayments on investments and
divestitures.
Financing
Highlights
On March 15, 2010, through our wholly-owned subsidiary,
Gladstone Business Loan, LLC, or Business Loan, we entered into
a fourth amended and restated credit agreement, which provides
for a $127 million revolving line of credit arranged by Key
Equipment Finance Inc. as administrative agent, which we refer
to as the Credit Facility. Branch Banking and Trust Company
and ING Capital LLC also joined the Credit Facility as committed
lenders. Subject to certain terms and conditions, the Credit
Facility may be expanded up to $202 million through the
addition of other committed lenders to the facility. The Credit
Facility matures on March 15, 2012, and, if the facility is
not
28
renewed or extended by this date, all unpaid principal and
interest will be due and payable one year thereafter on
March 15, 2013. Advances under the Credit Facility
initially bore interest at the
30-day LIBOR
(subject to a minimum rate of 2%), plus 4.5% per annum, with a
commitment fee of 0.5% per annum on undrawn amounts. However, on
November 22, 2010, or the Amendment Date, we amended our
Credit Facility such that advances bear interest at the
30-day 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 the
facility is drawn more than 50% and 1.0% per annum on undrawn
amounts when the facility is drawn less than 50%.
In addition to the annual interest rate on borrowings
outstanding, under the terms of the Credit Facility prior to the
Amendment Date, we were obligated to pay an annual minimum
earnings shortfall fee to the committed lenders on
March 15, 2011, which was calculated as the difference
between the weighted average of borrowings outstanding under the
Credit Facility and 50% of the commitment amount of the Credit
Facility, multiplied by 4.5% per annum, less commitment fees
paid during the year. However, as a result of the amendment to
the Credit Facility, we are no longer obligated to pay an annual
minimum earnings shortfall fee. As of September 30, 2010,
we had accrued approximately $590 in minimum earnings shortfall
fees. On the Amendment Date, we paid a $665 fee.
During the year ended September 30, 2010, we elected to
apply ASC 825, “Financial Instruments,”
specifically to our Credit Facility, which requires us to apply
a fair value methodology to the Credit Facility as of
September 30, 2010. The Credit Facility was fair valued at
$17,940 as of September 30, 2010.
Investment
Strategy
Our strategy is to make loans at favorable interest rates to
small and medium-sized businesses. Our loans typically range
from $5 million to $20 million, although this
investment size may vary proportionately as the size of our
capital base changes, generally mature in no more than seven
years and accrue interest at fixed or variable rates. Because
the majority of our portfolio loans consist of term debt of
private companies that typically cannot or will not expend the
resources to have their debt securities rated by a credit rating
agency, we expect that most, if not all, of the debt securities
we acquire will be unrated. We cannot accurately predict what
ratings these loans might receive if they were rated, and thus
cannot determine whether or not they could be considered
“investment grade” quality.
Some of our loans may contain a provision that calls for some
portion of the interest payments to be deferred and added to the
principal balance so that the interest is paid, together with
the principal, at maturity. This form of deferred interest is
often called “paid in kind,” or PIK, interest and,
when earned, we record PIK interest as interest income and add
the PIK interest to the principal balance of the loans. We seek
to avoid PIK interest with all potential investments under
review. As of December 31, 2010, we had loans in our
portfolio which contained a PIK provision.
To the extent possible, our loans generally are collateralized
by a security interest in the borrower’s assets. Interest
payments are generally made monthly or quarterly (except to the
extent of any PIK interest) with amortization of principal
generally being deferred for several years. The principal amount
of the loans and any accrued but unpaid interest generally
become due at maturity at five to seven years. When we receive a
warrant to purchase stock in a borrower in connection with a
loan, the warrant will typically have an exercise price equal to
the fair value of the portfolio company’s common stock at
the time of the loan and entitle us to purchase a modest
percentage of the borrower’s stock.
Original issue discount, or OID, arises when we extend a loan
and receive an equity interest in the borrower at the same time.
To the extent that the price paid for the equity is not at
market value, we must allocate part of the price paid for the
loan, to the value of the equity. Then the amount allocated to
the equity, the OID, must be amortized over the life of the
loan. As with PIK interest, the amortization of OID also
produces income that must be recognized for purposes of
satisfying the distribution requirements for a RIC under
Subchapter M of the Code, whereas the cash is received, if at
all, when the equity instrument is sold. We seek to avoid OID
with all potential investments under review. As of
December 31, 2010, we had nine loans with OID income.
In addition, as a BDC under the 1940 Act, we are required to
make available significant managerial assistance to our
portfolio companies. Our Adviser provides these services on our
behalf through its officers who are also our officers.
Currently, neither we nor our Adviser charges a fee for
managerial assistance, however, if our Adviser does
29
receive fees for managerial assistance, our Adviser will credit
the managerial assistance fees to the base management fee due
from us to our Adviser.
Our Adviser receives fees for the other services it provides to
our portfolio companies. These other fees are typically
non-recurring, are recognized as revenue when earned and are
generally paid directly to our Adviser by the borrower or
potential borrower upon the closing of the investment. The
services our Adviser provides to our portfolio companies vary by
investment, but generally include a broad array of services,
such as investment banking services, arranging bank and equity
financing, structuring financing from multiple lenders and
investors, reviewing existing credit facilities, restructuring
existing investments, raising equity and debt capital from other
investors, turnaround management, merger and acquisition
services and recruiting new management personnel. When our
Adviser receives fees for these services, 50% or 100% of certain
of those fees are credited against the base management fee that
we pay to our Adviser. Any services of this nature subsequent to
closing would typically generate a separate fee at the time of
completion.
Our Adviser also receives fees for monitoring and reviewing
portfolio company investments. These fees are recurring and are
generally paid annually or quarterly in advance to our Adviser
throughout the life of the investment. Fees of this nature are
recorded as revenue by our Adviser when earned and are not
credited against the base management fee. Our Adviser’s
affiliate, Gladstone Securities, also provides our portfolio
companies with investment banking and due diligence services.
These fees are recorded as revenue by Gladstone Securities when
earned and do not impact the fees we pay our Adviser.
We may receive fees for the origination and closing services we
provide to portfolio companies through our Adviser. These fees
are paid directly to us and are recognized as revenue upon
closing of the originated investment and are reported as fee
income in the consolidated statements of operations.
Prior to making an investment, we ordinarily enter into a
non-binding term sheet with the potential borrower. These
non-binding term sheets are generally subject to a number of
conditions, including, but not limited to, the satisfactory
completion of our due diligence investigations of the potential
borrower’s business, reaching agreement on the legal
documentation for the loan, and the receipt of all necessary
consents. Upon execution of the non-binding term sheet, the
potential borrower generally pays the Adviser a non-refundable
fee for services rendered by the Adviser through the date of the
non-binding term sheet. These fees are received by the Adviser
and are offset against the base management fee payable to the
Adviser, which has the effect of reducing our expenses to the
extent of any such fees received by the Adviser.
In the event that we expend significant effort in considering
and negotiating a potential investment that ultimately is not
consummated, we generally will seek reimbursement from the
proposed borrower for our reasonable expenses incurred in
connection with the transaction, including legal fees. Any
amounts collected for expenses incurred by the Adviser in
connection with unconsummated investments will be reimbursed to
the Adviser. Amounts collected for these expenses incurred by us
will be reimbursed to us and will be recognized in the period in
which such reimbursement is received, however, there can be no
guarantee that we will be successful in collecting any such
reimbursements.
Our
Adviser and Administrator
Our Adviser is led by a management team which has extensive
experience in our lines of business. Our Adviser is controlled
by David Gladstone, our chairman and chief executive officer.
Mr. Gladstone is also the chairman and chief executive
officer of our Adviser. Terry Lee Brubaker, our vice chairman,
chief operating officer, secretary and director, is a member of
the board of directors of our Adviser and its vice chairman and
chief operating officer, George Stelljes III, our president,
chief investment officer and director, is a member of the board
of directors of our Adviser and its president and chief
investment officer. Our Administrator, an affiliate of our
Adviser, employs our chief financial officer, chief compliance
officer, internal counsel, treasurer and their respective staffs.
Our Adviser and Administrator also provide investment advisory
and administrative services to our affiliates, Gladstone
Commercial, a publicly traded real estate investment trust;
Gladstone Investment, a publicly traded business development
company; and Gladstone Land, a private agricultural real estate
company. Excluding our chief financial officer, all of our
executive officers serve as either directors or executive
officers, or both, of our
30
Adviser, our Administrator, Gladstone Commercial and Gladstone
Investment. Our treasurer is also an executive office of
Gladstone Securities, a broker-dealer registered with the
Financial Industry Regulatory Authority. In the future, our
Adviser may provide investment advisory and administrative
services to other funds, both public and private, of which it is
the sponsor.
Investment
Advisory and Management Agreement
Under the amended and restated investment advisory agreement, or
the Advisory Agreement, we pay our Adviser an annual base
management fee of 2% of our average gross assets, which 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
two most recently completed calendar quarters and appropriately
adjusted for any share issuances or repurchases during the
current calendar quarter.
We also pay our Adviser a two-part incentive fee under the
Advisory Agreement. The first part of the incentive fee is an
income-based incentive fee which rewards our Adviser if our
quarterly net investment income (before giving effect to any
incentive fee) exceeds 1.75% of our net assets (the “hurdle
rate”). The second part of the incentive fee is a capital
gains-based incentive fee that is 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 our Adviser, we will calculate the cumulative
aggregate realized capital gains and cumulative aggregate
realized capital losses since our inception, and the aggregate
unrealized capital depreciation as of the date of the
calculation, as applicable, with respect to each of the
investments in our portfolio. The Adviser did not earn the
capital gains-based portion of the incentive fee for the fiscal
year ended September 30, 2010.
We pay our direct expenses including, but not limited to,
directors’ fees, legal and accounting fees, stockholder
related expenses, and directors and officers insurance under the
Advisory Agreement.
Beginning in April 2006, our Board of Directors has accepted
from the Adviser, unconditional and irrevocable voluntarily
waivers on a quarterly basis to reduce the annual 2.0% base
management fee on senior syndicated loans to 0.5% to the extent
that proceeds resulting from borrowings were used to purchase
such syndicated loan participations. In addition to the base
management and incentive fees under the Advisory Agreement, 50%
or 100% of certain fees received by the Adviser from our
portfolio companies are credited against the investment advisory
fee and paid to the Adviser.
The Adviser services our loan portfolio pursuant to a loan
servicing agreement with Business Loan in return for a 1.5%
annual fee, based on the monthly aggregate outstanding loan
balance of the loans pledged under our credit facility. All fees
received by the Adviser from Business Loan are credited toward
the 2% base management fee.
Administration
Agreement
We have entered into an administration agreement with our
Administrator, or the Administration Agreement, 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 our allocable portion of the salaries
and benefits expenses of our chief financial officer, chief
compliance officer, internal counsel, treasurer and their
respective staffs. Our allocable portion of expenses is
primarily derived by multiplying our Administrator’s total
expenses by the percentage of our average assets (the total
assets at the beginning and end of each quarter) in comparison
to the average total assets of all funds that have
administration agreements with our Administrator and are also
managed by our Adviser under similar agreements. On July 7,
2010, our Board of Directors approved the renewal of this
Administration Agreement through August 31, 2011. We expect
that the Board of Directors will consider a further one year
renewal in July 2011.
31
Critical
Accounting Policies
The preparation of financial statements and related disclosures
in conformity with generally accepted accounting principles in
the United States requires management to make estimates and
assumptions that affect the reported consolidated amounts of
assets and liabilities, disclosure of contingent assets and
liabilities at the date of the financial statements, and
revenues and expenses during the years reported. Actual results
could materially differ from those estimates. Actual results
could differ materially from those estimates. We have identified
our investment valuation process, which was modified during the
year ended September 30, 2010, as our most critical
accounting policy.
Investment
Valuation
The most significant estimate inherent in the preparation of our
consolidated financial statements is the valuation of
investments and the related amounts of unrealized appreciation
and depreciation of investments recorded.
General Valuation Policy: We value our
investments in accordance with the requirements of the 1940 Act.
As discussed more fully below, we value securities for which
market quotations are readily available and reliable at their
market value. We value all other securities and assets at fair
value as determined in good faith by our Board of Directors.
We adopted ASC 820 on October 1, 2008. In part,
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.
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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 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
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Level 3 — inputs to the valuation
methodology are unobservable and significant to the fair value
measurement. Unobservable inputs are those inputs that reflect
our own assumptions that market participants would use to price
the asset or liability based upon the best available information.
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See Note 3, “Investments” in the accompanying
notes to our consolidated financial statements included
elsewhere in this prospectus for additional information
regarding fair value measurements and our adoption of
ASC 820.
We use generally accepted valuation techniques to value our
portfolio unless we have specific information about the value of
an investment to determine otherwise. From time to time we 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 scopes used to value our investments.
When these specific third-party appraisals are engaged or
accepted, we would use estimates of value provided by such
appraisals and our own assumptions including estimated remaining
life, current market yield and interest rate spreads of similar
securities as of the measurement date to value the investment we
have in that business.
In determining the value of our investments, our Adviser has
established an investment valuation policy, or the Policy. The
Policy has been approved by our Board of Directors, and each
quarter our Board of Directors reviews whether our Adviser has
applied the Policy consistently and votes whether or not to
accept the recommended valuation of our investment portfolio.
32
The Policy, which is summarized below, applies to the following
categories of securities:
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Publicly-traded securities;
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Securities for which a limited market exists; and
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Securities for which no market exists.
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Valuation
Methods:
Publicly-traded securities: We determine the
value of publicly-traded securities based on the closing price
for the security on the exchange or securities market on which
it is listed and primarily traded on the valuation date. To the
extent that we own restricted securities that are not freely
tradable, but for which a public market otherwise exists, we
will use the market value of that security adjusted for any
decrease in value resulting from the restrictive feature.
Securities for which a limited market
exists: We value 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. In valuing these assets, we assess trading
activity in an asset class, evaluate variances in prices and
other market insights to determine if any available quote prices
are reliable. If we conclude that quotes based on active markets
or trading activity may be relied upon, firm bid prices are
requested; however, if a firm bid price is unavailable, we base
the value of the security upon the indicative bid price, or IBP,
offered by the respective originating syndication agent’s
trading desk, or secondary desk, on or near the valuation date.
To the extent that we use the indicative bid price as a basis
for valuing the security, our Adviser may take further steps to
consider additional information to validate that price in
accordance with the Policy.
In the event these limited markets become illiquid such that
market prices are no longer readily available, we will value our
syndicated loans using estimated net present values of the
future cash flows or discounted cash flows. The use of a
discounted cash flow, or DCF, methodology follows that
prescribed by ASC 820, 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, the
alternative outlined in ASC 820 is the use of valuing
investments based on DCF. For the purposes of using DCF to
provide fair value estimates, we consider 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, we develop a modified discount rate
approach that incorporates risk premiums including, among
others, increased probability of default, or higher loss given
default, or increased liquidity risk. The DCF valuations applied
to the syndicated loans provide an estimate of what we believe a
market participant would pay to purchase a syndicated loan in an
active market, thereby establishing a fair value. We will
continue to apply the DCF methodology in illiquid markets until
quoted prices are available or are deemed reliable based on
trading activity.
As of December 31, 2010, we assessed trading activity in
our syndicated loan assets and determined that there continued
to be market liquidity and a secondary market for these assets.
Thus, firm bid prices or IBPs were used to fair value our
remaining syndicated loans as of December 31, 2010.
Securities for which no market exists: The
valuation methodology for securities for which no market exists
falls into three categories: (1) portfolio investments
comprised solely of debt securities; (2) portfolio
investments in controlled companies comprised of a bundle of
securities, which can include debt and equity securities; and
(3) portfolio investments in non-controlled companies
comprised of a bundle of investments, which can include debt and
equity securities.
(1) Portfolio investments comprised solely of debt
securities: Debt securities that are not publicly
traded on an established securities market, or for which a
limited market does not exist, which we refer to as Non-Public
Debt Securities, and that are issued by portfolio companies
where we have no equity or equity-like securities, are fair
valued in accordance with the terms of the policy, which
utilizes opinions of value submitted to us by SPSE. We may also
submit PIK interest to SPSE for their evaluation when it is
determined that PIK interest is likely to be received.
In the case of Non-Public Debt Securities, we have engaged SPSE
to submit opinions of value for our debt securities that are
issued by portfolio companies in which we own no equity, or
equity-like securities. SPSE’s
33
opinions of value are based on the valuations prepared by our
portfolio management team as described below. We request that
SPSE also evaluate and assign values to success fees
(conditional interest included in some loan securities) when we
determine that there is reasonable probability of receiving a
success fee on a given loan. SPSE will only evaluate the debt
portion of our investments for which we specifically request
evaluation, and may decline to make requested evaluations for
any reason at its sole discretion. Upon completing our
collection of data with respect to the investments (which may
include the information described below under
“— Credit Information,” the risk ratings of
the loans described below under “— Loan Grading
and Risk Rating” and the factors described hereunder), this
valuation data is forwarded to SPSE for review and analysis.
SPSE makes its independent assessment of the data that we have
assembled and assesses its independent data to form an opinion
as to what they consider to be the market values for the
securities. With regard to its work, SPSE has issued the
following paragraph:
SPSE provides evaluated price opinions which are reflective of
what SPSE believes the bid side of the market would be for each
loan after careful review and analysis of descriptive, market
and credit information. Each price reflects SPSE’s best
judgment based upon careful examination of a variety of market
factors. Because of fluctuation in the market and in other
factors beyond its control, SPSE cannot guarantee these
evaluations. The evaluations reflect the market prices, or
estimates thereof, on the date specified. The prices are based
on comparable market prices for similar securities. Market
information has been obtained from reputable secondary market
sources. Although these sources are considered reliable, SPSE
cannot guarantee their accuracy.
SPSE opinions of value of our debt securities that are issued by
portfolio companies where we have no equity or equity-like
securities are submitted to our Board of Directors along with
our Adviser’s supplemental assessment and recommendation
regarding valuation of each of these investments. Our Adviser
generally accepts the opinion of value given by SPSE, however,
in certain limited circumstances, such as when our Adviser may
learn new information regarding an investment between the time
of submission to SPSE and the date of the Board assessment our
Adviser’s conclusions as to value may differ from the
opinion of value delivered by SPSE. Our Board of Directors then
reviews whether our Adviser has followed its established
procedures for determinations of fair value, and votes to accept
or reject the recommended valuation of our investment portfolio.
Our Adviser and our management recommended, and the Board of
Directors voted to accept, the opinions of value delivered by
SPSE on the loans in our portfolio as denoted on the Schedule of
Investments included in our accompanying consolidated financial
statements.
Because there is a delay between when we close an investment and
when the investment can be evaluated by SPSE, new loans are not
valued immediately by SPSE; rather, management makes its own
determination about the value of these investments in accordance
with our valuation policy using the methods described herein.
(2) 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 of
the portfolio company, or issuer, utilizing a liquidity
waterfall approach. For 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. In
accordance with
ASC 820-10,
we apply the in-use premise of value which assumes the debt and
equity securities are sold together. Under this liquidity
waterfall approach, we continue to use the enterprise value
methodology utilizing a liquidity waterfall approach to
determine the fair value of these investments under
ASC 820-10
if we have the ability to initiate a sale of a portfolio company
as of the measurement date. Under this approach, we first
calculate the total enterprise value of the issuer by
incorporating some or all of the following factors:
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the issuer’s ability to make payments;
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the earnings of the issuer;
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recent sales to third parties of similar securities;
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the comparison to publicly traded securities; and
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•
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discounted cash flow or other pertinent factors.
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34
In gathering the sales to third parties of similar securities,
we may reference industry statistics and use outside experts.
Once we have estimated the total enterprise value of the issuer,
we 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 total enterprise value over the total debt outstanding for
the issuer. Once the values for all outstanding senior
securities (which include the debt securities) have been
subtracted from the total enterprise value 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 our
Adviser’s judgment, the liquidity waterfall approach does
not accurately reflect the value of the debt component, our
Adviser may recommend that we use a valuation by SPSE or, if
that is unavailable, a DCF valuation technique.
(3) Portfolio investments in non-controlled companies
comprised of a bundle of investments, which can include debt and
equity securities: We value 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 820-10,
we determine the fair value of these debt securities of
non-control investments assuming the sale of an individual debt
security using the in-exchange premise of value. As such, we
estimate the fair value of the debt component using estimates of
value provided by SPSE and our 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.
Subsequent to June 30, 2009, for equity or equity-like
securities of investments for which we do not control or cannot
gain control as of the measurement date, we estimate the fair
value of the equity using the in-exchange premise of value 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 also is given to
capital structure and other contractual obligations that may
impact the fair value of the equity. Further, we may utilize
comparable values of similar companies, recent investments and
indices with similar structures and risk characteristics or our
own assumptions in the absence of other observable market data
and may also employ DCF valuation techniques.
(4) Portfolio investments comprised of non-publicly
traded non-control equity securities of other
funds: We value any uninvested capital of the
non-control fund at par value and value any invested capital at
the value provided by the non-control fund.
Due to the uncertainty inherent in the valuation process, such
estimates of fair value may differ significantly from the values
that would have been obtained had a ready market for the
securities existed, and the differences could be material.
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 we might reasonably
expect to receive upon the current sale of the security in an
arms-length transaction in the security’s principal market.
Valuation Considerations: From time to time,
depending on certain circumstances, the Adviser may use the
following valuation considerations, including but not limited to:
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the nature and realizable value of the collateral;
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the portfolio company’s earnings and cash flows and its
ability to make payments on its obligations;
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the markets in which the portfolio company does business;
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the comparison to publicly traded companies; and
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DCF and other relevant factors.
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Because such valuations, particularly valuations of private
securities and private companies, are not susceptible to precise
determination, may fluctuate over short periods of time, and may
be based on estimates, our
35
determinations of fair value may differ from the values that
might have actually resulted had a readily available market for
these securities been available.
Credit Information: Our Adviser monitors a
wide variety of key credit statistics that provide information
regarding our portfolio companies to help us assess credit
quality and portfolio performance. We and our Adviser
participate in the periodic board meetings of our portfolio
companies in which we hold Control and Affiliate investments and
also require them to provide annual audited and monthly
unaudited financial statements. Using these statements or
comparable information and board discussions, our Adviser
calculates and evaluates the credit statistics.
Loan Grading and Risk Rating: As part of our
valuation procedures above, we risk rate all of our investments
in debt securities. For syndicated loans that have been rated by
an NRSRO (as defined in
Rule 2a-7
under the 1940 Act), we use the NRSRO’s risk rating for
such security. For all other debt securities, we use a
proprietary risk rating system. Our risk rating system uses a
scale of 0 to 10, with 10 being the lowest probability of
default. This system is used to estimate the probability of
default on debt securities and the probability of loss if there
is a default. These types of systems are referred to as risk
rating systems and are used by banks and rating agencies. The
risk rating system covers both qualitative and quantitative
aspects of the business and the securities we hold. During the
three months ended March 31, 2010, we modified our risk
rating model to incorporate additional factors in our
qualitative and quantitative analysis. While the overall process
did not change, we believe the additional factors enhance the
quality of the risk ratings of our investments. No adjustments
were made to prior periods as a result of this modification.
For the debt securities for which we do not use a third-party
NRSRO risk rating, we seek to have our risk rating system mirror
the risk rating systems of major risk rating organizations, such
as those provided by an NRSRO. While we seek to mirror the NRSRO
systems, we cannot provide any assurance that our risk rating
system will provide the same risk rating as an NRSRO for these
securities. The following chart is an estimate of the
relationship of our risk rating system to the designations used
by two NRSROs as they risk rate debt securities of major
companies. Because our system rates debt securities of companies
that are unrated by any NRSRO, there can be no assurance that
the correlation to the NRSRO set out below is accurate. We
believe our risk rating would be significantly higher than a
typical NRSRO risk rating because the risk rating of the typical
NRSRO is designed for larger businesses. However, our risk
rating has been designed to risk rate the securities of smaller
businesses that are not rated by a typical NRSRO. Therefore,
when we use our risk rating on larger business securities, the
risk rating is higher than a typical NRSRO rating. The primary
difference between our risk rating and the rating of a typical
NRSRO is that our risk rating uses more quantitative
determinants and includes qualitative determinants that we
believe are not used in the NRSRO rating. It is our
understanding that most debt securities of medium-sized
companies do not exceed the grade of BBB on an NRSRO scale, so
there would be no debt securities in the middle market that
would meet the definition of AAA, AA or A. Therefore, our scale
begins with the designation 10 as the best risk rating which may
be equivalent to a BBB− or Baaa3 from an NRSRO, however,
no assurance can be given that a 10 on our scale is equal to a
BBB− or Baaa3 on an NRSRO scale.
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Company’s
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First
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Second
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System
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NRSRO
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NRSRO
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Description(a)
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> 10
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Baa2
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BBB
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Probability of Default (PD) during the next ten years is 4% and
the Expected Loss (EL) is 1% or less
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10
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Baa3
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BBB−
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PD is 5% and the EL is 1% to 2%
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9
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Ba1
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BB+
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PD is 10% and the EL is 2% to 3%
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8
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Ba2
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BB
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PD is 16% and the EL is 3% to 4%
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7
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Ba3
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BB−
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PD is 17.8% and the EL is 4% to 5%
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6
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B1
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B+
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PD is 22% and the EL is 5% to 6.5%
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5
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B2
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B
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PD is 25% and the EL is 6.5% to 8%
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4
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B3
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B−
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PD is 27% and the EL is 8% to 10%
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3
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Caa1
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CCC+
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PD is 30% and the EL is 10% to 13.3%
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2
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Caa2
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CCC
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PD is 35% and the EL is 13.3% to 16.7%
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1
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Caa3
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CC
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PD is 65% and the EL is 16.7% to 20%
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< 1
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N/A
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D
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PD is 85% or there is a payment default and the EL is greater
than 20%
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(a) |
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The default rates set forth are for a ten year term debt
security. If a debt security is less than ten years, then the
probability of default is adjusted to a lower percentage for the
shorter period, which may move the security higher on our risk
rating scale. |
The above scale gives an indication of the probability of
default and the magnitude of the loss if there is a default. Our
policy is to stop accruing interest on an investment if we
determine that interest is no longer collectible. As of
December 31, 2010, and September 30, 2010, two
Non-Control/Non-Affiliate investments and four Control
investments were on non-accrual. As of September 30, 2009,
one Non-Control/Non-Affiliate investment and four Control
investments were on non-accrual. Additionally, we do not risk
rate our equity securities.
The following table lists the risk ratings for all
non-syndicated loans in our portfolio at December 31, 2010,
September 30, 2010 and September 30, 2009,
representing approximately 92%, 93% and 96%, respectively, of
all loans in our portfolio at the end of each period:
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Dec. 31,
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Sept. 30,
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Sept. 30,
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Rating
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2010
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2010
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2009
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Highest
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10.0
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10.0
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9.0
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Average
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6.4
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6.1
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7.1
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Weighted Average
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6.5
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5.7
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7.2
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Lowest
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3.0
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1.0
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3.0
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The following table lists the risk ratings for all syndicated
loans in our portfolio that were not rated by an NRSRO at
September 30, 2010 and September 30, 2009,
representing approximately 2% of all loans in our portfolio at
the end of each year (all syndicated loans in our portfolio were
rated by an NRSRO at December 31, 2010):
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Sept. 30,
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Sept. 30,
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Rating
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2010
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2009
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Highest
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7.0
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7.0
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Average
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7.0
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7.0
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Weighted Average
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7.0
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7.0
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Lowest
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7.0
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7.0
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For syndicated loans that are currently rated by an NRSRO, we
risk rate such loans in accordance with the risk rating systems
of major risk rating organizations, such as those provided by an
NRSRO. The following table lists the risk ratings for all
syndicated loans in our portfolio that were rated by an NRSRO at
December 31, 2010, September 30, 2010 and
September 30, 2009, representing approximately 8%, 4% and
2%, respectively, of all loans in our portfolio at the end of
each period:
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Dec. 31,
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Sept. 30,
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Sept. 30,
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Rating
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2010
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2010
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2009
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Highest
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B+/B2
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B+/B2
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|
B-/B3
|
|
Average
|
|
B-/B3
|
|
B+/B2
|
|
CCC+/Caa1
|
|
Weighted Average
|
|
B/B2
|
|
B+/B2
|
|
CCC+/Caa1
|
|
Lowest
|
|
B-/B3
|
|
B2
|
|
D/C
|
Tax
Status
We intend to continue to qualify for treatment as a RIC under
Subtitle A, Chapter 1 of Subchapter M of the Code. As a
RIC, we are not subject to federal income tax on the portion of
our taxable income and gains distributed to stockholders. To
qualify as a RIC, we must meet certain
source-of-income,
asset diversification, and annual distribution requirements.
Under the annual distribution requirement, we are required to
distribute to stockholders at least 90% of our investment
company taxable income, as defined by the Code. We have a policy
to pay out as distributions up to 100% of that amount.
In an effort to avoid certain excise taxes imposed on RICs, we
currently intend to distribute during each calendar year, an
amount at least equal to the sum of (1) 98% of our ordinary
income for the calendar year, (2) 98%
37
of our capital gains in excess of capital losses for the
one-year period ending on October 31 of the calendar year and
(3) any ordinary income and net capital gains for preceding
years that were not distributed during such years.
We sought and received a private letter ruling from the Internal
Revenue Service, or IRS, related to our tax treatment for
success fees. In the ruling, executed by our consent on
January 3, 2011, we, in effect, will continue to account
for the recognition of income from the success fees upon
receipt, or when the amount becomes fixed. However, starting
January 1, 2011, the tax characterization of the success
fee amount will be treated as ordinary income. Previously, we
had treated the success fee amount as a realized gain for tax
characterization purposes. The private letter ruling does not
require us to retroactively change the capital gains treatment
of the success fees received prior to January 1, 2011.
Revenue
Recognition
Interest
Income Recognition
Interest income, adjusted for amortization of premiums and
acquisition costs and for the accretion of discounts, is
recorded on an 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
principal depending upon management’s judgment. Non-accrual
loans are restored to accrual status when past due principal and
interest is paid and in management’s judgment, are likely
to remain current. As of December 31, 2010, two
Non-Control/Non-Affiliate investments and four Control
investments were on non-accrual with an aggregate cost basis of
approximately $30.4 million, or 10.3% of the cost basis of
all loans in our portfolio. As of September 30, 2010, two
Non-Control/Non-Affiliate investments and four Control
investments were on non-accrual with an aggregate cost basis of
approximately $29.9 million or 10.0% of the cost basis of
all investments in our portfolio. As of September 30, 2009,
one Non-Control/Non-Affiliate investment and four Control
investments were on non-accrual with an aggregate cost basis of
approximately $10 million or 2.8% of the cost basis of all
investments in our portfolio.
As of December 31, 2010, we had loans in our portfolio
which contain a PIK provision. The PIK interest, computed at the
contractual rate specified in each loan agreement, is added to
the principal balance of the loan and recorded as income. To
maintain our status as a RIC, this non-cash source of income
must be paid out to stockholders in the form of distributions,
even though we have not yet collected the cash. We recorded PIK
income of $4 and $55 for the three months ended
December 31, 2010 and 2009, respectively. We recorded PIK
income of $53, $166 and $58 for the years ended
September 30, 2010, 2009 and 2008, respectively.
We also transfer past due interest to the principal balance as
stipulated in certain loan amendments with portfolio companies.
For the three months ended December 31, 2010 and 2009,
respectively, we transferred past due interest to the principal
balance of $0 and $103. For the years ended September 30,
2010, 2009 and 2008, we rolled over past due interest to the
principal balance of $529, $1,455 and $0, respectively.
As of December 31, 2010, we had nine OID loans. We recorded
OID income of $25 and $0 for the three months ended
December 31, 2010 and 2009, respectively. For the years
ended September 30, 2010, 2009 and 2008, we recorded OID
income of $21, $206 and $29, respectively.
Success fees are recorded upon receipt. Success fees are
contractually due upon a change of control in a portfolio
company and are recorded in Other income in our accompanying
condensed consolidated statements of operations. We recorded
$0.1 million of success fees during the quarter ended
December 31, 2010, which resulted from the exit and payoff
of Interfilm Corp. During the quarter ended December 31,
2009, we received $0.3 million in prepaid success fees from
Doe & Ingalls Management LLC and $0.3 million in
success fees from our exit in Tulsa Welding School.
38
RESULTS
OF OPERATIONS
COMPARISON
OF THE THREE MONTHS ENDED DECEMBER 31, 2010 TO THE THREE MONTHS
ENDED DECEMBER 31, 2009
A comparison of our operating results for the three months
ended December 31, 2010 and 2009 is below:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
$ Change
|
|
|
% Change
|
|
|
|
|
INVESTMENT INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
7,845
|
|
|
$
|
9,251
|
|
|
$
|
(1,406
|
)
|
|
|
(15.2
|
)%
|
|
Other income
|
|
|
161
|
|
|
|
553
|
|
|
|
(392
|
)
|
|
|
(70.9
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment income
|
|
|
8,006
|
|
|
|
9,804
|
|
|
|
(1,798
|
)
|
|
|
(18.3
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan servicing fee
|
|
|
842
|
|
|
|
929
|
|
|
|
(87
|
)
|
|
|
(9.4
|
)%
|
|
Base management fee
|
|
|
505
|
|
|
|
721
|
|
|
|
(216
|
)
|
|
|
(30.0
|
)%
|
|
Incentive fee
|
|
|
1,159
|
|
|
|
375
|
|
|
|
784
|
|
|
|
209.1
|
%
|
|
Administration fee
|
|
|
186
|
|
|
|
178
|
|
|
|
8
|
|
|
|
4.5
|
%
|
|
Interest expense
|
|
|
(120
|
)
|
|
|
1,535
|
|
|
|
(1,655
|
)
|
|
|
NM
|
|
|
Amortization of deferred financing fees
|
|
|
297
|
|
|
|
494
|
|
|
|
(197
|
)
|
|
|
(39.9
|
)%
|
|
Professional fees
|
|
|
332
|
|
|
|
912
|
|
|
|
(580
|
)
|
|
|
(63.6
|
)%
|
|
Other expenses
|
|
|
220
|
|
|
|
261
|
|
|
|
(41
|
)
|
|
|
(15.7
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses before credit from Adviser
|
|
|
3,421
|
|
|
|
5,405
|
|
|
|
(1,984
|
)
|
|
|
(36.7
|
)%
|
|
Credit to base management and incentive fees from Adviser
|
|
|
(52
|
)
|
|
|
(29
|
)
|
|
|
(23
|
)
|
|
|
79.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses net of credit to base management and incentive
fees
|
|
|
3,369
|
|
|
|
5,376
|
|
|
|
(2,007
|
)
|
|
|
(37.3
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INVESTMENT INCOME
|
|
|
4,637
|
|
|
|
4,428
|
|
|
|
209
|
|
|
|
4.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
REALIZED AND UNREALIZED (LOSS) GAIN ON:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized loss on investments
|
|
|
—
|
|
|
|
(920
|
)
|
|
|
920
|
|
|
|
(100.0
|
)%
|
|
Net unrealized (depreciation) appreciation on investments
|
|
|
(2,944
|
)
|
|
|
2,599
|
|
|
|
(5,543
|
)
|
|
|
NM
|
|
|
Net unrealized appreciation on borrowings
|
|
|
439
|
|
|
|
219
|
|
|
|
220
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) gain on investments and borrowings
|
|
|
(2,505
|
)
|
|
|
1,898
|
|
|
|
(4,403
|
)
|
|
|
NM
|
|
|
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS
|
|
$
|
2,132
|
|
|
$
|
6,326
|
|
|
$
|
(4,194
|
)
|
|
|
(66.3
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NM = Not
Meaningful
Investment
Income
Interest income from our investments in debt securities
decreased for the three months ended December 31, 2010, as
compared to the three months ended December 31, 2009, for
several reasons. The level of interest income from investments
is directly related to the balance, at cost, of the
interest-bearing investment portfolio outstanding during the
period multiplied by the weighted average yield. The weighted
average cost basis of our interest-bearing investment portfolio
during the quarter ended December 31, 2010 was
approximately $269.4 million, compared to approximately
$336.1 million for the prior year quarter, due primarily to
increased principal repayments, limited new investment activity
and an increased number of investments placed on non-accrual
subsequent to December 31, 2009. The annualized weighted
average yield on our interest-bearing investment portfolio for
the three months
39
ended December 31, 2010 was 11.37%, compared to 10.79% for
the prior year period. The weighted average yield varies from
period to period based on the current stated interest rate on
interest-bearing investments and the amounts of loans for which
interest is not accruing. The increase in the weighted average
yield on our portfolio for the quarter ended December 31,
2010 resulted primarily from the repayment of loans with lower
stated interest rates and the placement of loans with lower
stated interest rates on non-accrual. During the three months
ended December 31, 2010, six investments were on
non-accrual, for an aggregate of approximately
$30.4 million at cost, or 10.3% of the aggregate cost of
our investment portfolio, and during the prior year period, six
investments were on non-accrual, for an aggregate of
approximately $19.9 million at cost, or 5.7% of the
aggregate cost of our investment portfolio.
Other income decreased for the three months ended
December 31, 2010, as compared to the prior year period,
primarily due to success fees earned in the prior year period.
We received $0.3 million in prepaid success fees from
Doe & Ingalls Management LLC and $0.3 million in
success fees from our exit in Tulsa Welding School during the
three months ended December 31, 2009. The decrease in Other
income was partially offset by the receipt of $0.1 million
in success fees from our exit in Interfilm Holdings, Inc. during
the three months ended December 31, 2010.
The following table lists the interest income from investments
for our five largest portfolio company investments during the
respective periods:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
As of December 31, 2010
|
|
|
December 31, 2010
|
|
|
Company
|
|
Fair Value
|
|
|
% of Portfolio
|
|
|
Revenues
|
|
|
% of Total Revenues
|
|
|
|
|
Reliable Biopharmaceutical Holding Inc.
|
|
$
|
26,961
|
|
|
|
10.6
|
%
|
|
$
|
754
|
|
|
|
9.4
|
%
|
|
Sunshine Media Holdings
|
|
|
22,235
|
|
|
|
8.8
|
|
|
|
864
|
|
|
|
10.8
|
|
|
Westlake Hardware, Inc.
|
|
|
19,645
|
|
|
|
7.8
|
|
|
|
652
|
|
|
|
8.2
|
|
|
Clinton Holdings LLC (Midwest Metal)
|
|
|
15,813
|
|
|
|
6.3
|
|
|
|
561
|
|
|
|
7.0
|
|
|
Defiance Acquisition Corp.
|
|
|
12,757
|
|
|
|
5.1
|
|
|
|
231
|
|
|
|
2.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal — five largest investments
|
|
|
97,411
|
|
|
|
38.6
|
|
|
|
3,062
|
|
|
|
38.3
|
|
|
Other portfolio companies
|
|
|
155,094
|
|
|
|
61.4
|
|
|
|
4,822
|
|
|
|
60.2
|
|
|
Other non-portfolio company revenue
|
|
|
—
|
|
|
|
—
|
|
|
|
122
|
|
|
|
1.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
252,505
|
|
|
|
100.0
|
%
|
|
$
|
8,006
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
As of December 31, 2009
|
|
|
December 31, 2009
|
|
|
Company
|
|
Fair Value
|
|
|
% of Portfolio
|
|
|
Revenues
|
|
|
% of Total Revenues
|
|
|
|
|
Reliable Biopharmaceutical Holding Inc.
|
|
$
|
26,747
|
|
|
|
8.7
|
%
|
|
$
|
759
|
|
|
|
7.7
|
%
|
|
Sunshine Media Holdings
|
|
|
26,228
|
|
|
|
8.6
|
|
|
|
846
|
|
|
|
8.6
|
|
|
Westlake Hardware, Inc.
|
|
|
24,213
|
|
|
|
7.9
|
|
|
|
924
|
|
|
|
9.4
|
|
|
Clinton Holdings LLC (Midwest Metal)
|
|
|
13,712
|
|
|
|
4.5
|
|
|
|
522
|
|
|
|
5.3
|
|
|
Defiance Acquisition Corp.
|
|
|
13,590
|
|
|
|
4.4
|
|
|
|
419
|
|
|
|
4.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal — five largest investments
|
|
|
104,490
|
|
|
|
34.1
|
|
|
|
3,470
|
|
|
|
35.3
|
|
|
Other portfolio companies
|
|
|
202,148
|
|
|
|
65.9
|
|
|
|
6,221
|
|
|
|
63.5
|
|
|
Other non-portfolio company revenue
|
|
|
—
|
|
|
|
—
|
|
|
|
113
|
|
|
|
1.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
306,638
|
|
|
|
100.0
|
%
|
|
$
|
9,804
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Expenses
Operating expenses, net of credits from the Adviser for fees
earned and voluntary and irrevocable waivers applied to the base
management and incentive fees, decreased for the three months
ended December 31, 2010, as compared to the prior year
period. This reduction was primarily due to a decrease in
interest expense and the
40
amortization of deferred financing fees incurred in connection
with the Credit Facility, and a decrease in professional fees,
which were partially offset by an increase in the incentive fee.
Interest expense decreased for the three months ended
December 31, 2010, as compared to the prior year period due
primarily to decreased borrowings under our Credit Facility and
the reversal of $0.6 million minimum earnings shortfall fee
during the three months ended December 31, 2010. The
weighted average balance outstanding on our Credit Facility
during the quarter ended December 31, 2010 was
approximately $19.8 million, as compared to
$78.8 million in the prior year period, a decrease of
74.8%. On November 22, 2010, we amended our Credit Facility
such that advances bear interest at LIBOR subject to a minimum
rate of 1.5%, plus 3.75% per annum. For the three months ended
December 31, 2009, under our prior credit facility,
advances generally bore interest at LIBOR subject to a minimum
rate of 2.0%, plus 4.0% per annum. In addition to the lower
interest rate, the amendment removed the annual minimum earnings
shortfall fee to the committed lenders. As such, we reversed
$0.6 million during the three months ended
December 31, 2010 that we had accrued through
September 30, 2010 for a projected minimum earnings
shortfall fee, as it is no longer applicable.
Amortization of deferred financing fees decreased for the three
months ended December 31, 2010, as compared to the prior
year period due to significant one-time costs related to the
termination of our prior credit facility and transition to our
Credit Facility, resulting in increased amortization of deferred
financing fees during the quarter ended December 31, 2009
when compared to the quarter ended December 31, 2010.
Professional fees decreased for the three months ended
December 31, 2010, as compared to the prior period,
primarily due to legal fees incurred in connection with troubled
loans during the three months ended December 31, 2009.
The base management fee decreased for the three months ended
December 31, 2010, as compared to the prior year period,
which is reflective of holding fewer loans that generate loan
servicing fees that reduce the base management fee as compared
to the prior year period. An incentive fee was earned by the
Adviser during the three months ended December 31, 2010,
due primarily to decreased interest expense. The incentive fee
earned during the prior year period was due in part to success
fee income from two portfolio companies. The base management and
incentive fees are computed quarterly, as described under
“Investment Advisory and Management Agreement” in
Note 4 of the notes to the accompanying Condensed
Consolidated Financial Statements and are summarized in the
following table:
| |
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended December 31,
|
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
Average total assets subject to base management
fee(1)
|
|
$
|
269,408
|
|
|
$
|
330,000
|
|
|
Multiplied by pro-rated annual base management fee of 2.0%
|
|
|
0.5
|
%
|
|
|
0.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Unadjusted base management fee
|
|
$
|
1,347
|
|
|
$
|
1,650
|
|
|
Reduction for loan servicing
fees(2)
|
|
|
(842
|
)
|
|
|
(929
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Base management
fee(2)
|
|
|
505
|
|
|
|
721
|
|
|
Credit for fees received by Adviser from the portfolio companies
|
|
|
—
|
|
|
|
—
|
|
|
Fee reduction for the voluntary, irrevocable waiver of 2.0% fee
on senior syndicated loans to 0.5% per annum
|
|
|
(52
|
)
|
|
|
(7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net base management fee
|
|
$
|
453
|
|
|
$
|
714
|
|
|
|
|
|
|
|
|
|
|
|
|
Incentive fee
|
|
$
|
1,159
|
|
|
$
|
375
|
|
|
Credit from voluntary, irrevocable waiver issued by
Adviser’s board of directors
|
|
|
—
|
|
|
|
(22
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net incentive fee
|
|
$
|
1,159
|
|
|
$
|
353
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit for fees received by Adviser from the portfolio companies
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Fee reduction for the voluntary, irrevocable waiver of 2.0% fee
on senior syndicated loans to 0.5% per annum
|
|
|
(52
|
)
|
|
|
(7
|
)
|
|
Incentive fee credit
|
|
|
—
|
|
|
|
(22
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Credit to base management and incentive fees from
Adviser(2)
|
|
$
|
(52
|
)
|
|
$
|
(29
|
)
|
|
|
|
|
|
|
|
|
|
|
41
|
|
|
|
(1) |
|
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 and cash
equivalents resulting from borrowings, valued at the end of the
applicable quarters within the respective periods and
appropriately adjusted for any share issuances or repurchases
during the periods. |
|
|
|
|
(2) |
|
Reflected as a line item on the Condensed Consolidated Statement
of Operations located elsewhere in this prospectus. |
Net
Realized Loss on Investments
There were no realized gains or losses for the three months
ended December 31, 2010. Net realized loss on investments
for the three months ended December 31, 2009 was
$0.9 million, which consisted of losses of
$0.5 million and $0.4 million from the Kinetek
Acquisition Corporation and Wesco Holdings, Inc. syndicated loan
sales, respectively.
Net
Unrealized (Depreciation) Appreciation on Investments
Net unrealized (depreciation) appreciation on investments is the
net change in the fair value of our investment portfolio during
the reporting period, including the reversal of
previously-recorded unrealized appreciation or depreciation when
gains and losses are actually realized. During the quarter ended
December 31, 2010, we recorded net unrealized depreciation
on investments in the aggregate amount of $2.9 million.
During the prior year period, we recorded net unrealized
appreciation on investments in the aggregate amount of
$2.6 million, which included the reversal of
$0.9 million in unrealized depreciation related to two
syndicated loan sales. Excluding reversals,
we had $1.7 million in net unrealized
appreciation for the three months ended December 30, 2009.
The net unrealized (depreciation) appreciation across our
investments for the three months ended December 31, 2010
was as follows:
| |
|
|
|
|
|
|
|
Three Months Ended December 31, 2010
|
|
|
|
|
|
|
Net Unrealized
|
|
|
|
|
|
|
Appreciation
|
|
|
Portfolio Company
|
|
Investment Classification
|
|
(Depreciation)
|
|
|
|
|
Defiance Integrated Technologies, Inc.
|
|
Control
|
|
$
|
2,969
|
|
|
Puerto Rico Cable Acquisition Company, Inc.
|
|
Non-Control / Non-Affiliate
|
|
|
732
|
|
|
Midwest Metal Distribution, Inc.
|
|
Control
|
|
|
272
|
|
|
Global Brass & Cooper, Inc.
|
|
Non-Control / Non-Affiliate
|
|
|
263
|
|
|
Reliable Biopharmaceutical Holdings, Inc.
|
|
Non-Control / Non-Affiliate
|
|
|
250
|
|
|
Sunshine Media Holdings
|
|
Non-Control / Non-Affiliate
|
|
|
(5,450
|
)
|
|
Lindmark Acquisitions
|
|
Control
|
|
|
(1,051
|
)
|
|
GFRC Holdings LLC
|
|
Non-Control / Non-Affiliate
|
|
|
(406
|
)
|
|
Other, net (<$250)
|
|
|
|
|
(523
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total:
|
|
$
|
(2,944
|
)
|
|
|
|
|
|
|
|
|
The primary drivers in our net unrealized depreciation for the
quarter ended December 31, 2010 were notable depreciation
in Sunshine Media Holdings, or Sunshine, which was primarily due
to portfolio company performance and limited equity sponsor
support, partially offset by appreciation in Defiance Integrated
Technologies, Inc., which was due to an increase in portfolio
company performance and in certain comparable multiples.
42
The unrealized appreciation (depreciation) across our
investments for the three months ended December 31, 2009
was as follows:
| |
|
|
|
|
|
|
|
Three Months Ended December 31, 2009
|
|
|
|
|
|
|
Net Unrealized
|
|
|
|
|
|
|
Appreciation
|
|
|
Portfolio Company
|
|
Investment Classification
|
|
(Depreciation)
|
|
|
|
|
BAS Broadcasting
|
|
Non-Control / Non-Affiliate
|
|
$
|
1,192
|
(1)
|
|
Westlake Hardware, Inc.
|
|
Non-Control / Non-Affiliate
|
|
|
544
|
|
|
Kinetek Acquisition Corp.
|
|
Non-Control / Non-Affiliate
|
|
|
513
|
(2)
|
|
Wesco Holdings, Inc.
|
|
Non-Control / Non-Affiliate
|
|
|
408
|
(3)
|
|
WP Evenflo Group Holdings, Inc.
|
|
Non-Control / Non-Affiliate
|
|
|
343
|
|
|
Puerto Rico Cable Acquisition Company, Inc.
|
|
Non-Control / Non-Affiliate
|
|
|
289
|
|
|
Sunshine Media Holdings
|
|
Non-Control / Non-Affiliate
|
|
|
276
|
|
|
Allison Publications, LLC
|
|
Non-Control / Non-Affiliate
|
|
|
265
|
|
|
Pinnacle Treatment Centers, Inc.
|
|
Non-Control / Non-Affiliate
|
|
|
254
|
|
|
Defiance Integrated Technologies, Inc.
|
|
Control
|
|
|
(816
|
)
|
|
Legend Communications of Wyoming LLC
|
|
Non-Control / Non-Affiliate
|
|
|
(543
|
)
|
|
LocalTel, LLC
|
|
Control
|
|
|
(524
|
)
|
|
KMBQ Corporation
|
|
Non-Control / Non-Affiliate
|
|
|
(385
|
)
|
|
Other, net (<$250)
|
|
|
|
|
783
|
|
|
|
|
|
|
|
|
|
|
|
|
Total:
|
|
$
|
2,599
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Reflects the reversal of $0.5 million in unrealized
depreciation in connection with the payoff of the senior term B
loan of BAS Broadcasting. |
|
|
|
|
(2) |
|
Reflects the reversal of the unrealized depreciation in
connection with the $0.5 million realized loss on the sale
of Kinetek Acquisition Corp. |
|
|
|
|
(3) |
|
Reflects the reversal of the unrealized depreciation in
connection with the $0.4 million realized loss on the sale
of Wesco Holdings, Inc. |
Excluding reversals, general increase in our net unrealized
appreciation was experienced throughout the majority of our
entire portfolio of debt holdings based on increases in market
comparables and portfolio company performance.
Over our entire investment portfolio, we recorded an aggregate
of approximately $5.6 million of net unrealized
depreciation on our debt positions for the quarter ended
December 31, 2010, while our equity holdings experienced an
aggregate of approximately $2.7 million of net unrealized
appreciation. At December 31, 2010, the fair value of our
investment portfolio was less than its cost basis by
approximately $44.0 million, as compared to
$41.1 million at September 30, 2010, representing net
unrealized depreciation of $2.9 million for the period. We
believe that our aggregate investment portfolio was valued at a
depreciated value due primarily to the general instability of
the loan markets and resulting decrease in market multiples
relative to where multiples were when we originated the
investments in our portfolio. Even though valuations have
generally stabilized over the past several quarters, our entire
portfolio was fair valued at 85.1% of cost as of
December 31, 2010. The unrealized depreciation of our
investments does not have an impact on our current ability to
pay distributions to stockholders; however, it may be an
indication of future realized losses, which could ultimately
reduce our income available for distribution to stockholders.
Net
Unrealized Depreciation on Borrowings
Net unrealized depreciation on borrowings is the net change in
the fair value of our borrowings during the reporting period,
including the reversal of previously recorded unrealized
appreciation or depreciation when gains and losses are realized.
We elected to apply ASC 825, “Financial
Instruments,” which requires that we apply a fair
43
value methodology to the Credit Facility. We estimated the fair
value of the 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, current market yield and interest rate spreads of similar
securities as of the measurement date. The Credit Facility was
fair valued at $25.3 million as of December 31, 2010.
Net
Increase in Net Assets Resulting from Operations
For the three months ended December 31, 2010, we realized a
net increase in net assets resulting from operations of
$2.1 million as a result of the factors discussed above.
For the three months ended December 31, 2009, we realized a
net increase in net assets resulting from operations of
$6.3 million. Our net increase in net assets resulting from
operations per basic and diluted weighted average common share
for the three months ended December 31, 2010 and
December 31, 2009 were $0.10 and $0.30, respectively.
44
COMPARISON
OF THE FISCAL YEARS ENDED SEPTEMBER 30, 2010 AND
2009
A comparison of our operating results for the fiscal years
ended September 30, 2010 and 2009 is below:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30,
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
$ Change
|
|
|
% Change
|
|
|
|
|
INVESTMENT INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Control/Non-Affiliate investments
|
|
$
|
29,938
|
|
|
$
|
40,747
|
|
|
$
|
(10,809
|
)
|
|
|
(26.5
|
)%
|
|
Control investments
|
|
|
2,645
|
|
|
|
933
|
|
|
|
1,712
|
|
|
|
183.5
|
%
|
|
Cash
|
|
|
1
|
|
|
|
11
|
|
|
|
(10
|
)
|
|
|
(90.9
|
)%
|
|
Notes receivable from employees
|
|
|
437
|
|
|
|
468
|
|
|
|
(31
|
)
|
|
|
(6.6
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income
|
|
|
33,021
|
|
|
|
42,159
|
|
|
|
(9,138
|
)
|
|
|
(21.7
|
)%
|
|
Other income
|
|
|
2,518
|
|
|
|
459
|
|
|
|
2,059
|
|
|
|
448.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment income
|
|
|
35,539
|
|
|
|
42,618
|
|
|
|
(7,079
|
)
|
|
|
(16.6
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan servicing fee (Refer to Note 4)
|
|
|
3,412
|
|
|
|
5,620
|
|
|
|
(2,208
|
)
|
|
|
(39.3
|
)%
|
|
Base management fee (Refer to Note 4)
|
|
|
2,673
|
|
|
|
2,005
|
|
|
|
668
|
|
|
|
33.3
|
%
|
|
Incentive fee (Refer to Note 4)
|
|
|
1,823
|
|
|
|
3,326
|
|
|
|
(1,503
|
)
|
|
|
(45.2
|
)%
|
|
Administration fee (Refer to Note 4)
|
|
|
807
|
|
|
|
872
|
|
|
|
(65
|
)
|
|
|
(7.5
|
)%
|
|
Interest expense
|
|
|
4,390
|
|
|
|
7,949
|
|
|
|
(3,559
|
)
|
|
|
(44.8
|
)%
|
|
Amortization of deferred financing fees
|
|
|
1,490
|
|
|
|
2,778
|
|
|
|
(1,288
|
)
|
|
|
(46.4
|
)%
|
|
Professional fees
|
|
|
2,101
|
|
|
|
1,586
|
|
|
|
515
|
|
|
|
32.5
|
%
|
|
Compensation expense (Refer to Note 4)
|
|
|
245
|
|
|
|
—
|
|
|
|
245
|
|
|
|
NM
|
|
|
Other expenses
|
|
|
1,259
|
|
|
|
1,131
|
|
|
|
128
|
|
|
|
11.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses before credit from Adviser
|
|
|
18,200
|
|
|
|
25,267
|
|
|
|
(7,067
|
)
|
|
|
(28.0
|
)%
|
|
Credit to fees from Adviser (Refer to Note 4)
|
|
|
(420
|
)
|
|
|
(3,680
|
)
|
|
|
3,260
|
|
|
|
(88.6
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses net of credit to credits to fees
|
|
|
17,780
|
|
|
|
21,587
|
|
|
|
(3,807
|
)
|
|
|
(17.6
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INVESTMENT INCOME
|
|
|
17,759
|
|
|
|
21,031
|
|
|
|
(3,272
|
)
|
|
|
(15.6
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
REALIZED AND UNREALIZED LOSS ON:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized loss on investments
|
|
|
(2,893
|
)
|
|
|
(26,411
|
)
|
|
|
23,518
|
|
|
|
(89.0
|
)%
|
|
Net unrealized appreciation on investments
|
|
|
2,317
|
|
|
|
9,513
|
|
|
|
(7,196
|
)
|
|
|
(75.6
|
)%
|
|
Realized loss on settlement of derivative
|
|
|
—
|
|
|
|
(304
|
)
|
|
|
304
|
|
|
|
(100.0
|
)%
|
|
Net unrealized appreciation on derivative
|
|
|
—
|
|
|
|
304
|
|
|
|
(304
|
)
|
|
|
(100.0
|
)%
|
|
Net unrealized appreciation on borrowings under line of credit
|
|
|
(789
|
)
|
|
|
(350
|
)
|
|
|
(439
|
)
|
|
|
NM
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss on investments, derivative and borrowings under line of
credit
|
|
|
(1,365
|
)
|
|
|
(17,248
|
)
|
|
|
15,883
|
|
|
|
(92.1
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS
|
|
$
|
16,394
|
|
|
$
|
3,783
|
|
|
$
|
12,611
|
|
|
|
333.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NM = Not
Meaningful
Investment
Income
Investment income for the year ended September 30, 2010 was
$35,539 as compared to $42,618 for the year ended
September 30, 2009. Interest income from our aggregate
investment portfolio decreased for the year ended
45
September 30, 2010 as compared to the prior year. The
level of interest income from investments is directly related to
the balance, at cost, of the interest-bearing investment
portfolio outstanding during the year multiplied by the weighted
average yield. The weighted average yield varies from year to
year based on the current stated interest rate on
interest-bearing investments and the amounts of loans for which
interest is not accruing. Interest income from our investments
decreased primarily due to the overall reduction in the cost
basis of our investments, resulting primarily from the exit of
12 investments during the year ended September 30, 2010.
The annualized weighted average yield on our portfolio was 9.9%
for the year ended September 30, 2010 as compared to 9.8%
for the prior year. As of September 30, 2010, six
investments were on non-accrual, for an aggregate of
approximately $29,926 at cost, or 10.0% of the aggregate cost of
our investment portfolio and as of September 30, 2009, five
investments were on non-accrual, for an aggregate of
approximately $10,022 at cost, or 2.8% of the aggregate cost of
our investment portfolio.
Interest income from Non-Control/Non-Affiliate investments
decreased for the year ended September 30, 2010 as compared
to the prior year, primarily from an overall decrease in the
aggregate cost basis of our Non-Control/Non-Affiliate
investments during the year.
Interest income from Control investments increased for the year
ended September 30, 2010 as compared to the prior year. The
increase was attributable to the Control investments (mainly
Defiance and Midwest Metal) held for the entire year ended
September 30, 2010, where those same investments were held
for only a portion of the year ended September 30, 2009.
Interest income from invested cash was nominal for the years
ended September 30, 2010 and 2009.
Interest income from loans to employees, in connection with the
exercise of employee stock options, decreased slightly for the
year ended September 30, 2010 as compared to the prior year
due to principal payments on the employee loans during the year
ended September 30, 2010. In addition, during the year
ended September 30, 2010, $515 of an employee stock option
loan to a former employee of the Adviser was transferred from
notes receivable — employees to other assets in
connection with the termination of her employment with the
Adviser and the later amendment of the loan. The interest on the
loan from the time the employee stopped working for the Adviser
is included in other income on the accompanying consolidated
statement of operations.
Other income increased for the year ended September 30,
2010 as compared to the prior year. Other income includes
success fees as well as prepayment fees received upon the full
repayment of certain loan investments ahead of contractual
maturity and prepayment fees received upon the early unscheduled
principal repayments, which was based on a percentage of the
outstanding principal amount of the loan at the date of
prepayment. Success fees earned during the year ended
September 30, 2010 totaled $1,866, which we received from
ActivStyle, Anitox, Doe & Ingalls, Saunders, Northern
Contours, Tulsa Welding and Visual Edge. Success fees earned
during the year ended September 30, 2009 totaled $387,
which we received from ActivStyle, Interfilm and It’s Just
Lunch.
The following table lists the investment income for the five
largest portfolio companies during the respective years:
Year
Ended September 30, 2010
| |
|
|
|
|
|
|
|
|
|
|
|
Investment
|
|
|
% of
|
|
|
Company
|
|
Income
|
|
|
Total
|
|
|
|
|
Sunshine Media
|
|
$
|
3,254
|
|
|
|
9.3
|
%
|
|
Reliable Biopharma
|
|
|
3,003
|
|
|
|
8.6
|
%
|
|
Westlake Hardware
|
|
|
2,940
|
|
|
|
8.4
|
%
|
|
Midwest Metal (Clinton)#
|
|
|
2,127
|
|
|
|
6.1
|
%
|
|
Winchester
|
|
|
1,589
|
|
|
|
4.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
$
|
12,913
|
|
|
|
36.9
|
%
|
|
Other companies
|
|
|
22,036
|
|
|
|
63.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Total income from investments*
|
|
$
|
34,949
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
46
Year
Ended September 30, 2009
| |
|
|
|
|
|
|
|
|
|
|
|
Investment
|
|
|
% of
|
|
|
Company
|
|
Income
|
|
|
Total
|
|
|
|
|
Sunshine Media
|
|
$
|
3,352
|
|
|
|
8.0
|
%
|
|
Reliable Biopharma
|
|
|
3,073
|
|
|
|
7.3
|
%
|
|
Westlake Hardware
|
|
|
2,417
|
|
|
|
5.7
|
%
|
|
Clinton Holdings
|
|
|
1,888
|
|
|
|
4.5
|
%
|
|
VantaCore
|
|
|
1,696
|
|
|
|
4.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
$
|
12,426
|
|
|
|
29.5
|
%
|
|
Other companies
|
|
|
29,711
|
|
|
|
70.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Total income from investments*
|
|
$
|
42,137
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
# |
|
During the year ended September 30, 2010 Clinton Holdings
was restructured as Midwest Metal. |
|
|
|
|
* |
|
Includes interest and other income from Non-Control and Control
investments. |
Operating
Expenses
Operating expenses, net of credits from the Adviser for fees
earned and voluntary irrevocable and unconditional waivers to
the base management and incentive fees, decreased for the year
ended September 30, 2010 as compared to the prior year.
This reduction was primarily due to a decrease in interest
expense and amortization of deferred financing fees incurred in
connection with the Credit Facility, which were partially offset
by an increase in professional fees.
Loan servicing fees decreased for the year ended
September 30, 2010 as compared to the prior year. These
fees were incurred in connection with a loan servicing agreement
between Business Loan and our Adviser, which is based on the
size and mix of the portfolio. The decrease was primarily due to
the reduction in the size of our investment portfolio. Due to
voluntary, irrevocable and unconditional waivers in place during
these years, senior syndicated loans incurred a 0.5% annual fee,
whereas proprietary loans incurred a 1.5% annual fee. All of
these fees were reduced against the amount of the base
management fee due to our Adviser.
Base management fee (which is net of loan servicing fees)
increased for the year ended September 30, 2010 as compared
to the prior year. However, the gross management fee (consisting
of the loan servicing fees plus the base management fee)
decreased from the prior year as shown below:
| |
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
Loan servicing fee
|
|
$
|
3,412
|
|
|
$
|
5,620
|
|
|
Base management fee
|
|
|
2,673
|
|
|
|
2,005
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross management fee
|
|
$
|
6,085
|
|
|
$
|
7,625
|
|
|
|
|
|
|
|
|
|
|
|
Gross management fee decreased due to fewer total assets held
during the year ended September 30, 2010. The base
management fee is computed quarterly as described under
“Investment Advisory and Management
47
Agreement” in Note 4 of the notes to the accompanying
consolidated financial statements, and is summarized in the
table below:
| |
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
Base management
fee(1)
|
|
$
|
2,673
|
|
|
$
|
2,005
|
|
|
Credit for fees received by Adviser from the portfolio companies
|
|
|
(213
|
)
|
|
|
(89
|
)
|
|
Fee reduction for the voluntary, irrevocable and unconditional
waiver of 2% fee on senior syndicated loans to
0.5%(2)
|
|
|
(42
|
)
|
|
|
(265
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net base management fee
|
|
$
|
2,418
|
|
|
$
|
1,651
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Base management fee is net of loan servicing fees per the terms
of the Advisory Agreement. |
|
|
|
|
(2) |
|
The board of our Adviser voluntarily, irrevocably and
unconditionally waived on a quarterly basis the annual 2% base
management fee to 0.5% for senior syndicated loan participations
for the years ended September 30, 2010 and 2009. Fees
waived cannot be recouped by the Adviser in the future. |
Incentive fee decreased for the year ended September 30,
2010 as compared to the prior year. The board of our Adviser
voluntarily, irrevocably and unconditionally waived a portion of
the incentive fee for the year ended September 30, 2010 and
the entire incentive fee for the year ended September 30,
2009. The incentive fee and associated credits are summarized in
the table below:
| |
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
Incentive fee
|
|
$
|
1,823
|
|
|
$
|
3,326
|
|
|
Credit from voluntary, irrevocable and unconditional waiver
issued by Adviser’s board of directors
|
|
|
(165
|
)
|
|
|
(3,326
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net incentive fee
|
|
$
|
1,658
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
Administration fee decreased for the year ended
September 30, 2010 as compared to the prior year, due to a
decrease of administration staff and related expenses, as well
as a decrease in our total assets in comparison to the total
assets of all companies managed by our Adviser under similar
agreements. The calculation of the administration fee is
described in detail under “Investment Advisory and
Management Agreement” in Note 4 of the notes to the
accompanying consolidated financial statements.
Interest expense decreased for the year ended September 30,
2010 as compared to the prior year due primarily to decreased
borrowings under our line of credit during the year ended
September 30, 2010. The balance for the year ended
September 30, 2010 included $590 of the minimum earnings
shortfall fee that was accrued as of September 30, 2010.
Amortization of deferred financing fees decreased for the year
ended September 30, 2010 as compared to the prior year due
to significant one-time costs related to the termination of our
prior credit facility and transition to the Credit Facility,
resulting in increased amortization of deferred financing fees
during the year ended September 30, 2009 as compared to the
year ended September 30, 2010.
Compensation expense increased for the year ended
September 30, 2010 as compared to the prior year due to the
conversion of stock option loans of two former employees from
recourse to non-recourse loans. The conversions were non-cash
transactions and were accounted for as repurchases of the shares
previously received by the employees upon exercise of the stock
options in exchange for the non-recourse notes. The repurchases
were accounted for as treasury stock transactions at the fair
value of the shares, totaling $420. Since the value of the stock
option loans totaled $665, we recorded compensation expense of
$245.
Other operating expenses (including professional fees,
stockholder related costs, director’s fees, insurance and
other direct expenses) increased for the year ended
September 30, 2010 as compared to the prior year, due
primarily
48
to legal fees incurred in connection with certain portfolio
loans during the year ended September 30, 2010 and an
increase in the provision for uncollectible receivables from
portfolio companies.
Realized
Loss and Unrealized Appreciation (Depreciation) on
Investments
Realized
Losses
For the year ended September 30, 2010, we recorded a net
realized loss on investments of $2,893, which consisted of
$4,259 of losses from three syndicated loan sales (Gold Toe,
Kinetek and Wesco), the Western Directories write-off, and the
CCS payoff, offset by a $1,366 gain from the ACE Expediters
payoff. For the year ended September 30, 2009, we recorded
a net realized loss on investments of $26,411, which consisted
of $15,029 of losses from the sale of several syndicated loans
and one non-syndicated loan, a $9,409 write-off of the Badanco
loan, and a $2,000 write-off of a portion of the Greatwide
second lien syndicated loan, partially offset by a $27 gain from
the Country Road payoff.
Unrealized
Appreciation (Depreciation)
Net unrealized appreciation (depreciation) on investments is the
net change in the fair value of our investment portfolio during
the reporting period, including the reversal of previously
recorded unrealized appreciation or depreciation when gains and
losses are actually realized. The net unrealized appreciation
for the years ended September 30, 2010 and 2009 consisted
of the following:
| |
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
Reversal of previously recorded unrealized depreciation upon
realization of losses
|
|
$
|
6,411
|
|
|
$
|
24,531
|
|
|
Appreciation from Control investments
|
|
|
1,098
|
|
|
|
1,564
|
|
|
Depreciation from Non-Control/Non-Affiliate investments
|
|
|
(5,192
|
)
|
|
|
(16,582
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized appreciation on investments
|
|
$
|
2,317
|
|
|
$
|
9,513
|
|
|
|
|
|
|
|
|
|
|
|
The primary driver of our net unrealized appreciation for the
years ended September 30, 2010 and 2009 was the reversal of
previously recorded unrealized depreciation on our exited
investments. Our Control investments also experienced unrealized
appreciation due to an increase in certain comparable multiples.
However, our Non-Control investments experienced unrealized
depreciation, which was due primarily to a reduction in certain
comparable multiples and the performance of some of our
portfolio companies used to estimate the fair value of our
investments. Although our investment portfolio appreciated
during the year ended September 30, 2010, our entire
portfolio was fair valued at 86% of cost as of
September 30, 2010. The cumulative unrealized depreciation
of our investments does not have an impact on our current
ability to pay distributions to stockholders; however, it may be
an indication of future realized losses, which could ultimately
reduce our income available for distribution.
Realized
Loss and Unrealized Appreciation on Derivative
For the year ended September 30, 2009, we realized a loss
of $304 due to the expiration of the interest rate cap in
February 2009. In addition, we recorded unrealized appreciation
on derivative of $304, which resulted from the reversal of
previously recorded unrealized depreciation when the loss was
realized during the year.
Net
Unrealized Appreciation on Borrowings under Line of
Credit
Net unrealized appreciation on borrowings under line of credit
is the net change in the fair value of our line of credit
borrowings during the reporting period, including the reversal
of previously recorded unrealized appreciation or depreciation
when gains and losses are realized. The net unrealized
appreciation on borrowings under line of credit for the years
ended September 30, 2010 and 2009 were $789 and $350,
respectively. We elected to apply ASC 825, “Financial
Instruments,” which requires that we apply a fair value
methodology to the Credit Facility. We estimated the fair value
of the 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,
current market
49
yield and interest rate spreads of similar securities as of the
measurement date. The Credit Facility was fair valued at $17,940
and $83,350 as of September 30, 2010 and 2009,
respectively. As a result, we recorded unrealized appreciation
of $789 and $350 for the years ended September 30, 2010 and
2009, respectively.
Net
Increase in Net Assets from Operations
For the year ended September 30, 2010, we realized a net
increase in net assets resulting from operations of $16,394 as a
result of the factors discussed above. For the year ended
September 30, 2009, we realized a net increase in net
assets resulting from operations of $3,783. Our net increase in
net assets resulting from operations per basic and diluted
weighted average common share for the years ended
September 30, 2010 and 2009 were $0.78 and $0.18,
respectively.
50
COMPARISON
OF THE FISCAL YEARS ENDED SEPTEMBER 30, 2009 AND SEPTEMBER 30,
2008
A comparison of our operating results for the fiscal years
ended September 30, 2009 and 2008 is below:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
$ Change
|
|
|
% Change
|
|
|
|
|
INVESTMENT INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income — non control/non affiliate investments
|
|
$
|
40,747
|
|
|
$
|
43,734
|
|
|
$
|
(2,987
|
)
|
|
|
(6.8
|
)%
|
|
Interest income — control investments
|
|
|
933
|
|
|
|
64
|
|
|
|
869
|
|
|
|
1,357.8
|
%
|
|
Interest income — cash
|
|
|
11
|
|
|
|
335
|
|
|
|
(324
|
)
|
|
|
(96.7
|
)%
|
|
Interest income — notes receivable from employees
|
|
|
468
|
|
|
|
471
|
|
|
|
(3
|
)
|
|
|
(0.6
|
)%
|
|
Prepayment fees and other income
|
|
|
459
|
|
|
|
1,121
|
|
|
|
(662
|
)
|
|
|
(59.1
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment income
|
|
|
42,618
|
|
|
|
45,725
|
|
|
|
(3,107
|
)
|
|
|
(6.8
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
7,949
|
|
|
|
8,284
|
|
|
|
(335
|
)
|
|
|
(4.0
|
)%
|
|
Loan servicing fee
|
|
|
5,620
|
|
|
|
6,117
|
|
|
|
(497
|
)
|
|
|
(8.1
|
)%
|
|
Base management fee
|
|
|
2,005
|
|
|
|
2,212
|
|
|
|
(207
|
)
|
|
|
(9.4
|
)%
|
|
Incentive fee
|
|
|
3,326
|
|
|
|
5,311
|
|
|
|
(1,985
|
)
|
|
|
(37.4
|
)%
|
|
Administration fee
|
|
|
872
|
|
|
|
985
|
|
|
|
(113
|
)
|
|
|
(11.5
|
)%
|
|
Professional fees
|
|
|
1,586
|
|
|
|
911
|
|
|
|
675
|
|
|
|
74.1
|
%
|
|
Amortization of deferred financing fees
|
|
|
2,778
|
|
|
|
1,534
|
|
|
|
1,244
|
|
|
|
81.1
|
%
|
|
Stockholder related costs
|
|
|
415
|
|
|
|
443
|
|
|
|
(28
|
)
|
|
|
(6.3
|
)%
|
|
Directors’ fees
|
|
|
197
|
|
|
|
220
|
|
|
|
(23
|
)
|
|
|
(10.5
|
)%
|
|
Insurance expense
|
|
|
241
|
|
|
|
227
|
|
|
|
14
|
|
|
|
6.2
|
%
|
|
Other expenses
|
|
|
278
|
|
|
|
325
|
|
|
|
(47
|
)
|
|
|
(14.5
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses before credit from Adviser
|
|
|
25,267
|
|
|
|
26,569
|
|
|
|
(1,302
|
)
|
|
|
(4.9
|
)%
|
|
Credit to base management and incentive fees from Adviser
|
|
|
(3,680
|
)
|
|
|
(7,397
|
)
|
|
|
3,717
|
|
|
|
(50.3
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses net of credit to base management and incentive
fees
|
|
|
21,587
|
|
|
|
19,172
|
|
|
|
2,415
|
|
|
|
12.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INVESTMENT INCOME
|
|
|
21,031
|
|
|
|
26,553
|
|
|
|
(5,522
|
)
|
|
|
(20.8
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS, DERIVATIVE
AND BORROWINGS UNDER LINE OF CREDIT:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized loss on investments
|
|
|
(26,411
|
)
|
|
|
(787
|
)
|
|
|
(25,624
|
)
|
|
|
3,255.9
|
%
|
|
Realized (loss) gain on settlement of derivative
|
|
|
(304
|
)
|
|
|
7
|
|
|
|
(311
|
)
|
|
|
(4,442.9
|
)%
|
|
Net unrealized appreciation (depreciation) on derivative
|
|
|
304
|
|
|
|
(12
|
)
|
|
|
316
|
|
|
|
(2,633.3
|
)%
|
|
Net unrealized appreciation (depreciation) on investments
|
|
|
9,513
|
|
|
|
(47,023
|
)
|
|
|
56,536
|
|
|
|
(120.2
|
)%
|
|
Net unrealized appreciation on borrowings under line of credit
|
|
|
(350
|
)
|
|
|
—
|
|
|
|
(350
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss on investments, derivative and borrowings under line of
credit
|
|
|
(17,248
|
)
|
|
|
(47,815
|
)
|
|
|
30,567
|
|
|
|
(63.9
|
)%
|
|
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS
|
|
$
|
3,783
|
|
|
$
|
(21,262
|
)
|
|
|
25,045
|
|
|
|
(117.8
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
51
Investment
Income
Investment income for the year ended September 30, 2009 was
$42,618 as compared to $45,725 for the year ended
September 30, 2008. Interest income from our aggregate
investment portfolio decreased for the year ended
September 30, 2009 as compared to the prior year. The level
of interest income from investments is directly related to the
balance, at cost, of the interest-bearing investment portfolio
outstanding during the year multiplied by the weighted average
yield. The weighted average yield varies from year to year based
on the current stated interest rate on interest-bearing
investments and the amounts of loans for which interest is not
accruing. Interest income from our investments decreased
primarily due to the overall reduction in the cost basis of our
investments, resulting primarily from the exit of 15 investments
during the year ended September 30, 2009, as well as a
slight decrease in the weighted average yield on our portfolio.
The annualized weighted average yield on our portfolio was 9.8%
for the year ended September 30, 2009 as compared to 10.0%
for the prior year. During the year ended September 30,
2009, five investments were on non-accrual, for an aggregate of
approximately $10,022 at cost, or 2.8% of the aggregate cost of
our investment portfolio and during the prior year, three
investments were on non-accrual for an aggregate of
approximately $13,098 at cost, or 2.8% of the aggregate cost of
our investment portfolio.
Interest income from Non-Control/Non-Affiliate investments
decreased for the year ended September 30, 2009 as compared
to the prior year, primarily from an overall decrease in the
aggregate cost basis of our Non-Control/Non-Affiliate
investments during the year. In addition, the success fees
earned during the year ended September 30, 2009 totaled
$387, compared to $998 earned in the prior year. Success fees
earned during the year ended September 30, 2009 resulted
from refinancings by ActivStyle and It’s Just Lunch and an
amendment by Interfilm. Success fees earned during the year
ended September 30, 2008 resulted from refinancings by
Defiance and Westlake Hardware and a full repayment from Express
Courier.
Interest income from Control investments increased for the year
ended September 30, 2009 as compared to the prior year. The
increase was attributable to four additional Control investments
held during the year ended September 30, 2009, which were
converted from Non-Control/Non-Affiliate investments.
The following table lists the interest income from investments
for the five largest portfolio companies during the respective
years:
Year
ended September 30, 2009
| |
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
|
% of
|
|
|
Company
|
|
Income
|
|
|
Total
|
|
|
|
|
Sunshine Media
|
|
$
|
3,377
|
|
|
|
8.0
|
%
|
|
Reliable Biopharma
|
|
|
3,076
|
|
|
|
7.3
|
%
|
|
Westlake Hardware
|
|
|
2,451
|
|
|
|
5.8
|
%
|
|
Clinton Holdings
|
|
|
1,899
|
|
|
|
4.5
|
%
|
|
VantaCore
|
|
|
1,705
|
|
|
|
4.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
$
|
12,508
|
|
|
|
29.6
|
%
|
|
Other companies
|
|
|
29,629
|
|
|
|
70.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income
|
|
$
|
42,137
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
52
Year
ended September 30, 2008
| |
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
|
% of
|
|
|
Company
|
|
Income
|
|
|
Total
|
|
|
|
|
Sunshine Media
|
|
$
|
2,939
|
|
|
|
6.5
|
%
|
|
Reliable Biopharma
|
|
|
2,871
|
|
|
|
6.4
|
%
|
|
Westlake Hardware
|
|
|
2,860
|
|
|
|
6.4
|
%
|
|
Clinton Holdings
|
|
|
1,903
|
|
|
|
4.2
|
%
|
|
Winchester Electronics
|
|
|
1,401
|
|
|
|
3.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
$
|
11,974
|
|
|
|
26.6
|
%
|
|
Other companies
|
|
|
32,945
|
|
|
|
73.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income
|
|
$
|
44,919
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
Interest income from invested cash decreased for the year ended
September 30, 2009 as compared to the prior year. Interest
income came from the following sources:
| |
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
Interest earned on Gladstone Capital
account(1)
|
|
$
|
—
|
|
|
$
|
50
|
|
|
Interest earned on Business Loan custodial
account(2)
|
|
|
10
|
|
|
|
199
|
|
|
Interest earned on Gladstone Financial
account(3)
|
|
|
1
|
|
|
|
86
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income from invested cash
|
|
$
|
11
|
|
|
$
|
335
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Interest earned on our Gladstone Capital account during the year
ended September 30, 2008 resulted from proceeds received
from the equity offerings completed during the fiscal year that
were held in the account prior to being invested or used to pay
down the line of credit. |
| |
|
(2) |
|
Interest earned on our Business Loan custodial account during
the year ended September 30, 2008 resulted from large cash
amounts held in the account prior to disbursement. During this
fiscal year, we had $140,817 of originations to new portfolio
companies. |
| |
|
(3) |
|
Interest earned on our Gladstone Financial account during the
year ended September 30, 2008 resulted from the U.S.
Treasury bill that was held with an original maturity of six
months. |
Interest income from loans to our employees, in connection with
the exercise of employee stock options, decreased slightly for
the year ended September 30, 2009 as compared to the prior
year due to principal payments on the employee loans during the
current year.
Prepayment fees and other income decreased for the year ended
September 30, 2009 as compared to the prior year. The
income for the prior year consisted of prepayment penalty fees
received upon the full repayment of certain loan investments
ahead of contractual maturity and prepayment fees received upon
the early unscheduled principal repayments, which was based on a
percentage of the outstanding principal amount of the loan at
the date of prepayment.
Operating
Expenses
Operating expenses, net of credits from the Adviser for fees
earned and voluntary irrevocable and unconditional waivers to
the base management and incentive fees, increased for the year
ended September 30, 2009 as compared to the prior year
primarily due to an increase in professional fees and
amortization of deferred financing fees incurred in connection
with our previous credit facility with Deutsche Bank AG, or the
DB Facility, and the new KEF Facility.
Interest expense decreased for the year ended September 30,
2009 as compared to the prior year due primarily to decreased
borrowings under our line of credit during the year ended
September 30, 2009, partially offset by a
53
higher weighted average annual interest cost, which is
determined by using the annual stated interest rate plus
commitment and other fees, plus the amortization of deferred
financing fees divided by the weighted average debt outstanding.
Loan servicing fees decreased for the year ended
September 30, 2009 as compared to the prior year. These
fees were incurred in connection with a loan servicing agreement
between Business Loan and our Adviser, which is based on the
size and mix of the portfolio. The decrease was primarily due to
the reduction in the size of our investment portfolio. Due to
voluntary, irrevocable and unconditional waivers in place during
these years, senior syndicated loans incurred a 0.5% annual fee,
whereas proprietary loans incurred a 1.5% annual fee. All of
these fees were reduced against the amount of the base
management fee due to our Adviser.
The base management fee decreased for the year ended
September 30, 2009 as compared to the prior year, which is
reflective of fewer total assets held during the year ended
September 30, 2009. Furthermore, due to the liquidation of
the majority of our syndicated loans, the credit received
against the gross base management fee for investments in
syndicated loans has also been reduced. The base management fee
is computed quarterly as described under “Investment
Advisory and Management Agreement” in Note 4 to the
accompanying consolidated financial statements, and is
summarized in the table below:
| |
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
Base management
fee(1)
|
|
$
|
2,005
|
|
|
$
|
2,212
|
|
|
Credit for fees received by Adviser from the portfolio companies
|
|
|
(89
|
)
|
|
|
(1,678
|
)
|
|
Fee reduction for the voluntary, irrevocable and unconditional
waiver of 2% fee on senior syndicated loans to
0.5%(2)
|
|
|
(265
|
)
|
|
|
(408
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net base management fee
|
|
$
|
1,651
|
|
|
$
|
126
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Base management fee is net of loan servicing fees per the terms
of the Advisory Agreement. |
| |
|
(2) |
|
The board of our Adviser voluntarily, irrevocably and
unconditionally waived on a quarterly basis the annual 2.0% base
management fee to 0.5% for senior syndicated loan participations
for the years ended September 30, 2009 and 2008. Fees
waived cannot be recouped by the Adviser in the future. |
Incentive fee decreased for the year ended September 30,
2009 as compared to the prior year. The board of our Adviser
voluntarily, irrevocably and unconditionally waived on a
quarterly basis the entire incentive fee for each quarter of the
years ended September 30, 2009 and 2008. The incentive fee
and associated credits are summarized in the table below:
| |
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
Incentive fee
|
|
$
|
3,326
|
|
|
$
|
5,311
|
|
|
Credit from voluntary, irrevocable and unconditional waiver
issued by Adviser’s board of directors
|
|
|
(3,326
|
)
|
|
|
(5,311
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net incentive fee
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
Administration fee decreased for the year ended
September 30, 2009 as compared to the prior year, due to a
decrease of administration staff and related expenses, as well
as a decrease in our total assets in comparison to the total
assets of all companies managed by our Adviser under similar
agreements. The calculation of the administrative fee is
described in detail under “Investment Advisory and
Management Agreement” in Note 4 of the notes to the
accompanying consolidated financial statements.
Other operating expenses (including deferred financing fees,
stockholder related costs, directors’ fees, insurance and
other expenses) increased over the prior year driven by
amortization of additional fees incurred with amending the DB
Facility and entering into the new KEF Facility and legal fees
incurred in connection with troubled loans in the current year.
54
Net
Realized Loss on Investments
The realized loss for the year ended September 30, 2009
consisted of a $15,029 loss from the sale of several syndicated
loans and one non-syndicated loan, a $9,409 write-off of the
Badanco loan, and a $2,000 write-off of a portion of the
Greatwide second lien syndicated loan, partially offset by a $27
gain from the Country Road payoff. Net realized loss on
investments during the year ended September 30, 2008
resulted from the partial sale of the senior subordinated term
debt of Greatwide Logistics, as well as the unamortized
investment acquisition costs related to the Anitox and Macfadden
loans, which were repaid in full during the year.
Realized
(Loss) Gain on Settlement of Derivative
The realized loss for the year ended September 30, 2009 was
due to the expiration of our interest rate cap agreement in
February 2009. We did not receive any interest rate cap
agreement payments during the period from October 2008 through
February 2009 as a result of the one-month LIBOR having a
downward trend. During the year ended September 30, 2008,
we received interest rate cap agreement payments of only $7 as a
result of the one-month LIBOR having a downward trend. We
received payments when the one-month LIBOR was over 5%.
Net
Unrealized Appreciation (Depreciation) on Derivative
Net unrealized appreciation (depreciation) on derivative is the
net change in the fair value of our interest rate cap during the
year, including the reversal of previously recorded unrealized
appreciation or depreciation when gains and losses are realized.
The unrealized appreciation on derivative during the year ended
September 30, 2009 resulted from the reversal of previously
recorded unrealized depreciation when the loss was realized
during the three months ended March 31, 2009. For the year
ended September 30, 2008, the unrealized depreciation was
due to a decrease in the fair market value of our interest rate
cap agreement.
Net
Unrealized Appreciation (Depreciation) on Investments
Net unrealized appreciation (depreciation) on investments is the
net change in the fair value of our investment portfolio during
the year, including the reversal of previously recorded
unrealized appreciation or depreciation when gains and losses
are realized. The net unrealized appreciation on investments for
the year ended September 30, 2009 consisted of the
following:
| |
|
|
|
|
|
• Control investments
|
|
$
|
1,564
|
|
|
• Non-Control/Non-Affiliate investments
|
|
|
(16,582
|
)
|
|
• Reversal of previously unrealized depreciation upon
realization of losses
|
|
|
24,531
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
9,513
|
|
|
|
|
|
|
|
We believe that our investment portfolio was valued at a
depreciated value due primarily to the general instability of
the loan markets. Although our investment portfolio has
depreciated, our entire portfolio was fair valued at 88% of cost
as of September 30, 2009. The cumulative unrealized
depreciation of our investments does not have an impact on our
current ability to pay distributions to stockholders; however,
it may be an indication of future realized losses, which could
ultimately reduce our income available for distribution.
Net
Unrealized Appreciation on Borrowings under Line of
Credit
Unrealized appreciation on borrowings under line of credit is
the net change in the fair value of our line of credit
borrowings during the year, including the reversal of previously
recorded unrealized appreciation or depreciation when gains and
losses are realized. During the year ended September 30,
2009, we elected to apply ASC 825, “Financial
Instruments,” which requires that we apply a fair value
methodology to the KEF Facility. We estimated the fair value of
the KEF 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,
current market yield and interest rate spreads of similar
securities as of the measurement date. The KEF Facility was fair
valued at $83,350 as of September 30, 2009, and an
unrealized appreciation of $350 was recorded for the year ended
September 30, 2009.
55
Net
Increase (Decrease) in Net Assets from Operations
For the year ended September 30, 2009, we realized a net
increase in net assets resulting from operations of $3,783 as a
result of the factors discussed above. For the year ended
September 30, 2008, we realized a net decrease in net
assets resulting from operations of $21,262. Our net increase
(decrease) in net assets resulting from operations per basic and
diluted weighted average common share for the years ended
September 30, 2009 and 2008 were $0.18 and ($1.08),
respectively.
LIQUIDITY
AND CAPITAL RESOURCES
Operating
Activities
Net cash used in operating activities for the three months ended
December 31, 2010 was $4.0 million and consisted
primarily of disbursements of $11.8 million in new
investments and an increase of $10.5 million in due from
custodian, which resulted from the repayment of Puerto Rico
Cable on December 31, 2010, partially offset by principal
repayments of $13.2 million and net unrealized depreciation
of $2.9 million. Net cash provided by operating activities
for the three months ended December 31, 2009 was
$15.1 million and consisted primarily of principal
repayments of $15.4 million.
At December 31, 2010, we had investments in equity of,
loans to or syndicated participations in, 41 private companies
with an aggregate cost basis of approximately
$296.6 million. At December 31, 2009, we had
investments in equity of, loans to, or syndicated participations
in, 46 private companies with an aggregate cost basis of
approximately $347.5 million. The following table
summarizes our total portfolio investment activity during the
three months ended December 31, 2010 and 2009:
| |
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
December 31,
|
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
Beginning investment portfolio at fair value
|
|
$
|
257,109
|
|
|
$
|
320,969
|
|
|
New investments
|
|
|
9,000
|
|
|
|
—
|
|
|
Disbursements to existing portfolio companies
|
|
|
2,794
|
|
|
|
2,063
|
|
|
Principal repayments (including repayment of PIK)
|
|
|
(13,208
|
)
|
|
|
(15,404
|
)
|
|
Proceeds from sales
|
|
|
(37
|
)
|
|
|
(2,782
|
)
|
|
Increase in investment balance due to PIK
|
|
|
4
|
|
|
|
55
|
|
|
Increase in investment balance due to transferred interest
|
|
|
—
|
|
|
|
103
|
|
|
Unrealized (depreciation) appreciation
|
|
|
(2,944
|
)
|
|
|
1,193
|
|
|
Reversal of prior period depreciation on realization
|
|
|
—
|
|
|
|
1,406
|
|
|
Net realized loss
|
|
|
—
|
|
|
|
(920
|
)
|
|
Amortization of premiums and discounts
|
|
|
(213
|
)
|
|
|
(45
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Ending investment portfolio at fair value
|
|
$
|
252,505
|
|
|
$
|
306,638
|
|
|
|
|
|
|
|
|
|
|
|
56
The following table summarizes the contractual principal
repayments and maturity of our investment portfolio by fiscal
year, assuming no voluntary prepayments, at December 31,
2010.
| |
|
|
|
|
|
|
|
Amount
|
|
|
|
|
For the remaining nine months ending September 30:
|
|
|
|
|
|
2011
|
|
$
|
50,640
|
|
|
For the fiscal year ending September 30:
|
|
|
|
|
|
2012
|
|
|
73,339
|
|
|
2013
|
|
|
123,043
|
|
|
2014
|
|
|
31,245
|
|
|
2015
|
|
|
9,925
|
|
|
2016
|
|
|
5,045
|
|
|
|
|
|
|
|
|
Total contractual repayments
|
|
$
|
293,237
|
|
|
Investments in equity securities
|
|
|
4,469
|
|
|
Adjustments to cost basis on debt securities
|
|
|
(1,149
|
)
|
|
|
|
|
|
|
|
Total cost basis of investments held at December 31,
2010:
|
|
$
|
296,557
|
|
|
|
|
|
|
|
Net cash provided by operating activities for the years ended
September 30, 2010 and 2009 were $86,501 and $95,521,
respectively, and consisted primarily of proceeds received from
the principal payments received from existing investments,
partially offset by the purchase of new investments. In
contrast, net cash used in operating activities for the year
ended September 30, 2008 was $80,218, and consisted of the
purchase of new investments, partially offset by principal loan
repayments.
As of September 30, 2010, we had investments in debt
securities, or loans to or syndicated participations in 39
private companies with a cost basis totaling $298,216. As of
September 30, 2009, we had investments in debt securities,
or loans to or syndicated participations in 48 private companies
with a cost basis totaling $364,393. The following table
summarizes our total portfolio investment activity during the
years ended September 30, 2010 and 2009:
| |
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30,
|
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
Beginning investment portfolio at fair value
|
|
$
|
320,969
|
|
|
$
|
407,933
|
|
|
New investments
|
|
|
23,245
|
|
|
|
24,911
|
|
|
Principal repayments (including repayment of PIK)
|
|
|
(82,566
|
)
|
|
|
(47,490
|
)
|
|
Proceeds from sales
|
|
|
(3,119
|
)
|
|
|
(49,203
|
)
|
|
Increase in investment balance due to PIK
|
|
|
53
|
|
|
|
166
|
|
|
Increase in investment balance due to rolled-over interest
|
|
|
529
|
|
|
|
1,455
|
|
|
Loan impairment / contra-investment
|
|
|
(715
|
)
|
|
|
—
|
|
|
Net unrealized appreciation
(depreciation)(1)
|
|
|
2,317
|
|
|
|
9,513
|
|
|
Net realized loss
|
|
|
(2,893
|
)
|
|
|
(26,411
|
)
|
|
Amortization of premiums and discounts
|
|
|
(711
|
)
|
|
|
95
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending investment portfolio at fair value
|
|
$
|
257,109
|
|
|
$
|
320,969
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes the reversal of unrealized depreciation due to
investment exits for the years ended September 30, 2010 and
2009 of $6,411 and $24,835, respectively. |
57
During the fiscal years ended September 30, 2010, 2009 and
2008, the following investment activity occurred during each
quarter of the respective fiscal year:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New
|
|
|
Principal
|
|
|
Proceeds from
|
|
|
Net Gain (Loss)
|
|
|
Quarter Ended
|
|
Investments(1)
|
|
|
Repayments(2)
|
|
|
Sales/Exits(3)
|
|
|
on Disposal
|
|
|
|
|
September 30, 2010
|
|
$
|
14,193
|
|
|
$
|
25,615
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
June 30, 2010
|
|
|
2,171
|
|
|
|
18,482
|
|
|
|
—
|
|
|
|
(2,865
|
)
|
|
March 31, 2010
|
|
|
4,817
|
|
|
|
23,065
|
|
|
|
337
|
|
|
|
892
|
|
|
December 31, 2009
|
|
|
2,064
|
|
|
|
15,404
|
|
|
|
2,782
|
|
|
|
(920
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fiscal year 2010
|
|
$
|
23,245
|
|
|
$
|
82,566
|
|
|
$
|
3,119
|
|
|
$
|
(2,893
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2009
|
|
$
|
1,221
|
|
|
$
|
4,071
|
|
|
$
|
7,241
|
|
|
$
|
(12,086
|
)
|
|
June 30, 2009
|
|
|
6,975
|
|
|
|
15,439
|
|
|
|
39,750
|
|
|
|
(10,594
|
)
|
|
March 31, 2009
|
|
|
8,013
|
|
|
|
13,053
|
|
|
|
—
|
|
|
|
(2,000
|
)
|
|
December 31, 2008
|
|
|
8,702
|
|
|
|
14,927
|
|
|
|
2,212
|
|
|
|
(1,731
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fiscal year 2009
|
|
$
|
24,911
|
|
|
$
|
47,490
|
|
|
$
|
49,203
|
|
|
$
|
(26,411
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2008
|
|
$
|
39,048
|
|
|
$
|
21,381
|
|
|
$
|
1,299
|
|
|
$
|
(701
|
)
|
|
June 30, 2008
|
|
|
43,678
|
|
|
|
40,755
|
|
|
|
—
|
|
|
|
(86
|
)
|
|
March 31, 2008
|
|
|
20,483
|
|
|
|
3,000
|
|
|
|
—
|
|
|
|
—
|
|
|
December 31, 2007
|
|
|
73,341
|
|
|
|
4,047
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fiscal year 2008
|
|
$
|
176,550
|
|
|
$
|
69,183
|
|
|
$
|
1,299
|
|
|
$
|
(787
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Disbursements to
|
|
|
|
|
|
|
|
New Investments
|
|
|
Existing Portfolio
|
|
|
Total
|
|
|
Quarter Ended
|
|
Companies
|
|
|
Investments
|
|
|
Companies
|
|
|
Disbursements
|
|
|
|
|
September 30, 2010
|
|
|
1
|
(a)
|
|
$
|
10,000
|
|
|
$
|
4,193
|
|
|
$
|
14,193
|
|
|
June 30, 2010
|
|
|
1
|
(b)
|
|
|
400
|
|
|
|
1,771
|
|
|
|
2,171
|
|
|
March 31, 2010
|
|
|
—
|
|
|
|
—
|
|
|
|
4,817
|
|
|
|
4,817
|
|
|
December 31, 2009
|
|
|
1
|
(c)
|
|
|
180
|
|
|
|
1,884
|
|
|
|
2,064
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fiscal year 2010
|
|
|
3
|
|
|
$
|
10,580
|
|
|
$
|
12,665
|
|
|
$
|
23,245
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2009
|
|
|
—
|
|
|
$
|
—
|
|
|
$
|
1,221
|
|
|
$
|
1,221
|
|
|
June 30, 2009
|
|
|
—
|
|
|
|
—
|
|
|
|
6,975
|
|
|
|
6,975
|
|
|
March 31, 2009
|
|
|
—
|
|
|
|
—
|
|
|
|
8,013
|
|
|
|
8,013
|
|
|
December 31, 2008
|
|
|
—
|
|
|
|
—
|
|
|
|
8,702
|
|
|
|
8,702
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fiscal year 2009
|
|
|
—
|
|
|
$
|
—
|
|
|
$
|
24,911
|
|
|
$
|
24,911
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2008
|
|
|
3
|
(d)
|
|
$
|
33,375
|
|
|
$
|
5,673
|
|
|
$
|
39,048
|
|
|
June 30, 2008
|
|
|
3
|
(e)
|
|
|
35,750
|
|
|
|
7,928
|
|
|
|
43,678
|
|
|
March 31, 2008
|
|
|
1
|
(f)
|
|
|
13,700
|
|
|
|
6,783
|
|
|
|
20,483
|
|
|
December 31, 2007
|
|
|
5
|
(g)
|
|
|
57,992
|
|
|
|
15,349
|
|
|
|
73,341
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fiscal year 2008
|
|
|
12
|
|
|
$
|
140,817
|
|
|
$
|
35,733
|
|
|
$
|
176,550
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Airvana Network Solutions |
|
|
|
|
(d) |
|
AKQA, VantaCore and Tulsa Welding School |
58
|
|
|
|
(e) |
|
Saunders, Legend and BAS Broadcasting |
|
|
|
|
(g) |
|
Interfilm, Reliable, Lindmark, GS Maritime and GFRC |
(2) Principal
Repayments (including repayment of PIK previously applied to
principal balance):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
Unscheduled
|
|
|
Scheduled
|
|
|
Total
|
|
|
|
|
|
|
|
Companies
|
|
|
Principal
|
|
|
Principal
|
|
|
Principal
|
|
|
Net Gain on
|
|
|
Quarter Ended
|
|
Fully Exited
|
|
|
Repayments(*)
|
|
|
Repayments
|
|
|
Repayments
|
|
|
Sale/Exit(#)
|
|
|
|
|
September 30, 2010
|
|
|
2
|
(a)
|
|
$
|
14,135
|
|
|
$
|
11,480
|
|
|
$
|
25,615
|
|
|
$
|
—
|
|
|
June 30, 2010
|
|
|
1
|
(b)
|
|
|
13,590
|
|
|
|
4,892
|
|
|
|
18,482
|
|
|
|
—
|
|
|
March 31, 2010
|
|
|
4
|
(c)
|
|
|
18,902
|
|
|
|
4,163
|
|
|
|
23,065
|
|
|
|
1,055
|
|
|
December 31, 2009
|
|
|
1
|
(d)
|
|
|
13,054
|
|
|
|
2,350
|
|
|
|
15,404
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fiscal year 2010
|
|
|
8
|
|
|
$
|
59,681
|
|
|
$
|
22,885
|
|
|
$
|
82,566
|
|
|
$
|
1,055
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2009
|
|
|
—
|
|
|
$
|
—
|
|
|
$
|
4,071
|
|
|
$
|
4,071
|
|
|
$
|
—
|
|
|
June 30, 2009
|
|
|
1
|
(e)
|
|
|
10,449
|
|
|
|
4,990
|
|
|
|
15,439
|
|
|
|
—
|
|
|
March 31, 2009
|
|
|
—
|
(f)
|
|
|
7,813
|
|
|
|
5,240
|
|
|
|
13,053
|
|
|
|
—
|
|
|
December 31, 2008
|
|
|
2
|
(g)
|
|
|
6,966
|
|
|
|
7,961
|
|
|
|
14,927
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fiscal year 2009
|
|
|
3
|
|
|
$
|
25,228
|
|
|
$
|
22,262
|
|
|
$
|
47,490
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2008
|
|
|
2
|
(h)
|
|
$
|
12,797
|
|
|
$
|
8,584
|
|
|
$
|
21,381
|
|
|
$
|
—
|
|
|
June 30, 2008
|
|
|
3
|
(i)
|
|
|
28,134
|
|
|
|
12,621
|
|
|
|
40,755
|
|
|
|
—
|
|
|
March 31, 2008
|
|
|
—
|
(j)
|
|
|
500
|
|
|
|
2,500
|
|
|
|
3,000
|
|
|
|
—
|
|
|
December 31, 2007
|
|
|
—
|
|
|
|
—
|
|
|
|
4,047
|
|
|
|
4,047
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fiscal year 2008
|
|
|
5
|
|
|
$
|
41,431
|
|
|
$
|
27,752
|
|
|
$
|
69,183
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(*) |
|
Includes principal payments due to excess cash flows, covenant
violations, exits, refinancing, etc. |
|
|
|
|
(#) |
|
Net gain on principal repayments of $1,055 plus the net loss on
sales/exits of $3,948 (per footnote 3 below) equals net loss of
$2,893, which is included on the consolidated statement of
operations for the year ended September 30, 2010. |
|
|
|
|
(a) |
|
Full payoff from Anitox and Doe and Ingalls. |
|
|
|
|
(b) |
|
Full payoff from VantaCore. |
|
|
|
|
(c) |
|
Full payoff from ACE Expediters (which resulted in a gain on the
warrants), ActivStyle, CCS and Visual Edge. |
|
|
|
|
(d) |
|
Full payoff from Tulsa Welding and partial payoff from BAS
Broadcasting senior term debt (last out tranche). |
|
|
|
|
(e) |
|
Full payoff from Multi-Ag Media ($1,687), partial payoff from
Saunders line of credit ($2,500) and refinancing from ActivStyle
($6,262). |
|
|
|
|
(f) |
|
Refinancing from ACE Expediters and Sunburst media. |
|
|
|
|
(g) |
|
Full payoff from Community Media and Country Road. |
|
|
|
|
(h) |
|
Full payoff from Express Courier International and Meteor
Holding. |
|
|
|
|
(i) |
|
Full payoff from Macfadden Performing Arts, Reading Broadcasting
and SCS ($25,074) and partial payoff from Anitox Senior Real
Estate Term Debt ($3,060). |
|
|
|
|
(j) |
|
Partial payoff from Risk Metrics Senior Subordinated Term Debt. |
59
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
Position
|
|
|
Unamortized
|
|
|
Net (Loss)
|
|
|
|
|
Companies
|
|
|
Proceeds
|
|
|
(Principal)
|
|
|
Loan
|
|
|
Gain on
|
|
|
Quarter Ended
|
|
Fully Exited
|
|
|
Received
|
|
|
Exited
|
|
|
Costs(*)
|
|
|
Exit(#)
|
|
|
|
|
September 30, 2010
|
|
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
June 30, 2010
|
|
|
1
|
(a)
|
|
|
—
|
|
|
|
(2,865
|
)
|
|
|
—
|
|
|
|
(2,865
|
)
|
|
March 31, 2010
|
|
|
1
|
(b)
|
|
|
337
|
|
|
|
(500
|
)
|
|
|
—
|
|
|
|
(163
|
)
|
|
December 31, 2009
|
|
|
2
|
(c)
|
|
|
2,782
|
|
|
|
(3,685
|
)
|
|
|
(17
|
)
|
|
|
(920
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fiscal year 2010
|
|
|
4
|
|
|
$
|
3,119
|
|
|
$
|
(7,050
|
)
|
|
$
|
(17
|
)
|
|
$
|
(3,948
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2009
|
|
|
3
|
(d)
|
|
$
|
7,241
|
|
|
$
|
(19,321
|
)
|
|
$
|
(6
|
)
|
|
$
|
(12,086
|
)
|
|
June 30, 2009
|
|
|
8
|
(e)
|
|
|
39,750
|
|
|
|
(52,295
|
)
|
|
|
1,951
|
|
|
|
(10,594
|
)
|
|
March 31, 2009
|
|
|
1
|
(f)
|
|
|
—
|
|
|
|
(2,000
|
)
|
|
|
—
|
|
|
|
(2,000
|
)
|
|
December 31, 2008
|
|
|
—
|
(g)
|
|
|
2,212
|
|
|
|
(3,950
|
)
|
|
|
7
|
|
|
|
(1,731
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fiscal year 2009
|
|
|
12
|
|
|
$
|
49,203
|
|
|
$
|
(77,566
|
)
|
|
$
|
1,952
|
|
|
$
|
(26,411
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2008
|
|
|
—
|
(h)
|
|
$
|
1,299
|
|
|
$
|
(2,000
|
)
|
|
$
|
—
|
|
|
$
|
(701
|
)
|
|
June 30, 2008
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(86
|
)
|
|
|
(86
|
)
|
|
March 31, 2008
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
December 31, 2007
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fiscal year 2008
|
|
|
—
|
|
|
$
|
1,299
|
|
|
$
|
(2,000
|
)
|
|
$
|
(86
|
)
|
|
$
|
(787
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(*) |
|
Includes balance of premiums, discounts and acquisition cost at
time of exit. |
|
|
|
|
(#) |
|
Net gain on principal repayments of $1,055 (per footnote 2
above) plus the net loss on sales/exits of $3,948 equals net
loss of $2,893, which is included on the consolidated statement
of operations for the year ended September 30, 2010. |
|
|
|
|
(a) |
|
Write-off of Western Directories line of credit, preferred stock
and common stock. |
|
|
|
|
(b) |
|
Complete sale of Gold Toe senior subordinated syndicated loan. |
|
|
|
|
(c) |
|
Complete sale of Kinetek senior term syndicated loan and Wesco
Holdings senior subordinated syndicated loan. |
|
|
|
|
(d) |
|
Full sale of CHG and John Henry syndicated loans, write-off of
Badanco loan, and partial sale of Kinetek syndicated loan
(senior subordinated debt). |
|
|
|
|
(e) |
|
Full sale of 8 loans (7 syndicated and 1 non-syndicated) and
partial sale of CHG, GTM and Wesco syndicated loans (senior term
debt). |
|
|
|
|
(f) |
|
Write-off of Greatwide syndicated loan (senior subordinated term
debt). |
|
|
|
|
(g) |
|
Partial sale of Greatwide Logistics syndicated loan (senior term
debt). |
|
|
|
|
(h) |
|
Partial sale of Greatwide Logistics syndicated loan (senior
subordinated term debt). |
60
The following table summarizes the contractual principal
repayment and maturity of our investment portfolio by fiscal
year, assuming no voluntary prepayments.
| |
|
|
|
|
|
Fiscal Year Ending September 30,
|
|
Amount
|
|
|
|
|
2011
|
|
$
|
59,575
|
|
|
2012
|
|
|
72,201
|
|
|
2013
|
|
|
124,496
|
|
|
2014
|
|
|
31,840
|
|
|
2015
|
|
|
6,850
|
|
|
|
|
|
|
|
|
Total Contractual Repayments
|
|
$
|
294,962
|
|
|
Investments in equity securities
|
|
|
4,189
|
|
|
Unamortized premiums, discounts and investment acquisition costs
on debt securities
|
|
|
(935
|
)
|
|
|
|
|
|
|
|
Total
|
|
$
|
298,216
|
|
|
|
|
|
|
|
Investing
Activities
Net cash provided by investing activities for the fiscal year
ended September 30, 2008 was $2,484 for the redemption of a
U.S. Treasury Bill with an original maturity of six months.
The U.S. Treasury Bill was purchased in 2007 with proceeds
from our initial stock purchase in our wholly-owned subsidiary,
Gladstone Financial Corporation (previously known as Gladstone
SSBIC Corporation).
Financing
Activities
Net cash provided by financing activities for the three months
ended December 31, 2010 was $2.7 million and consisted
primarily of net borrowings from the Credit Facility of
$7.8 million, partially offset by distributions to
stockholders of $4.4 million and $0.7 million in
financing fees for the Credit Facility. Net cash used in
financing activities for the three months ended
December 31, 2009 was $14.0 million and primarily
consisted of net payments on our Credit Facility of
$9.6 million and distributions to stockholders of
$4.4 million.
Net cash used in financing activities for the fiscal year ended
September 30, 2010 was $84,043 and mainly consisted of net
payments on the Credit Facility of $91,100, distribution
payments of $17,690 and financing fees of $1,525 associated with
the Credit Facility, which was entered into on March 15,
2010.
Net cash used in financing activities for the fiscal year ended
September 30, 2009 was $96,738 and mainly consisted of net
payments on our line of credit of $68,030, distribution payments
of $26,570 and financing fees of $2,103 associated with the
Credit Facility which was entered into on May 15, 2009.
Net cash provided by financing activities for the fiscal year
ended September 30, 2008 was $75,388 and mainly consisted
of net borrowings on our line of credit of $6,590, proceeds of
$105,374, net of offering costs, from the issuance of common
stock and distribution payments of $33,379.
Distributions
In order to qualify as a RIC and to avoid corporate level tax on
the income we distribute to our stockholders, we are required,
under Subchapter M of the Code, to distribute at least 90% of
our ordinary income and short-term capital gains to our
stockholders on an annual basis. In accordance with these
requirements, we declared and paid monthly cash distributions of
$0.14 per common share for each month from October 2008 through
March 2009 and $0.07 per common share for each month from April
2009 through December 2010. We declared and paid monthly cash
distributions of $0.14 per common share during each month of the
fiscal year ended September 30, 2008.
For the year ended September 30, 2010, our distribution
payments were approximately $17.7 million. We declared
these distributions based on our estimates of net investment
income for the fiscal year. Our investment pace was slower than
expected and, consequently, our net investment income was lower
than our original estimates. A portion of the distributions
declared during fiscal 2010 is expected to be treated as a
return of capital to our stockholders.
61
Issuance
of Equity
We have filed a registration statement with the SEC, which we
refer to as the Registration Statement, of which this prospectus
is a part, that permits us to issue, through one or more
transactions, up to an aggregate of $300 million in
securities, consisting of common stock, senior common stock,
preferred stock, subscription rights, debt securities and
warrants to purchase common stock, or a combination of these
securities.
We anticipate issuing equity securities to obtain additional
capital in the future. However, we cannot determine the terms of
any future equity issuances or whether we will be able to issue
equity on terms favorable to us, or at all. Additionally, when
our common stock is trading below NAV, as it has consistently
traded for most of the last 2 years, we will have
regulatory constraints under the 1940 Act on our ability to
obtain additional capital in this manner. Generally, the 1940
Act provides that we may not issue and sell our common stock at
a price below our NAV per share, other than to our then existing
stockholders pursuant to a rights offering, without first
obtaining approval from our stockholders and our independent
directors. As of December 31, 2010, our NAV per share was
$11.74 per share and as of February 4, 2011 our closing
market price was $10.80 per share. To the extent that our common
stock trades at a market price below our NAV per share, we will
generally be precluded from raising equity capital through
public offerings of our common stock, other than pursuant to
stockholder approval or a rights offering. The asset coverage
requirement of a BDC under the 1940 Act effectively limits our
ratio of debt to equity to 1:1. To the extent that we are unable
to raise capital through the issuance of equity, our ability to
raise capital through the issuance of debt may also be inhibited
to the extent of our regulatory debt to equity ratio limits.
At our annual meeting of stockholders held on February 17,
2011, stockholders approved a proposal which authorizes us to
sell shares of our common stock at a price below our then
current NAV per share for a period of one year from the date of
approval, provided that the number of shares issued and sold
pursuant to such authority does not exceed 25% of our then
outstanding common stock immediately prior to each such sale and
that our Board of Directors makes certain determinations prior
to any such sale. We have not issued any common stock since
February 2008.
On May 17, 2010, we and our Adviser entered into an equity
distribution agreement, which we refer to as the Equity
Agreement, with BB&T Capital Markets, a division of
Scott & Stringfellow, LLC, who we refer to as the
Agent, under which we may, from time to time, issue and sell
through the Agent up to 2,000,000 shares of our common
stock, or the Shares, based upon instructions from us
(including, at a minimum, the number of Shares to be offered,
the time period during which sales are requested to be made, any
limitation on the number of Shares that may be sold in any one
day and any minimum price below which sales may not be made).
Sales of Shares through the Agent, if any, will be executed by
means of either ordinary brokers’ transactions on the
NASDAQ Global Select Market in accordance with Rule 153
under the Securities Act or such other sales of the Shares as
shall be agreed by us and the Agent. The compensation payable to
the Agent for sales of Shares with respect to which the Agent
acts as sales agent shall be equal to 2.0% of the gross sales
price of the Shares for amounts of Shares sold pursuant to the
Agreement. To date, we have not issued any shares pursuant to
the Equity Agreement and the agreement may be terminated by us
or the Agent at any time.
Revolving
Credit Facility
On March 15, 2010, we entered into the Credit Facility,
which currently provides for a $127 million revolving line
of credit. Advances under the Credit Facility initially bore
interest at the
30-day LIBOR
(subject to a minimum rate of 2.0%), plus 4.5% per annum, with a
commitment fee of 0.5% per annum on undrawn amounts. However, on
November 22, 2010 (the Amendment Date), we amended our
Credit Facility such that advances bear interest at the
30-day 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 the
facility is drawn more than 50% and 1.0% per annum on undrawn
amounts when the facility is drawn less than 50%. Subject to
certain terms and conditions, the Credit Facility may be
expanded up to $202,000 through the addition of other committed
lenders to the facility. As of December 31, 2010, there was
a cost basis of approximately $24.6 million of borrowings
outstanding under the Credit Facility at an average interest
rate of 5.25%. As of April 5, 2011, there was a cost basis
of approximately $33.2 million of borrowings outstanding.
We expect that the Credit Facility will allow us to increase the
rate of our investment activity and grow the size of our
investment portfolio. Available borrowings are subject to
various constraints
62
imposed under the Credit Facility, based on the aggregate loan
balance pledged by us. Interest is payable monthly during the
term of the Credit Facility. The Credit Facility matures on
March 15, 2012, and, if the facility is not renewed or
extended by this date, all unpaid principal and interest will be
due and payable on March 15, 2013. In addition, if the
Credit Facility is not renewed on or before March 15, 2012,
we will be required to use all principal collections from our
loans to pay outstanding principal on the Credit Facility.
In addition to the annual interest rate on borrowings
outstanding, under the terms of the Credit Facility prior to the
Amendment Date, we were obligated to pay an annual minimum
earnings shortfall fee to the committed lenders on
March 15, 2011, which was calculated as the difference
between the weighted average of borrowings outstanding under the
Credit Facility and 50% of the commitment amount of the Credit
Facility, multiplied by 4.5% per annum, less commitment fees
paid during the year. As of the Amendment Date, we paid a
$0.7 million fee.
The Credit Facility contains covenants that require Business
Loan to maintain its status as a separate entity, prohibit
certain significant corporate transactions (such as mergers,
consolidations, liquidations or dissolutions) and restrict
material changes to our credit and collection policies. The
facility requires a minimum of 20 obligors in the borrowing base
and also limits payments of distributions. As of
December 31, 2010, Business Loan had 26 obligors and we
were in compliance with all of the Credit Facility covenants.
Contractual
Obligations and Off-Balance Sheet Arrangements
As of September 30, 2010, we had a commitment to purchase a
$3,000 syndicated loan, which closed subsequent to
September 30, 2010 and as of December 31, 2010, we
were not party to any signed term sheets for potential
investments. However, we have certain line of credit and capital
commitments with our portfolio companies that have not been
fully drawn or called, respectively. Since these commitments
have expiration dates, and we expect many will never be fully
drawn or called, the total commitment amounts do not necessarily
represent future cash requirements. In addition, we have certain
lines of credit with our portfolio companies that have not been
fully drawn. Since these lines of credit have expiration dates
and we expect many will never be fully drawn, the total line of
credit commitment amounts do not necessarily represent future
cash requirements. We estimate the fair value of these unused
lines of credit commitments as of December 31, 2010 and
September 30, 2010 to be nominal.
In July 2009, we executed a guaranty of a line of credit
agreement between Comerica Bank and Defiance Integrated
Technologies, Inc., or Defiance, one of our Control investments.
If Defiance has a payment default, the guaranty is callable once
the bank has reduced its claim by using commercially reasonable
efforts to collect through disposition of the Defiance
collateral. The guaranty is limited to $0.3 million plus
interest on that amount accrued from the date demand payment is
made under the guaranty, and all costs incurred by the bank in
its collection efforts. As of December 31, 2010, we had not
been required to make any payments on the guaranty of the line
of credit agreement and we consider the credit risk to be remote.
In accordance with GAAP, the unused portions of the lines of
credit commitments are not recorded on the accompanying
consolidated statements of assets and liabilities. The following
table summarizes the nominal dollar balance of unused line of
credit commitments, uncalled capital commitments and guarantees
as of December 31, 2010 and September 30, 2010:
| |
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
|
December 31,
|
|
|
September 30,
|
|
|
|
|
2010
|
|
|
2010
|
|
|
|
|
Unused lines of credit
|
|
$
|
6,099
|
|
|
$
|
9,304
|
|
|
Uncalled capital commitment
|
|
|
1,600
|
|
|
|
1,600
|
|
|
Guarantees
|
|
|
250
|
|
|
|
250
|
|
The following table shows our contractual obligations as of
September 30, 2010:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
|
Less than
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contractual
Obligations(1)
|
|
1 Year
|
|
|
1-3 Years
|
|
|
4-5 Years
|
|
|
After 5 Years
|
|
|
Total
|
|
|
|
|
Line of
credit(2)
|
|
|
—
|
|
|
$
|
17,940
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
17,940
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
63
|
|
|
|
(1) |
|
Excludes the unused commitments to extend credit to our
portfolio companies of $9,304, as discussed above. |
|
|
|
|
(2) |
|
Borrowings under the Credit Facility are listed, at fair value,
based on the contractual maturity due to the revolving nature of
the facility. |
Quantitative
and Qualitative Disclosures About Market Risk
Market risk includes risks that arise from changes in interest
rates, foreign currency exchange rates, commodity prices, equity
prices and other market changes that affect market sensitive
instruments. The prices of securities held by the us may decline
in response to certain events, including those directly
involving the companies whose securities are owned by us;
conditions affecting the general economy; overall market
changes; local, regional or global political, social or economic
instability; and interest rate fluctuations.
The primary risk we believe we are exposed to is interest rate
risk. Because we borrow money to make investments, our net
investment is dependent upon the difference between the rate at
which we borrow funds and the rate at which we invest those
funds. As a result, there can be no assurance that a significant
change in market interest rates will not have a material adverse
effect on our net investment income. We use a combination of
debt and equity capital to finance our investing activities. We
may use interest rate risk management techniques to limit our
exposure to interest rate fluctuations. Such techniques may
include various interest rate hedging activities to the extent
permitted by the 1940 Act. We have analyzed the potential impact
of changes in interest rates on interest income net of interest
expense.
While we expect that ultimately approximately 20% of the loans
in our portfolio will be made at fixed rates, with approximately
80% made at variable rates or variables rates with a floor
mechanism, all of our variable-rate loans have rates associated
with either the current LIBOR or Prime Rate. At
December 31, 2010, our portfolio, at cost, consisted of the
following breakdown in relation to all outstanding debt
investments:
| |
|
|
|
84.7%
|
|
variable rates with a floor
|
|
5.6%
|
|
variable rates without a floor or ceiling
|
|
9.7%
|
|
fixed rate
|
|
|
|
|
|
100%
|
|
total
|
|
|
|
|
To illustrate the potential impact of changes in interest rates
on our net increase in net assets resulting from operations, we
have performed the following analysis, which assumes that our
balance sheet remains constant and no further actions are taken
to alter our existing interest rate sensitivity.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
|
|
|
Increase
|
|
|
Net Increase (Decrease) in
|
|
|
|
|
(Decrease) in
|
|
|
(Decrease) in
|
|
|
Net Assets Resulting
|
|
|
Basis Point Change
|
|
Interest Income
|
|
|
Interest
Expense(a)
|
|
|
from Operations
|
|
|
|
|
Up 200 basis points
|
|
$
|
639
|
|
|
$
|
43
|
|
|
$
|
596
|
|
|
Up 100 basis points
|
|
|
246
|
|
|
|
—
|
|
|
|
246
|
|
|
Down 100 basis points
|
|
|
(128
|
)
|
|
|
—
|
|
|
|
(128
|
)
|
|
Down 200 basis points
|
|
|
(201
|
)
|
|
|
—
|
|
|
|
(201
|
)
|
|
|
|
|
(a) |
|
As of September 30, 2010, the LIBOR was 0.26%; since the
Credit Facility interest rate was subject to a 2.0% floor, there
is no impact from a 100 basis point increase or decrease. |
Although management believes that this analysis is indicative of
our existing interest rate sensitivity, it does not adjust for
potential changes in credit quality, size and composition of our
loan portfolio on the balance sheet and other business
developments that could affect net increase in net assets
resulting from operations. Accordingly, no assurances can be
given that actual results would not differ materially from the
results under this hypothetical analysis.
We may also experience risk associated with investing in
securities of companies with foreign operations. We currently do
not anticipate investing in debt or equity of foreign companies,
however, some potential portfolio companies may have operations
located outside the United States. These risks include, but are
not limited to, fluctuations in foreign currency exchange rates,
imposition of foreign taxes, changes in exportation regulations
and political and social instability.
64
SALES OF
COMMON STOCK BELOW NET ASSET VALUE
At our 2011 annual stockholders meeting, our stockholders
approved our ability to sell or otherwise issue shares of our
common stock at a price below the then current net asset value,
or NAV, per share during a one year period, which we refer to as
the Stockholder Approval, beginning on February 17, 2011,
and expiring on the first anniversary of the date of the 2011
annual stockholders meeting. In order to sell shares of common
stock pursuant to this authorization, no further authorization
from our stockholders will be solicited but the cumulative
number of shares issued and sold pursuant to such authority can
not exceed 25% of our then outstanding common stock immediately
prior to such sale and a majority of our directors who have no
financial interest in the sale and a majority of our independent
directors must (i) find that the sale is in our best
interests and in the best interests of our stockholders and
(ii) in consultation with any underwriter or underwriters
of the offering, make a good faith determination as of a time
either immediately prior to the first solicitation by us or on
our behalf of firm commitments to purchase such shares of common
stock, or immediately prior to the issuance of such common
stock, that the price at which such shares of common stock are
to be sold is not less than a price which closely approximates
the market value of those shares of common stock, less any
distributing commission or discount.
Any offering of common stock below its NAV per share will be
designed to raise capital for investment in accordance with our
investment objective.
In making a determination that an offering of common stock below
its NAV per share is in our and our stockholders’ best
interests, our board of directors will consider a variety of
factors including:
|
|
|
| |
•
|
the effect that an offering below NAV per share would have on
our stockholders, including the potential dilution they would
experience as a result of the offering;
|
| |
| |
•
|
the amount per share by which the offering price per share and
the net proceeds per share are less than our most recently
determined NAV per share;
|
| |
| |
•
|
the relationship of recent market prices of par common stock to
NAV per share and the potential impact of the offering on the
market price per share of our common stock;
|
| |
| |
•
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whether the estimated offering price would closely approximate
the market value of shares of our common stock;
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•
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the potential market impact of being able to raise capital
during the current financial market difficulties;
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•
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the nature of any new investors anticipated to acquire shares of
our common stock in the offering;
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•
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the anticipated rate of return on and quality, type and
availability of investments; and
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•
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the leverage available to us.
|
Our board of directors will also consider the fact that sales of
shares of common stock at a discount will benefit our Adviser as
our Adviser will earn additional investment management fees on
the proceeds of such offerings, as it would from the offering of
any other of our securities or from the offering of common stock
at a premium to NAV per share.
We will not sell shares of our common stock under this
prospectus or an accompanying prospectus supplement pursuant to
the Stockholder Approval without first filing a post-effective
amendment to the registration statement if the cumulative
dilution to our NAV per share from offerings under the
registration statement exceeds 15%. This would be measured
separately for each offering pursuant to the registration
statement by calculating the percentage dilution or accretion to
aggregate NAV from that offering and then summing the percentage
from each offering. For example, if our most recently determined
NAV per share at the time of the first offering is $10.00 and we
have 140 million shares outstanding, the sale of
35 million shares at net proceeds to us of $5.00 per share
(a 50% discount) would produce dilution of 10%. If we
subsequently determined that our NAV per share increased to
$11.00 on the then 175 million shares outstanding and then
made an additional offering, we could, for example, sell
approximately an additional 43.75 million shares at net
proceeds to us of $8.25 per share, which would produce dilution
of 5%, before we would reach the aggregate 15% limit. If we file
a new post-effective amendment, the threshold would reset.
65
Sales by us of our common stock at a discount from NAV per share
pose potential risks for our existing stockholders whether or
not they participate in the offering, as well as for new
investors who participate in the offering. Any sale of common
stock at a price below NAV per share would result in an
immediate dilution to existing common stockholders who do not
participate in such sale on at least a pro-rata basis. See
“Risk Factors — Risks Related to an Investment in
Our Common Stock.”
The following three headings and accompanying tables explain and
provide hypothetical examples on the impact of an offering of
our common stock at a price less than NAV per share on three
different types of investors:
|
|
|
| |
•
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existing stockholders who do not purchase any shares in the
offering;
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| |
•
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existing stockholders who purchase a relatively small amount of
shares in the offering or a relatively large amount of shares in
the offering; and
|
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| |
•
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new investors who become stockholders by purchasing shares in
the offering.
|
Impact on
Existing Stockholders who do not Participate in an
Offering
Our existing stockholders who do not participate in an offering
below NAV per share or who do not buy additional shares in the
secondary market at the same or lower price we obtain in the
offering (after expenses and commissions) face the greatest
potential risks. These stockholders will experience an immediate
decrease (often called dilution) in the NAV of the shares they
hold and their NAV per share. These stockholders will also
experience a disproportionately greater decrease in their
participation in our earnings and assets and their voting power
than the increase we will experience in our assets, potential
earning power and voting interests due to the offering. These
stockholders may also experience a decline in the market price
of their shares, which often reflects to some degree announced
or potential decreases in NAV per share. This decrease could be
more pronounced as the size of the offering and level of
discounts increase. Further, if current stockholders do not
purchase sufficient shares to maintain their percentage
interest, regardless of whether such offering is above or below
the then current NAV, their voting power will be diluted.
The following table illustrates the level of NAV dilution that
would be experienced by a nonparticipating stockholder in three
different hypothetical offerings of different sizes and levels
of discount from NAV per share, although it is not possible to
predict the level of market price decline that may occur. Actual
sales prices and discounts may differ from the presentation
below.
The examples assume that we have 1,000,000 common shares
outstanding, $15,000,000 in total assets and $5,000,000 in total
liabilities. The current NAV and NAV per share are thus
$10,000,000 and $10.00, respectively. The table illustrates the
dilutive effect on a nonparticipating stockholder of (1) an
offering of 50,000 shares (5% of the outstanding shares) at
$9.50 per share after offering expenses and commission (a 5%
discount from NAV), (2) an offering of 100,000 shares
(10% of the outstanding shares) at $9.00 per share after
offering expenses and commissions (a 10% discount from NAV) and
(3) an offering of 200,000 shares (20% of the
outstanding shares) at $8.00 per share after offering expenses
and commissions (a 20% discount from NAV). The prospectus
66
supplement pursuant to which any discounted offering is made
will include a chart based on the actual number of shares of
common stock in such offering and the actual discount to the
most recently determined NAV.
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Example 1
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Example 2
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Example 3
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5% Offering
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10% Offering
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20% Offering
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at 5% Discount
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at 10% Discount
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at 20% Discount
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Prior to Sale
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Following
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%
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Following
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%
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Following
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%
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Below NAV
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Sale
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Change
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Sale
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Change
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Sale
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Change
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Offering Price
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Price per Share to Public
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—
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$
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10.00
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—
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$
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9.47
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—
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$
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8.42
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—
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Net Proceeds per Share to Issuer
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—
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$
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9.50
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—
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$
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9.00
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—
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$
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8.00
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—
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Decrease to NAV per Share
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Total Shares Outstanding
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1,000,000
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1,050,000
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5.00
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%
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1,100,000
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10.00
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%
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1,200,000
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20.00
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%
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NAV per Share
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$
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10.00
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$
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9.98
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(0.20
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)%
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$
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9.91
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|
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(0.90
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)%
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$
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9.67
|
|
|
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(3.33
|
)%
|
|
Dilution to Stockholder
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Shares Held by Stockholder
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10,000
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10,000
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—
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10,000
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—
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10,000
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—
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Percentage Held by Stockholder
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1.0
|
%
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0.95
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%
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(4.76
|
)%
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0.91
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%
|
|
|
(9.09
|
)%
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|
0.83
|
%
|
|
|
(16.67
|
)%
|
|
Total Asset Values
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Total NAV Held by Stockholder
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|
$
|
100,000
|
|
|
$
|
99,800
|
|
|
|
(0.20
|
)%
|
|
$
|
99,100
|
|
|
|
(0.90
|
)%
|
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$
|
96,700
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|
|
|
(3.33
|
)%
|
|
Total Investment by Stockholder (Assumed to be $10.00 per Share)
|
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$
|
100,000
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|
$
|
100,000
|
|
|
|
—
|
|
|
$
|
100,000
|
|
|
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—
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|
$
|
100,000
|
|
|
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—
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Total Dilution to Stockholder (Total NAV Less Total Investment)
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—
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$
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(200
|
)
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—
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|
|
$
|
(900
|
)
|
|
|
—
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|
$
|
(3,300
|
)
|
|
|
—
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Per Share Amounts
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NAV Per Share Held by Stockholder
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|
—
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|
$
|
9.98
|
|
|
|
—
|
|
|
$
|
9.91
|
|
|
|
—
|
|
|
$
|
9.67
|
|
|
|
—
|
|
|
Investment per Share Held by Stockholder (Assumed to be $10.00
per Share on Shares Held prior to Sale)
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|
$
|
10.00
|
|
|
$
|
10.00
|
|
|
|
—
|
|
|
$
|
10.00
|
|
|
|
—
|
|
|
$
|
10.00
|
|
|
|
—
|
|
|
Dilution per Share Held by Stockholder (NAV per Share Less
Investment per Share)
|
|
|
—
|
|
|
$
|
(0.02
|
)
|
|
|
—
|
|
|
$
|
(0.09
|
)
|
|
|
—
|
|
|
$
|
(0.33
|
)
|
|
|
—
|
|
|
Percentage Dilution to Stockholder (Dilution per Share Divided
by Investment per Share)
|
|
|
—
|
|
|
|
—
|
|
|
|
(0.20
|
)%
|
|
|
—
|
|
|
|
(0.90
|
)%
|
|
|
—
|
|
|
|
(3.33
|
)%
|
Impact on
Existing Stockholders who do Participate in an
Offering
Our existing stockholders who participate in an offering below
NAV per share or who buy additional shares in the secondary
market at the same or lower price as we obtain in the offering
(after expenses and commissions) will experience the same types
of NAV dilution as the nonparticipating stockholders, albeit at
a lower level, to the extent they purchase less than the same
percentage of the discounted offering as their interest in our
shares immediately prior to the offering. The level of NAV
dilution will decrease as the number of shares such stockholders
purchase increases. Existing stockholders who buy more than such
percentage will experience NAV dilution but will, in contrast to
existing stockholders who purchase less than their proportionate
share of the offering, experience an
67
increase (often called accretion) in NAV per share over their
investment per share and will also experience a
disproportionately greater increase in their participation in
our earnings and assets and their voting power than our increase
in assets, potential earning power and voting interests due to
the offering. The level of accretion will increase as the excess
number of shares such stockholder purchases increases. Even a
stockholder who over-participates will, however, be subject to
the risk that we may make additional discounted offerings in
which such stockholder does not participate, in which case such
a stockholder will experience NAV dilution as described above in
such subsequent offerings. These stockholders may also
experience a decline in the market price of their shares, which
often reflects to some degree announced or potential decreases
in NAV per share. This decrease could be more pronounced as the
size of the offering and level of discount to NAV increases.
The following chart illustrates the level of dilution and
accretion in the hypothetical 20% discount offering from the
prior chart for a stockholder that acquires shares equal to
(1) 50% of its proportionate share of the offering (i.e.,
1,000 shares, which is 0.50% of the offering
200,000 shares rather than its 1% proportionate share) and
(2) 150% of such percentage (i.e., 3,000 shares, which
is 1.50% of an offering of 200,000 shares rather than its
1% proportionate share). The prospectus supplement pursuant to
which any discounted offering is made will include a chart for
this example based on the actual number of shares in such
offering and the actual discount from the most recently
determined NAV per share. It is not possible to predict the
level of market price decline that may occur.
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|
50% Participation
|
|
150% Participation
|
|
|
|
Prior to Sale
|
|
Following
|
|
%
|
|
Following
|
|
%
|
|
|
|
Below NAV
|
|
Sale
|
|
Change
|
|
Sale
|
|
Change
|
|
|
|
Offering Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Price per Share to Public
|
|
|
—
|
|
|
$
|
8.42
|
|
|
|
—
|
|
|
$
|
8.42
|
|
|
|
—
|
|
|
Net Proceeds per Share to Issuer
|
|
|
—
|
|
|
$
|
8.00
|
|
|
|
—
|
|
|
$
|
8.00
|
|
|
|
—
|
|
|
Increases in Shares and Decrease to NAV per Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Shares Outstanding
|
|
|
1,000,000
|
|
|
|
1,200,000
|
|
|
|
20.00
|
%
|
|
|
1,200,000
|
|
|
|
20.00
|
%
|
|
NAV per Share
|
|
$
|
10.00
|
|
|
$
|
9.67
|
|
|
|
(3.33
|
)%
|
|
$
|
9.67
|
|
|
|
(3.33
|
)%
|
|
Dilution/Accretion to Stockholder
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares Held by Stockholder
|
|
|
10,000
|
|
|
|
11,000
|
|
|
|
10.00
|
%
|
|
|
13,000
|
|
|
|
30.00
|
%
|
|
Percentage Held by Stockholder
|
|
|
1.0
|
%
|
|
|
0.92
|
%
|
|
|
(8.33
|
)%
|
|
|
1.08
|
%
|
|
|
8.33
|
%
|
|
Total Asset Values
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total NAV Held by Stockholder
|
|
$
|
100,000
|
|
|
$
|
106,333
|
|
|
|
6.33
|
%
|
|
$
|
125,667
|
|
|
|
25.67
|
%
|
|
Total Investment by Stockholder (Assumed to be $10.00 per Share
on Shares Held prior to Sale)
|
|
$
|
100,000
|
|
|
$
|
108,420
|
|
|
|
—
|
|
|
$
|
125,260
|
|
|
|
—
|
|
|
Total Dilution/Accretion to Stockholder (Total NAV Less Total
Investment)
|
|
|
—
|
|
|
|
(2,087
|
)
|
|
|
—
|
|
|
$
|
407
|
|
|
|
—
|
|
|
Per Share Amounts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NAV Per Share Held by Stockholder
|
|
|
—
|
|
|
$
|
9.67
|
|
|
|
—
|
|
|
$
|
9.67
|
|
|
|
—
|
|
|
Investment per Share Held by Stockholder (Assumed to be $10.00
per Share on Shares Held prior to Sale)
|
|
$
|
10.00
|
|
|
$
|
9.86
|
|
|
|
(1.44
|
)%
|
|
$
|
9.64
|
|
|
|
(3.65
|
)%
|
|
Dilution/Accretion per Share Held by Stockholder (NAV per Share
Less Investment per Share)
|
|
|
—
|
|
|
$
|
(0.19
|
)
|
|
|
—
|
|
|
$
|
0.03
|
|
|
|
—
|
|
|
Percentage Dilution/Accretion to Stockholder (Dilution/Accretion
per Share Divided by Investment per Share)
|
|
|
—
|
|
|
|
—
|
|
|
|
(1.92
|
)%
|
|
|
—
|
|
|
|
0.32
|
%
|
68
Impact on
New Investors
Investors who are not currently stockholders, but who
participate in an offering below NAV and whose investment per
share is greater than the resulting NAV per share (due to
selling compensation and expenses paid by us) will experience an
immediate decrease, albeit small, in the NAV of their shares and
their NAV per share compared to the price they pay for their
shares. Investors who are not currently stockholders and who
participate in an offering below NAV per share and whose
investment per share is also less than the resulting NAV per
share due to selling compensation and expenses paid by the
issuer being significantly less than the discount per share will
experience an immediate increase in the NAV of their shares and
their NAV per share compared to the price they pay for their
shares. These investors will experience a disproportionately
greater participation in our earnings and assets and their
voting power than our increase in assets, potential earning
power and voting interests. These investors will, however, be
subject to the risk that we may make additional discounted
offerings in which such new stockholder does not participate, in
which case such new stockholder will experience dilution as
described above in such subsequent offerings. These investors
may also experience a decline in the market price of their
shares, which often reflects to some degree announced or
potential decreases in NAV per share. This decrease could be
more pronounced as the size of the offering and level of
discounts increases.
The following chart illustrates the level of dilution or
accretion for new investors that would be experienced by a new
investor in the same 5%, 10% and 20% discounted offerings as
described in the first chart above. The illustration is for a
new investor who purchases the same percentage (1%) of the
shares in the offering as the stockholder in the prior examples
held immediately prior to the offering. The prospectus
supplement pursuant to which any discounted offering is made
will include a chart for this example based on the actual number
of shares in such offering and the actual discount from the most
recently determined NAV per share. It is not possible to predict
the level of market price decline that may occur.
| |
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|
|
|
|
|
|
|
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|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Example 1
|
|
Example 2
|
|
Example 3
|
|
|
|
|
|
5% Offering
|
|
10% Offering
|
|
20% Offering
|
|
|
|
|
|
at 5% Discount
|
|
at 10% Discount
|
|
at 20% Discount
|
|
|
|
Prior to Sale
|
|
Following
|
|
%
|
|
Following
|
|
%
|
|
Following
|
|
%
|
|
|
|
Below NAV
|
|
Sale
|
|
Change
|
|
Sale
|
|
Change
|
|
Sale
|
|
Change
|
|
|
|
Offering Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Price per Share to Public
|
|
|
—
|
|
|
$
|
10.00
|
|
|
|
—
|
|
|
$
|
9.47
|
|
|
|
—
|
|
|
$
|
8.42
|
|
|
|
—
|
|
|
Net Proceeds per Share to Issuer
|
|
|
—
|
|
|
$
|
9.50
|
|
|
|
—
|
|
|
$
|
9.00
|
|
|
|
—
|
|
|
$
|
8.00
|
|
|
|
—
|
|
|
Decrease to NAV per Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Shares Outstanding
|
|
|
1,000,000
|
|
|
|
1,050,000
|
|
|
|
5.00
|
%
|
|
|
1,100,000
|
|
|
|
10.00
|
%
|
|
|
1,200,000
|
|
|
|
20.00
|
%
|
|
NAV per Share
|
|
$
|
10.00
|
|
|
$
|
9.98
|
|
|
|
(0.20
|
)%
|
|
$
|
9.91
|
|
|
|
(0.90
|
)%
|
|
$
|
9.67
|
|
|
|
(3.33
|
)%
|
|
Dilution/Accretion to Stockholder
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares Held by Stockholder
|
|
|
—
|
|
|
|
500
|
|
|
|
—
|
|
|
|
1,000
|
|
|
|
—
|
|
|
|
2,000
|
|
|
|
—
|
|
|
Percentage Held by Stockholder
|
|
|
0.0
|
%
|
|
|
0.05
|
%
|
|
|
—
|
|
|
|
0.09
|
%
|
|
|
—
|
|
|
|
0.17
|
%
|
|
|
—
|
|
|
Total Asset Values
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total NAV Held by Stockholder
|
|
|
—
|
|
|
$
|
4,990
|
|
|
|
—
|
|
|
$
|
9,910
|
|
|
|
—
|
|
|
$
|
19,340
|
|
|
|
—
|
|
|
Total Investment by Stockholder
|
|
|
—
|
|
|
$
|
5,000
|
|
|
|
—
|
|
|
$
|
9,470
|
|
|
|
—
|
|
|
$
|
16,840
|
|
|
|
—
|
|
|
Total Dilution/Accretion to Stockholder (Total NAV Less Total
Investment)
|
|
|
—
|
|
|
$
|
(10
|
)
|
|
|
—
|
|
|
$
|
440
|
|
|
|
—
|
|
|
$
|
2,500
|
|
|
|
—
|
|
69
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Example 1
|
|
Example 2
|
|
Example 3
|
|
|
|
|
|
5% Offering
|
|
10% Offering
|
|
20% Offering
|
|
|
|
|
|
at 5% Discount
|
|
at 10% Discount
|
|
at 20% Discount
|
|
|
|
Prior to Sale
|
|
Following
|
|
%
|
|
Following
|
|
%
|
|
Following
|
|
%
|
|
|
|
Below NAV
|
|
Sale
|
|
Change
|
|
Sale
|
|
Change
|
|
Sale
|
|
Change
|
|
|
|
Per Share Amounts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NAV Per Share Held by Stockholder
|
|
|
—
|
|
|
$
|
9.98
|
|
|
|
—
|
|
|
$
|
9.91
|
|
|
|
—
|
|
|
$
|
9.67
|
|
|
|
—
|
|
|
Investment per Share Held by Stockholder
|
|
|
—
|
|
|
$
|
10.00
|
|
|
|
—
|
|
|
$
|
9.47
|
|
|
|
—
|
|
|
$
|
8.42
|
|
|
|
—
|
|
|
Dilution/Accretion per Share Held by Stockholder (NAV per Share
Less Investment per Share)
|
|
|
—
|
|
|
$
|
(0.02
|
)
|
|
|
—
|
|
|
$
|
0.44
|
|
|
|
—
|
|
|
$
|
1.25
|
|
|
|
—
|
|
|
Percentage Dilution/Accretion to Stockholder (Dilution/Accretion
per Share Divided by Investment per Share)
|
|
|
—
|
|
|
|
—
|
|
|
|
(0.20
|
)%
|
|
|
—
|
|
|
|
4.65
|
%
|
|
|
—
|
|
|
|
14.85
|
%
|
70
BUSINESS
Overview
We were incorporated under the General Corporation Laws of the
State of Maryland on May 30, 2001. Our investment objective
is to achieve a high level of current income by investing in
debt securities, consisting primarily of senior notes, senior
subordinated notes and junior subordinated notes, of established
private businesses that are substantially owned by leveraged
buyout funds, individual investors or are family-owned
businesses, with a particular focus on senior notes. In
addition, we may acquire from other funds existing loans that
meet this profile. We also seek to provide our stockholders with
long-term capital growth through the appreciation in the value
of warrants or other equity instruments that we may receive when
we make loans. We operate as a closed-end, non-diversified
management investment company, and we have elected to be treated
as a business development company under the 1940 Act. In
addition, for tax purposes we have elected to be treated as a
RIC under the Code.
We seek to invest in small and medium-sized private
U.S. businesses that meet certain criteria, including some
but not necessarily all of the following: the potential for
growth in cash flow, adequate assets for loan collateral,
experienced management teams with a significant ownership
interest in the borrower, profitable operations based on the
borrower’s cash flow, reasonable capitalization of the
borrower (usually by leveraged buyout funds or venture capital
funds) and the potential to realize appreciation and gain
liquidity in our equity position, if any. We anticipate that
liquidity in our equity position will be achieved through a
merger or acquisition of the borrower, a public offering of the
borrower’s stock or by exercising our right to require the
borrower to repurchase our warrants, though there can be no
assurance that we will always have these rights. We lend to
borrowers that need funds to finance growth, restructure their
balance sheets or effect a change of control.
We seek to invest primarily in three categories of loans of
private companies:
|
|
|
| |
•
|
Senior Loans. We seek to invest a portion of
our assets in senior notes of borrowers. Using its assets and
cash flow as collateral, the borrower typically uses senior
notes to cover a substantial portion of the funding needed to
operate. Senior lenders are exposed to the least risk of all
providers of debt because they command a senior position with
respect to scheduled interest and principal payments and assets
of the borrower. However, unlike senior subordinated and junior
subordinated lenders, these senior lenders typically do not
receive any stock, warrants to purchase stock of the borrowers
or other yield enhancements. As such, they generally do not
participate in the equity appreciation of the value of the
business. Senior notes may include revolving lines of credit,
senior term loans, senior syndicated loans and senior last-out
tranche loans.
|
| |
| |
•
|
Senior Subordinated Loans. We seek to invest a
portion of our assets in senior subordinated notes, which
include second lien notes. Holders of senior subordinated notes
are subordinated to the rights of holders of senior debt in
their right to receive principal and interest payments or, in
the case of last out tranches of senior debt, liquidation
proceeds from the borrower. As a result, senior subordinated
notes are riskier than senior notes. Although such loans are
sometimes secured by significant collateral (assets of the
borrower), the lender is largely dependent on the
borrower’s cash flow for repayment. Additionally, lenders
may receive warrants to acquire shares of stock in borrowers or
other yield enhancements in connection with these loans. Senior
subordinated notes include second lien loans and syndicated
second lien loans.
|
| |
| |
•
|
Junior Subordinated Loans. We also seek to
invest a small portion of our assets in junior subordinated
notes, which include mezzanine notes. Holders of junior
subordinated notes are subordinated to the rights of the holders
of senior debt and senior subordinated debt in their rights to
receive principal and interest payments from the borrower and
the assets of the borrower. The risk profile of junior
subordinated notes is high, which permits the junior
subordinated lender to obtain higher interest rates and more
equity and equity-like compensation.
|
We also may receive yield enhancements in connection with many
of our loans, which may include warrants to purchase stock,
stock or success fees.
71
Investment
Concentrations
At September 30, 2010, we had aggregate investments in 39
portfolio companies, and approximately 67.1% of the aggregate
fair value of such investments was senior term loans,
approximately 31.9% was senior subordinated term loans, no
investments were in junior subordinated loans and approximately
1.0% was in equity securities. The following table outlines our
investments by type at December 31, 2010 and
September 30, 2010:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010
|
|
|
September 30, 2010
|
|
|
|
|
Cost
|
|
|
Fair Value
|
|
|
Cost
|
|
|
Fair Value
|
|
|
|
|
Senior Term Loans
|
|
$
|
203,258
|
|
|
$
|
169,882
|
|
|
$
|
200,041
|
|
|
$
|
172,596
|
|
|
Senior Subordinated Term Loans
|
|
|
88,830
|
|
|
|
76,999
|
|
|
|
93,987
|
|
|
|
81,899
|
|
|
Preferred Equity
|
|
|
445
|
|
|
|
523
|
|
|
|
444
|
|
|
|
387
|
|
|
Common Equity/Equivalents
|
|
|
4,024
|
|
|
|
5,101
|
|
|
|
3,744
|
|
|
|
2,227
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Investments
|
|
$
|
296,557
|
|
|
$
|
252,505
|
|
|
$
|
298,216
|
|
|
$
|
257,109
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments at fair value consisted of the following industry
classifications as of December 31, 2010 and
September 30, 2010:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010
|
|
|
September 30, 2010
|
|
|
|
|
|
|
|
Percentage
|
|
|
|
|
|
Percentage
|
|
|
|
|
|
|
|
of Total
|
|
|
|
|
|
of Total
|
|
|
Industry Classification
|
|
Fair Value
|
|
|
Investments
|
|
|
Fair Value
|
|
|
Investments
|
|
|
|
|
Healthcare, education & childcare
|
|
$
|
42,085
|
|
|
|
16.6
|
%
|
|
$
|
41,098
|
|
|
|
16.0
|
%
|
|
Broadcast (TV & radio)
|
|
|
36,052
|
|
|
|
14.3
|
|
|
|
44,562
|
|
|
|
17.3
|
|
|
Printing & publishing
|
|
|
32,425
|
|
|
|
12.8
|
|
|
|
37,705
|
|
|
|
14.7
|
|
|
Electronics
|
|
|
24,945
|
|
|
|
9.9
|
|
|
|
25,080
|
|
|
|
9.8
|
|
|
Mining, steel, iron & non-precious metals
|
|
|
24,495
|
|
|
|
9.7
|
|
|
|
24,343
|
|
|
|
9.5
|
|
|
Retail stores
|
|
|
19,645
|
|
|
|
7.8
|
|
|
|
19,620
|
|
|
|
7.6
|
|
|
Automobile
|
|
|
12,757
|
|
|
|
5.1
|
|
|
|
9,868
|
|
|
|
3.8
|
|
|
Buildings & real estate
|
|
|
11,948
|
|
|
|
4.7
|
|
|
|
12,454
|
|
|
|
4.8
|
|
|
Personal & non-durable consumer products
|
|
|
11,177
|
|
|
|
4.4
|
|
|
|
9,230
|
|
|
|
3.6
|
|
|
Home & office furnishings
|
|
|
10,167
|
|
|
|
4.0
|
|
|
|
10,666
|
|
|
|
4.1
|
|
|
Machinery
|
|
|
8,627
|
|
|
|
3.4
|
|
|
|
8,719
|
|
|
|
3.4
|
|
|
Chemicals, plastics & rubber
|
|
|
4,605
|
|
|
|
1.8
|
|
|
|
7,044
|
|
|
|
2.7
|
|
|
Leisure, amusement, movies & entertainment
|
|
|
4,757
|
|
|
|
1.9
|
|
|
|
3,994
|
|
|
|
1.6
|
|
|
Diversified natural resources, precious metals &
minerals
|
|
|
3,168
|
|
|
|
1.3
|
|
|
|
—
|
|
|
|
—
|
|
|
Diversified/conglomerate manufacturing
|
|
|
2,227
|
|
|
|
0.9
|
|
|
|
2,042
|
|
|
|
0.8
|
|
|
Telecommunications
|
|
|
2,025
|
|
|
|
0.8
|
|
|
|
—
|
|
|
|
—
|
|
|
Insurance
|
|
|
1,000
|
|
|
|
0.4
|
|
|
|
—
|
|
|
|
—
|
|
|
Aerospace & defense
|
|
|
400
|
|
|
|
0.2
|
|
|
|
400
|
|
|
|
0.2
|
|
|
Farming & agriculture
|
|
|
—
|
|
|
|
—
|
|
|
|
284
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments
|
|
$
|
252,505
|
|
|
|
100.0
|
%
|
|
$
|
257,109
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
72
The investments at fair value were included in the following
geographic regions of the United States at December 31,
2010 and September 30, 2010:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010
|
|
|
September 30, 2010
|
|
|
|
|
|
|
|
Percent of
|
|
|
|
|
|
Percentage of
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
Total
|
|
|
Geographic Region
|
|
Fair Value
|
|
|
Investments
|
|
|
Fair Value
|
|
|
Investments
|
|
|
|
|
Midwest
|
|
$
|
119,424
|
|
|
|
47.3
|
%
|
|
$
|
109,299
|
|
|
|
42.5
|
%
|
|
West
|
|
|
56,156
|
|
|
|
22.2
|
|
|
|
59,684
|
|
|
|
23.2
|
|
|
South
|
|
|
41,582
|
|
|
|
16.5
|
|
|
|
44,704
|
|
|
|
17.4
|
|
|
Northeast
|
|
|
35,343
|
|
|
|
14.0
|
|
|
|
36,995
|
|
|
|
14.4
|
|
|
U.S. Territory
|
|
|
—
|
|
|
|
—
|
|
|
|
6,427
|
|
|
|
2.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Investments
|
|
$
|
252,505
|
|
|
|
100.0
|
%
|
|
$
|
257,109
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The geographic region indicates the location of the headquarters
for our portfolio companies. A portfolio company may have a
number of other business locations in other geographic regions.
Our loans typically range from $5 million to
$20 million, generally mature in no more than seven years
and accrue interest at a fixed or variable rate that exceeds the
prime rate. Because the majority of the loans in our portfolio
consist of term debt of private companies that typically cannot
or will not expend the resources to have their debt securities
rated by a credit rating agency, we expect that most, if not
all, of the debt securities we acquire will be unrated.
Accordingly, we cannot accurately predict what ratings these
loans might receive if they were in fact rated, and thus cannot
determine whether or not they could be considered
“investment grade” quality.
We hold our loan investment portfolio through our wholly-owned
subsidiary, Business Loan.
Our
Investment Adviser and Administrator
Gladstone Management Corporation, or the Adviser, is led by a
management team which has extensive experience in our lines of
business. Gladstone Administration, LLC, or the Administrator,
an affiliate of our Adviser, employs our chief financial
officer, chief compliance officer, internal counsel, treasurer
and their respective staffs. Excluding our chief financial
officer, all of our executive officers are officers or
directors, or both, of our Adviser and our Administrator.
Our Adviser and Administrator also provide investment advisory
and administrative services, respectively, to our affiliates
Gladstone Commercial, a publicly traded real estate investment
trust; Gladstone Investment, a publicly traded BDC and RIC;
Gladstone Partners Fund, L.P., a private partnership fund formed
primarily to co-invest with us and Gladstone Investment;
Gladstone Land, a private agricultural real estate company owned
by David Gladstone, our chairman and chief executive officer;
and Gladstone Lending, a private corporation that has filed a
registration statement on
Form N-2
with the SEC. The majority of our executive officers serve as
either directors or executive officers, or both, of our Adviser,
our Administrator, Gladstone Commercial, Gladstone Investment
and Gladstone Lending. In the future, our Adviser and
Administrator may provide investment advisory and administrative
services, respectively, to other funds, both public and private.
We have been externally managed by our Adviser pursuant to a
contractual investment advisory arrangement since
October 1, 2004. Our Adviser was organized as a corporation
under the laws of the State of Delaware on July 2, 2002,
and is a registered investment adviser under the Investment
Advisers’ Act of 1940, as amended. Our Adviser is
headquartered in McLean, Virginia, a suburb of
Washington, D.C., and our Adviser also has offices in New
York, New Jersey, Illinois, Connecticut, Texas and Georgia.
Corporate
Information
Our executive offices are located at 1521 Westbranch Drive,
Suite 200, McLean, Virginia 22102 and our telephone number
is
(703) 287-5800.
Our corporate website is located at
http://www.gladstonecapital.com.
Our website and the information contained therein or connected
thereto shall not be deemed to be incorporated into this
prospectus or the registration statement of which it forms a
part.
73
Our
Investment Strategy
Our strategy is to make loans at favorable interest rates to
small and medium-sized businesses. Our Adviser uses the loan
referral networks of Mr. David Gladstone, our chairman and
chief executive officer, Mr. Terry Brubaker, our vice
chairman, chief operating officer and secretary, and
Mr. George Stelljes III, our president and chief investment
officer, and of its managing directors to identify and make
senior and subordinated loans to borrowers that need funds to
finance growth, restructure their balance sheets or effect a
change of control. We believe that our business strategy will
enable us to achieve a high level of current income by investing
in debt securities, consisting primarily of senior notes, senior
subordinated notes and junior subordinated notes of established
private businesses that are backed by leveraged buyout funds,
venture capital funds or others. In addition, from time to time
we might acquire existing loans that meet this profile from
leveraged buyout funds, venture capital funds and others. We
also seek to provide our stockholders with long-term capital
growth through the appreciation in the value of warrants or
other equity instruments that we might receive when we make
loans.
We target small and medium-sized private businesses that meet
certain criteria, including some but not necessarily all of the
following: the potential for growth in cash flow, adequate
assets for loan collateral, experienced management teams with a
significant ownership interest in the borrower, profitable
operations based on the borrower’s cash flow, reasonable
capitalization of the borrower (usually by leveraged buyout
funds or venture capital funds) and the potential to realize
appreciation and gain liquidity in our equity position, if any.
We may achieve liquidity in an equity position through a merger
or acquisition of the borrower, a public offering of the
borrower’s stock or by exercising our right to require the
borrower to repurchase our warrants, although we cannot assure
you that we will always have these rights. We can also achieve a
similar effect by requiring the borrower to pay us conditional
interest, which we refer to as a success fee, upon the
occurrence of certain events. Success fees are dependent upon
the success of the borrower and the occurrence of a triggering
event, and are paid in lieu of warrants to purchase common stock
of the borrower.
Investment
Process
Overview
of Investment and Approval Process
To originate investments, our Adviser’s investment
professionals use an extensive referral network comprised
primarily of venture capitalists, leveraged buyout funds,
investment bankers, attorneys, accountants, commercial bankers
and business brokers. Our Adviser’s investment
professionals review informational packages from these and other
sources in search of potential financing opportunities. If a
potential opportunity matches our investment objectives, the
investment professionals will seek an initial screening of the
opportunity from our Adviser’s investment committee, which
is composed of Messrs. Gladstone, Brubaker and Stelljes. If
the prospective portfolio company passes this initial screening,
the investment professionals conduct a due diligence
investigation and create a detailed profile summarizing the
prospective portfolio company’s historical financial
statements, industry and management team and analyzing its
conformity to our general investment criteria. The investment
professionals then present this profile to our Adviser’s
investment committee, which must approve each investment.
Further, each financing is available for review by the members
of our Board of Directors, a majority of whom are not
“interested persons” as defined in
Section 2(a)(19) of the 1940 Act.
Prospective
Portfolio Company Characteristics
We have identified certain characteristics that we believe are
important in identifying and investing in prospective portfolio
companies. The criteria listed below provide general guidelines
for our investment decisions, although not all of these criteria
may be met by each portfolio company.
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Value-and-Income
Orientation and Positive Cash Flow. Our
investment philosophy places a premium on fundamental analysis
from an investor’s perspective and has a distinct
value-and-income
orientation. In seeking value, we focus on companies in which we
can invest at relatively low multiples of earnings before
interest, taxes, depreciation and amortization, or EBITDA, and
that have positive operating cash flow at the time of
investment. In seeking income, we seek to invest in companies
that generate relatively stable and high percentage of sales and
cash flow to provide some assurance that they will be able to
service their debt
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and pay any required distributions on preferred stock.
Typically, we do not expect to invest in
start-up
companies or companies with speculative business plans.
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Experienced Management. We generally require
that our portfolio companies have experienced management teams.
We also require the portfolio companies to have in place proper
incentives to induce management to succeed and act in concert
with our interests as investors, including having significant
equity or other interests in the financial performance of their
companies.
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Strong Competitive Position in an Industry. We
seek to invest in target companies that have developed strong
market positions within their respective markets and that we
believe are well-positioned to capitalize on growth
opportunities. We seek companies that demonstrate significant
competitive advantages versus their competitors, which we
believe will help to protect their market positions and
profitability.
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Exit Strategy. We seek to invest in companies
that we believe will provide a stable stream of earnings and
cash flow that is sufficient to repay the loans we make to them
and to reinvest in their respective businesses. We expect that
such internally generated cash flow, which will allow our
portfolio companies to pay interest on, and repay the principal
of, our investments, will be a key means by which we exit from
our investments over time. In addition, we also seek to invest
in companies whose business models and expected future cash
flows offer attractive possibilities for capital appreciation on
any equity interests we may obtain or retain. These capital
appreciation possibilities include strategic acquisitions by
other industry participants or financial buyers, initial public
offerings of common stock, or other capital market transactions.
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Liquidation Value of Assets. The prospective
liquidation value of the assets, if any, collateralizing loans
in which we invest is an important factor in our investment
analysis. We emphasize both tangible assets, such as accounts
receivable, inventory, equipment, and real estate and intangible
assets, such as intellectual property, customer lists, networks,
databases, although the relative weight we place on these assets
will vary by company and industry.
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Extensive
Due Diligence
Our Adviser and its affiliate, Gladstone Securities, conducts
what we believe are extensive due diligence investigations of
our prospective portfolio companies and investment
opportunities. The due diligence investigation may begin with a
review of publicly available information and will generally
include some or all of the following:
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a review of the prospective portfolio company’s historical
and projected financial information;
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visits to the prospective portfolio company’s business
site(s);
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interviews with the prospective portfolio company’s
management, employees, customers and vendors;
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review of all loan documents;
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background checks on the prospective portfolio company’s
management team; and
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research on the prospective portfolio company’s products,
services or particular industry.
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Upon completion of the due diligence investigation and a
decision to proceed with an investment, our Adviser’s
investment professionals who have primary responsibility for the
investment present the investment opportunity to our
Adviser’s investment committee, which consists of
Messrs. Gladstone, Brubaker and Stelljes. The investment
committee determines whether to pursue the potential investment.
Additional due diligence of a potential investment may be
conducted on our behalf by attorneys and independent
accountants, as well as other outside advisers, prior to the
closing of the investment, as appropriate.
We also rely on the long-term relationships that our
Adviser’s investment professionals have with venture
capitalists, leveraged buyout funds, investment bankers,
commercial bankers and business brokers, and on the extensive
direct experiences of our executive officers and managing
directors in providing debt and equity capital to small and
medium-sized private businesses.
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Investment
Structure
We typically invest in senior, senior subordinated and junior
subordinated loans. Our loans typically range from
$5 million to $20 million, although the size of our
investments may vary as our capital base changes. Our loans
generally mature within seven years and accrue interest at a
variable rate that exceeds the London Interbank Offer Rate, or
LIBOR, and prime rates. In the past, some of our loans have had
a provision that calls for some portion of the interest payments
to be deferred and added to the principal balance so that the
interest is paid, together with the principal, at maturity. This
form of deferred interest is often called “paid in
kind,” or PIK, interest. When earned, we record PIK
interest as interest income and add the PIK interest to the
principal balance of the loans. As of December 31, 2010, we
had loans in our portfolio which contained a PIK provision.
To the extent possible, our loans generally are collateralized
by a security interest in the borrower’s assets. In senior
and subordinated loans, we do not usually have the first claim
on these assets. Interest payments on loans we make will
generally be made monthly or quarterly (except to the extent of
any PIK interest) with amortization of principal generally being
deferred for several years. The principal amount of the loans
and any accrued but unpaid interest will generally become due at
maturity at five to seven years. We seek to make loans that are
accompanied by warrants to purchase stock in the borrowers or
other yield enhancement features, such as success fees. Any
warrants that we receive will typically have an exercise price
equal to the fair value of the portfolio company’s common
stock at the time of the loan and entitle us to purchase a
modest percentage of the borrower’s stock. Success fees are
conditional interest that is paid if the borrower is successful.
The success fee is calculated as additional interest on the loan
and is paid upon the occurrence of certain triggering events,
such as the sale of the borrower. If the event or events do not
occur, no success fee will be paid.
From time to time, a portfolio company may request additional
financing, providing us with additional lending opportunities.
We will consider such requests for additional financing under
the criteria we have established for initial investments and we
anticipate that any debt securities we acquire in a follow-on
financing will have characteristics comparable to those issued
in the original financing. In some situations, our failure,
inability or decision not to make a follow-on investment may be
detrimental to the operations or survival of a portfolio
company, and thus may jeopardize our investment in that borrower.
As noted above, we expect to receive yield enhancements in
connection with many of our loans, which may include warrants to
purchase stock or success fees. If a financing is successful,
not only will our debt securities have been repaid with
interest, but we will be in a position to realize a gain on the
accompanying equity interests or other yield enhancements. The
opportunity to realize such gain may occur if the borrower is
sold to new owners or if it makes a public offering of its
stock. In most cases, we will not have the right to require a
borrower to undergo an initial public offering by registering
securities under the Securities Act, but we generally will have
the right to sell our equity interests in any subsequent public
offering by the borrower. Even when we have the right to
participate in a borrower’s public offering, the
underwriters might insist, particularly if we own a large amount
of equity securities, that we retain all or a substantial
portion of our shares for a specified period of time. Moreover,
we may decide not to sell an equity position even when we have
the right and the opportunity to do so. Thus, although we expect
to dispose of an equity interest after a certain time,
situations may arise in which we hold equity securities for a
longer period.
Risk
Management
We seek to limit the downside risk of our investments by:
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making investments with an expected total return (including both
interest and potential equity appreciation) that we believe
compensates us for the credit risk of the investment;
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seeking collateral or superior positions in the portfolio
company’s capital structure where possible;
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incorporating put rights and call protection into the investment
structure where possible; and
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negotiating covenants in connection with our investments that
afford our portfolio companies as much flexibility as possible
in managing their businesses, consistent with the preservation
of our capital.
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Temporary
Investments
Pending investment in private companies, we invest our otherwise
uninvested cash primarily in cash, cash items, government
securities or high-quality debt securities maturing in one year
or less from the time of investment, to which we refer
collectively as temporary investments, so that at least 70% of
our assets are “qualifying assets” for purposes of the
business development company provisions of the 1940 Act. For
information regarding regulations to which we are subject and
the definition of “qualifying assets,” see
“Regulation as a Business Development Company —
Qualifying Assets.”
Hedging
Strategies
Although it has not yet happened, nor do we expect this to
happen in the near future, when one of our portfolio companies
goes public, we may undertake hedging strategies with regard to
any equity interests that we may have in that company. We may
mitigate risks associated with the volatility of publicly traded
securities by, for example, selling securities short or writing
or buying call or put options. Hedging against a decline in the
value of such investments in public companies would not
eliminate fluctuations in the values of such investments or
prevent losses if the values of such investments decline, but
would establish or enhance a hedging strategy to seek to protect
our investment in such securities. Therefore, by engaging in
hedging transactions, we seek to moderate the decline in the
value of our hedged investments in public companies. However,
such hedging transactions would also limit our opportunity to
gain from an increase in the value of our investment in the
public company. In the future, we may enter into hedging
transactions, such as interest rate cap agreements, in
connection with the borrowings that we make under our line of
credit. To date, we do not hold any interest rate cap
agreements. Hedging strategies can pose risks to us and our
stockholders, however we believe that such activities are
manageable because they will be limited to only a portion of our
portfolio.
Section 12(a)(3) of the 1940 Act prohibits us from
effecting a short sale of any security “in contravention of
such rules and regulations or orders as the [SEC] may prescribe
as necessary or appropriate in the public interest or for the
protection of investors . . .” However, to date, the SEC
has not promulgated regulations under this statute. It is
possible that such regulations could be promulgated in the
future in a way that would require us to change any hedging
strategies that we may adopt. In addition, our ability to engage
in short sales may be limited by the 1940 Act’s leverage
limitations. We will only engage in hedging activities in
compliance with applicable laws and regulations.
Competitive
Advantages
A large number of entities compete with us and make the types of
investments that we seek to make in small and medium-sized
privately-owned businesses. Such competitors include private
equity funds, leveraged buyout funds, venture capital funds,
investment banks and other equity and non-equity based
investment funds, and other financing sources, including
traditional financial services companies such as commercial
banks. Many of our competitors are substantially larger than we
are and have considerably greater funding sources that are not
available to us. In addition, certain of our competitors may
have higher risk tolerances or different risk assessments, which
could allow them to consider a wider variety of investments,
establish more relationships and build their market shares.
Furthermore, many of these competitors are not subject to the
regulatory restrictions that the 1940 Act imposes on us as a
business development company. However, we believe that we have
the following competitive advantages over other providers of
financing to small and mid-sized businesses.
Management
Expertise
David Gladstone, our chairman and chief executive officer, is
also the chairman and chief executive officer of our Adviser and
the Gladstone Companies, and has been involved in all aspects of
the Gladstone Companies’ investment activities, including
serving as a member of our Adviser’s investment committee.
Terry Lee Brubaker is our vice chairman, chief operating officer
and secretary, and has substantial experience in acquisitions
and operations of companies. George Stelljes III is our
president and chief investment officer and has extensive
experience in leveraged finance. Messrs. Gladstone,
Brubaker and Stelljes have principal management responsibility
for our Adviser as its senior executive officers. These
individuals dedicate a significant portion of their time
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to managing our investment portfolio. Our senior management has
extensive experience providing capital to small and mid-sized
companies and has worked together for more than 10 years.
In addition, we have access to the resources and expertise of
our Adviser’s investment professionals and supporting staff
who possess a broad range of transactional, financial,
managerial and investment skills.
Increased
Access to Investment Opportunities Developed Through Proprietary
Research Capability and an Extensive Network of
Contacts
Our Adviser seeks to identify potential investments both through
active origination and due diligence and through its dialogue
with numerous management teams, members of the financial
community and potential corporate partners with whom our
Adviser’s investment professionals have long-term
relationships. We believe that our Adviser’s investment
professionals have developed a broad network of contacts within
the investment, commercial banking, private equity and
investment management communities, and that their reputation in
investment management enables us to identify well-positioned
prospective portfolio companies which provide attractive
investment opportunities. Additionally, our Adviser expects to
generate information from its professionals’ network of
accountants, consultants, lawyers and management teams of
portfolio companies and other companies.
Disciplined,
Value and Income-Oriented Investment Philosophy with a Focus on
Preservation of Capital
In making its investment decisions, our Adviser focuses on the
risk and reward profile of each prospective portfolio company,
seeking to minimize the risk of capital loss without foregoing
the potential for capital appreciation. We expect our Adviser to
use the same value and income-oriented investment philosophy
that its professionals use in the management of the other
Gladstone Companies and to commit resources to management of
downside exposure. Our Adviser’s approach seeks to reduce
our risk in investments by using some or all of the following
approaches:
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focusing on companies with good market positions, established
management teams and good cash flow;
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investing in businesses with experienced management teams;
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engaging in extensive due diligence from the perspective of a
long-term investor;
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investing at low
price-to-cash
flow multiples; or
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adopting flexible transaction structures by drawing on the
experience of the investment professionals of our Adviser and
its affiliates.
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Longer
Investment Horizon with Attractive Publicly Traded
Model
Unlike private equity and venture capital funds that are
typically organized as finite-life partnerships, we are not
subject to standard periodic capital return requirements. The
partnership agreements of most private equity and venture
capital funds typically provide that these funds may only invest
investors’ capital once and must return all capital and
realized gains to investors within a finite time period, often
seven to ten years. These provisions often force private equity
and venture capital funds to seek returns on their investments
by causing their portfolio companies to pursue mergers, public
equity offerings, or other liquidity events more quickly than
might otherwise be optimal or desirable, potentially resulting
in both a lower overall return to investors and an adverse
impact on their portfolio companies. We believe that our
flexibility to make investments with a long-term view and
without the capital return requirements of traditional private
investment vehicles provides us with the opportunity to achieve
greater long-term returns on invested capital.
Flexible
Transaction Structuring
We believe our management team’s broad expertise and its
ability to draw upon many years of combined experience enables
our Adviser to identify, assess, and structure investments
successfully across all levels of a company’s capital
structure and manage potential risk and return at all stages of
the economic cycle. We are not subject to many of the regulatory
limitations that govern traditional lending institutions such as
banks. As a result,
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we are flexible in selecting and structuring investments,
adjusting investment criteria and transaction structures, and,
in some cases, the types of securities in which we invest. We
believe that this approach enables our Adviser to identify
attractive investment opportunities that will continue to
generate current income and capital gain potential throughout
the economic cycle, including during turbulent periods in the
capital markets. One example of our flexibility is our ability
to exchange our publicly-traded stock for the stock of an
acquisition target in a tax-free reorganization under the Code.
After completing an acquisition in such an exchange, we can
restructure the capital of the small company to include senior
and subordinated debt.
Leverage
For the purpose of making investments other than temporary
investments and to take advantage of favorable interest rates,
we intend to issue senior debt securities (including borrowings
under our current line of credit) up to the maximum amount
permitted by the 1940 Act. The 1940 Act currently permits us to
issue senior debt securities and preferred stock, to which we
refer collectively as senior securities, in amounts such that
our asset coverage, as defined in the 1940 Act, is at least 200%
after each issuance of senior securities. We may also incur such
indebtedness to repurchase our common stock. As a result of
issuing senior securities, we are exposed to the risks of
leverage. Although borrowing money for investments increases the
potential for gain, it also increases the risk of a loss. A
decrease in the value of our investments will have a greater
impact on the value of our common stock to the extent that we
have borrowed money to make investments. There is a possibility
that the costs of borrowing could exceed the income we receive
on the investments we make with such borrowed funds. In
addition, our ability to pay distributions or incur additional
indebtedness would be restricted if asset coverage is less than
twice our indebtedness. If the value of our assets declines, we
might be unable to satisfy that test. If this happens, we may be
required to liquidate a portion of our loan portfolio and repay
a portion of our indebtedness at a time when a sale may be
disadvantageous. Furthermore, any amounts that we use to service
our indebtedness will not be available for distributions to our
stockholders. Our Board of Directors is authorized to provide
for the issuance of preferred stock with such preferences,
powers, rights and privileges as it deems appropriate, provided
that such an issuance adheres to the requirements of the 1940
Act. See “Regulation as a Business Development
Company — Asset Coverage” for a discussion of our
leveraging constraints.
Ongoing
Relationships with and Monitoring of Portfolio
Companies
Monitoring
Our Adviser’s investment professionals, led by Terry Lee
Brubaker, our chief operating officer, monitor the financial
trends of each portfolio company on an ongoing basis to
determine if each is meeting its respective business plans and
to assess the appropriate course of action for each company. We
monitor the status and performance of each portfolio company and
use it to evaluate the overall performance of our portfolio.
Our Adviser employs various methods of evaluating and monitoring
the performance of each of our portfolio companies, which
include some or all of following:
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assessment of success in the portfolio company’s overall
adherence to its business plan and compliance with covenants;
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attendance at and participation in meetings of the portfolio
company’s board of directors;
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periodic contact, including formal update interviews with
portfolio company management, and, if appropriate, the financial
or strategic sponsor;
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comparison with other companies in the portfolio company’s
industry; and
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review of monthly and quarterly financial statements and
financial projections for portfolio companies.
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Managerial
Assistance and Services
As a business development company, we make available significant
managerial assistance to our portfolio companies and provide
other services to such portfolio companies. Neither we nor our
Adviser currently receives fees in connection with managerial
assistance we make available. At times, our Adviser provides
other services to
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certain of our portfolio companies and it receives fees for
these other services, certain of which are credited by 50% or
100% against the investment advisory fees that we pay our
Adviser. Gladstone Securities also provides investment banking
and due diligence services to some of our portfolio companies,
and it receives fees for these services which do not impact the
fees we pay our Adviser.
Valuation
Process
The following is a general description of the steps we take each
quarter to determine the value of our investment portfolio. We
value our investments in accordance with the requirements of the
1940 Act. We value securities for which market quotations are
readily available at their market value. We value all other
securities and assets at fair value as determined in good faith
by our Board of Directors. In determining the value of our
investments, our Adviser has established an investment valuation
policy, or the Policy.
The Policy has been approved by our Board of Directors and each
quarter the Board of Directors reviews whether our Adviser has
applied the Policy consistently and votes whether or not to
accept the recommended valuation of our investment portfolio.
Due to the uncertainty inherent in the valuation process, such
estimates of fair value may differ significantly from the values
that would have been obtained had a ready market for the
securities existed. Investments for which market quotations are
readily available are recorded in our financial statements at
such market quotations. With respect to any investments for
which market quotations are not readily available, we perform
the following valuation process each quarter:
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Our quarterly valuation process begins with each portfolio
company or investment being initially assessed by our
Adviser’s investment professionals responsible for the
investment, using the Policy.
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Preliminary valuation conclusions are then discussed with our
management, and documented, along with any independent opinions
of value provided by SPSE for review by our Board of Directors.
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Our Board of Directors reviews this documentation and discusses
the input of our Adviser, management, and the opinions of value
of SPSE to arrive at a determination for the aggregate fair
value of our portfolio of investments.
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Our valuation policies, procedures and processes are more fully
described under “Management’s Discussion and Analysis
of Financial Condition and Results of Operations —
Critical Accounting Policies — Investment
Valuation.”
Investment
Advisory and Management Agreements
We are externally managed pursuant to contractual arrangements
with our Adviser and Administrator, under which our Adviser and
Administrator employ all of our personnel and pay our payroll,
benefits, and general expenses directly. On October 1,
2006, we entered into the Advisory Agreement with our Adviser
and the Administration Agreement with our Administrator. On
July 7, 2010, our Board of Directors renewed the Advisory
Agreement and the Administration Agreement through
August 31, 2011. The management services and fees in effect
under the Advisory Agreement are described below. In addition,
we pay our direct expenses including, but not limited to,
directors’ fees, legal and accounting fees and stockholder
related expenses under the Advisory Agreement.
Base
Management Fee
The base management fee is computed and payable quarterly and is
assessed at an annual rate of 2.0% computed on the basis of the
value of our average gross 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.
Overall, the base management fee cannot exceed 2.0% of total
assets (as reduced by cash and cash equivalents pledged to
creditors) during any given fiscal year. In addition, the
following three items are potential adjustments to the base
management fee calculation.
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Our Adviser also services the loans held by our wholly-owned
subsidiary, Business Loan, in return for which our Adviser
receives a 2.0% annual fee based on the monthly aggregate
outstanding balance of loans pledged under our line of credit.
Since we own these loans, all loan servicing fees paid to our
Adviser are treated as reductions directly against the 2.0% base
management fee under the Advisory Agreement.
Under the Advisory Agreement, our Adviser has also provided and
continues to provide managerial assistance and other services to
our portfolio companies and may receive fees for services other
than managerial assistance. 50% or 100% of certain of these fees
are credited against the base management fee that we would
otherwise be required to pay to our Adviser.
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Senior Syndicated Loan Fee Waiver
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Since our 2008 fiscal year, our Board of Directors has accepted
on a quarterly basis unconditional and irrevocable voluntary
waivers 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 syndicated loan participations and any waived
fees may not be recouped by our Adviser in the future.
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:
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no incentive fee in any calendar quarter in which our
pre-incentive fee net investment income does not exceed the
hurdle rate (7% annualized);
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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
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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).
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Quarterly
Incentive Fee Based on Net Investment Income
Pre-incentive
fee net investment income
(expressed as a percentage of the value of net assets)
Percentage
of pre-incentive fee net investment income
allocated to income-related portion of incentive fee
The second part of the incentive fee is a capital gains-based
incentive fee that is 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 our
Adviser, we calculate the cumulative aggregate realized capital
gains and cumulative aggregate realized capital losses since our
inception, and the aggregate unrealized capital depreciation as
of the date
81
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 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 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.
Administration Agreement
Under the Administration Agreement, 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 our allocable portion of the salaries
and benefits expenses of our chief financial officer, chief
compliance officer, internal counsel, treasurer and their
respective staffs. Our allocable portion of expenses is
primarily derived by multiplying our Administrator’s total
expenses by the percentage of our average total assets (the
total assets at the beginning and end of each quarter) in
comparison to the average total assets of all funds that have
administration agreements with our Administrator and are also
managed by our Adviser under similar agreements.
Code of
Ethics
We and our Adviser have each adopted a Code of Ethics and
Business Conduct applicable to our officers, directors and all
employees of our Adviser and our Administrator that complies
with the guidelines set forth in Item 406 of
Regulation S-K
of the Securities Act. As required by the 1940 Act, this code
establishes procedures for personal investments, restricts
certain transactions by our personnel and requires the reporting
of certain transactions and holdings by our personnel. A copy of
this code is available for review, free of charge, at our
website at
http://www.gladstonecapital.com.
We intend to provide any required disclosure of any amendments
to or waivers of the provisions of this code by posting
information regarding any such amendment or waiver to our
website within four days of its effectiveness.
Compliance
Policies and Procedures
We and our Adviser have adopted and implemented written policies
and procedures reasonably designed to prevent violation of the
federal securities laws, and our Board of Directors is required
to review these compliance policies and procedures annually to
assess their adequacy and the effectiveness of their
implementation. We have designated a chief compliance officer,
John Dellafiora, Jr., who also serves as chief compliance
officer for our Adviser.
Competition
A large number of entities compete with us and make the types of
investments that we seek to make in small and medium-sized
privately-owned businesses. Such competitors include private
equity funds, leveraged buyout funds, venture capital funds,
investment banks and other equity and non-equity based
investment funds, and other financing sources, including
traditional financial services companies such as commercial
banks. Many of our competitors are substantially larger than we
are and have considerably greater funding sources that are not
available to us. In addition, certain of our competitors may
have higher risk tolerances or different risk assessments, which
could allow them to consider a wider variety of investments,
establish more relationships and build their market shares.
Furthermore, many of these competitors are not subject to the
regulatory restrictions that the 1940 Act imposes on us as a
business development company. There is no assurance that the
competitive pressures we face will not have a material adverse
effect on our business, financial condition and results of
operations. In addition, because
82
of this competition, we may not be able to take advantage of
attractive investment opportunities from time to time and there
can be no assurance that we will be able to identify and make
investments that satisfy our investment objective or that we
will be able to meet our investment goals. Recently we have seen
an increase in our competition such that terms and rates for
proposed loans have been reduced. However, we believe that our
extensive loan referral network and flexible transaction
structuring enable us to compete effectively for opportunities
in the current market environment.
Staffing
We do not currently have any employees and do not expect to have
any employees in the foreseeable future. Currently, services
necessary for our business are provided by individuals who are
employees of our Adviser and our Administrator pursuant to the
terms of the Advisory Agreement and the Administration
Agreement, respectively. Each of our executive officers is an
employee or officer, or both, of our Adviser or our
Administrator. No employee of our Adviser and our Administrator
will dedicate all of his or her time to us. However, we expect
that 25-30
full time employees of our Adviser and our Administrator will
spend substantial time on our matters during the remainder of
calendar year 2011. To the extent we acquire more investments,
we anticipate that the number of employees of our Adviser and
our Administrator who devote time to our matters will increase.
As of March 31, 2011, our Adviser and Administrator
collectively had 51 full-time employees. A breakdown of
these employees is summarized by functional area in the table
below:
| |
|
|
|
Number of Individuals
|
|
Functional Area
|
|
|
|
9
|
|
Executive Management
|
|
32
|
|
Investment Management, Portfolio Management and Due Diligence
|
|
10
|
|
Administration, Accounting, Compliance, Human Resources, Legal
and Treasury
|
Properties
We do not own any real estate or other physical properties
materially important to our operations. Our Adviser is the
current leaseholder of all properties in which we operate. We
occupy these premises pursuant to the Advisory Agreement and
Administration Agreement. Our Adviser and Administrator are
headquartered in McLean, Virginia and our Adviser also has
operations in New York, New Jersey, Illinois, Texas, Connecticut
and Georgia.
Legal
Proceedings
We are not currently subject to any material legal proceedings,
nor, to our knowledge, is any material legal proceeding
threatened against us.
83
PORTFOLIO
COMPANIES
The following table sets forth certain information as of
December 31, 2010, regarding each portfolio company in
which we had a debt or equity security as of such date. All such
investments have been made in accordance with our investment
policies and procedures described in this prospectus.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held
|
|
|
|
|
|
|
|
|
|
|
|
|
|
on a Fully
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
December 31, 2010
|
|
|
Company(1)
|
|
Industry
|
|
Investment
|
|
Basis
|
|
Cost
|
|
|
Fair Value
|
|
|
|
|
NON-CONTROL/NON-AFFILIATE INVESTMENTS
|
|
Non-syndicated Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Access Television Network, Inc.
2600 Michelson Drive, Ste 1650
Irvine, California 91612
|
|
Service-cable airtime (infomercials)
|
|
Senior Term
Debt(4)
|
|
|
|
|
|
$
|
948
|
|
|
$
|
711
|
|
|
Allison Publications, LLC
4311 Oak Lawn, Suite 100
Dallas, Texas 75219
|
|
Service-publisher of consumer oriented magazines
|
|
Senior Term
Debt(4)
|
|
|
|
|
|
|
8,940
|
|
|
|
8,413
|
|
|
BAS Broadcasting
905 West State St.
Fremont, OH 43420
|
|
Service-radio station operator
|
|
Senior Term
Debt(4)
|
|
|
|
|
|
|
7,465
|
|
|
|
6,606
|
|
|
Chinese Yellow Pages Company
9550 Flair Drive Suite 200
El Monte, CA 91731
|
|
Service-publisher of Chinese
language directories
|
|
Line of
Credit(4)
Senior Term
Debt(4)
|
|
|
|
|
|
|
450
288
|
|
|
|
425
273
|
|
|
CMI Acquisition, LLC
4211 E. 43rd St. Place
Kearney, NE 68848
|
|
Service-recycling
|
|
Senior Term
Debt(4)
|
|
|
|
|
|
|
5,976
|
|
|
|
5,901
|
|
|
FedCap Partners, LLC
11951 Freedom Drive, 13th Floor
Reston, VA 20190
|
|
Private equity fund
|
|
Class A Membership
Units(7)
Uncalled Capital Commitment
|
|
|
6.67%
|
|
|
|
400
|
|
|
|
400
|
|
|
GFRC Holdings LLC
3615 Miller Park Dr.
Garland, TX 75042
|
|
Manufacturing-glass-fiber
reinforced concrete
|
|
Senior Term
Debt(4)
Senior Subordinated Term
Debt(3)(4)
|
|
|
|
|
|
|
6,011
6,632
|
|
|
|
5,681
6,267
|
|
|
Global Materials Technologies, Inc.
1540 E. Dundee Road
Palatine, IL 60067
|
|
Manufacturing-steel wool
products and metal fibers
|
|
Senior Term
Debt(3)(4)
|
|
|
|
|
|
|
3,360
|
|
|
|
2,780
|
|
|
Heartland Communications Group
909 North Railroad
Eagle River, WI 54521
|
|
Service-radio station operator
|
|
Line of Credit
Senior Term
Debt(4)
Common Stock Warrants
|
|
|
8.75%
|
|
|
|
100
4,305
66
|
|
|
|
58
2,508
|
|
|
International Junior Golf
Training Acquisition Company
58 Hospital Center Common
Hilton Head, SC 29926
|
|
Service-golf training
|
|
Line of
Credit(4)
Senior Term
Debt(4)
Senior Term
Debt(4)
|
|
|
|
|
|
|
1,000
1,391
2,500
|
|
|
|
972
1,353
2,431
|
|
|
KMBQ Corporation
2200 East Parks Highway
Wasilla, Alaska 99654
|
|
Service-AM/FM radio
broadcaster
|
|
Line of
Credit(4)(8)(7)
Senior Term
Debt(4)(8)(7)
|
|
|
|
|
|
|
162
2,063
|
|
|
|
16
204
|
|
|
Legend Communications of
Wyoming LLC
6805 Douglas Legum Dr, Ste 100
Elkridge, MD 21075
|
|
Service-operator of radio stations
|
|
Senior Term
Debt(4)
|
|
|
|
|
|
|
9,880
|
|
|
|
6,274
|
|
|
Newhall Holdings, Inc.
26529 Ruether Ave
Santa Clarita, CA 91350
|
|
Service-distributor of personal
care products and supplements
|
|
Line of
Credit(4)
Senior Term
Debt(5)
Senior Term
Debt(4)
Senior Term
Debt(3)(4)
Preferred
Equity(6)(7)
Common
Stock(6)(7)
|
|
|
7.7%
10%
|
|
|
|
1,350
1,870
2,000
4,648
—
—
|
|
|
|
1,276
1,767
1,860
4,276
—
—
|
|
|
Northern Contours, Inc.
409 South Roberts Street
Fergus Falls, MN 56537
|
|
Manufacturing veneer and
laminate components
|
|
Senior Subordinated Term
Debt(4)
|
|
|
|
|
|
|
6,258
|
|
|
|
5,741
|
|
|
Northstar Broadband, LLC
3660 East Covington Ave suite C
Post Falls, ID 83854
|
|
Service cable TV franchise owner
|
|
Senior Term
Debt(4)
|
|
|
|
|
|
|
104
|
|
|
|
92
|
|
|
Pinnacle Treatment Centers, Inc.
59 31st Street
Pittsburgh, PA 15201
|
|
Service-Addiction treatment
centers
|
|
Line of
Credit(4)(7)
Senior Term
Debt(4)(7)
Senior Term
Debt(3)(4)(7)
|
|
|
|
|
|
|
100
1,750
7,500
|
|
|
|
100
1,750
7,500
|
|
|
Precision Acquisition Group
Holdings, Inc.
435 Burt Street
Sistersville, WV 26175
|
|
Manufacturing-consumable
components for the aluminum
industry
|
|
Equipment
Note(4)
Senior Term
Debt(4)
Senior Term
Debt(3)(4)
|
|
|
|
|
|
|
1,000
4,125
4,053
|
|
|
|
940
3,877
3,810
|
|
84
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held
|
|
|
|
|
|
|
|
|
|
|
|
|
|
on a Fully
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
December 31, 2010
|
|
|
Company(1)
|
|
Industry
|
|
Investment
|
|
Basis
|
|
Cost
|
|
|
Fair Value
|
|
|
|
|
PROFITSystems
Acquisition Co.
422 E. Vermijo Ave, Suite 100
Colorado Springs, CO 80903
|
|
Service-design and develop
ERP software
|
|
Line of Credit
Senior Term
Debt(4)
Senior Term
Debt(3)(4)
|
|
|
|
|
|
$
|
—
750
2,900
|
|
|
$
|
—
711
2,719
|
|
|
RCS Management Holding Co.
16535 Southpark Drive
Westfield, IN 46074
|
|
Service-healthcare supplies
|
|
Senior Term
Debt(2)(3)
Senior Term
Debt(3)
|
|
|
|
|
|
|
1,813
3,060
|
|
|
|
1,785
3,014
|
|
|
Reliable Biopharmaceutical
Holdings, Inc.
1945 Walton Rd.
St. Louis, MO 63114
|
|
Manufacturing-pharmaceutical
and biochemical intermediates
|
|
Line of
Credit(3)
Mortgage
Note(3)
Senior Term
Debt(3)
Senior Term
Debt(3)
Senior Subordinated Term
Debt(2)(3)
Common Stock
Warrants(5)(6)
|
|
|
6.70%
|
|
|
|
1,500
7,234
967
11,663
6,000
209
|
|
|
|
1,491
7,198
961
11,415
5,760
136
|
|
|
Saunders & Associates
2520 East Rose Garden Ln.
Phoenix, AZ 85050
|
|
Manufacturing-equipment provider
for frequency control devices
|
|
Senior Term
Debt(3)
|
|
|
|
|
|
|
8,947
|
|
|
|
8,947
|
|
|
SCI Cable, Inc.
6700 South Topeka Boulevard
Building 818, Unit N4
Topeka, Kansas 66619
|
|
Service-cable, internet, voice provider
|
|
Senior Term
Debt(3)(6)
Senior Term
Debt(3)(6)
|
|
|
|
|
|
|
601
2,931
|
|
|
|
132
293
|
|
|
Sunburst Media-Louisiana, LLC
300 Crescent Court, Suite 850
Dallas, Texas 75201
|
|
Service-radio station operator
|
|
Senior Term Debt(3)
|
|
|
|
|
|
|
6,335
|
|
|
|
4,997
|
|
|
Sunshine Media Holdings
735 Broad St, Suite 708
Chattanooga, TN 37402
|
|
Service-publisher regional B2B
trade magazines
|
|
Line of
Credit(3)
Senior Term
Debt(3)
Senior Term
Debt(2)(3)
|
|
|
|
|
|
|
1,999
16,948
10,700
|
|
|
|
1,499
12,711
8,025
|
|
|
Thibaut Acquisition Co.
480 Frelinghuysen Avenue
Newark, NJ 07114
|
|
Service-design and distribute
wall covering
|
|
Line of
Credit(3)
Senior Term
Debt(3)
Senior Term
Debt(2)(3)
|
|
|
|
|
|
|
750
813
3,000
|
|
|
|
731
792
2,903
|
|
|
Viapack, Inc.
1224 S. Hamilton St
Dalton, GA 30720
|
|
Manufacturing-polyethylene film
|
|
Senior Real Estate Term
Debt(3)
Senior Term
Debt(2)(3)
|
|
|
|
|
|
|
650
3,978
|
|
|
|
647
3,958
|
|
|
Westlake Hardware, Inc.
14000 Marshall Dr. Lenexa, KS 66215
|
|
Retail-hardware and variety
|
|
Senior Subordinated Term
Debt(3)
Senior Subordinated Term
Debt(3)
|
|
|
|
|
|
|
12,000
8,000
|
|
|
|
11,835
7,810
|
|
|
Winchester Electronics
62 Barnes Industrial Road
North Wallingford, CT 06492
|
|
Manufacturing-high bandwidth
connectors and cables
|
|
Senior Term
Debt(3)
Senior Term
Debt(3)
Senior Subordinated Term
Debt(3)
|
|
|
|
|
|
|
1,250
1,686
9,875
|
|
|
|
1,247
1,669
9,653
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal—Non-syndicated loans
|
|
|
|
|
|
|
|
|
|
|
223,254
|
|
|
|
197,301
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Syndicated Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Airvana Network Solutions, Inc.
19 Alpha Road,
Chelmsford, MA 01824
|
|
Service-telecommunications
|
|
Senior Term
Debt(4)
|
|
|
|
|
|
|
7,702
|
|
|
|
7,918
|
|
|
Applied Systems
200 Applied Parkway,
University Park, IL 60466
|
|
Service-software for property &
casualty insurance industry
|
|
Senior Subordinated Term
Debt(4)
|
|
|
|
|
|
|
990
|
|
|
|
1,000
|
|
|
Ascend Learning
7500 West 160th Street,
Stillwell, KS 66085
|
|
Service-technology-based
learning solutions
|
|
Senior Subordinated Term
Debt(4)
|
|
|
|
|
|
|
970
|
|
|
|
975
|
|
|
Covad Communications
2220 O’Toole Avenue,
San Jose, CA 95131
|
|
Service-telecommunications
|
|
Senior Term
Debt(4)
|
|
|
|
|
|
|
1,961
|
|
|
|
2,025
|
|
|
Global Brass
1901 North Roselle Road, Suite 824
Schaumburg, IL 60195
|
|
Service-telecommunications
|
|
Senior Term
Debt(4)
|
|
|
|
|
|
|
2,905
|
|
|
|
3,168
|
|
|
HGI
1810 Summit Commerce Park
Twinsburg, OH 44087
|
|
Service-telecommunications
|
|
Senior Term
Debt(4)
|
|
|
|
|
|
|
1,956
|
|
|
|
1,998
|
|
|
WP Evenflo Group
Holdings Inc.
707 Crossroads Court
|
|
Manufacturing-infant and
juvenile products
|
|
Senior Term
Debt(4)
Senior Preferred
Equity(5)(6)
Junior Preferred
Equity(5)(6)
|
|
|
1.10%
4.40%
|
|
|
|
1,876
333
111
|
|
|
|
1,651
389
134
|
|
|
Vandalia, OH 45377
|
|
|
|
Common
Stock(5)(6)
|
|
|
0.76%
|
|
|
|
—
|
|
|
|
53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal—Syndicated loans
|
|
|
|
|
|
|
|
|
|
|
18,804
|
|
|
|
19,311
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Non-Control/Non-Affiliate Investments
|
|
|
|
|
|
|
|
|
|
$
|
242,058
|
|
|
$
|
216,612
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
85
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
|
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Class
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Held
|
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on a Fully
|
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Diluted
|
|
December 31, 2010
|
|
|
Company(1)
|
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Industry
|
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Investment
|
|
Basis
|
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Cost
|
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Fair Value
|
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|
CONTROL INVESTMENTS
|
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BERTL, Inc.
200 Craig Road
Manalapan, NJ 07726
|
|
Service-web-based evaluator
of digital imaging products
|
|
Line of
Credit(5)(6)
Common
Stock(5)(6)
|
|
|
100%
|
|
|
$
|
1,399
424
|
|
|
$
|
—
—
|
|
|
Defiance Acquisition Corp.
1090 Perry Street
Defiance, OH 43512
|
|
Manufacturing-trucking parts
|
|
Senior Term
Debt(2)(3)
Common
Stock(5)(6)
|
|
|
58.7%
|
|
|
|
8,245
1
|
|
|
|
8,245
4,512
|
|
|
Lindmark Acquisition, LLC
306 Lindmark Ave.
Purcell, OK 73080
|
|
Service-advertising
|
|
Senior Subordinated Term
Debt(3)(6)
Senior Subordinated Term
Debt(3)(6)
Senior Subordinated Term
Debt(3)(6)
Common
Stock(5)(6)
|
|
|
100%
|
|
|
|
10,000
2,000
1,874
317
|
|
|
|
4,500
900
843
—
|
|
|
LocalTel, LLC
360 Merrimack Street, Suite 216
Lawrence, MA 01843
|
|
Service-yellow pages publishing
|
|
Line of
Credit(5)(6)
Senior Term
Debt(5)(6)
Line of
Credit(5)(6)
Senior Term
Debt(5)(6)
Senior Term
Debt(2)(5)(6)
Common Stock
Warrants(5)(6)
|
|
|
40%
|
|
|
|
1,723
325
1,170
2,688
2,750
—
|
|
|
|
1,075
—
—
—
—
—
|
|
|
Midwest Metal Distribution, Inc.
6270 Van Buren Road
Clinton, OH 44216
|
|
Distribution-aluminum sheets
and stainless steel
|
|
Senior Subordinated Term
Debt(3)
Common
Stock(5)(6)
|
|
|
70.1%
|
|
|
|
18,256
138
|
|
|
|
15,813
—
|
|
|
U.S. Healthcare
Communications, Inc.
318 Cleveland Ave., Unit 1
|
|
Service-magazine publisher/
operator
|
|
Line of
Credit(5)(6)
Line of
Credit(5)(6)
Common
Stock(5)(6)
|
|
|
|
|
|
|
269
450
2,470
|
|
|
|
5
—
—
|
|
|
Highland Park, NJ 08904
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
Total Control Investments
|
|
|
|
|
|
|
|
|
|
$
|
54,499
|
|
|
$
|
35,893
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Investments
|
|
|
|
|
|
|
|
|
|
$
|
296,557
|
|
|
$
|
252,505
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Certain of the listed securities are issued by affiliate(s) of
the indicated portfolio
company. |
| |
|
(2) |
|
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. |
| |
|
(3) |
|
LOT of senior debt, meaning if the portfolio company is
liquidated, the holder of the LOT is
paid after the senior debt, however, the debt is also junior to
another LOT. |
| |
|
(4) |
|
Fair value was primarily based on opinions of value submitted by
Standard & Poor’s Securities
Evaluations, Inc. |
| |
|
(5) |
|
Security valued based on the indicative bid price on or near
September 30, 2010, offered by the
respective syndication agent’s trading desk or secondary
desk. |
| |
|
(6) |
|
Fair value was primarily based on the total enterprise value of
the portfolio company using a
liquidity waterfall approach. The Company also considered
discounted cash flow methodologies. |
| |
|
(7) |
|
Security is non-income producing. |
Significant
Portfolio Companies
Set forth below is a brief description of each portfolio company
in which we have made an investment that currently represents
greater than 5% of our total assets (excluding cash pledged to
creditors). Because of the relative size of our investments in
these companies, we are exposed to a greater degree to the risks
associated with these companies.
Sunshine
Media Holdings Corp.
We currently have invested approximately $30.4 million in
Sunshine Media Holdings Corp., which we refer to as Sunshine. We
invested in a senior term loan with a principal amount
outstanding of $16.9 million, a senior term last out
tranche loan with a principal amount outstanding of
$10.7 million, and a revolving credit facility of
$2.0 million, of which $0.4 million is currently
undrawn. Additionally, we have invested $0.4 million in
preferred
86
stock and we purchased common stock from existing shareholders
for $0.7 million. The maturity date for all of the loans
and the revolving credit facility is May 14, 2016.
Sunshine is a publisher of sponsored, custom publications for
145 organizations, such as community hospitals and financial
institutions. The company also publishes 83 regionally focused
business-to-business
targeted trade magazines focused on the medical, construction
and real estate fields.
Because of the relative size of this investment, we are
significantly exposed to the risks associated with
Sunshine’s business. In particular, Sunshine has
significant exposure to advertising cyclicality. Advertising
spending is a leading indicator of general economic health, and
the majority of Sunshine’s revenues are advertising-based.
There is a risk that poor performance of Sunshine’s end
market could impact spending on advertising and sponsorships,
which could have a material adverse impact on Sunshine and the
value of our investment in Sunshine.
Our Adviser’s managing director, Lud Kimbrough, and one of
our Adviser’s directors, Kipp Kranbuhl, are directors of
Sunshine. Sunshine’s principal executive offices are
located at 735 Broad St, Chattanooga, Tennessee 37402.
Reliable
Biopharmaceutical Holdings, Inc.
We currently have invested approximately $27.0 million in
Reliable Biopharmaceutical Holdings, Inc. and its subsidiaries,
which we refer to collectively as Reliable. We invested in a
senior term last out tranche loan with a principal amount
outstanding of $11.7 million, a senior subordinated term
loan with a principal amount outstanding of $6.0 million, a
mortgage note with a principal amount outstanding of
$7.2 million, a revolving credit facility of
$4.0 million, of which $1.9 million is currently
undrawn, and we purchased warrants for common stock for
$0.2 million. Each of the notes has a maturity date of
December 22, 2014 and the revolving credit facility has a
maturity date of January 30, 2013.
Reliable, based in St. Louis, Missouri, develops and
manufactures active pharmaceutical ingredients and high purity
processing chemicals used in the manufacture of pharmaceuticals
and biological products. Reliable’s products are the active
ingredients for leading generic injectable drugs that treat
cancer, heart disease, hypertension, anxiety and other serious
illnesses.
Because of the relative size of this investment, we are
significantly exposed to the risks associated with
Reliable’s business. In particular, Reliable is subject to
regulation and approvals by the Food & Drug
Administration, or FDA. Should Reliable fail to comply with FDA
regulations, it could have a material adverse impact on Reliable
and the value of our investment in Reliable.
Reliable’s principal executive offices are located at 1945
Walton Road, St. Louis, Missouri 63114.
Westlake
Hardware, Inc.
We currently have invested approximately $20.0 million in
Westlake Hardware, Inc., which we refer to as Westlake. We
invested in a senior subordinated term loan with a principal
amount outstanding of $12.0 million and a senior
subordinated term last out tranche loan with a principal amount
outstanding of $8.0 million, both maturing on
January 6, 2014.
Westlake is a business with a
100-year
history as a retailer of home hardware. Westlake is the largest
member of the ACE Hardware Corporation buying cooperative.
Westlake operates more than 85 retail locations, averaging
20,000 square feet each, in seven Midwestern states that
sell a variety of products and services to predominantly
“do-it-yourself,” or DIY, customers and some
professionals. Westlake has a strong brand name in the Midwest,
gained by providing customers quality products, a broad
selection and superior service in a neighborhood retail setting.
Because of the relative size of this investment, we are
significantly exposed to the risks associated with
Westlake’s business. Big-box retailers dominate the home
improvement market and have impacted Westlake’s revenue
growth historically. There is a risk that they may change
strategy and compete with stores like Westlake with smaller
stores similar to Westlake. In fact, Big-box retailers have been
doing this during the economic
87
downturn, but Westlake has had some success repositioning
itself as offering more knowledgeable staff (older and more
experienced with more training) who can offer guidance on a
range of home repairs and projects. Westlake plans on growing
through infill store growth and positioning itself as the
“neighborhood” store. Slowdown in the economy could
reduce personal incomes, leading to lower retail hardware
purchases if customers defer repairs.
The principal executive offices of Westlake are located at 14000
Marshall Drive, Lenexa, Kansas 66215.
Midwest
Metal Distribution, Inc.
We currently have invested approximately $18.4 million in
Midwest Metal Distribution, Inc., which we refer to as Midwest
Metal. We invested in a senior subordinated term loan with a
principal amount outstanding of $18.3 million, maturing on
July 31, 2013 and we purchased common stock for
$0.1 million.
Midwest Metal is a metal service center that supplies custom cut
aluminum sheet, plate, bar/extrusions, angle as well as
stainless steel. Midwest Metal has focused on serving customers
in the Midwest and Great Lakes region that require small batches
of custom cut metal, and
Just-in-time
(JIT) delivery service at competitive prices.
Because of the relative size of this investment, we are
significantly exposed to the risks associated with Midwest
Metal’s business. Midwest Metal is exposed to commodity
price risk in aluminum and stainless steel, which historically
have been substantially more volatile during the past three
years than in previous historical periods. Additionally, despite
a diversified customer base, a significant percentage of sales
are to customers in the auto industry, which has historically
been volatile and has undergone significant changes during the
recent recession. To overcome these risks, Midwest Metal
management will need to execute on offering competitively priced
metal enhanced by high value-added processing with a quick
turnaround.
Our vice chairman and chief operating officer, Terry Lee
Brubaker, one of our Adviser’s managing directors, Lud
Kimbrough, and one of our Adviser’s associates, Christopher
Seneta, are directors of Midwest Metal. The principal executive
offices of Midwest Metal are located at 6270 Van Buren Road,
Clinton, Ohio 44216.
88
MANAGEMENT
Our business and affairs are managed under the direction of our
Board of Directors. Our Board of Directors currently consists of
ten members, six of whom are not considered to be
“interested persons” of Gladstone Capital as defined
in Section 2(a)(19) of the 1940 Act. We refer to these
individuals as our independent directors. Our Board of Directors
elects our officers, who serve at the discretion of the Board of
Directors.
Board of
Directors
Under our articles of incorporation, our directors are divided
into three classes. Each class consists, as nearly as possible,
of one-third of the total number of directors, and each class
has a three year term. At each annual meeting of our
stockholders, the successors to the class of directors whose
term expires at such meeting will be elected to hold office for
a term expiring at the annual meeting of stockholders held in
the third year following the year of their election. Each
director will hold office for the term to which he or she is
elected and until his or her successor is duly elected and
qualifies. Information regarding our Board of Directors is as
follows (the address for each director is
c/o Gladstone
Capital Corporation, 1521 Westbranch Drive, Suite 200,
McLean, Virginia 22102):
| |
|
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|
|
|
|
|
|
|
|
|
Director
|
|
Expiration
|
|
Name
|
|
Age
|
|
Position
|
|
Since
|
|
of Term
|
|
|
|
Interested Directors
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
David Gladstone
|
|
|
68
|
|
|
Chairman of the Board and Chief Executive
Officer(1)(2)
|
|
|
2001
|
|
|
|
2013
|
|
|
Terry L. Brubaker
|
|
|
67
|
|
|
Vice Chairman, Chief Operating Officer, Secretary and
Director(1)(2)
|
|
|
2001
|
|
|
|
2012
|
|
|
George Stelljes III
|
|
|
49
|
|
|
President, Chief Investment Officer and
Director(1)
|
|
|
2003
|
|
|
|
2014
|
|
|
David A. R. Dullum
|
|
|
63
|
|
|
Director(1)
|
|
|
2001
|
|
|
|
2012
|
|
|
Independent Directors
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Anthony W. Parker
|
|
|
65
|
|
|
Director(2)(3)(6)
|
|
|
2001
|
|
|
|
2014
|
|
|
Michela A. English
|
|
|
61
|
|
|
Director(3)(6)
|
|
|
2002
|
|
|
|
2014
|
|
|
Paul W. Adelgren
|
|
|
68
|
|
|
Director(4)(5)(6)
|
|
|
2003
|
|
|
|
2013
|
|
|
John H. Outland
|
|
|
65
|
|
|
Director(4)(5)(6)
|
|
|
2003
|
|
|
|
2013
|
|
|
Gerard Mead
|
|
|
67
|
|
|
Director(3)(5)(6)
|
|
|
2005
|
|
|
|
2012
|
|
|
John Reilly
|
|
|
68
|
|
|
Director(3)(6)
|
|
|
2011
|
|
|
|
2012
|
|
|
|
|
|
(1) |
|
Interested person as defined in Section 2(a)(19) of the
1940 Act due to the director’s position as our officer
and/or employment by our Adviser. |
| |
|
(2) |
|
Member of the executive committee. |
| |
|
(3) |
|
Member of the audit committee. |
| |
|
(4) |
|
Member of the ethics, nominating, and corporate governance
committee. |
| |
|
(5) |
|
Member of the compensation committee. |
|
|
|
|
(6) |
|
Each independent director serves as an alternate member of each
committee for which they do not serve as a regular member.
Messrs. Adelgren and Outland serve as alternate members of
the audit committee; Messrs. Parker and Reilly and
Ms. English serve as alternates on the compensation
committee; and Messrs. Parker, Mead and Reilly and
Ms. English serve as alternates on the ethics, nominating
and corporate governance committee. Alternate members of the
committees serve and participate in meetings of the committees
only in the event of an absence of a regular member of the
committee. |
89
Executive
Officers Who Are Not Directors
Information regarding our executive officers who are not
directors is as follows (the address for each executive officer
is
c/o Gladstone
Capital Corporation, 1521 Westbranch Drive, Suite 200,
McLean, Virginia 22102):
| |
|
|
|
|
|
|
|
Name
|
|
Age
|
|
Position
|
|
|
|
David Watson
|
|
|
35
|
|
|
Chief Financial Officer
|
|
Gary Gerson
|
|
|
46
|
|
|
Treasurer
|
Independent
Directors (in alphabetical order)
Paul W. Adelgren. Mr. Adelgren has served
as a director since January 2003. Mr. Adelgren has also
served as a director of Gladstone Commercial since August 2003
and a director of Gladstone Investment since June 2005. From
1997 to the present, Mr. Adelgren has served as the pastor
of Missionary Alliance Church. From 1991 to 1997,
Mr. Adelgren was pastor of New Life Alliance Church. From
1988 to 1991, Mr. Adelgren was vice president —
finance and materials for Williams & Watts, Inc., a
logistics management and procurement business located in
Fairfield, NJ. Prior to joining Williams & Watts,
Mr. Adelgren served in the United States Navy, where he
served in a number of capacities, including as the director of
the Strategic Submarine Support Department, as an executive
officer at the Naval Supply Center, and as the director of the
Joint Uniform Military Pay System. He is a retired Navy Captain.
Mr. Adelgren holds an MBA from Harvard Business School and
a BA from the University of Kansas. Mr. Adelgren was
selected to serve as an independent director on our Board due to
his strength and experience in ethics, which also led to his
appointment to the chairmanship of our Ethics,
Nominating & Corporate Governance Committee, as well
as his past service on our Board since 2003.
Michela A. English. Ms. English has
served as director since June 2002. Ms. English is
President and CEO of Fight for Children, a non-profit charitable
organization focused on providing high quality education and
health care services to underserved youth in
Washington, D.C. Ms. English has also been a director
of Gladstone Commercial since August 2003, and a director of
Gladstone Investment since June 2005. From March 1996 to March
2004, Ms. English held several positions with Discovery
Communications, Inc., including president of Discovery Consumer
Products, president of Discovery Enterprises Worldwide and
president of Discovery.com. From 1991 to 1996, Ms. English
served as senior vice president of the National Geographic
Society and was a member of the National Geographic
Society’s Board of Trustees and Education Foundation Board.
Prior to 1991, Ms. English served as vice president,
corporate planning and business development for Marriott
Corporation and as a senior engagement manager for
McKinsey & Company. Ms. English currently serves
as director of the Educational Testing Service (ETS), as a
director of D.C. Preparatory Academy, a director of the District
of Columbia Public Education Fund, a director of the National
Women’s Health Resource Center, a member of the Advisory
Board of the Yale University School of Management, a director of
the Society for Science and the Public and as a member of the
Virginia Institute of Marine Science Council. Ms. English
is an emeritus member of the board of Sweet Briar College.
Ms. English holds a Bachelor of Arts in International
Affairs from Sweet Briar College and a Master of Public and
Private Management degree from Yale University’s School of
Management. Ms. English was selected to serve as an
independent director on our Board due to her greater than twenty
years of senior management experience at various corporations
and non-profit organizations as well as her past service on our
Board since 2002.
Gerard Mead. Mr. Mead has served as a
director since December 2005. Mr. Mead has also served as a
director of Gladstone Commercial and of Gladstone Investment
since December 2005. Mr. Mead is chairman of Gerard Mead
Capital Management, a firm which he founded in 2003 that
provides investment management services to pension funds,
endowments, insurance companies, and high net worth individuals.
From 1966 to 2003 Mr. Mead was employed by the Bethlehem
Steel Corporation, where he held a series of engineering,
corporate finance and investment positions with increasing
management responsibility. From 1987 to 2003 Mr. Mead
served as chairman and pension fund manager of the Pension Trust
of Bethlehem Steel Corporation and Subsidiary Companies. From
1972 to 1987 he served successively as investment analyst,
director of investment research, and trustee of the Pension
Trust, during which time he was also a corporate finance analyst
and investor relations contact for institutional investors of
Bethlehem Steel. Prior to that time Mr. Mead was a steel
plant engineer. Mr. Mead holds an MBA from the Harvard
Business School and a BSCE from Lehigh University. Mr. Mead
was selected to serve as an
90
independent director on our Board due to his more than forty
years of experience in various areas of the investment analysis
and management fields as well as his past service on our Board
since 2005.
John H. Outland. Mr. Outland has served
as a director since December 2003. Mr. Outland has also
served as a director of Gladstone Commercial since December 2003
and of Gladstone Investment since June 2005. From March 2004 to
June 2006, he served as vice president of Genworth Financial,
Inc. From 2002 to March 2004, Mr. Outland served as a
managing director for 1789 Capital Advisors, where he provided
market and transaction structure analysis and advice on a
consulting basis for multifamily commercial mortgage purchase
programs. From 1999 to 2001, Mr. Outland served as vice
president of mortgage-backed securities at Financial Guaranty
Insurance Company where he was team leader for bond insurance
transactions, responsible for sourcing business, coordinating
credit, loan files, due diligence and legal review processes,
and negotiating structure and business issues. From 1993 to
1999, Mr. Outland was senior vice president for Citicorp
Mortgage Securities, Inc., where he securitized non-conforming
mortgage product. From 1989 to 1993, Mr. Outland was vice
president of real estate and mortgage finance for Nomura
Securities International, Inc., where he performed due diligence
on and negotiated the financing of commercial mortgage packages
in preparation for securitization. Mr. Outland holds an MBA
from Harvard Business School and a bachelor’s degree in
Chemical Engineering from Georgia Institute of Technology.
Mr. Outland was selected to serve as an independent
director on our Board due to his more than twenty years of
experience in the real estate and mortgage industry as well as
his past service on our Board since 2003.
Anthony W. Parker. Mr. Parker has served
as a director since August 2001. Mr. Parker has also served
as a director of Gladstone Commercial since August 2003 and as a
director of Gladstone Investment since June 2005. In 1997
Mr. Parker founded Parker Tide Corp., formerly known as
Snell Professional Corp. Parker Tide Corp. is a government
contracting company providing mission critical solutions to the
Federal government. From 1992 to 1996, Mr. Parker was
chairman of, and a 50 percent stockholder of, Capitol
Resource Funding, Inc., or CRF, a commercial finance company.
Mr. Parker practiced corporate and tax law for over
15 years: from 1980 to 1983, he practiced at Verner,
Liipfert, Bernhard & McPherson and from 1983 to 1992,
in private practice. From 1973 to 1977, Mr. Parker served
as executive assistant to the administrator of the
U.S. Small Business Administration. Mr. Parker
received his J.D. and Masters in Tax Law from Georgetown Law
Center and his undergraduate degree from Harvard College.
Mr. Parker was selected to serve as an independent director
on our Board due to his expertise and wealth of experience in
the field of corporate taxation as well as his past service on
our Board since our inception. Mr. Parker’s knowledge
of corporate tax was instrumental in his appointment to the
chairmanship of our Audit Committee.
John Reilly. Mr. Reilly has served as a
director since January 2011. Mr. Reilly has also served as
a director of Gladstone Investment and Gladstone Commercial
since January 2011. From 1987 until the present, Mr. Reilly
has served as president of Reilly Investment Corporation, where
he provides advisory services to public and private companies,
and financing and joint venture development. From March 1976
until April 1984 he served as principal stockholder, president
and chief executive officer of Reilly Mortgage Group, Inc.,
where he provided origination and construction lending and
permanent loan placement of commercial real estate loans for
institutional investors. In 1988, Mr. Reilly assumed the
role of chairman. In 1994, Stonehurst Ventures, L.P., purchased
Reilly Mortgage Group, at which time he then assumed the role of
executive director. From 1971 to 1976, Mr. Reilly served as
vice president of Walker & Dunlop, Inc. where he
provided services for commercial loan originations, joint
ventures, HUD programs and secondary marketing. From 1967 to
1969, Mr. Reilly served as a research engineer for Crane
Company, and from 1964 to 1967 he served as a supply officer in
the United States Navy. Mr. Reilly also currently serves a
member of the board of directors of Beekman Helix India from
2009 to present, and is co-chairman of the board of directors
for Community Preservation and Development Corporation from 2006
until present. Mr. Reilly has held a D.C. real estate
broker license since 1973. Mr. Reilly is a graduate of
Mortgage Bankers School I, II and II and Income
School I and II. Mr. Reilly holds an MBA from Harvard
Business School and a Bachelor of Arts and a Bachelor of Science
in Mathematical Engineering from the University of Notre Dame.
Mr. Reilly was selected to serve as an independent director
on our Board due to his expertise and wealth of experience in
the real estate and mortgage industry.
Interested
Directors
David Gladstone. Mr. Gladstone is our
founder and has served as our chief executive officer and
chairman of our Board of Directors since our inception.
Mr. Gladstone is also the founder of our Adviser and has
served as its
91
chief executive officer and chairman of its board of directors
since its inception. Mr. Gladstone also founded and serves
as the chief executive officer and chairman of the boards of
directors of our affiliates, Gladstone Investment and Gladstone
Commercial. Prior to founding the Gladstone Companies,
Mr. Gladstone served as either chairman or vice chairman of
the board of directors of American Capital Strategies, Ltd., a
publicly traded leveraged buyout fund and mezzanine debt finance
company, from June 1997 to August 2001. From 1974 to February
1997, Mr. Gladstone held various positions, including
chairman and chief executive officer, with Allied Capital
Corporation (a mezzanine debt lender), Allied Capital
Corporation II (a subordinated debt lender), Allied Capital
Lending Corporation (a small business lending company), Allied
Capital Commercial Corporation (a real estate investment
company), and Allied Capital Advisers, Inc., a registered
investment adviser that managed the Allied companies. The Allied
companies were the largest group of publicly-traded mezzanine
debt funds in the United States and were managers of two
private venture capital limited partnerships (Allied Venture
Partnership and Allied Technology Partnership) and a private
REIT (Business Mortgage Investors). From 1992 to 1997,
Mr. Gladstone served as a director, president and chief
executive officer of Business Mortgage Investors, a privately
held mortgage REIT managed by Allied Capital Advisors, which
invested in loans to small and medium-sized businesses.
Mr. Gladstone is also a past director of Capital Automotive
REIT, a real estate investment trust that purchases and net
leases real estate to automobile dealerships. Mr. Gladstone
served as a director of The Riggs National Corporation (the
parent of Riggs Bank) from 1993 to May 1997 and of Riggs Bank
from 1991 to 1993. He has served as a trustee of The George
Washington University and currently is a trustee emeritus. He is
a past member of the Listings and Hearings Committee of the
National Association of Securities Dealers, Inc. He is a past
member of the advisory committee to the Women’s Growth
Capital Fund, a venture capital firm that finances women-owned
small businesses. Mr. Gladstone was the founder and
managing member of The Capital Investors, LLC, a group of angel
investors, and is currently a member emeritus. He is also the
past chairman and past owner of Coastal Berry Company, LLC, a
large strawberry farming operation in California. He is also the
chairman and owner of Gladstone Land Corporation, a privately
held company that has substantial farmland holdings in
agriculture real estate in California. Mr. Gladstone holds
an MBA from the Harvard Business School, an MA from American
University and a BA from the University of Virginia.
Mr. Gladstone has co-authored two books on financing for
small and medium-sized businesses, Venture Capital Handbook
and Venture Capital Investing. Mr. Gladstone was
selected to serve as a director on our Board due to the fact
that he is our founder and has greater than thirty years of
experience in the industry, including his service as our
chairman and chief executive since our inception.
Terry Lee Brubaker. Mr. Brubaker has been
our chief operating officer, secretary and a director since our
inception. He also served as our president from May 2001 through
April 2004, when he assumed the duties of vice chairman.
Mr. Brubaker has also served as a director of our Adviser
since its inception. He also served as president of our Adviser
from its inception through February 2006, when he assumed the
duties of vice chairman, chief operating officer and secretary.
He has served as vice chairman, chief operating officer,
secretary and as a director of Gladstone Investment since its
inception. Mr. Brubaker has also served chief operating
officer, secretary and as a director of Gladstone Commercial
since February 2003, and as president from February 2003 through
July 2007, when he assumed the duties of vice chairman. In March
1999, Mr. Brubaker founded and, until May 1, 2003,
served as chairman of Heads Up Systems, a company providing
process industries with leading edge technology. From 1996 to
1999, Mr. Brubaker served as vice president of the paper
group for the American Forest & Paper Association.
From 1992 to 1995, Mr. Brubaker served as president of
Interstate Resources, a pulp and paper company. From 1991 to
1992, Mr. Brubaker served as president of IRI, a radiation
measurement equipment manufacturer. From 1981 to 1991,
Mr. Brubaker held several management positions at James
River Corporation, a forest and paper company, including vice
president of strategic planning from 1981 to 1982, group vice
president of the Groveton Group and Premium Printing Papers from
1982 to 1990, and vice president of human resources development
in 1991. From 1976 to 1981, Mr. Brubaker was strategic
planning manager and marketing manager of white papers at Boise
Cascade. Previously, Mr. Brubaker was a senior engagement
manager at McKinsey & Company from 1972 to 1976. Prior
to 1972, Mr. Brubaker was a U.S. Navy fighter pilot.
Mr. Brubaker holds an MBA from the Harvard Business School
and a BSE from Princeton University. Mr. Brubaker was
selected to serve as a director on our Board due to his more
than thirty years of experience in various mid-level and senior
management positions at several corporations as well as his past
service on our Board since our inception.
George Stelljes III. Mr. Stelljes has
served as our chief investment officer since September 2002 and
a director from August 2001 to September 2002, and then rejoined
the Board of Directors in July 2003. He also served
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as our executive vice president from September 2002 through
April 2004, when he assumed the duties of president.
Mr. Stelljes has served as our Adviser’s chief
investment officer and a director of our Adviser since May 2003.
He also served as executive vice president of our Adviser until
February 2006, when he assumed the duties of president.
Mr. Stelljes has served as Gladstone Investment’s
chief investment officer and a director since inception.
Mr. Stelljes also served as Gladstone Investment’s
president from inception through April 2008, when he became a
vice chairman. Mr. Stelljes has served as chief investment
officer of Gladstone Commercial since February 2003, and as a
director since July 2007. He also served as executive vice
president of Gladstone Commercial from February 2003 through
July 2007, when he assumed the duties of president. Prior to
joining Gladstone Mr. Stelljes served as a managing member
of St. John’s Capital, a vehicle used to make private
equity investments. From 1999 to 2001, Mr. Stelljes was a
co-founder and managing member of Camden Partners and Cahill
Warnock & Company, private equity firms which finance
high growth companies in the communications, education,
healthcare, and business services sectors. From 1997 to 1999,
Mr. Stelljes was a managing director and partner of
Columbia Capital, a venture capital firm focused on investments
in communications and information technology. From 1989 to 1997,
Mr. Stelljes held various positions, including executive
vice president and principal, with the Allied companies.
Mr. Stelljes serves as a general partner and investment
committee member of Patriot Capital and Patriot Capital II,
private equity funds, and serves on the board of Intrepid
Capital Management, a money management firm. He is also a former
board member and regional president of the National Association
of Small Business Investment Companies. Mr. Stelljes holds
an MBA from the University of Virginia and a BA in Economics
from Vanderbilt University. Mr. Stelljes was selected to
serve as a director on our Board due to his more than twenty
years of experience in the investment analysis, management, and
advisory industries as well as his past service on our Board
since 2003.
David A. R. Dullum. Mr. Dullum has served
as a director since August 2001. Mr. Dullum has been a
senior managing director of our Adviser since February 2008, a
director of Gladstone Commercial since August 2003, and a
director of Gladstone Investment since June 2005 and has served
as Gladstone Investment’s president since April 2008.
From 1995 through June 2009, Mr. Dullum was a partner of
New England Partners, a venture capital firm focused on
investments in small and medium-sized business in the
Mid-Atlantic and New England regions. From May 2005 to May 2008,
Mr. Dullum served as the President and a director of Harbor
Acquisition Corporation, an operating business with emphasis in
the consumer and industrial sectors. From 1976 to 1990,
Mr. Dullum was a managing general partner of Frontenac
Company, a Chicago-based venture capital firm. Mr. Dullum
holds an MBA from Stanford Graduate School of Business and a BME
from the Georgia Institute of Technology. Mr. Dullum was
selected to serve as a director on our Board due to his more
than thirty years of experience in various areas of the
investment industry as well as his past service on our Board
since our inception.
Executive
Officers Who Are Not Directors
David Watson. Mr. Watson has served as
our chief financial officer since January 2011 and has served as
the chief financial officer of Gladstone Investment since
January 2010. Prior to joining our company, from July 2007 until
January 2010, Mr. Watson was Director of Portfolio
Accounting of MCG Capital Corporation. Mr. Watson was
employed by Capital Advisory Services, LLC, which subsequently
joined Navigant Consulting, Inc., where he held various
positions providing finance and accounting consulting services
from 2001 to 2007. Prior to that, Mr. Watson was an auditor
at Deloitte and Touche. He received a BS from Washington and Lee
University, an MBA from the University of Maryland’s Smith
School of Business, and is a licensed CPA in the Commonwealth of
Virginia.
Gary Gerson. Mr. Gerson has served as our
treasurer since April 2006. Mr. Gerson has also served as
treasurer of Gladstone Investment and Gladstone Commercial since
April 2006 and of our Adviser since May 2006. From 2004 to early
2006, Mr. Gerson was assistant vice president of finance at
the Bozzuto Group, a real estate developer, manager and owner,
where he was responsible for the financing of multi-family and
for-sale residential projects. From 1995 to 2004 he held various
finance positions, including director, finance from 2000 to
2004, at PG&E National Energy Group where he led, and
assisted in, the financing of power generation assets.
Mr. Gerson holds an MBA from the Yale School of Management,
a B.S. in mechanical engineering from the U.S. Naval
Academy, and is a CFA charter holder and is a licensed CPA in
the Commonwealth of Virginia.
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Employment
Agreements
We are not a party to any employment agreements.
Messrs. Gladstone, Brubaker and Stelljes have entered into
employment agreements with our Adviser, whereby they are direct
employees of our Adviser. The employment agreement of
Mr. Stelljes provides for his nomination to serve as our
chief investment officer.
Director
Independence
As required under NASDAQ listing standards, our Board of
Directors annually determines each director’s independence,
and continually assesses the independence of each of the
directors throughout the year. The NASDAQ listing standards
provide that a director of a business development company is
considered to be independent if he or she is not an
“interested person” of ours, as defined in
Section 2(a)(19) of the 1940 Act. Section 2(a)(19) of
the 1940 Act defines an “interested person” to
include, among other things, any person who has, or within the
last two years had, a material business or professional
relationship with us.
Consistent with these considerations, after review of all
relevant transactions or relationships between each director, or
any of his or her family members, and us, our senior management
and our independent auditors, the Board has affirmatively
determined that the following six directors are independent
directors within the meaning of the applicable NASDAQ listing
standards: Messrs. Adelgren, Mead, Outland, Parker and
Reilly and Ms. English. In making this determination, the
Board found that none of the these directors or nominees for
director had a material or other disqualifying relationship with
us. Mr. Gladstone, the chairman of our Board of Directors
and chief executive officer, Mr. Brubaker, our vice
chairman, chief operating officer and secretary,
Mr. Stelljes, our president and chief investment officer,
and Mr. Dullum, a senior managing director of our Adviser,
are not independent directors by virtue of their positions as
our officers or as officers of our Adviser or their employment
by our Adviser.
Corporate
Leadership Structure
Since our inception, Mr. Gladstone has served as chairman
of our Board and our chief executive officer. Our Board believes
that our chief executive officer is best situated to serve as
chairman because he is the director most familiar with our
business and industry, and most capable of effectively
identifying strategic priorities and leading the discussion and
execution of strategy. In addition, Mr. Adelgren, one of
our independent directors, serves as the lead director for all
meetings of our independent directors held in executive session.
The lead director has the responsibility of presiding at all
executive sessions of our Board, consulting with the chairman
and chief executive officer on Board and committee meeting
agendas, acting as a liaison between management and the
independent directors and facilitating teamwork and
communication between the independent directors and management.
Our Board believes the combined role of chairman and chief
executive officer, together with an independent Lead Director,
is in the best interest of stockholders because it provides the
appropriate balance between strategic development and
independent oversight of risk management. In coming to this
conclusion, the Board considered the importance of having an
interested chairperson that is familiar with our
day-to-day
management activities, our portfolio companies and the
operations of our Adviser. The Board concluded that the combined
role enhances, among other things, the Board’s
understanding of our investment portfolio, business, finances
and risk management efforts. In addition, the Board believes
that Mr. Gladstone’s employment by the Adviser better
allows for the efficient mobilization of the Adviser’s
resources at the Board’s behest and on its behalf.
Committees
of Our Board of Directors
Executive Committee. Membership of our
executive committee is comprised of Messrs. Gladstone,
Brubaker and Parker. The executive committee has the authority
to exercise all powers of our Board of Directors except for
actions that must be taken by a majority of independent
directors or the full Board of Directors under the Maryland
General Corporation Law, including electing our chairman and
president. Mr. Gladstone serves as chairman of the
executive committee. The executive committee did not meet during
the last fiscal year.
Audit Committee. The Audit Committee of our
Board oversees our corporate accounting and financial reporting
process. For this purpose, the Audit Committee performs several
functions. The Audit Committee evaluates the performance of and
assesses the qualifications of the independent registered public
accounting firm;
94
determines and approves the engagement of the independent
registered public accounting firm; determines whether to retain
or terminate the existing independent registered public
accounting firm or to appoint and engage a new independent
registered public accounting firm; reviews and approves the
retention of the independent registered public accounting firm
to perform any proposed permissible non-audit services; monitors
the rotation of partners of the independent registered public
accounting firm on our audit engagement team as required by law;
confers with management and the independent registered public
accounting firm regarding the effectiveness of internal controls
over financial reporting; establishes procedures, as required
under applicable law, for the receipt, retention and treatment
of complaints received by us regarding accounting, internal
accounting controls or auditing matters and the confidential and
anonymous submission by employees of concerns regarding
questionable accounting or auditing matters; and meets to review
our annual audited financial statements and quarterly financial
statements with management and the independent registered public
accounting firm, including reviewing our disclosures under
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations.” During fiscal 2010,
the Audit Committee was comprised of Messrs. Parker
(Chairman) and Mead and Ms. English. Messrs. Adelgren,
Outland, and Maurice Coulon served as alternate members of the
Audit Committee during the fiscal year ended September 30,
2010. Mr. Coulon resigned from the Board, effective
September 30, 2010 and, effective January 2011,
Mr. Reilly was appointed to the Audit Committee. Alternate
members of the Audit Committee serve and participate in meetings
of the Audit Committee only in the event of an absence of a
regular member of the Audit Committee. The Audit Committee met
eight times during the last fiscal year. The Audit Committee has
adopted a written charter that is available to stockholders on
our website at www.gladstonecapital.com.
Compensation Committee. The Compensation
Committee operates pursuant to a written charter that is
available to stockholders on our website at
www.gladstonecapital.com. The Compensation Committee conducts
periodic reviews of the Advisory Agreement and the
Administration Agreement to evaluate whether the fees paid to
our Adviser and our Administrator under the agreements are in
the best interests of us and our stockholders. The committee
considers in such periodic reviews, among other things, whether
the salaries and bonuses paid to our executive officers by our
Adviser and our Administrator are consistent with our
compensation philosophies, whether the performance of our
Adviser and our Administrator are reasonable in relation to the
nature and quality of services performed and whether the
provisions of the Advisory and Administration Agreements are
being satisfactorily performed. The Compensation Committee also
reviews with management our Compensation Discussion and Analysis
and to consider whether to recommend that it be included in
proxy statements and other filings. During the last fiscal year,
the Compensation Committee was comprised of Messrs. Coulon
(Chairperson), Outland and Mead. Messrs. Adelgren and
Parker and Ms. English served as alternate members of the
Compensation Committee. Mr. Coulon’s resignation from
the Board and the Compensation Committee was effective
September 30, 2010. On August 31, 2010, the Board, by
unanimous written consent, appointed Mr. Adelgren to the
Compensation Committee and named Mr. Outland its Chairman,
with each such appointment effective September 30, 2010.
Mr. Reilly joined the Board of Directors in January 2011
and he, Mr. Parker and Ms. English are the current
alternate members of the Compensation Committee. Alternate
members of the Compensation Committee serve and participate in
meetings of the Compensation Committee only in the event of an
absence of a regular member of the Compensation Committee. The
Compensation Committee met four times during the last fiscal
year. The Compensation Committee has adopted a written charter
that is available to stockholders on our website at
www.gladstonecapital.com.
Ethics, Nominating and Corporate Governance
Committee. The Ethics, Nominating and Corporate
Governance Committee of our Board is responsible for
identifying, reviewing and evaluating candidates to serve as our
directors (consistent with criteria approved by our Board),
reviewing and evaluating incumbent directors, recommending to
our Board for selection candidates for election to our Board,
making recommendations to our Board regarding the membership of
the committees of our Board, assessing the performance of our
Board, and developing our corporate governance principles. Our
Ethics, Nominating and Corporate Governance Committee charter
can be found on our website at www.gladstonecapital.com.
During fiscal 2010, membership of the Ethics, Nominating and
Corporate Governance Committee was comprised of
Messrs. Adelgren (Chairperson) and Coulon.
Messrs. Outland, Mead and Parker and Ms. English
served as alternate members of the committee during fiscal 2010.
Mr. Coulon’s resignation from the Board and the
Ethics, Nominating and Corporate Governance Committee was
effective September 30, 2010. On August 31, 2010, the
Board, by unanimous written consent, appointed Mr. Outland
to the committee, effective September 30, 2010.
Messrs. Mead, Parker and Reilly and Ms. English serve
as the current
95
alternate members of the committee. Alternate members of the
Ethics, Nominating and Corporate Governance Committee serve and
participate in meetings of the committee only in the event of an
absence of a regular member of the committee. Each member of the
Ethics, Nominating and Corporate Governance Committee is
independent (as independence is currently defined in
Rule 5605(a)(2) of the NASDAQ listing standards). The
Ethics, Nominating and Corporate Governance Committee met four
times during the last fiscal year. The Ethics, Nominating and
Corporate Governance Committee has adopted a written charter
that is available to stockholders on our website at
www.gladstonecapital.com.
Qualifications for Director Candidates. The
Ethics, Nominating and Corporate Governance Committee believes
that candidates for director should have certain minimum
qualifications, including being able to read and understand
basic financial statements, being over 21 years of age and
having the highest personal integrity and ethics. The Ethics,
Nominating and Corporate Governance Committee also considers
such factors as possessing relevant expertise upon which to be
able to offer advice and guidance to management, having
sufficient time to devote to our affairs, demonstrated
excellence in his or her field, having the ability to exercise
sound business judgment and having the commitment to rigorously
represent the long-term interests of our stockholders. However,
the Ethics, Nominating and Corporate Governance Committee
retains the right to modify these qualifications from time to
time. Candidates for director nominees are reviewed in the
context of the current composition of our Board, our operating
requirements and the long-term interests of our stockholders.
Though we have no formal policy addressing diversity, the
Ethics, Nominating and Corporate Governance Committee and Board
believe that diversity is an important attribute of directors
and that our Board should be the culmination of an array of
backgrounds and experiences and be capable of articulating a
variety of viewpoints. Accordingly, the Ethics, Nominating and
Corporate Governance Committee considers in its review of
director nominees factors such as values, disciplines, ethics,
age, gender, race, culture, expertise, background and skills,
all in the context of an assessment of the perceived needs of us
and our Board at that point in time in order to maintain a
balance of knowledge, experience and capability.
In the case of incumbent directors whose terms of office are set
to expire, the Ethics, Nominating and Corporate Governance
Committee reviews such directors’ overall service to us
during their term, including the number of meetings attended,
level of participation, quality of performance, and any other
relationships and transactions that might impair such
directors’ independence. In the case of new director
candidates, the Ethics, Nominating and Corporate Governance
Committee also determines whether such new nominee must be
independent for NASDAQ purposes, which determination is based
upon applicable NASDAQ listing standards, applicable SEC rules
and regulations and the advice of counsel, if necessary. The
Ethics, Nominating and Corporate Governance Committee then uses
its network of contacts to compile a list of potential
candidates, but may also engage, if it deems appropriate, a
professional search firm. The Ethics, Nominating and Corporate
Governance Committee conducts any appropriate and necessary
inquiries into the backgrounds and qualifications of possible
candidates after considering the function and needs of our
Board. The Ethics, Nominating and Corporate Governance Committee
meets to discuss and consider such candidates’
qualifications and then selects a nominee for recommendation to
our Board by majority vote. To date, the Ethics, Nominating and
Corporate Governance Committee has not paid a fee to any third
party to assist in the process of identifying or evaluating
director candidates.
Nominations made by stockholders must be made by written notice
(setting forth the information required by our bylaws) received
by the secretary of our company at least 120 days in
advance of an annual meeting or within 10 days of the date
on which notice of a special meeting for the election of
directors is first given to our stockholders.
Meetings. During the fiscal year ended
September 30, 2010, each member of our Board of Directors
attended 75% or more of the aggregate of the meetings of our
Board of Directors and of the committees on which he or she
served.
Oversight
of Risk Management
Since September 2007, Jack Dellafiora has served as our chief
compliance officer and, in that position, Mr. Dellafiora
directly oversees our enterprise risk management function and
reports to our chief executive officer, the Audit Committee and
our Board in this capacity. In fulfilling his risk management
responsibilities, Mr. Dellafiora
96
works closely with our internal counsel and other members of
senior management including, among others, our chief executive
officer, chief financial officer, chief investment officer and
chief operating officer.
Our Board, in its entirety, plays an active role in overseeing
management of our risks. Our Board regularly reviews information
regarding our credit, liquidity and operations, as well as the
risks associated with each. Each committee of our Board plays a
distinct role with respect to overseeing management of our risks:
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Audit Committee: Our Audit Committee oversees the management of
enterprise risks. To this end, our Audit Committee meets at
least annually (i) to discuss our risk management
guidelines, policies and exposures and (ii) with our
independent registered public accounting firm to review our
internal control environment and other risk exposures.
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Compensation Committee: Our Compensation Committee oversees the
management of risks relating to the fees paid to our Adviser and
Administrator under the Advisory Agreement and the
Administration Agreement, respectively. In fulfillment of this
duty, the Compensation Committee meets at least annually to
review these agreements. In addition, the Compensation Committee
reviews the performance of our Adviser to determine whether the
compensation paid to our executive officers was reasonable in
relation to the nature and quality of services performed and
whether the provisions of the Advisory Agreement were being
satisfactorily performed.
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Ethics, Nominating and Corporate Governance Committee: Our
Ethics, Nominating and Corporate Governance Committee manages
risks associated with the independence of our Board and
potential conflicts of interest.
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While each committee is responsible for evaluating certain risks
and overseeing the management of such risks, the committees each
report to our Board on a regular basis to apprise our Board
regarding the status of remediation efforts of known risks and
of any new risks that may have arisen since the previous report.
Summary
of Compensation
Executive
Compensation
None of our executive officers receive direct compensation from
us. We do not currently have any employees and do not expect to
have any employees in the foreseeable future. The services
necessary for the operation of our business are provided to us
by our officers and the other employees of our Adviser and
Administrator, pursuant to the terms of the Advisory and
Administration Agreements, respectively. Mr. Gladstone, our
chairman and chief executive officer, Mr. Brubaker, our
vice chairman, chief operating officer and secretary, and
Mr. Stelljes, our president and chief investment officer,
are all employees of and compensated directly by our Adviser.
Our chief financial officer and our treasurer are employees of
our Administrator. Under the Administration Agreement, we
reimbursed our Administrator for our allocable portion of the
salaries of Mr. Gerson, our treasurer, and Mr. Gray,
our former chief financial officer. For the year ended
September 30, 2010, our allocable portion of
Mr. Gray’s compensation paid by our Administrator was:
$46,748 of Mr. Gray’s salary, $6,167 of his bonus, and
$5,883 of the cost of his benefits. For the year ended
September 30, 2009, our allocable portion of
Mr. Gray’s compensation paid by our Administrator was:
$50,161 of Mr. Gray’s salary, $6,692 of his bonus, and
$8,483 of the cost of his benefits. Mr. Gray was appointed
as our chief financial officer on April 8, 2008. From that
date through September 30, 2008, $25,201 of
Mr. Gray’s salary, $4,259 of his bonus, and $2,579 of
the cost of his benefits were paid by our Administrator.
Compensation
of Directors
The following table shows, for the fiscal year ended
September 30, 2010, compensation awarded to or paid to our
directors who are not executive officers, which we refer to as
our non-employee directors, for all services rendered to us
during this period. No compensation is paid to directors who are
our executive officers for their
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service on the Board of Directors. We do not issue stock
options and therefore have no information to report relating to
stock option grants and exercises for our directors.
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Total
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Compensation
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from Fund and
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Aggregate
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Fund Complex
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Compensation
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Paid to
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Name
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from Fund ($)
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Directors
($)(1)
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Paul W. Adelgren
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$
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29,000
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$
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87,000
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Maurice W.
Coulon(2)
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$
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33,000
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$
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99,000
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Michela A. English
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$
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32,000
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$
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96,000
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Gerard Mead
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$
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36,000
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$
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108,000
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John H. Outland
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$
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28,000
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$
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84,000
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Anthony W. Parker
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$
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35,500
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$
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105,000
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(1) |
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Includes compensation the director received from Gladstone
Investment, as part of our Fund Complex. Also includes
compensation the director received from Gladstone Commercial,
our affiliate and a real estate investment trust, although not
part of our Fund Complex. |
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(2) |
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Mr. Coulon resigned from the Board effective as of
September 30, 2010. |
As compensation for serving on our Board of Directors, each of
our independent directors receives an annual fee of $20,000, an
additional $1,000 for each Board of Directors meeting attended,
and an additional $1,000 for each committee meeting attended if
such committee meeting takes place on a day other than when the
full Board of Directors meets. In addition, the chairperson of
the Audit Committee receives an annual fee of $3,000, and the
chairpersons of each of the Compensation and Ethics, Nominating
and Corporate Governance committees receive annual fees of
$1,000 for their additional services in these capacities. During
the fiscal year ended September 30, 2010, the total cash
compensation paid to non-employee directors was $193,500. We
also reimburse our directors for their reasonable
out-of-pocket
expenses incurred in attending Board of Directors and committee
meetings.
We do not pay any compensation to directors who also serve as
our officers, or as officers or directors of our Adviser or our
Administrator, in consideration for their service to us. Our
Board of Directors may change the compensation of our
independent directors in its discretion. None of our independent
directors received any compensation from us during the fiscal
year ended September 30, 2010 other than for Board of
Directors or committee service and meeting fees.
Certain
Transactions
Investment
Advisory and Management Agreement
Management
Services
Our Adviser is a Delaware corporation registered as an
investment adviser under the Investment Advisers Act of 1940, as
amended. Subject to the overall supervision of our Board of
Directors, our Adviser provides investment advisory and
management services to us. Under the terms of our Advisory
Agreement, our Adviser has investment discretion with respect to
our capital and, in that regard:
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determines the composition of our portfolio, the nature and
timing of the changes to our portfolio, and the manner of
implementing such changes;
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•
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identifies, evaluates, and negotiates the structure of the
investments we make (including performing due diligence on our
prospective portfolio companies);
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•
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closes and monitors the investments we make; and
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makes available on our behalf, and provides if requested,
managerial assistance to our portfolio companies.
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Our Adviser’s services under the Advisory Agreement are not
exclusive, and it is free to furnish similar services to other
entities so long as its services to us are not impaired.
98
Portfolio
Management
Our Adviser takes a team approach to portfolio management;
however, the following persons are primarily responsible for the
day-to-day
management of our portfolio and comprise our Adviser’s
investment committee: David Gladstone, Terry Lee Brubaker and
George Stelljes III, whom we refer to collectively as the
Portfolio Managers. Our investment decisions are made on our
behalf by the investment committee of our Adviser by unanimous
decision.
Mr. Gladstone has served as the chairman and the chief
executive officer of our Adviser, since he founded the Adviser
in 2002, along with Mr. Brubaker and Mr. Stelljes.
Mr. Brubaker has served as the vice chairman, chief
operating officer and secretary of our Adviser since 2002.
Mr. Stelljes has served as the president and chief
investment officer of our Adviser since 2002. For more complete
biographical information on Messrs. Gladstone, Brubaker and
Stelljes, please see “Management — Interested
Directors.”
The Portfolio Managers are all officers or directors, or both,
of our Adviser and our Administrator. David Gladstone is the
controlling stockholder of our Adviser, which is the sole member
of our Administrator. Although we believe that the terms of the
Advisory Agreement are no less favorable to us than those that
could be obtained from unaffiliated third parties in arms’
length transactions, our Adviser and its officers and its
directors have a material interest in the terms of this
agreement. Based on an analysis of publicly available
information, the Board believes that the terms and the fees
payable under the Advisory Agreement are similar to those of the
agreements between other business development companies that do
not maintain equity incentive plans and their external
investment advisers.
Our Adviser provides investment advisory services to other
investment funds in the Gladstone Companies. As such, the
Portfolio Managers also are primarily responsible for the
day-to-day
management of the portfolios of other pooled investment vehicles
in the Gladstone Companies that are managed by our Adviser. As
of the date hereof, Messrs. Gladstone, Brubaker, and
Stelljes are primarily responsible for the
day-to-day
management of the portfolios of Gladstone Investment, another
publicly-traded business development company, Gladstone
Commercial, a publicly-traded real estate investment trust, and
Gladstone Land Corporation, a private company controlled by
Mr. Gladstone that owns farmland in California. As of
September 30, 2010, our Adviser had an aggregate of
approximately $902 million in total assets under management.
Possible
Conflicts of Interest
Our portfolio managers provide investment advisory services and
serve as officers, directors or principals of the other
Gladstone Companies, which operate in the same or a related line
of business as we do. Accordingly, they have corresponding
obligations to investors in those entities. For example,
Mr. Gladstone, our chairman and chief executive officer, is
chairman of the board and chief executive officer of our
Adviser, Gladstone Investment, Gladstone Commercial, and
Gladstone Land with management responsibilities for the other
members of the Gladstone Companies. In addition,
Mr. Brubaker, our vice chairman, chief operating officer
and secretary, is vice chairman, chief operating officer and
secretary of our Adviser, Gladstone Investment and Gladstone
Commercial, and Mr. Stelljes, our president and chief
investment officer, is president and chief investment officer of
our Adviser and Gladstone Commercial and vice chairman and chief
investment officer of Gladstone Investment. Moreover, we may
establish other investment vehicles which from time to time may
have potentially overlapping investment objectives with those of
Gladstone Investment and accordingly may invest in, whether
principally or secondarily, asset classes similar to those
targeted by us. While the Adviser generally has broad authority
to make investments on behalf of the investment vehicles that it
advises, our Adviser has adopted investment allocation
procedures to address these potential conflicts and intends to
direct investment opportunities to the member of the Gladstone
Companies with the investment strategy that most closely fits
the investment opportunity. Nevertheless, the portfolio managers
may face conflicts in the allocation of investment opportunities
to other entities managed by our Adviser. As a result, it is
possible that certain investment opportunities may not be
available to other members of the Gladstone Companies or
investment funds managed by our Adviser. When the officers of
the Adviser identify an investment, they will be forced to
choose which investment fund should make the investment in
accordance with their investment allocation procedures.
Our affiliate, Gladstone Commercial, may lease property to
portfolio companies that we do not control under certain
circumstances. We may pursue such transactions only if
(i) the portfolio company is not controlled by us or any of
our affiliates, (ii) the portfolio company satisfies the
tenant underwriting criteria that meets the lease
99
underwriting criteria of Gladstone Commercial, and
(iii) the transaction is approved by a majority of our
independent directors and a majority of the independent
directors of Gladstone Commercial. We expect that any such
negotiations between Gladstone Commercial and our portfolio
companies would result in lease terms consistent with the terms
that the portfolio companies would be likely to receive were
they not portfolio companies of ours. Additionally, we may make
simultaneous investments in senior syndicated loans with our
affiliate, Gladstone Investment. In this regard, our Adviser has
adopted allocation procedures designed to ensure fair and
equitable allocations of such investments.
Portfolio
Manager Compensation
The portfolio managers receive compensation from our Adviser in
the form of a base salary plus a bonus. Each of the portfolio
managers’ base salaries is determined by a review of salary
surveys for persons with comparable experience who are serving
in comparable capacities in the industry. Each portfolio
manager’s base salary is set and reviewed yearly. Like all
employees of the Adviser, a portfolio manager’s bonus is
tied to the performance of the Adviser and the entities that it
advises. A portfolio manager’s bonus increases or decreases
when the Adviser’s income increases or decreases. The
Adviser’s income, in turn, is directly tied to the
management and performance fees earned in managing its
investment funds, including the Company. Pursuant to the
Advisory Agreement, the Adviser receives an incentive fee based
on net investment income in excess of the hurdle rates and
capital gains as set out in the Advisory Agreement.
All compensation of the portfolio managers from the Adviser
takes the form of cash. The portfolio managers are also
portfolio managers for other members of the Gladstone Companies,
one of which (Gladstone Commercial) had a stock option plan
through which the portfolio managers have previously received
options to purchase stock of those entities. Gladstone
Commercial terminated its stock option plan effective
December 31, 2006. We also previously had a stock option
plan, but it was terminated effective September 30, 2006.
These plan terminations were effected in connection with the
implementation of new advisory agreements between each of us and
Gladstone Commercial with our Adviser, which have been approved
by our respective stockholders. All outstanding, unexercised
options under our plan were terminated effective
September 30, 2006, and all outstanding, unexercised
options under the Gladstone Commercial plan were terminated
effective December 31, 2006.
Investment
Advisory and Management Agreement and Administration
Agreement
We are externally managed pursuant to contractual arrangements
with our Adviser, under which our Adviser has directly employed
our personnel and paid our payroll, benefits, and general
expenses directly. The management services and fees in effect
under the Advisory Agreement are described below. In addition,
we pay our direct expenses including, but not limited to,
directors’ fees, legal and accounting fees and stockholder
related expenses under the Advisory Agreement.
The principal executive office of each of the Adviser and the
Administrator is located at 1521 Westbranch Drive,
Suite 200, McLean, Virginia 22102.
Management
services and fees under the Advisory Agreement
Under the Advisory Agreement, we pay our Adviser an annual base
management fee of 2% of our average gross assets, which 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
two most recently completed calendar quarters, and appropriately
adjusted for any share issuances or repurchases during the
current calendar quarter.
We also pay our Adviser a two-part incentive fee under the
Advisory Agreement. The first part of the incentive fee is an
income-based incentive fee which rewards our Adviser if our
quarterly net investment income (before giving effect to any
incentive fee) exceeds the hurdle rate. We pay our Adviser an
income-based incentive fee with respect to our pre-incentive fee
net investment income in each calendar quarter as follows:
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no incentive fee in any calendar quarter in which our
pre-incentive fee net investment income does not exceed the
hurdle rate (7% annualized);
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100
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•
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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
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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).
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Quarterly
Incentive Fee Based on Net Investment Income
Pre-incentive
fee net investment income
(expressed as a percentage of the value of net assets)
Percentage
of pre-incentive fee net investment income
allocated to income-based portion of incentive fee
The second part of the incentive fee is a capital gains-based
incentive fee that is 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), 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 our
Adviser, we calculate the cumulative aggregate realized capital
gains and cumulative aggregate realized capital losses since our
inception, and the aggregate 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
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 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.
Beginning in April 2006, our Board of Directors has accepted
from the Adviser unconditional and irrevocable voluntary waivers
on a quarterly basis 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 syndicated loan participations. These waivers were
applied through December 31, 2010, and any waived fees may
not be recouped by our Adviser in the future.
When our Adviser receives fees from our portfolio companies,
such as investment banking fees, structuring fees or executive
recruiting services fees, 50% or 100% of certain of these fees
will be credited against the base management fee that we would
otherwise be required to pay to our Adviser.
We pay our direct expenses including, but not limited to,
directors’ fees, legal and accounting fees,
stockholder-related expenses, and directors and officers
insurance under the Advisory Agreement.
During the fiscal year ended September 30, 2010, we
incurred total fees of approximately $4,076,000 to our Adviser
under the Advisory Agreement. During the fiscal year ended
September 30, 2009, we incurred total fees of
101
approximately $1,651,000 to our Adviser under the Advisory
Agreement. During the fiscal year ended September 30, 2008,
we incurred total fees of approximately $126,000 to our Adviser
under the Advisory Agreement.
Duration
and Termination
Unless terminated earlier as described below, the Advisory
Agreement will remain in effect from year to year if approved
annually by our Board of Directors or by the affirmative vote of
the holders of a majority of our outstanding voting securities,
including, in either case, approval by a majority of our
directors who are not interested persons. On July 7, 2010,
we renewed the Advisory Agreement through August 31, 2011.
The Advisory Agreement will automatically terminate in the event
of its assignment. The Advisory Agreement may be terminated by
either party without penalty upon 60 days’ written
notice to the other. See “Risk Factors — We are
dependent upon our key management personnel and the key
management personnel of our Adviser, particularly David
Gladstone, George Stelljes III and Terry Lee Brubaker, and
on the continued operations of our Adviser, for our future
success.”
Administration
Agreement
Pursuant to the Administration Agreement, our Administrator
furnishes us with clerical, bookkeeping and record keeping
services and our Administrator also performs, or oversees the
performance of, our required administrative services, which
include, among other things, being responsible for the financial
records which we are required to maintain and preparing reports
to our stockholders and reports filed with the SEC. In addition,
our Administrator assists us in determining and publishing our
net asset value, oversees the preparation and filing of our tax
returns, the printing and dissemination of reports to our
stockholders, and generally oversees the payment of our expenses
and the performance of administrative and professional services
rendered to us by others. Payments under the Administration
Agreement are equal to an amount based upon our allocable
portion of our Administrator’s overhead in performing its
obligations under the Administration Agreement, including rent
and our allocable portion of the salaries and benefits expenses
of our chief financial officer, chief compliance officer,
internal counsel, controller, treasurer and their respective
staffs. On July 7, 2010, we renewed the Administration
Agreement through August 31, 2011.
During the fiscal year ended September 30, 2010, we paid
total fees of approximately $807,000 to our Administrator under
the Administration Agreement. During the fiscal year ended
September 30, 2009, we incurred total fees of approximately
$872,000 to our Administrator under the Administration
Agreement. During the fiscal year ended September 30, 2008,
we incurred total fees of approximately $985,000 to our
Administrator under the Administration Agreement.
Based on an analysis of publicly available information, the
Board believes that the terms and the fees payable under the
Advisory and Administration Agreements are similar to those of
the agreements between other business development companies that
do not maintain equity incentive plans and their external
investment advisers. David Gladstone, Terry Lee Brubaker, George
Stelljes III and Gary Gerson are all officers or directors,
or both, of our Adviser and our Administrator. David Gladstone
is the controlling stockholder of our Adviser, which is the sole
member of our Administrator. Although we believe that the terms
of the Advisory and Administration Agreements are no less
favorable to us than those that could be obtained from
unaffiliated third parties in arms’ length transactions,
our Adviser and its officers and its directors have a material
interest in the terms of these agreements.
Consulting
Services Agreements
As a business development company, we make available significant
managerial assistance to our portfolio companies and provide
other services to such portfolio companies. Neither we nor our
Adviser currently receives fees in connection with managerial
assistance. Our Adviser provides other services to our portfolio
companies and receives fees for these other services.
On October 25, 2010, our Adviser received a payment of
$277,015 from Lindmark Acquisition, LLC, or Lindmark, a
wholly-owned portfolio company of ours which we own through one
of our wholly-owned subsidiaries, Lindmark Holdings Corp., in
connection with the performance of certain consulting services
rendered from March 18, 2009 through March 31, 2010
pursuant to that certain Consulting Agreement between our
Adviser and Lindmark, effective October 10, 2010 and that
certain Engagement Letter Agreement between our Adviser and
102
Lindmark Outdoor Advertising, LLC, dated November 19,
2009. Beginning with April 1, 2010, Lindmark has received
current invoices and has remitted payment for such in a timely
manner. Payments for services rendered beginning April 1,
2010 and ending September 30, 2010 have totaled $40,000.
On October 29, 2010, our Adviser received a payment of
$213,191 from BERTL, Inc., or Bertl, one of our wholly-owned
portfolio companies, in connection with the performance of
certain consulting services rendered from March 19, 2009
through June 30, 2010 pursuant to that certain Engagement
Letter Agreement, dated March 19, 2009 between Bertl and
our Adviser. Beginning with the quarter ended September 30,
2010, Bertl has received current quarterly invoices from our
Adviser for the provision of such services and has paid current
through the quarter ended September 30, 2010. The amount
paid to our Adviser for the quarter ended September 30,
2010 was $7,800.
Loan
Servicing Agreement
Our Adviser services the loans pledged under our credit facility
pursuant to a loan servicing agreement with our wholly-owned
subsidiary, Business Loan, in return for a 1.5% annual fee,
based on the monthly aggregate outstanding loan balance of the
loans pledged under our credit facility. Loan servicing fees
paid to our Adviser under this agreement directly reduce the
amount of fees payable under the Advisory Agreement. Loan
servicing fees of approximately $3,412,000 $5,620,000 and
$6,117,000 were incurred for the fiscal year ended
September 30, 2010, 2009 and 2008, respectively, all of
which were directly credited against the amount of the base
management fee due to our Adviser under the Advisory Agreement.
Loans
At September 30, 2010, we had a loan outstanding in the
principal amount of $5,900,010 to Mr. Gladstone, which was
due and payable in cash on August 23, 2010 and, because the
loan was not repaid on its due date, it is currently in default.
This loan was originally extended in connection with the
exercise of stock options by Mr. Gladstone under our former
Amended and Restated 2001 Equity Incentive Plan, as amended, or
the 2001 Plan, which was terminated on September 30, 2006,
and the loan was made on terms available to all eligible
participants under the 2001 Plan. The loan is evidenced by a
full recourse promissory note secured by the shares of common
stock purchased upon the exercise of the options as well as
additional collateral. The interest rate on the loan is 4.9% per
annum, plus an additional 2.0% per annum for periods following
the date of default. Interest is due quarterly and
Mr. Gladstone has made each of his quarterly interest
payments to date. The Sarbanes-Oxley Act of 2002 prohibits us
from making loans to our executive officers, although certain
loans outstanding prior to July 30, 2002, including the
promissory note we received from Mr. Gladstone, were
expressly exempted from this prohibition.
Also at September 30, 2010, we had two loans outstanding in
the principal amounts of $275,010 and $474,990, respectively, to
Laura Gladstone, a managing director of ours and the daughter of
Mr. Gladstone. The outstanding principal amount of the
$275,010 loan was originally due on August 23, 2010 and,
because the loan was not repaid on its due date, it is now in
default. The outstanding principal amount of the $474,990 loan
is due on July 13, 2015. These loans were issued in
connection with the exercise of stock options under the 2001
Plan by Ms. Gladstone, and were made on terms available to
all eligible participants under the 2001 Plan. These loans are
evidenced by full recourse promissory notes and are secured by
the shares of common stock purchased upon the exercise of the
options as well as additional collateral. The interest rate on
the $275,010 loan is 4.9% per annum, plus an additional 2.0% per
annum for periods following the date of default. The interest
rate on the $474,990 loan is 8.26% per annum. Interest on the
loans is due quarterly and Ms. Gladstone has made each of
her quarterly interest payments to date with respect to both
loans. Mr. Gladstone has not received, nor will he receive
in the future, any direct or indirect benefit from these loans.
On July 9, 2008, our Board voted to require
Mr. Gladstone and Ms. Gladstone to post additional
collateral for each of these loans to satisfy the requirement of
the 1940 Act that the loans be fully collateralized at all
times, which collateral was subsequently posted by
Mr. Gladstone and Ms. Gladstone.
On September 7, 2010, each of Mr. Gladstone and
Ms. Gladstone executed a redemption agreement with us, each
of which provides that, pursuant to the terms and conditions
thereof, we will automatically accept and retire the shares of
our common stock pledged as collateral for their loans in
partial or full satisfaction, as applicable, of
103
Mr. Gladstone’s or Ms. Gladstone’s
obligations to us under the loans that are in default 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
promissory notes and related pledge agreements, including but
not limited to the ability to foreclose on the shares of common
stock pledged as collateral for the loans, or additional pledged
collateral, at any time.
Indemnification
In our articles of incorporation and bylaws, we have agreed to
indemnify certain officers and directors by providing, among
other things, that we will indemnify such officer or director,
under the circumstances and to the extent provided for therein,
for expenses, damages, judgments, fines and settlements he or
she may be required to pay in actions or proceedings which he or
she is or may be made a party by reason of his or her position
as our director, officer or other agent, to the fullest extent
permitted under Maryland law and our bylaws. Notwithstanding the
foregoing, the indemnification provisions shall not protect any
officer or director from liability to us or our stockholders as
a result of any action that would constitute willful
misfeasance, bad faith or gross negligence in the performance of
such officer’s or director’s duties, or reckless
disregard of his or her obligations and duties.
Each of the Advisory and Administration Agreements provide that,
absent willful misfeasance, bad faith or gross negligence in the
performance of their duties or by reason of the reckless
disregard of their duties and obligations (as the same may be
determined in accordance with the 1940 Act and any
interpretations or guidance by the SEC or its staff thereunder),
our Adviser, our Administrator and their respective officers,
managers, agents, employees, controlling persons, members and
any other person or entity affiliated with them are entitled to
indemnification from us for any damages, liabilities, costs and
expenses (including reasonable attorneys’ fees and amounts
reasonably paid in settlement) arising from the rendering of our
Adviser’s or Administrator’s services under the
Advisory or Administration Agreements or otherwise as an
investment adviser of ours.
104
CONTROL
PERSONS AND PRINCIPAL STOCKHOLDERS
The following table sets forth, as of March 14, 2011
(unless otherwise indicated), the beneficial ownership of each
current director, each of the executive officers, the executive
officers and directors as a group and each stockholder known to
our management to own beneficially more than 5% of the
outstanding shares of common stock. Except as otherwise noted,
the address of the individuals below is
c/o Gladstone
Capital Corporation, 1521 Westbranch Drive, Suite 200,
McLean, VA 22102.
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Beneficial
Ownership(1)
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Aggregate
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Dollar Range
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of Equity Securities
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of all Funds
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Overseen by
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Dollar Range of
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Directors and
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Equity Securities of
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Executive Officers
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the Company Owned
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in Family of
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Number of
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Percent of
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by Directors and
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Investment
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Name and Address
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Shares
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Total
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Executive
Officers(2)
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Companies(2)(3)
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Executive Officers and Directors:
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David Gladstone
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1,005,428
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4.8
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%
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Over $100,000
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Over $100,000
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Terry Lee
Brubaker(4)
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197,471
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1.0
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%
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Over $100,000
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Over $100,000
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George Stelljes III
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15,353
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*
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Over $100,000
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Over $100,000
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David Watson
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0
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*
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None
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$10,001 - $50,000
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Gary Gerson
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150
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*
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$1 - $10,000
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$10,001 - $50,000
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Anthony W. Parker
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6,270
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*
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$50,001 - $100,000
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Over $100,000
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David A.R.
Dullum(5)
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4,000
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*
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$10,001 - $50,000
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Over $100,000
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Michela A. English
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3,500
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*
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$10,001 - $50,000
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$50,001 - $100,000
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Paul W. Adelgren
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3,378
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*
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$10,001 - $50,000
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Over $100,000
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John H. Outland
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1,287
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*
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$10,001 - $50,000
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$50,001 - $100,000
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Gerard Mead
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3,099
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*
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$10,001 - $50,000
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Over $100,000
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John Reilly
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3,400
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*
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$10,001 - $50,000
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Over $100,000
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All executive officers and directors as a group (12 persons)
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1,243,336
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6.0
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%
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N/A
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N/A
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(1) |
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This table is based upon information supplied by officers,
directors and principal stockholders. Unless otherwise indicated
in the footnotes to this table and subject to community property
laws where applicable, we believe that each of the stockholders
named in this table has sole voting and sole investment power
with respect to the shares indicated as beneficially owned.
Applicable percentages are based on 21,039,242 shares
outstanding on March 14, 2011. |
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(2) |
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Ownership calculated in accordance with
Rule 16a-1(a)(2)
of the Exchange Act. The dollar range of our equity securities
beneficially owned is calculated by multiplying the closing
price of Common Stock as reported on The Nasdaq Global Select
Market as of March 14, 2011, times the number of shares
beneficially owned. |
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(3) |
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Each of our directors and executive officers, is also a director
or executive officer, or both, of Gladstone Investment
Corporation, our affiliate and a business development company,
and Gladstone Commercial Corporation, our affiliate and a real
estate investment trust, each of which is also externally
managed by our Adviser. |
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(4) |
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Includes 75,114 shares owned by Mr. Brubaker’s
spouse with respect to which Mr. Brubaker disclaims
beneficial ownership. |
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(5) |
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Includes 2,000 shares owned by Mr. Dullum’s
spouse with respect to which Mr. Dullum disclaims
beneficial ownership. |
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DIVIDEND
REINVESTMENT PLAN
We have adopted a dividend reinvestment plan that provides for
reinvestment of our distributions on behalf of our stockholders
upon their election as provided below. As a result, if our Board
of Directors authorizes, and we declare, a cash dividend, then
our stockholders who have “opted in” to our dividend
reinvestment plan will not receive cash dividends but, instead,
such cash dividends will automatically be reinvested in
additional shares of our common stock.
Pursuant to our dividend reinvestment plan, if your shares of
our common stock are registered in your own name you can have
all distributions reinvested in additional shares of our common
stock by BNY Mellon Shareowner Services, the plan agent, if you
enroll in the dividend reinvestment plan by delivering an
authorization form to the plan agent prior to the corresponding
dividend declaration date. The plan agent will effect purchases
of our common stock under the dividend reinvestment plan in the
open market. If you do not elect to participate in the dividend
reinvestment plan, you will receive all distributions in cash
paid by check mailed directly to you (or if you hold your shares
in street or other nominee name, then to your nominee) as of the
relevant record date, by the plan agent, as our dividend
disbursing agent. If your shares are held in the name of a
broker or nominee or if you are transferring such an account to
a new broker or nominee, you should contact the broker or
nominee to determine whether and how they may participate in the
dividend reinvestment plan.
The plan agent serves as agent for the holders of our common
stock in administering the dividend reinvestment plan. After we
declare a dividend, the plan agent will, as agent for the
participants, receive the cash payment and use it to buy common
stock on The Nasdaq Global Select Market or elsewhere for the
participants’ accounts. The price of the shares will be the
average market price at which such shares were purchased by the
plan agent.
Participants in the dividend reinvestment plan may withdraw from
the dividend reinvestment plan upon written notice to the plan
agent. Such withdrawal will be effective immediately if received
not less than ten days prior to a dividend record date;
otherwise, it will be effective the day after the related
dividend distribution date. When a participant withdraws from
the dividend reinvestment plan or upon termination of the
dividend reinvestment plan as provided below, certificates for
whole shares of common stock credited to his or her account
under the dividend reinvestment plan will be issued and a cash
payment will be made for any fractional share of common stock
credited to such account.
The plan agent will maintain each participant’s account in
the dividend reinvestment plan and will furnish monthly written
confirmations of all transactions in such account, including
information needed by the stockholder for personal and tax
records. Common stock in the account of each dividend
reinvestment plan participant will be held by the plan agent in
non-certificated form in the name of such participant. Proxy
materials relating to our stockholders’ meetings will
include those shares purchased as well as shares held pursuant
to the dividend reinvestment plan.
In the case of participants who beneficially own shares that are
held in the name of banks, brokers or other nominees, the plan
agent will administer the dividend reinvestment plan on the
basis of the number of shares of common stock certified from
time to time by the record holders as the amount held for the
account of such beneficial owners. Shares of our common stock
may be purchased by the plan agent through any of the
underwriters, acting as broker or dealer.
We pay the plan agent’s fees for the handling or
reinvestment of dividends and other distributions. Each
participant in the dividend reinvestment plan pays a pro rata
share of brokerage commissions incurred with respect to the plan
agent’s open market purchases in connection with the
reinvestment of distributions. There are no other charges to
participants for reinvesting distributions.
Distributions are taxable whether paid in cash or reinvested in
additional shares, and the reinvestment of distributions
pursuant to the dividend reinvestment plan will not relieve
participants of any U.S. federal income tax or state income
tax that may be payable or required to be withheld on such
distributions. For more information regarding taxes that our
stockholders may be required to pay, see “Material
U.S. Federal Income Tax Considerations.”
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Experience under the dividend reinvestment plan may indicate
that changes are desirable. Accordingly, we reserve the right to
amend or terminate the dividend reinvestment plan as applied to
any distribution paid subsequent to written notice of the change
sent to participants in the dividend reinvestment plan at least
90 days before the record date for the distribution. The
dividend reinvestment plan also may be amended or terminated by
the plan agent with our prior written consent, on at least
90 days’ written notice to participants in the
dividend reinvestment plan. All correspondence concerning the
reinvestment plan should be directed to the plan agent, BNY
Mellon Shareowner Services, by mail at 480 Washington Boulevard,
Jersey City, NJ 07310 or by phone at
800-274-2944.
MATERIAL
U.S. FEDERAL INCOME TAX CONSIDERATIONS
Regulated
Investment Company Status
In order to maintain our qualification for treatment as a RIC
under Subchapter M of the Code, we generally must distribute to
our stockholders, for each taxable year, at least 90% of our
investment company taxable income, which is generally our
ordinary income plus short-term capital gains. We refer to this
as the annual distribution requirement. We must also meet
several additional requirements, including:
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Business Development Company Status. At all
times during each taxable year, we must maintain our status as a
business development company;
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Income source requirements. At least 90% of
our gross income for each taxable year must be from dividends,
interest, payments with respect to securities loans, gains from
sales or other dispositions of securities or other income
derived with respect to our business of investing in securities,
and net income derived from an interest in a qualified publicly
traded partnership; and
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Asset diversification requirements. As of the
close of each quarter of our taxable year: (1) at least 50%
of the value of our assets must consist of cash, cash items,
U.S. government securities, the securities of other
regulated investment companies and other securities to the
extent that (a) we do not hold more than 10% of the
outstanding voting securities of an issuer of such other
securities and (b) such other securities of any one issuer
do not represent more than 5% of our total assets, and
(2) no more than 25% of the value of our total assets may
be invested in the securities of one issuer (other than
U.S. government securities or the securities of other
regulated investment companies), or of two or more issuers that
are controlled by us and are engaged in the same or similar or
related trades or businesses or in the securities of one or more
qualified publicly traded partnerships.
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Failure to Qualify as a RIC. If we are unable
to qualify for treatment as a RIC, we will be subject to tax on
all of our taxable income at regular corporate rates. We would
not be able to deduct distributions to stockholders, nor would
we be required to make such distributions. Distributions would
be taxable to our stockholders as dividend income to the extent
of our current and accumulated earnings and profits. Subject to
certain limitations under the Code, corporate distributees would
be eligible for the dividends received deduction. Distributions
in excess of our current and accumulated earnings and profits
would be treated first as a return of capital to the extent of
the stockholder’s tax basis, and then as a gain realized
from the sale or exchange of property. If we fail to meet the
RIC requirements for more than two consecutive years and then
seek to requalify as a RIC, we would be required to recognize a
gain to the extent of any unrealized appreciation on our assets
unless we make a special election to pay corporate-level tax on
any such unrealized appreciation recognized during the
succeeding
10-year
period. Absent such special election, any gain we recognized
would be deemed distributed to our stockholders as a taxable
distribution.
Qualification as a RIC. If we qualify as a RIC
and distribute to stockholders each year in a timely manner at
least 90% of our investment company taxable income, we will not
be subject to federal income tax on the portion of our taxable
income and gains we distribute to stockholders. We would,
however, be subject to a 4% nondeductible federal excise tax if
we do not distribute, actually or on a deemed basis, 98% of our
ordinary income and 98.2% of our capital gain net income. The
excise tax would apply only to the amount by which 98% of our
ordinary income or 98.2% of our capital gain net income exceeds
the amount of income we distribute, actually or on a deemed
basis, to stockholders. We will be subject to regular corporate
income tax, currently at rates up to 35%, on any undistributed
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income, including both ordinary income and capital gains. We
intend to retain some or all of our capital gains, but to
designate the retained amount as a deemed distribution. In that
case, among other consequences, we will pay tax on the retained
amount, each stockholder will be required to include its share
of the deemed distribution in income as if it had been actually
distributed to the stockholder and the stockholder will be
entitled to claim a credit or refund equal to its allocable
share of the tax we pay on the retained capital gain. The amount
of the deemed distribution net of such tax will be added to the
stockholder’s cost basis for its common stock. Since we
expect to pay tax on any retained capital gains at our regular
corporate capital gain tax rate, and since that rate is in
excess of the maximum rate currently payable by individuals on
long-term capital gains, the amount of tax that individual
stockholders will be treated as having paid will exceed the tax
they owe on the capital gain dividend and such excess may be
claimed as a credit or refund against the stockholder’s
other tax obligations. A stockholder that is not subject to
U.S. federal income tax or tax on long-term capital gains
would be required to file a U.S. federal income tax return
on the appropriate form in order to claim a refund for the taxes
we paid. We will also be subject to alternative minimum tax, but
any tax preference items would be apportioned between us and our
stockholders in the same proportion that distributions, other
than capital gain dividends, paid to each stockholder bear to
our taxable income determined without regard to the dividends
paid deduction.
From time to time, we acquire debt obligations that are issued
at a discount, which may include loans we make that are
accompanied by warrants, that bear interest at rates that are
not either fixed rates or certain qualified variable rates or
that are not unconditionally payable at least annually over the
life of the obligation. In such cases, we are required to
include in taxable income each year a portion of the original
issue discount, or OID, that accrues over the life of the
obligation. Such OID is included in our investment company
taxable income even though we receive no cash corresponding to
such discount amount. As a result, we may be required to make
additional distributions corresponding to such OID amounts in
order to satisfy the annual distribution requirement and to
continue to qualify as a RIC or to avoid the 4% excise tax. This
could mean that we may be required to sell temporary investments
or other assets to meet the RIC distribution requirements.
Taxation
of Our U.S. Stockholders
Distributions. For any period during which we
qualify for treatment as a RIC for federal income tax purposes,
distributions to our stockholders attributable to our investment
company taxable income generally will be taxable as ordinary
income to stockholders to the extent of our current or
accumulated earnings and profits. Any distributions in excess of
our earnings and profits will first be treated as a return of
capital to the extent of the stockholder’s adjusted basis
in his or her shares of common stock and thereafter as gain from
the sale of shares of our common stock. Distributions of our
long-term capital gains, designated by us as such, will be
taxable to stockholders as long-term capital gains regardless of
the stockholder’s holding period for its common stock and
whether the distributions are paid in cash or invested in
additional common stock. Corporate stockholders are generally
eligible for the 70% dividends received deduction with respect
to ordinary income, but not with respect to capital gain
dividends to the extent such amount designated by us does not
exceed the dividends received by us from domestic corporations.
Any dividend declared by us in October, November or December of
any calendar year, payable to stockholders of record on a
specified date in such a month and actually paid during January
of the following year, will be treated as if it were paid by us
and received by the stockholders on December 31 of the previous
year. In addition, we may elect to relate a dividend back to the
prior taxable year if we (1) declare such dividend prior to
the 15th
day of the
9th month
following the close of that taxable year, or any applicable
extended due date of our tax return for such prior taxable year
(2) make the election in that tax return, and
(3) distribute such amount in the
12-month
period following the close of the taxable year but not later
than our first payment of the same type of dividend following
such declaration. Any such election will not alter the general
rule that a stockholder will be treated as receiving a dividend
in the taxable year in which the dividend is made, subject to
the October, November, December rule described above.
In general, the tax rates applicable to our dividends other than
dividends designated as capital gain dividends will be the
standard ordinary income tax rates, and not the lower federal
income tax rate applicable to “qualified dividend
income.” If we distribute dividends that are attributable
to actual dividend income received by us that is eligible to be,
and is, designated by us as qualified dividend income, such
dividends would be eligible for such lower federal income tax
rate. For this purpose, “qualified dividend income”
means dividends received by us from
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United States corporations and qualifying foreign
corporations, provided that both we and the stockholder
recipient of our dividends satisfy certain holding period and
other requirements in respect of our shares (in the case of our
stockholder) and the stock of such corporations (in our case).
However, we do not anticipate receiving or distributing a
significant amount of qualified dividend income.
If a stockholder participates in our dividend reinvestment plan,
any dividends reinvested under the plan will be taxable to the
stockholder to the same extent, and with the same character, as
if the stockholder had received the dividend in cash. The
stockholder will have an adjusted basis in the additional common
shares purchased through the plan equal to the amount of the
reinvested dividend. The additional shares will have a new
holding period commencing on the day following the day on which
the shares are credited to the stockholder’s account.
Sale of Our Shares. A U.S. stockholder
generally will recognize taxable gain or loss if the
U.S. stockholder sells or otherwise disposes of his, her or
its shares of our common stock. Any gain arising from such sale
or disposition generally will be treated as long-term capital
gain or loss if the U.S. stockholder has held his, her or
its shares for more than one year. Otherwise, it will be
classified as short-term capital gain or loss. However, any
capital loss arising from the sale or disposition of shares of
our common stock held for six months or less will be treated as
long-term capital loss to the extent of the amount of capital
gain dividends received, or undistributed capital gain deemed
received, with respect to such shares. Under the tax laws in
effect as of the date of this prospectus, individual
U.S. stockholders are subject to a maximum federal income
tax rate of 15% on their net capital gain (i.e., the
excess of realized net long-term capital gain over realized net
short-term capital loss for a taxable year) including any
long-term capital gain derived from an investment in our shares.
Such rate is lower than the maximum rate on ordinary income
currently payable by individuals. Corporate
U.S. stockholders currently are subject to federal income
tax on net capital gain at the same rates applied to their
ordinary income (currently up to a maximum of 35%). Capital
losses are subject to limitations on use for both corporate and
non-corporate stockholders.
Backup Withholding. We may be required to
withhold federal income tax, or backup withholding, currently at
a rate of 28%, from all taxable dividends to any non-corporate
U.S. stockholder (1) who fails to furnish us with a
correct taxpayer identification number or a certificate that
such stockholder is exempt from backup withholding, or
(2) with respect to whom the Internal Revenue Service, or
IRS, notifies us that such stockholder has failed to properly
report certain interest and dividend income to the IRS and to
respond to notices to that effect. An individual’s taxpayer
identification number is generally his or her social security
number. Any amount withheld under backup withholding is allowed
as a credit against the U.S. stockholder’s federal
income tax liability, provided that proper information is
provided to the IRS.
REGULATION AS
A BUSINESS DEVELOPMENT COMPANY
We are a closed-end, non-diversified management investment
company that has elected to be regulated as a business
development company under Section 54 of the 1940 Act. As
such, we are subject to regulation under the 1940 Act. The 1940
Act contains prohibitions and restrictions relating to
transactions between business development companies and their
affiliates, principal underwriters and affiliates of those
affiliates or underwriters and requires that a majority of the
directors be persons other than “interested persons,”
as defined in the 1940 Act. In addition, the 1940 Act provides
that we may not change the nature of our business so as to cease
to be, or to withdraw our election as, a business development
company unless approved by a majority of our outstanding voting
securities, as defined in the 1940 Act.
We intend to conduct our business so as to retain our status as
a business development company. A business development company
may use capital provided by public stockholders and from other
sources to invest in long-term private investments in
businesses. A business development company provides stockholders
the ability to retain the liquidity of a publicly traded stock
while sharing in the possible benefits, if any, of investing in
primarily privately owned companies. In general, a business
development company must have been organized and have its
principal place of business in the United States and must be
operated for the purpose of making certain types of investments
in assets described in
Sections 55(a)(1)-(3)
of the 1940 Act.
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Qualifying
Assets
Under the 1940 Act, a business development company may not
acquire any asset other than assets of the type listed in
Section 55(a) of the 1940 Act, which are referred to as
qualifying assets, unless, at the time the acquisition is made,
qualifying assets, other than assets defined in
Section 55(a)(7) (“operating assets”), which
includes certain interests in furniture, equipment, real estate,
or leasehold improvements, represent at least 70% of the
company’s total assets, exclusive of operating assets. The
types of qualifying assets in which we may invest under the 1940
Act include, but are not limited to, the following:
(1) Securities purchased in transactions not involving any
public offering from the issuer of such securities, which issuer
is an eligible portfolio company. An eligible portfolio company
is generally defined in the 1940 Act as any issuer which:
(a) is organized under the laws of, and has its principal
place of business in, any state or states in the United States;
(b) is not an investment company (other than a small
business investment company wholly owned by the business
development company) or otherwise excluded from the definition
of investment company; and
(c) satisfies one of the following:
(i) it does not have any class of securities with respect
to which a broker or dealer may extend margin credit;
(ii) it is controlled by the business development company,
alone or as part of a group, and the business development
company in fact exercises a controlling influence over the
management or policies of the portfolio company and, as a result
of such control, has an affiliated person who is a director of
the portfolio company;
(iii) it has total assets of not more than $4 million
and capital and surplus of not less than $2 million;
(iv) it does not have any class of securities listed on a
national securities exchange; or
(v) it has a class of securities listed on a national
securities exchange, with an aggregate market value of
outstanding voting and non-voting equity of less than
$250 million.
(2) Securities received in exchange for or distributed on
or with respect to securities described in (1) above, or
pursuant to the exercise of options, warrants or rights relating
to such securities.
(3) Cash, cash items, government securities or high quality
debt securities maturing in one year or less from the time of
investment.
Asset
Coverage
We are permitted, under specified conditions, to issue multiple
classes of indebtedness and one class of stock senior to our
common stock if our asset coverage, as defined in the 1940 Act,
is at least 200% immediately after each such issuance. In
addition, while senior securities are outstanding, we must make
provisions to prohibit any distribution to our stockholders or
the repurchase of such securities or shares unless we meet the
applicable asset coverage ratios at the time of the distribution
or repurchase. We may also borrow amounts up to 5% of the value
of our total assets for temporary purposes. The 1940 Act
requires, among other things, that (1) immediately after
issuance and before any dividend or distribution is made with
respect to our common stock or before any purchase of our common
stock is made, the involuntary liquidation preference of any
outstanding preferred stock, together with all other senior
securities, must not exceed an amount equal to 50% of our total
assets after deducting the amount of such dividend, distribution
or purchase price, as the case may be, and (2) the holders
of shares of preferred stock, if any are issued, must be
entitled as a class to elect two directors at all times and to
elect a majority of the directors if dividends on the preferred
stock are in arrears by two years or more.
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Significant
Managerial Assistance
A business development company generally must make available
significant managerial assistance to issuers of certain of its
portfolio securities that the business development company
counts as a qualifying asset for the 70% test described above.
Making available significant managerial assistance means, among
other things, any arrangement whereby the business development
company, through its directors, officers or employees, offers to
provide, and, if accepted, does so provide, significant guidance
and counsel concerning the management, operations or business
objectives and policies of a portfolio company. Significant
managerial assistance also includes the exercise of a
controlling influence over the management and policies of the
portfolio company. However, with respect to certain, but not all
such securities, where the business development company
purchases such securities in conjunction with one or more other
persons acting together, one of the other persons in the group
may make available such managerial assistance, or the business
development company may exercise such control jointly.
Investment
Policies
We seek to achieve a high level of current income and capital
gains through investments in debt securities and preferred and
common stock that we acquired in connection with buyout and
other recapitalizations. The following investment policies may
not be changed without the approval of our Board of Directors:
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We will at all times conduct our business so as to retain our
status as a business development company. In order to retain
that status we must continue to meet the definition of business
development company contained in the 1940 Act, which requires
us, among other things, to be operated for the purpose of
investing in certain categories of qualifying assets. In
addition, we may not acquire any assets (other than operating
assets or qualifying assets) if, after giving effect to such
acquisition, the value of our “qualifying assets,”
less our operating assets, is less than 70% of the value of our
total assets (excluding our operating assets). We anticipate
that the securities we seek to acquire, as well as temporary
investments, will generally be qualifying assets.
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We will at all times endeavor to conduct our business so as to
retain our status as a regulated investment company under the
Code. In order to do so, we must meet income source, asset
diversification and annual distribution requirements. We may
issue senior securities, such as debt or preferred stock, to the
extent permitted by the 1940 Act for the purpose of making
investments, to fund share repurchases, or for temporary
emergency or other purposes.
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With the exception of our policy to conduct our business as a
business development company, these policies are not fundamental
and may be changed without stockholder approval.
Pending
Exemptive Application
We have filed an exemptive application with the SEC. The
exemptive request, if granted by the SEC, would permit us, under
certain circumstances, to co-invest with other business
development companies that are managed by the Adviser. There are
no assurances that the SEC will grant our exemptive request.
DESCRIPTION
OF OUR SECURITIES
Our authorized capital stock consists of 50,000,000 shares
of capital stock, $0.001 par value per share, all of which
is currently designated as common stock. Under our articles of
incorporation, our Board of Directors is authorized to classify
and reclassify any unissued shares of capital stock without
requiring stockholder approval. The following summary
description of our capital stock is not necessarily complete and
is subject to, and qualified in its entirety by, our articles of
incorporation. Please review our articles of incorporation for a
more detailed description of the provisions summarized below.
Common
Stock
All shares of our common stock have equal rights as to earnings,
assets, dividends and voting privileges and, when issued, will
be duly authorized, validly issued, fully paid and
nonassessable. Distributions may be paid to the
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holders of our common stock if, as and when declared by our
Board of Directors out of funds legally available therefor.
Shares of our common stock have no preemptive, conversion or
redemption rights and are freely transferable, except where
their transfer is restricted by federal and state securities
laws. In the event of our liquidation, dissolution or winding
up, each share of our common stock is entitled to share ratably
in all of our assets that are legally available for distribution
after we pay all debts and other liabilities and subject to any
preferential rights of holders of our preferred stock, if any is
outstanding at the time. Each share of our common stock is
entitled to one vote and does not have cumulative voting rights,
which means that holders of a majority of such shares, if they
so choose, could elect all of the directors, and holders of less
than a majority of such shares would, in that case, be unable to
elect any director. Our common stock is listed on The Nasdaq
Global Select Market under the ticker symbol “GLAD.”
Senior
Common Stock and Preferred Stock
Our articles of incorporation give the Board of Directors the
authority, without further action by stockholders, to issue
shares of “senior common stock” or preferred stock,
which we refer to collectively as Senior Equity Securities, in
one or more series and to fix the rights, preferences,
privileges, qualifications and restrictions granted to or
imposed upon such Senior Equity Securities, including dividend
rights, conversion rights, voting rights, rights and terms of
redemption, and liquidation preference, any or all of which may
be greater than the rights of the common stock. Thus, the Board
of Directors could authorize the issuance of shares of Senior
Equity Securities with terms and conditions which could have the
effect of delaying, deferring or preventing a transaction or a
change in control that might involve a premium price for holders
of our common stock or otherwise be in their best interest. The
issuance of Senior Equity Securities could adversely affect the
voting power of holders of common stock and reduce the
likelihood that such holders will receive dividend payments and
payments upon liquidation, and could also decrease the market
price of our common stock.
You should note, however, that any issuance of Senior Equity
Securities must comply with the requirements of the 1940 Act.
The 1940 Act requires, among other things, that
(1) immediately after issuance and before any dividend or
other distribution is made with respect to our common stock and
before any purchase of common stock is made, such Senior Equity
Securities together with all other senior securities must not
exceed an amount equal to 50% of our total assets after
deducting the amount of such dividend, distribution or purchase
price, as the case may be, and (2) the holders of shares of
Senior Equity Securities, if any are issued, must be entitled as
a class to elect two directors at all times and to elect a
majority of the directors if dividends on such Senior Equity
Securities are in arrears by two years or more. Certain matters
under the 1940 Act require the separate vote of the holders of
any issued and outstanding Senior Equity Securities. We have no
present plans to issue any shares of Senior Equity Securities,
but believe that the availability for issuance of Senior Equity
Securities will provide us with increased flexibility in
structuring future financings. If we offer Senior Equity
Securities under this prospectus, we will issue an appropriate
prospectus supplement. You should read that prospectus
supplement for a description of the Senior Equity Securities,
including, but not limited to, whether there will be an
arrearage in the payment of dividends or sinking fund
installments, if any, restrictions with respect to the
declaration of dividends, requirements in connection with the
maintenance of any ratio or assets, or creation or maintenance
of reserves, or provisions for permitting or restricting the
issuance of additional securities.
Subscription
Rights
General
We may issue subscription rights to our stockholders to purchase
common stock or preferred stock. Subscription rights may be
issued independently or together with any other offered security
and may or may not be transferable by the person purchasing or
receiving the subscription rights. In connection with any
subscription rights offering to our stockholders, we may enter
into a standby underwriting arrangement with one or more
underwriters pursuant to which such underwriters would purchase
any offered securities remaining unsubscribed after such
subscription rights offering to the extent permissible under
applicable law. In connection with a subscription rights
offering to our stockholders, we would distribute certificates
evidencing the subscription rights and a prospectus supplement
to our stockholders on the record date that we set for receiving
subscription rights in such subscription rights offering.
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The applicable prospectus supplement would describe the
following terms of subscription rights in respect of which this
prospectus is being delivered:
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the period of time the offering would remain open (which in no
event would be less than fifteen business days);
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the title of such subscription rights;
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the exercise price for such subscription rights;
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the ratio of the offering (which in no event would exceed one
new share of common stock for each three rights held);
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the number of such subscription rights issued to each
stockholder;
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the extent to which such subscription rights are transferable;
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if applicable, a discussion of the material U.S. federal
income tax considerations applicable to the issuance or exercise
of such subscription rights;
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the date on which the right to exercise such subscription rights
shall commence, and the date on which such rights shall expire
(subject to any extension);
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the extent to which such subscription rights include an
over-subscription privilege with respect to unsubscribed
securities;
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if applicable, the material terms of any standby underwriting or
other purchase arrangement that we may enter into in connection
with the subscription rights offering; and
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any other terms of such subscription rights, including terms,
procedures and limitations relating to the exchange and exercise
of such subscription rights.
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Exercise
of Subscription Rights
Each subscription right would entitle the holder of the
subscription right to purchase for cash such amount of shares of
common stock, or preferred stock, at such exercise price as
shall in each case be set forth in, or be determinable as set
forth in, the prospectus supplement relating to the subscription
rights offered thereby. Subscription rights may be exercised at
any time up to the close of business on the expiration date for
such subscription rights set forth in the prospectus supplement.
After the close of business on the expiration date, all
unexercised subscription rights would become void.
Subscription rights may be exercised as set forth in the
prospectus supplement relating to the subscription rights
offered thereby. Upon receipt of payment and the subscription
rights certificate properly completed and duly executed at the
corporate trust office of the subscription rights agent or any
other office indicated in the prospectus supplement we will
forward, as soon as practicable, the shares of common stock, or
preferred stock, purchasable upon such exercise. We may
determine to offer any unsubscribed offered securities directly
to persons other than stockholders, to or through agents,
underwriters or dealers or through a combination of such
methods, including pursuant to standby underwriting
arrangements, as set forth in the applicable prospectus
supplement.
Warrants
The following is a general description of the terms of the
warrants we may issue from time to time. Particular terms of any
warrants we offer will be described in the prospectus supplement
relating to such warrants.
We may issue warrants to purchase shares of our common stock.
Such warrants may be issued independently or together with
shares of common stock or other equity or debt securities and
may be attached or separate from such securities. We will issue
each series of warrants under a separate warrant agreement to be
entered into between us and a warrant agent. The warrant agent
will act solely as our agent and will not assume any obligation
or relationship of agency for or with holders or beneficial
owners of warrants.
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A prospectus supplement will describe the particular terms of
any series of warrants we may issue, including the following:
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the title of such warrants;
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the aggregate number of such warrants;
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the price or prices at which such warrants will be issued;
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the currency or currencies, including composite currencies, in
which the price of such warrants may be payable;
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if applicable, the designation and terms of the securities with
which the warrants are issued and the number of warrants issued
with each such security or each principal amount of such
security;
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the number of shares of common stock purchasable upon exercise
of one warrant and the price at which and the currency or
currencies, including composite currencies, in which these
shares may be purchased upon such exercise;
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the date on which the right to exercise such warrants shall
commence and the date on which such right will expire;
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whether such warrants will be issued in registered form or
bearer form;
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if applicable, the minimum or maximum amount of such warrants
which may be exercised at any one time;
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if applicable, the date on and after which such warrants and the
related securities will be separately transferable;
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information with respect to book-entry procedures, if any;
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the terms of the securities issuable upon exercise of the
warrants;
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if applicable, a discussion of certain U.S. federal income
tax considerations; and
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any other terms of such warrants, including terms, procedures
and limitations relating to the exchange and exercise of such
warrants.
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We and the warrant agent may amend or supplement the warrant
agreement for a series of warrants without the consent of the
holders of the warrants issued thereunder to effect changes that
are not inconsistent with the provisions of the warrants and
that do not materially and adversely affect the interests of the
holders of the warrants.
Prior to exercising their warrants, holders of warrants will not
have any of the rights of holders of the securities purchasable
upon such exercise, including the right to receive dividends, if
any, or payments upon our liquidation, dissolution or winding up
or to exercise any voting rights.
Under the 1940 Act, we may generally only offer warrants (except
for warrants expiring not later than 120 days after
issuance and issued exclusively and ratably to a class of our
security holders) on the condition that (1) the warrants
expire by their terms within ten years; (2) the exercise or
conversion price is not less than the current market value of
the securities underlying the warrants at the date of issuance;
(3) our stockholders authorize the proposal to issue such
warrants (our stockholders approved such a proposal to issue
long-term rights, including warrants, in connection with our
2008 annual meeting of stockholders) and a “required”
majority of our Board of Directors approves such issuance on the
basis that the issuance is in the best interests of Gladstone
Capital and our stockholders; and (4) if the warrants are
accompanied by other securities, the warrants are not separately
transferable unless no class of such warrants and the securities
accompanying them has been publicly distributed. A
“required” majority of our Board of Directors is a
vote of both a majority of our directors who have no financial
interest in the transaction and a majority of the directors who
are not interested persons of the company. The 1940 Act also
provides that the amount of our voting securities that would
result from the exercise of all outstanding warrants, options
and subscription rights at the time of issuance may not exceed
25% of our outstanding voting securities.
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Debt
Securities
Any debt securities that we issue may be senior or subordinated
in priority of payment. We have no present plans to issue any
debt securities. If we offer debt securities under this
prospectus, we will provide a prospectus supplement that
describes the ranking, whether senior or subordinated, the
specific designation, the aggregate principal amount, the
purchase price, the maturity, the redemption terms, the interest
rate or manner of calculating the interest rate, the time of
payment of interest, if any, the terms for any conversion or
exchange, including the terms relating to the adjustment of any
conversion or exchange mechanism, the listing, if any, on a
securities exchange, the name and address of the trustee and any
other specific terms of the debt securities.
CERTAIN
PROVISIONS OF MARYLAND LAW AND OF OUR
ARTICLES OF INCORPORATION AND BYLAWS
Our articles of incorporation and bylaws and the Maryland
General Corporation Law contain certain provisions that could
make more difficult the acquisition of us by means of a tender
offer, a proxy contest or otherwise. These provisions are
expected to discourage certain types of coercive takeover
practices and inadequate takeover bids and to encourage persons
seeking to acquire control of us to negotiate first with our
Board of Directors. We believe that the benefits of these
provisions outweigh the potential disadvantages of discouraging
such proposals because, among other things, negotiation of such
proposals might result in an improvement of their terms. The
description set forth below is intended as a summary only and is
qualified in its entirety by reference to our articles of
incorporation and bylaws, as amended, which are filed as
exhibits to the registration statement of which this prospectus
is a part.
Classified
Board of Directors
In accordance with our bylaws, our Board of Directors is divided
into three classes of directors serving staggered three-year
terms. Under the Maryland General Corporation Law, each class
must consist as nearly as possible of one-third of the directors
then elected to our Board of Directors and our board is
currently divided into three classes two of which have three
directors and one of which has four directors. A classified
board may render more difficult a change in control of us or
removal of our incumbent management. We believe, however, that
the longer time required to elect a majority of a classified
board of directors will help to ensure continuity and stability
of our management and policies.
Our classified board could have the effect of making the
replacement of incumbent directors more time consuming and
difficult. Because our directors may only be removed for cause,
at least two annual meetings of stockholders, instead of one,
will generally be required to effect a change in a majority of
our Board of Directors. Thus, our classified board could
increase the likelihood that incumbent directors will retain
their positions. The staggered terms of directors may delay,
defer or prevent a tender offer or an attempt to change control
of us or another transaction that might involve a premium price
for our common stock that might be in the best interest of our
stockholders.
Number of
Directors; Removal; Vacancies
Our articles of incorporation provide that the number of
directors will be determined pursuant to our bylaws and our
bylaws provide that a majority of our entire Board of Directors
may at any time increase or decrease the number of directors. In
addition, our bylaws provide that the number of directors shall
not be increased by 50% or more in any
12-month
period without the approval of at least
662/3% of
the members of our Board of Directors then in office. Our bylaws
provide that any vacancies will be filled by the vote of a
majority of the remaining directors, even if less than a quorum,
and the directors so appointed shall hold office until the next
annual meeting of stockholders and until their successors are
elected and qualified. Accordingly, our Board of Directors could
temporarily prevent any stockholder from enlarging the Board of
Directors and filling the new directorships with such
stockholder’s own nominees.
115
Our bylaws also provide that, except as may be required by law
or our articles of incorporation, our directors may only be
removed for cause and only by the affirmative vote of 75% of the
voting power of all of the shares of our capital stock then
entitled to vote generally in the election of directors, voting
together as a single class.
Stockholder
Approval Requirements
Maryland General Corporation Law provides that stockholder
action can be taken only at an annual or special meeting of
stockholders or by unanimous written consent in lieu of a
meeting. These provisions may have the effect of delaying
consideration of a stockholder proposal until the next annual
meeting.
Advance
Notice Provisions for Stockholder Nominations and Stockholder
Proposals
Our bylaws establish an advance notice procedure for
stockholders to make nominations of candidates for election as
directors or to bring other business before an annual meeting of
our stockholders, which we refer to as the stockholder notice
procedure.
The stockholder notice procedure provides that (1) only
persons who are nominated by, or at the direction of, the Board
of Directors, or by a stockholder who has given timely written
notice containing specified information to our secretary prior
to the meeting at which directors are to be elected, will be
eligible for election as directors and (2) at an annual
meeting only such business may be conducted as has been brought
before the meeting by, or at the direction of, our Board of
Directors or by a stockholder who has given timely written
notice to our secretary of such stockholder’s intention to
bring such business before the meeting. Except for stockholder
proposals submitted in accordance with the federal proxy rules
as to which the requirements specified therein shall control,
notice of stockholder nominations or business to be conducted at
an annual meeting must be received by us prior to the first
anniversary of the previous year’s annual meeting. If we
call a special meeting of stockholders for the purpose of
electing directors, stockholder nominations must be received by
us not earlier than the 90th day prior to such meeting and
not later than the later of the 60th day prior to such
meeting or the 10th day following the day on which notice
of the date of a special meeting of stockholders was given.
The purpose of requiring stockholders to give us advance notice
of nominations and other business is to afford our Board of
Directors a meaningful opportunity to consider the
qualifications of the proposed nominees and the advisability of
the other proposed business and, to the extent deemed necessary
or desirable by the Board of Directors, to inform stockholders
and make recommendations about such qualifications or business,
as well as to provide a more orderly procedure for conducting
meetings of stockholders. Although our bylaws do not give our
Board of Directors any power to disapprove stockholder
nominations for the election of directors or proposals for
action, they may have the effect of precluding a contest for the
election of directors or the consideration of stockholder
proposals if proper procedures are not followed and of
discouraging or deterring a third party from conducting a
solicitation of proxies to elect its own slate of directors or
to approve its own proposal without regard to whether
consideration of such nominees or proposals might be harmful or
beneficial to us and our stockholders.
Authority
to Issue Senior Equity Securities without Stockholder
Approval
Our articles of incorporation permit our Board of Directors to
issue up to 50,000,000 shares of capital stock. In
addition, our Board of Directors, without any action by our
stockholders, may amend our articles of incorporation from time
to time to increase or decrease the aggregate number of shares
or the number of shares of any class or series of stock that we
have authority to issue. Our Board of Directors may classify or
reclassify any unissued common stock or preferred stock and
establish the preferences, conversion or other rights, voting
powers, restrictions, limitations as to distributions,
qualifications and terms or conditions of redemption of any such
stock. Thus, our Board of Directors could authorize the issuance
of senior common stock or preferred stock with terms and
conditions that could have a priority as to distributions and
amounts payable upon liquidation over the rights of the holders
of our common stock.
Amendment
of Articles of Incorporation and Bylaws
Our articles of incorporation may be amended, altered, changed
or repealed, subject to the resolutions providing for any class
or series of preferred stock, only by the affirmative vote of
both a majority of the members of
116
our Board of Directors then in office and a majority of the
voting power of all of the shares of our capital stock entitled
to vote generally in the election of directors, voting together
as a single class.
Our articles of incorporation also provide that the bylaws may
be adopted, amended, altered, changed or repealed by the
affirmative vote of the majority of our Board of Directors then
in office. Any action taken by our stockholders with respect to
adopting, amending, altering, changing or repealing our bylaws
may be taken only by the affirmative vote of the holders of at
least 75% of the voting power of all of the shares of our
capital stock then entitled to vote generally in the election of
directors, voting together as a single class.
These provisions are intended to make it more difficult for
stockholders to circumvent certain other provisions contained in
our articles of incorporation and bylaws, such as those that
provide for the classification of our Board of Directors. These
provisions, however, also will make it more difficult for
stockholders to amend the articles of incorporation or bylaws
without the approval of the Board of Directors, even if a
majority of the stockholders deems such amendment to be in the
best interests of all stockholders.
Limitation
on Liability of Directors
We have adopted provisions in our articles of incorporation,
which, to the fullest extent permitted by Maryland law and as
limited by the 1940 Act, limit the liability of our directors
and officers for monetary damages. Under our articles of
incorporation we shall indemnify (1) our directors and
officers to the fullest extent permitted by the General Laws of
the State of Maryland as limited by the 1940 Act or any valid
rule, regulation or order of the SEC thereunder, including the
advance of expenses under the procedures and to the fullest
extent permitted by law and (2) other employees and agents
to such extent as shall be authorized by our Board of Directors
or our bylaws and be permitted by law. The effect of these
provisions is to eliminate our rights and the rights of our
stockholders (through stockholders’ derivative suits on our
behalf) to recover monetary damages against one of our directors
or officers for breach of the fiduciary duty of care as a
director or officer (including breaches resulting from negligent
or grossly negligent behavior) except to the extent this
limitation is not permitted under applicable law, including the
1940 Act. These provisions do not limit or eliminate our rights
or the rights of any of our stockholders to seek non-monetary
relief such as an injunction or rescission in the event one of
our directors or officers breaches his or her duty of care.
These provisions also will not alter the liability of our
directors or officers under federal securities laws.
SHARE
REPURCHASES
Shares of closed-end investment companies frequently trade at
discounts to net asset value. We cannot predict whether our
shares will trade above, at or below net asset value. The market
price of our common stock is determined by, among other things,
the supply and demand for our shares, our investment performance
and investor perception of our overall attractiveness as an
investment as compared with alternative investments. Our Board
of Directors has authorized our officers, in their discretion
and subject to compliance with the 1940 Act and other applicable
law, to purchase on the open market or in privately negotiated
transactions, outstanding shares of our common stock in the
event that our shares trade at a discount to net asset value. We
can not assure you that we will ever conduct any open market
purchases and if we do conduct open market purchases, we may
terminate them at any time.
In addition, if our shares publicly trade for a substantial
period of time at a substantial discount to our then current net
asset value per share, our Board of Directors will consider
authorizing periodic repurchases of our shares or other actions
designed to eliminate the discount. Our Board of Directors would
consider all relevant factors in determining whether to take any
such actions, including the effect of such actions on our status
as a RIC under the Code and the availability of cash to finance
these repurchases in view of the restrictions on our ability to
borrow. We can not assure you that any share repurchases will be
made or that if made, they will reduce or eliminate market
discount. Should we make any such repurchases in the future, we
expect that we would make them at prices at or below the then
current net asset value per share. Any such repurchase would
cause our total assets to decrease, which may have the effect of
increasing our expense ratio. We may borrow money to finance the
repurchase of shares subject to the limitations described in
this prospectus. Any interest on such borrowing for this purpose
would reduce our net income.
117
PLAN OF
DISTRIBUTION
We may sell the Securities through underwriters or dealers,
directly to one or more purchasers, including existing
stockholders in a rights offering, or through agents or through
a combination of any such methods of sale. In the case of a
rights offering, the applicable prospectus supplement will set
forth the number of shares of our common stock issuable upon the
exercise of each right and the other terms of such rights
offering. Any underwriter or agent involved in the offer and
sale of the Securities will also be named in the applicable
prospectus supplement.
The distribution of the Securities may be effected from time to
time in one or more transactions at a fixed price or prices,
which may be changed, in “at the market offerings”
within the meaning of Rule 415(a)(4) of the Securities Act,
at prevailing market prices at the time of sale, at prices
related to such prevailing market prices, or at negotiated
prices, provided, however, that in the case of our common stock,
the offering price per share less any underwriting commissions
or discounts must equal or exceed the net asset value per share
of our common stock except (i) in connection with a rights
offering to our existing stockholders, (ii) with the
consent of the majority of our common stockholders, or
(iii) under such other circumstances as the SEC may permit.
In connection with the sale of the Securities, underwriters or
agents may receive compensation from us or from purchasers of
the Securities, for whom they may act as agents, in the form of
discounts, concessions or commissions. Underwriters may sell the
Securities to or through dealers and such dealers may receive
compensation in the form of discounts, concessions or
commissions from the underwriters
and/or
commissions from the purchasers for whom they may act as agents.
Underwriters, dealers and agents that participate in the
distribution of the Securities may be deemed to be underwriters
under the Securities Act, and any discounts and commissions they
receive from us and any profit realized by them on the resale of
the Securities may be deemed to be underwriting discounts and
commissions under the Securities Act. Any such underwriter or
agent will be identified and any such compensation received from
us will be described in the applicable prospectus supplement.
The maximum commission or discount to be received by any
Financial Industry Regulatory Authority, or FINRA, member or
independent broker-dealer will not exceed 8%.
We may enter into derivative transactions with third parties, or
sell securities not covered by this prospectus to third parties
in privately negotiated transactions. If the applicable
prospectus supplement indicates, in connection with those
derivatives, the third parties may sell Securities covered by
this prospectus and the applicable prospectus supplement,
including in short sale transactions. If so, the third party may
use securities pledged by us or borrowed from us or others to
settle those sales or to close out any related open borrowings
of stock, and may use securities received from us in settlement
of those derivatives to close out any related open borrowings of
stock. The third parties in such sale transactions will be
underwriters and, if not identified in this prospectus, will be
identified in the applicable prospectus supplement (or a
post-effective amendment).
Any of our common stock sold pursuant to a prospectus supplement
will be listed on The Nasdaq Global Select Market, or another
exchange on which our common stock is traded.
Under agreements into which we may enter, underwriters, dealers
and agents who participate in the distribution of the Securities
may be entitled to indemnification by us against certain
liabilities, including liabilities under the Securities Act.
Underwriters, dealers and agents may engage in transactions
with, or perform services for, us in the ordinary course of
business.
If so indicated in the applicable prospectus supplement, we will
authorize underwriters or other persons acting as our agents to
solicit offers by certain institutions to purchase the
Securities from us pursuant to contracts providing for payment
and delivery on a future date. Institutions with which such
contracts may be made include commercial and savings banks,
insurance companies, pension funds, investment companies,
educational and charitable institutions and others, but in all
cases such institutions must be approved by us. The obligations
of any purchaser under any such contract will be subject to the
condition that the purchase of the Securities shall not at the
time of delivery be prohibited under the laws of the
jurisdiction to which such purchaser is subject. The
underwriters and such other agents will not have any
responsibility in respect of the validity or performance of such
contracts. Such contracts will be subject only to those
conditions set forth in the prospectus supplement, and the
prospectus supplement will set forth the commission payable for
solicitation of such contracts.
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In order to comply with the securities laws of certain states,
if applicable, the Securities offered hereby will be sold in
such jurisdictions only through registered or licensed brokers
or dealers. In addition, in certain states, the Securities may
not be sold unless they have been registered or qualified for
sale in the applicable state or an exemption from the
registration or qualification requirement is available and is
complied with.
CUSTODIAN,
TRANSFER AND DIVIDEND PAYING AGENT AND REGISTRAR
Our securities are held under a custodian agreement with The
Bank of New York Mellon Corp. The address of the custodian is: 2
Hanson Place, Sixth Floor, Brooklyn, NY 11217. Our assets are
held under bank custodianship in compliance with the 1940 Act.
Securities held through our wholly-owned subsidiary, Business
Loan, are held under a custodian agreement with The Bank of New
York Mellon Corp., which acts as collateral custodian pursuant
to Business Loan’s credit facility with Key Equipment
Finance Inc. and certain other parties. The address of the
collateral custodian is 2 Hanson Place, Sixth Floor, Brooklyn,
NY 11217. BNY Mellon Shareowner Services acts as our transfer
and dividend paying agent and registrar. The principal business
address of BNY Mellon Shareowner Services is 480 Washington
Boulevard, Jersey City, New Jersey 07310, telephone number
800-274-2944.
BNY Mellon Shareowner Services also maintains an internet
website at
http://stock.bankofny.com.
BROKERAGE
ALLOCATION AND OTHER PRACTICES
Since we generally acquire and dispose of our investments in
privately negotiated transactions, we will infrequently use
securities brokers or dealers in the normal course of our
business. Subject to policies established by our Board of
Directors, our Adviser will be primarily responsible for the
execution of transactions involving publicly traded securities
and the allocation of brokerage commissions in respect thereof,
if any. In the event that our Adviser executes such
transactions, we do not expect our Adviser to execute
transactions through any particular broker or dealer, but we
would expect our Adviser to seek to obtain the best net results
for us, taking into account such factors as price (including the
applicable brokerage commission or dealer spread), size of
order, difficulty of execution, and operational facilities of
the firm and the firm’s risk and skill in positioning
blocks of securities. While we expect that our Adviser generally
will seek reasonably competitive trade execution costs, we will
not necessarily pay the lowest spread or commission available.
Subject to applicable legal requirements, our Adviser may select
a broker based partly upon brokerage or research services
provided to us, our Adviser and any of its other clients. In
return for such services, we may pay a higher commission than
other brokers would charge if our Adviser determines in good
faith that such commission is reasonable in relation to the
value of the brokerage and research services provided by such
broker or dealer viewed in terms either of the particular
transaction or our Adviser’s overall responsibilities with
respect to all of our Adviser’s clients.
LEGAL
MATTERS
The legality of securities offered hereby will be passed upon
for us by Cooley LLP, Reston, Virginia. Certain legal matters
will be passed upon for the underwriters, if any, by the counsel
named in the accompanying prospectus supplement.
EXPERTS
The financial statements as of September 30, 2010 and
September 30, 2009 and for each of the three years in the
period ended September 30, 2010 and management’s
assessment of the effectiveness of internal control over
financial reporting (which is included in Management’s
Report on Internal Control over Financial Reporting) as of
September 30, 2010 included in this prospectus have been so
included in reliance on the report of PricewaterhouseCoopers
LLP, an independent registered public accounting firm, given on
the authority of said firm as experts in auditing and accounting.
119
GLADSTONE
CAPITAL CORPORATION
INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS
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Audited Consolidated Financial Statements
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F-2
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F-3
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F-4
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F-5
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F-6
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F-7
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F-8
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F-21
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F-48
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F-49
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F-50
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F-51
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F-52
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F-62
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F-1
Report of
Management on Internal Controls
To the Stockholders and Board of Directors of Gladstone Capital
Corporation:
Our management is responsible for establishing and maintaining
adequate internal control over financial reporting as defined in
Rule 13a-15(f)
under the Securities Exchange Act of 1934. Our internal control
over financial reporting is designed to provide reasonable
assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles and
include those policies and procedures that: (1) pertain to
the maintenance of records that in reasonable detail accurately
and fairly reflect our transactions and the dispositions of our
assets; (2) provide reasonable assurance that our
transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted
accounting principles, and that our receipts and expenditures
are being made only in accordance with appropriate
authorizations; and (3) provide reasonable assurance
regarding prevention or timely detection of unauthorized
acquisition, use or disposition of our assets that could have a
material effect on our financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Therefore, even those systems determined to be effective can
provide only reasonable assurance with respect to financial
statement preparation and presentation.
Under the supervision and with the participation of our
management, we assessed the effectiveness of our internal
control over financial reporting as of September 30, 2010,
using the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) in Internal
Control — Integrated Framework. Based on its
assessment, management has concluded that our internal control
over financial reporting was effective as of September 30,
2010.
The effectiveness of the Company’s internal control over
financial reporting as of September 30, 2010 has been
audited by PricewaterhouseCoopers LLP, an independent registered
public accounting firm, as stated in their report which appears
herein.
November 22, 2010
F-2
Report of
Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors of Gladstone Capital
Corporation:
In our opinion, the accompanying consolidated statements of
assets and liabilities, including the schedules of investments,
and the related statements of operations, changes in net assets
and cash flows present fairly, in all material respects, the
financial position of Gladstone Capital Corporation and its
subsidiaries (the “Company”) at September 30,
2010 and 2009, and the results of their operations and their
cash flows for each of the three years in the period ended
September 30, 2010 in conformity with accounting principles
generally accepted in the United States of America. In addition,
in our opinion, the financial statement schedule listed in the
accompanying index under Item 15(a)(2) presents fairly, in
all material respects, the information set forth therein when
read in conjunction with the related consolidated financial
statements. Also in our opinion, the Company maintained, in all
material respects, effective internal control over financial
reporting as of September 30, 2010, based on criteria
established in Internal Control — Integrated Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). The Company’s management is
responsible for these financial statements and financial
statement schedule, for maintaining effective internal control
over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting,
included in the accompanying Management’s Report on
Internal Control over Financial Reporting. Our responsibility is
to express opinions on these financial statements, on the
financial statement schedule, and on the Company’s internal
control over financial reporting based on our integrated audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are
free of material misstatement and whether effective internal
control over financial reporting was maintained in all material
respects. Our audits of the financial statements included
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. Our audit of internal control over financial
reporting included obtaining an understanding of internal
control over financial reporting, assessing the risk that a
material weakness exists, and testing and evaluating the design
and operating effectiveness of internal control based on the
assessed risk. Our audits also included performing such other
procedures as we considered necessary in the circumstances. We
believe that our audits provide a reasonable basis for our
opinions.
A company’s internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A company’s
internal control over financial reporting includes those
policies and procedures that (i) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (ii) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations of
management and directors of the company; and (iii) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers
LLP
McLean, VA
November 22, 2010
F-3
GLADSTONE
CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF ASSETS AND
LIABILITIES
| |
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
(Dollar amounts in thousands,
|
|
|
|
|
except per share data)
|
|
|
|
|
ASSETS
|
|
Non-Control/Non-Affiliate investments (Cost of $244,140 and
$312,043, respectively)
|
|
$
|
223,737
|
|
|
$
|
286,997
|
|
|
Control investments (Cost of $54,076 and $52,350, respectively)
|
|
|
33,372
|
|
|
|
33,972
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments at fair value (Cost of $298,216 and $364,393,
respectively)
|
|
|
257,109
|
|
|
|
320,969
|
|
|
Cash
|
|
|
7,734
|
|
|
|
5,276
|
|
|
Interest receivable — investments in debt securities
|
|
|
2,648
|
|
|
|
3,048
|
|
|
Interest receivable — employees (Refer to Note 4)
|
|
|
104
|
|
|
|
85
|
|
|
Due from custodian
|
|
|
255
|
|
|
|
3,059
|
|
|
Due from Adviser (Refer to Note 4)
|
|
|
—
|
|
|
|
69
|
|
|
Deferred financing fees
|
|
|
1,266
|
|
|
|
1,230
|
|
|
Prepaid assets
|
|
|
799
|
|
|
|
341
|
|
|
Receivables from portfolio companies, less allowance for
uncollectible receivables of $322 and $0 at September 30,
2010 and 2009, respectively
|
|
|
289
|
|
|
|
1,528
|
|
|
Other assets
|
|
|
314
|
|
|
|
305
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
270,518
|
|
|
$
|
335,910
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
Accounts payable
|
|
$
|
—
|
|
|
$
|
67
|
|
|
Interest payable
|
|
|
693
|
|
|
|
378
|
|
|
Fee due to Administrator (Refer to Note 4)
|
|
|
267
|
|
|
|
216
|
|
|
Fees due to Adviser (Refer to Note 4)
|
|
|
673
|
|
|
|
834
|
|
|
Borrowings under line of credit (Cost of $16,800 and $83,000,
respectively)
|
|
|
17,940
|
|
|
|
83,350
|
|
|
Accrued expenses and deferred liabilities
|
|
|
1,426
|
|
|
|
1,800
|
|
|
Funds held in escrow
|
|
|
273
|
|
|
|
189
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES
|
|
|
21,272
|
|
|
|
86,834
|
|
|
|
|
|
|
|
|
|
|
|
|
COMMITMENTS AND CONTINGENCIES
|
|
|
—
|
|
|
|
—
|
|
|
NET ASSETS
|
|
$
|
249,246
|
|
|
$
|
249,076
|
|
|
|
|
|
|
|
|
|
|
|
|
ANALYSIS OF NET ASSETS
|
|
|
|
|
|
|
|
|
|
Common stock, $0.001 par value, 50,000,000 shares
authorized and 21,039,242 and 21,087,574 shares issued and
outstanding at September 30, 2010 and 2009, respectively
|
|
$
|
21
|
|
|
$
|
21
|
|
|
Capital in excess of par value
|
|
|
326,935
|
|
|
|
328,203
|
|
|
Notes receivable — employees (Refer to Note 4)
|
|
|
(7,103
|
)
|
|
|
(9,019
|
)
|
|
Net unrealized depreciation on investments
|
|
|
(41,108
|
)
|
|
|
(43,425
|
)
|
|
Net unrealized appreciation on borrowings under line of credit
|
|
|
(1,140
|
)
|
|
|
(350
|
)
|
|
Overdistributed net investment income
|
|
|
(1,103
|
)
|
|
|
—
|
|
|
Accumulated Net Realized Losses
|
|
|
(27,256
|
)
|
|
|
(26,354
|
)
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL NET ASSETS
|
|
$
|
249,246
|
|
|
$
|
249,076
|
|
|
|
|
|
|
|
|
|
|
|
|
NET ASSETS PER SHARE
|
|
$
|
11.85
|
|
|
$
|
11.81
|
|
|
|
|
|
|
|
|
|
|
|
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED
FINANCIAL STATEMENTS.
F-4
GLADSTONE
CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF
OPERATIONS
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30,
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
|
(Dollar amounts in thousands,
|
|
|
|
|
except per share data)
|
|
|
|
|
INVESTMENT INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Control/Non-Affiliate investments
|
|
$
|
29,938
|
|
|
$
|
40,747
|
|
|
$
|
43,734
|
|
|
Control investments
|
|
|
2,645
|
|
|
|
933
|
|
|
|
64
|
|
|
Cash
|
|
|
1
|
|
|
|
11
|
|
|
|
335
|
|
|
Notes receivable from employees (Refer to Note 4)
|
|
|
437
|
|
|
|
468
|
|
|
|
471
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income
|
|
|
33,021
|
|
|
|
42,159
|
|
|
|
44,604
|
|
|
Other income
|
|
|
2,518
|
|
|
|
459
|
|
|
|
1,121
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment income
|
|
|
35,539
|
|
|
|
42,618
|
|
|
|
45,725
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan servicing fee (Refer to Note 4)
|
|
|
3,412
|
|
|
|
5,620
|
|
|
|
6,117
|
|
|
Base management fee (Refer to Note 4)
|
|
|
2,673
|
|
|
|
2,005
|
|
|
|
2,212
|
|
|
Incentive fee (Refer to Note 4)
|
|
|
1,823
|
|
|
|
3,326
|
|
|
|
5,311
|
|
|
Administration fee (Refer to Note 4)
|
|
|
807
|
|
|
|
872
|
|
|
|
985
|
|
|
Interest expense
|
|
|
4,390
|
|
|
|
7,949
|
|
|
|
8,284
|
|
|
Amortization of deferred financing fees
|
|
|
1,490
|
|
|
|
2,778
|
|
|
|
1,534
|
|
|
Professional fees
|
|
|
2,101
|
|
|
|
1,586
|
|
|
|
911
|
|
|
Compensation expense (Refer to Note 4)
|
|
|
245
|
|
|
|
—
|
|
|
|
—
|
|
|
Other expenses
|
|
|
1,259
|
|
|
|
1,131
|
|
|
|
1,215
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses before credit from Adviser
|
|
|
18,200
|
|
|
|
25,267
|
|
|
|
26,569
|
|
|
Credit to fees from Adviser (Refer to Note 4)
|
|
|
(420
|
)
|
|
|
(3,680
|
)
|
|
|
(7,397
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses net of credit to credits to fees
|
|
|
17,780
|
|
|
|
21,587
|
|
|
|
19,172
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INVESTMENT INCOME
|
|
|
17,759
|
|
|
|
21,031
|
|
|
|
26,553
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
REALIZED AND UNREALIZED LOSS ON:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized loss on investments
|
|
|
(2,893
|
)
|
|
|
(26,411
|
)
|
|
|
(787
|
)
|
|
Net unrealized appreciation (depreciation) on investments
|
|
|
2,317
|
|
|
|
9,513
|
|
|
|
(47,023
|
)
|
|
Realized (loss) gain on settlement of derivative
|
|
|
—
|
|
|
|
(304
|
)
|
|
|
7
|
|
|
Net unrealized appreciation (depreciation) on derivative
|
|
|
—
|
|
|
|
304
|
|
|
|
(12
|
)
|
|
Net unrealized appreciation on borrowings under line of credit
|
|
|
(789
|
)
|
|
|
(350
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss on investments, derivative and borrowings under line of
credit
|
|
|
(1,365
|
)
|
|
|
(17,248
|
)
|
|
|
(47,815
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS
|
|
$
|
16,394
|
|
|
$
|
3,783
|
|
|
$
|
(21,262
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS
PER COMMON SHARE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and Diluted
|
|
$
|
0.78
|
|
|
$
|
0.18
|
|
|
$
|
(1.08
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED AVERAGE SHARES OF COMMON STOCK OUTSTANDING
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and Diluted
|
|
|
21,060,351
|
|
|
|
21,087,574
|
|
|
|
19,699,796
|
|
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED
FINANCIAL STATEMENTS.
F-5
GLADSTONE
CAPITAL CORPORATION
CONSOLIDATED
STATEMENTS OF CHANGES IN NET ASSETS
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30,
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
|
(Dollar amounts in thousands)
|
|
|
|
|
Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
$
|
17,759
|
|
|
$
|
21,031
|
|
|
$
|
26,553
|
|
|
Net loss on sale of investments
|
|
|
(2,893
|
)
|
|
|
(26,411
|
)
|
|
|
(787
|
)
|
|
Net unrealized appreciation (depreciation) on investments
|
|
|
2,317
|
|
|
|
9,513
|
|
|
|
(47,023
|
)
|
|
Realized (loss) gain on settlement of derivative
|
|
|
—
|
|
|
|
(304
|
)
|
|
|
7
|
|
|
Net unrealized appreciation (depreciation) on derivative
|
|
|
—
|
|
|
|
304
|
|
|
|
(12
|
)
|
|
Net unrealized appreciation on borrowings under line of credit
|
|
|
(789
|
)
|
|
|
(350
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in net assets from operations
|
|
|
16,394
|
|
|
|
3,783
|
|
|
|
(21,262
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions to stockholders from:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
(16,907
|
)
|
|
|
(20,795
|
)
|
|
|
(25,945
|
)
|
|
Long Term Capital Gains
|
|
|
—
|
|
|
|
(27
|
)
|
|
|
(285
|
)
|
|
Return of capital
|
|
|
(783
|
)
|
|
|
(5,748
|
)
|
|
|
(7,149
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net decrease in net assets from distributions to stockholders
|
|
|
(17,690
|
)
|
|
|
(26,570
|
)
|
|
|
(33,379
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital share transactions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock under shelf offering
|
|
|
—
|
|
|
|
—
|
|
|
|
106,226
|
|
|
Shelf offering costs
|
|
|
(28
|
)
|
|
|
(41
|
)
|
|
|
(852
|
)
|
|
Repayment of principal on employee notes
|
|
|
1,400
|
|
|
|
6
|
|
|
|
56
|
|
|
Conversion of former employee stock option loans from recourse
to non-recourse
|
|
|
(420
|
)
|
|
|
—
|
|
|
|
—
|
|
|
Reclassification of principal on employee note
|
|
|
514
|
|
|
|
150
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in net assets from capital share transactions
|
|
|
1,466
|
|
|
|
115
|
|
|
|
105,430
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total increase (decrease) in net assets
|
|
|
170
|
|
|
|
(22,672
|
)
|
|
|
50,789
|
|
|
Net assets at beginning of year
|
|
|
249,076
|
|
|
|
271,748
|
|
|
|
220,959
|
|
|
Net assets at end of year
|
|
$
|
249,246
|
|
|
$
|
249,076
|
|
|
$
|
271,748
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED
FINANCIAL STATEMENTS.
F-6
GLADSTONE
CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH
FLOWS
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30,
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
|
(Dollar amounts in thousands)
|
|
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in net assets resulting from operations
|
|
$
|
16,393
|
|
|
$
|
3,783
|
|
|
$
|
(21,262
|
)
|
|
Adjustments to reconcile net (decrease) increase in net assets
resulting from operations to net cash used in operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of investments
|
|
|
(23,245
|
)
|
|
|
(24,911
|
)
|
|
|
(176,550
|
)
|
|
Principal repayments on investments
|
|
|
82,515
|
|
|
|
47,490
|
|
|
|
69,183
|
|
|
Proceeds from sale of investments
|
|
|
3,119
|
|
|
|
49,203
|
|
|
|
1,299
|
|
|
Repayment of paid in kind interest
|
|
|
51
|
|
|
|
—
|
|
|
|
—
|
|
|
Increase in investment balance due to paid in kind interest
|
|
|
(53
|
)
|
|
|
(166
|
)
|
|
|
(58
|
)
|
|
Increase in investment balance due to rolled-over interest
|
|
|
(529
|
)
|
|
|
(1,455
|
)
|
|
|
—
|
|
|
Net change in premiums, discounts and amortization
|
|
|
711
|
|
|
|
(95
|
)
|
|
|
228
|
|
|
Loan impairment / contra-investment
|
|
|
715
|
|
|
|
—
|
|
|
|
—
|
|
|
Net realized loss on investments
|
|
|
2,893
|
|
|
|
26,411
|
|
|
|
787
|
|
|
Net unrealized (appreciation) depreciation on investments
|
|
|
(2,317
|
)
|
|
|
(9,513
|
)
|
|
|
47,023
|
|
|
Realized loss on settlement of derivative
|
|
|
—
|
|
|
|
304
|
|
|
|
—
|
|
|
Net unrealized (appreciation) depreciation on derivative
|
|
|
—
|
|
|
|
(304
|
)
|
|
|
12
|
|
|
Net unrealized appreciation on borrowings under line of credit
|
|
|
789
|
|
|
|
350
|
|
|
|
—
|
|
|
Amortization of deferred financing fees
|
|
|
1,490
|
|
|
|
2,778
|
|
|
|
1,534
|
|
|
Change in compensation expense from non-recourse notes
|
|
|
245
|
|
|
|
—
|
|
|
|
—
|
|
|
Decrease (increase) in interest receivable
|
|
|
382
|
|
|
|
546
|
|
|
|
(1,232
|
)
|
|
Decrease (increase) in funds due from custodian
|
|
|
2,804
|
|
|
|
1,485
|
|
|
|
(1,313
|
)
|
|
(Increase) decrease in prepaid assets
|
|
|
(459
|
)
|
|
|
(35
|
)
|
|
|
31
|
|
|
Decrease (increase) in due from Adviser
|
|
|
69
|
|
|
|
(69
|
)
|
|
|
—
|
|
|
Decrease in receivables from portfolio companies
|
|
|
1,239
|
|
|
|
(968
|
)
|
|
|
(480
|
)
|
|
Increase in other assets
|
|
|
(3
|
)
|
|
|
123
|
|
|
|
(10
|
)
|
|
(Decrease) increase in accounts payable
|
|
|
(67
|
)
|
|
|
59
|
|
|
|
2
|
|
|
Increase (decrease) in interest payable
|
|
|
315
|
|
|
|
(268
|
)
|
|
|
59
|
|
|
(Decrease) increase in accrued expenses and deferred liabilities
|
|
|
(529
|
)
|
|
|
472
|
|
|
|
537
|
|
|
(Decrease) increase in fees due to Adviser (Refer to Note 4)
|
|
|
(161
|
)
|
|
|
377
|
|
|
|
(252
|
)
|
|
Increase (decrease) in fee due to Administrator (Refer to
Note 4)
|
|
|
51
|
|
|
|
(31
|
)
|
|
|
10
|
|
|
Increase (decrease) in funds held in escrow
|
|
|
83
|
|
|
|
(45
|
)
|
|
|
234
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
|
86,501
|
|
|
|
95,521
|
|
|
|
(80,218
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redemption of U.S. Treasury Bill
|
|
|
—
|
|
|
|
—
|
|
|
|
2,484
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by investing activities
|
|
|
—
|
|
|
|
—
|
|
|
|
2,484
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net proceeds from the issuance of common shares
|
|
|
—
|
|
|
|
—
|
|
|
|
106,226
|
|
|
Shelf offering costs
|
|
|
(28
|
)
|
|
|
(41
|
)
|
|
|
(852
|
)
|
|
Borrowings from the line of credit
|
|
|
24,900
|
|
|
|
48,800
|
|
|
|
200,618
|
|
|
Repayments on the line of credit
|
|
|
(91,100
|
)
|
|
|
(116,830
|
)
|
|
|
(194,028
|
)
|
|
Distributions paid
|
|
|
(17,690
|
)
|
|
|
(26,570
|
)
|
|
|
(33,379
|
)
|
|
Receipt of principal on notes receivable — employees
(Refer to Note 4)
|
|
|
1,400
|
|
|
|
6
|
|
|
|
56
|
|
|
Deferred financing fees
|
|
|
(1,525
|
)
|
|
|
(2,103
|
)
|
|
|
(3,253
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities
|
|
|
(84,043
|
)
|
|
|
(96,738
|
)
|
|
|
75,388
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCREASE (DECREASE) IN CASH
|
|
|
2,458
|
|
|
|
(1,217
|
)
|
|
|
(2,346
|
)
|
|
CASH, BEGINNING OF YEAR
|
|
|
5,276
|
|
|
|
6,493
|
|
|
|
8,839
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH, END OF YEAR
|
|
$
|
7,734
|
|
|
$
|
5,276
|
|
|
$
|
6,493
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH PAID DURING PERIOD FOR INTEREST
|
|
$
|
4,075
|
|
|
$
|
8,278
|
|
|
$
|
8,226
|
|
|
CASH PAID DURING PERIOD FOR TAXES
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
7
|
|
|
NON-CASH FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Portfolio company payoff proceeds held in escrow (included in
other assets and other liabilities)
|
|
$
|
155
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Reclassification of principal on employee note (Refer to
Note 4)
|
|
$
|
515
|
|
|
$
|
150
|
|
|
$
|
—
|
|
|
Cancellation of employee note receivable (Refer to Note 4)
|
|
$
|
420
|
|
|
$
|
—
|
|
|
$
|
—
|
|
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED
FINANCIAL STATEMENTS.
F-7
GLADSTONE
CAPITAL CORPORATION
CONSOLIDATED
SCHEDULE OF INVESTMENTS
SEPTEMBER
30, 2010
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Company(1)
|
|
Industry
|
|
Investment(2)
|
|
Cost
|
|
|
Fair Value
|
|
|
|
|
|
|
|
|
(Dollar amounts in thousands)
|
|
|
|
|
NON-CONTROL/NON-AFFILIATE INVESTMENTS
|
|
|
|
|
|
|
|
|
|
Non-syndicated Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Access Television Network, Inc.
|
|
Service-cable airtime (infomercials)
|
|
Senior Term Debt (14.0%, Due
12/2011)(5)
|
|
$
|
963
|
|
|
$
|
809
|
|
|
Allison Publications, LLC
|
|
Service-publisher of consumer oriented magazines
|
|
Senior Term Debt (10.5%, Due
9/2012)(5)
|
|
|
9,094
|
|
|
|
8,543
|
|
|
|
|
|
|
Senior Term Debt (13.0%, Due
12/2010)(5)
|
|
|
65
|
|
|
|
64
|
|
|
BAS Broadcasting
|
|
Service-radio station operator
|
|
Senior Term Debt (11.5%, Due
7/2013)(5)
|
|
|
7,465
|
|
|
|
6,644
|
|
|
Chinese Yellow Pages Company
|
|
Service-publisher of Chinese language directories
|
|
Line of Credit, $700 available (7.3%, Due
11/2010)(5)
|
|
|
450
|
|
|
|
428
|
|
|
|
|
|
|
Senior Term Debt (7.3%, Due
11/2010)(5)
|
|
|
333
|
|
|
|
317
|
|
|
CMI Acquisition, LLC
|
|
Service-recycling
|
|
Senior Subordinated Term Debt (10.3%, Due
11/2012)(5)
|
|
|
5,972
|
|
|
|
5,868
|
|
|
FedCap Partners, LLC
|
|
Private equity fund
|
|
Class A Membership
Units(8)
|
|
|
400
|
|
|
|
400
|
|
|
Finn Corporation
|
|
Manufacturing-landscape equipment
|
|
Common Stock
Warrants(7)(8)
|
|
|
37
|
|
|
|
284
|
|
|
GFRC Holdings LLC
|
|
Manufacturing-glass-fiber reinforced concrete
|
|
Senior Term Debt (11.5%, Due
12/2012)(5)
|
|
|
6,111
|
|
|
|
6,004
|
|
|
|
|
|
|
Senior Subordinated Term Debt (14.0%, Due
12/2012)(3)(5)
|
|
|
6,632
|
|
|
|
6,450
|
|
|
Global Materials Technologies, Inc.
|
|
Manufacturing-steel wool products and metal fibers
|
|
Senior Term Debt (13.0%, Due
6/2012)(3)(5)
|
|
|
3,560
|
|
|
|
2,937
|
|
|
Heartland Communications Group
|
|
Service-radio station operator
|
|
Line of Credit, $100 available (8.5%, Due 3/2013)
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
Line of Credit, $100 available (8.5%, Due 3/2013)
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
Senior Term Debt (8.5%, Due
3/2013)(5)
|
|
|
4,301
|
|
|
|
2,519
|
|
|
|
|
|
|
Common Stock
Warrants(7)(8)
|
|
|
66
|
|
|
|
—
|
|
|
Interfilm Holdings, Inc.
|
|
Service-slitter and distributor of plastic films
|
|
Senior Term Debt (12.3%, Due
10/2012)(5)
|
|
|
2,400
|
|
|
|
2,382
|
|
|
International Junior Golf Training Acquisition Company
|
|
Service-golf training
|
|
Line of Credit, $1,500 available (9.0%, Due
5/2011)(5)
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
Senior Term Debt (8.5%, Due
5/2012)(5)
|
|
|
1,557
|
|
|
|
1,537
|
|
F-8
GLADSTONE
CAPITAL CORPORATION
CONSOLIDATED
SCHEDULE OF
INVESTMENTS — (Continued)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Company(1)
|
|
Industry
|
|
Investment(2)
|
|
Cost
|
|
|
Fair Value
|
|
|
|
|
|
|
|
|
(Dollar amounts in thousands)
|
|
|
|
|
|
|
|
|
Senior Term Debt (10.5%, Due
5/2012)(3)(5)
|
|
$
|
2,500
|
|
|
$
|
2,456
|
|
|
KMBQ Corporation
|
|
Service-AM/FM radio broadcaster
|
|
Line of Credit, $200 available (non-accrual, Due
7/2010)(5)(10)
|
|
|
161
|
|
|
|
16
|
|
|
|
|
|
|
Senior Term Debt (non-accrual, Due
7/2010)(5)(10)
|
|
|
1,921
|
|
|
|
192
|
|
|
Legend Communications of Wyoming LLC
|
|
Service-operator of radio stations
|
|
Senior Term Debt (12.0%, Due
6/2013)(5)
|
|
|
9,880
|
|
|
|
6,422
|
|
|
Newhall Holdings, Inc.
|
|
Service-distributor of personal care products and supplements
|
|
Line of Credit, $1,350 available (5.0%, Due
12/2012)(5)
|
|
|
1,350
|
|
|
|
1,269
|
|
|
|
|
|
|
Senior Term
Debt(5)
(5.0%, Due
12/2012)(5)
|
|
|
3,870
|
|
|
|
3,638
|
|
|
|
|
|
|
Senior Term Debt (5.0%, Due
12/2012)(3)(5)
|
|
|
4,648
|
|
|
|
4,323
|
|
|
|
|
|
|
Preferred
Equity(7)(8)
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
Common
Stock(7)(8)
|
|
|
—
|
|
|
|
—
|
|
|
Northern Contours, Inc.
|
|
Manufacturing-veneer and laminate components
|
|
Senior Subordinated Term Debt (13.0%, Due
9/2012)(5)
|
|
|
6,301
|
|
|
|
5,765
|
|
|
Northstar Broadband, LLC
|
|
Service-cable TV franchise owner
|
|
Senior Term Debt (0.7%, Due
12/2012)(5)
|
|
|
117
|
|
|
|
102
|
|
|
Pinnacle Treatment Centers, Inc.
|
|
Service-Addiction treatment centers
|
|
Line of Credit, $500 available (12.0%, Due
10/2010)(5)(12)
|
|
|
150
|
|
|
|
150
|
|
|
|
|
|
|
Senior Term Debt (10.5%, Due
12/2011)(5)
|
|
|
1,950
|
|
|
|
1,945
|
|
|
|
|
|
|
Senior Term Debt (10.5%, Due
12/2011)(3)(5)
|
|
|
7,500
|
|
|
|
7,481
|
|
|
Precision Acquisition Group Holdings, Inc.
|
|
Manufacturing-consumable components for the aluminum industry
|
|
Equipment Note (13.0%, Due
10/2010)(5)(13)
|
|
|
1,000
|
|
|
|
950
|
|
|
|
|
|
|
Senior Term Debt (13.0%, Due
10/2010)(5)(13)
|
|
|
4,125
|
|
|
|
3,919
|
|
|
|
|
|
|
Senior Term Debt (13.0%, Due
10/2010)(3)(5)(13)
|
|
|
4,053
|
|
|
|
3,850
|
|
|
PROFITSystems Acquisition Co.
|
|
Service-design and develop ERP software
|
|
Line of Credit, $350 available (4.5%, Due 7/2011)
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
Senior Term Debt (8.5%, Due
7/2011)(5)
|
|
|
1,000
|
|
|
|
940
|
|
|
|
|
|
|
Senior Term Debt (10.5%, Due
7/2011)(3)(5)
|
|
|
2,900
|
|
|
|
2,697
|
|
|
RCS Management Holding Co.
|
|
Service-healthcare supplies
|
|
Senior Term Debt (9.5%, Due
1/2011)(3)(5)
|
|
|
1,937
|
|
|
|
1,918
|
|
|
|
|
|
|
Senior Term Debt (11.5%, Due
1/2011)(4)(5)
|
|
|
3,060
|
|
|
|
3,029
|
|
F-9
GLADSTONE
CAPITAL CORPORATION
CONSOLIDATED
SCHEDULE OF
INVESTMENTS — (Continued)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Company(1)
|
|
Industry
|
|
Investment(2)
|
|
Cost
|
|
|
Fair Value
|
|
|
|
|
|
|
|
|
(Dollar amounts in thousands)
|
|
|
|
|
Reliable Biopharmaceutical Holdings, Inc.
|
|
Manufacturing-pharmaceutical and biochemical intermediates
|
|
Line of Credit, $5,000 available (9.0%, Due
10/2010)(5)(14)
|
|
$
|
1,200
|
|
|
$
|
1,188
|
|
|
|
|
|
|
Mortgage Note (9.5%, Due
10/2014)(5)
|
|
|
7,255
|
|
|
|
7,201
|
|
|
|
|
|
|
Senior Term Debt (9.0%, Due
10/2012)(5)
|
|
|
1,080
|
|
|
|
1,069
|
|
|
|
|
|
|
Senior Term Debt (11.0%, Due
10/2012)(3)(5)
|
|
|
11,693
|
|
|
|
11,386
|
|
|
|
|
|
|
Senior Subordinated Term Debt (12.0%, Due
10/2013)(5)
|
|
|
6,000
|
|
|
|
5,730
|
|
|
|
|
|
|
Common Stock
Warrants(7)(8)
|
|
|
209
|
|
|
|
—
|
|
|
Saunders & Associates
|
|
Manufacturing-equipment provider for frequency control devices
|
|
Senior Term Debt (9.8%, Due
5/2013)(5)
|
|
|
8,947
|
|
|
|
8,935
|
|
|
SCI Cable, Inc.
|
|
Service-cable, internet, voice provider
|
|
Senior Term Debt (non-accrual, Due
10/2012)(5)(10)
|
|
|
450
|
|
|
|
140
|
|
|
|
|
|
|
Senior Term Debt (non-accrual, Due
10/2012)(5)(10)
|
|
|
2,931
|
|
|
|
352
|
|
|
Sunburst Media — Louisiana, LLC
|
|
Service-radio station operator
|
|
Senior Term Debt (10.5%, Due
6/2011)(5)
|
|
|
6,391
|
|
|
|
5,100
|
|
|
Sunshine Media Holdings
|
|
Service-publisher regional B2B trade magazines
|
|
Line of credit, $2,000 available (10.5%, Due
2/2011)(5)
|
|
|
1,599
|
|
|
|
1,499
|
|
|
|
|
|
|
Senior Term Debt (10.5%, Due
5/2012)(5)
|
|
|
16,948
|
|
|
|
15,889
|
|
|
|
|
|
|
Senior Term Debt (13.3%, Due
5/2012)(3)(5)
|
|
|
10,700
|
|
|
|
9,898
|
|
|
Thibaut Acquisition Co.
|
|
Service-design and distribute wall covering
|
|
Line of Credit, $1,000 available (9.0%, Due
1/2011)(5)
|
|
|
1,000
|
|
|
|
970
|
|
|
|
|
|
|
Senior Term Debt (8.5%, Due
1/2011)(5)
|
|
|
1,075
|
|
|
|
1,043
|
|
|
|
|
|
|
Senior Term Debt (12.0%, Due
1/2011)(3)(5)
|
|
|
3,000
|
|
|
|
2,888
|
|
|
Viapack, Inc.
|
|
Manufacturing-polyethylene film
|
|
Senior Real Estate Term Debt (10.0%, Due
3/2011)(5)
|
|
|
675
|
|
|
|
672
|
|
|
|
|
|
|
Senior Term Debt (13.0%, Due
3/2011)(3)(5)
|
|
|
4,005
|
|
|
|
3,990
|
|
F-10
GLADSTONE
CAPITAL CORPORATION
CONSOLIDATED
SCHEDULE OF
INVESTMENTS — (Continued)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Company(1)
|
|
Industry
|
|
Investment(2)
|
|
Cost
|
|
|
Fair Value
|
|
|
|
|
|
|
|
|
(Dollar amounts in thousands)
|
|
|
|
|
Westlake Hardware, Inc.
|
|
Retail-hardware and variety
|
|
Senior Subordinated Term Debt (12.3%, Due
1/2014)(5)
|
|
$
|
12,000
|
|
|
$
|
11,820
|
|
|
|
|
|
|
Senior Subordinated Term Debt (13.5%, Due
1/2014)(5)
|
|
|
8,000
|
|
|
|
7,800
|
|
|
Winchester Electronics
|
|
Manufacturing-high bandwidth connectors and cables
|
|
Senior Term Debt (5.3%, Due
5/2012)(5)
|
|
|
1,250
|
|
|
|
1,244
|
|
|
|
|
|
|
Senior Term Debt (6.0%, Due
5/2013)(5)
|
|
|
1,686
|
|
|
|
1,661
|
|
|
|
|
|
|
Senior Subordinated Term Debt (14.0%, Due
6/2013)(5)
|
|
|
9,875
|
|
|
|
9,603
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal — Non-syndicated loans
|
|
|
|
|
|
|
225,798
|
|
|
|
206,326
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Syndicated Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Airvana Network Solutions, Inc
|
|
Service-telecommunications
|
|
Senior Term Debt (11.0%, Due
8/2014)(6)
|
|
$
|
8,858
|
|
|
$
|
8,942
|
|
|
Puerto Rico Cable Acquisition Company, Inc.
|
|
Service-telecommunications
|
|
Senior Subordinated Term Debt (7.9%, Due
1/2012)(6)
|
|
|
7,159
|
|
|
|
6,427
|
|
|
WP Evenflo Group Holdings Inc.
|
|
Manufacturing-infant and juvenile products
|
|
Senior Term Debt (8.0%, Due
2/2013)(6)
|
|
|
1,881
|
|
|
|
1,655
|
|
|
|
|
|
|
Senior Preferred
Equity(7)(8)
|
|
|
333
|
|
|
|
379
|
|
|
|
|
|
|
Junior Preferred
Equity(7)(8)
|
|
|
111
|
|
|
|
8
|
|
|
|
|
|
|
Common
Stock(7)(8)
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal — Syndicated loans
|
|
|
|
|
|
|
18,342
|
|
|
|
17,411
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Non-Control/Non-Affiliate Investments
|
|
|
|
|
|
$
|
244,140
|
|
|
$
|
223,737
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONTROL INVESTMENTS
|
|
BERTL, Inc.
|
|
Service-web-based evaluator of digital imaging products
|
|
Line of Credit, $1,621 available (non-accrual, Due
10/2010)(7)(10)(11)
|
|
$
|
1,319
|
|
|
$
|
—
|
|
|
|
|
|
|
Common
Stock(7)(8)
|
|
|
424
|
|
|
|
—
|
|
|
Defiance Integrated Technologies, Inc.
|
|
Manufacturing-trucking parts
|
|
Senior Term Debt (11.0%, Due
4/2013)(3)(5)
|
|
|
8,325
|
|
|
|
8,325
|
|
|
|
|
|
|
Common
Stock(7)(8)
|
|
|
1
|
|
|
|
1,543
|
|
|
|
|
|
|
Guaranty ($250)
|
|
|
|
|
|
|
|
|
F-11
GLADSTONE
CAPITAL CORPORATION
CONSOLIDATED
SCHEDULE OF
INVESTMENTS — (Continued)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Company(1)
|
|
Industry
|
|
Investment(2)
|
|
Cost
|
|
|
Fair Value
|
|
|
|
|
|
|
|
|
(Dollar amounts in thousands)
|
|
|
|
|
Lindmark Acquisition, LLC
|
|
Service-advertising
|
|
Senior Subordinated Term Debt (non-accrual, Due
10/2012)(5)(9)(10)
|
|
$
|
10,000
|
|
|
$
|
5,000
|
|
|
|
|
|
|
Senior Subordinated Term Debt (non-accrual, Due
12/2010)(5)(9)(10)
|
|
|
2,000
|
|
|
|
1,000
|
|
|
|
|
|
|
Senior Subordinated Term Debt (non-accrual, Due Upon
Demand)(5)(9)(10)
|
|
|
1,794
|
|
|
|
897
|
|
|
|
|
|
|
Common
Stock(7)(8)
|
|
|
1
|
|
|
|
—
|
|
|
LocalTel, LLC
|
|
Service-yellow pages publishing
|
|
Line of credit, $1,850 available (non-accrual, Due
12/2010)(7)(10)
|
|
|
1,698
|
|
|
|
1,063
|
|
|
|
|
|
|
Senior Term Debt (non-accrual, Due
2/2012)(7)(10)
|
|
|
325
|
|
|
|
—
|
|
|
|
|
|
|
Line of Credit, $3,000 available (non-accrual, Due
6/2011)(7)(10)
|
|
|
1,170
|
|
|
|
—
|
|
|
|
|
|
|
Senior Term Debt (non-accrual, Due
6/2011)(7)(10)
|
|
|
2,688
|
|
|
|
—
|
|
|
|
|
|
|
Senior Term Debt (non-accrual, Due
6/2011)(3)(7)(10)
|
|
|
2,750
|
|
|
|
—
|
|
|
|
|
|
|
Common Stock
Warrants(7)(8)
|
|
|
—
|
|
|
|
—
|
|
|
Midwest Metal Distribution, Inc.
|
|
Distribution-aluminum sheets and stainless steel
|
|
Senior Subordinated Term Debt (12.0%, Due
7/2013)(5)
|
|
|
18,254
|
|
|
|
15,539
|
|
|
|
|
|
|
Common
Stock(7)(8)
|
|
|
138
|
|
|
|
—
|
|
|
U.S. Healthcare Communications, Inc.
|
|
Service-magazine publisher/ operator
|
|
Line of credit, $400 available (non-accrual, Due
12/2010)(7)(10)
|
|
|
269
|
|
|
|
5
|
|
|
|
|
|
|
Line of credit, $450 available (non-accrual, Due
12/2010)(7)(10)
|
|
|
450
|
|
|
|
—
|
|
|
|
|
|
|
Common
Stock(7)(8)
|
|
|
2,470
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Control Investments
|
|
|
|
|
|
$
|
54,076
|
|
|
$
|
33,372
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Investments(15)
|
|
|
|
|
|
$
|
298,216
|
|
|
$
|
257,109
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Certain of the listed securities are issued by affiliate(s) of
the indicated portfolio company. |
| |
|
(2) |
|
Percentage represents interest rates in effect at
September 30, 2010 and due date represents the contractual
maturity date. |
| |
|
(3) |
|
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. |
| |
|
(4) |
|
LOT of senior debt, meaning if the portfolio company is
liquidated, the holder of the LOT is paid after the senior debt,
however, the debt is also junior to another LOT. |
F-12
GLADSTONE
CAPITAL CORPORATION
CONSOLIDATED
SCHEDULE OF
INVESTMENTS — (Continued)
|
|
|
|
(5) |
|
Fair value was based on opinions of value submitted by
Standard & Poor’s Securities Evaluations, Inc. |
| |
|
(6) |
|
Security valued based on the indicative bid price on or near
September 30, 2010, offered by the respective syndication
agent’s trading desk or secondary desk. |
| |
|
(7) |
|
Fair value was based on the total enterprise value of the
portfolio company using a liquidity waterfall approach. The
Company also considered discounted cash flow methodologies. |
| |
|
(8) |
|
Security is non-income producing. |
| |
|
(9) |
|
Lindmark’s loan agreement was amended in March 2009 such
that any unpaid current interest accrues at a conditional
interest rate. The conditional interest is not recorded until
paid (see Note 2, “Summary of Significant Accounting
Policies — Interest Income Recognition”). |
| |
|
(10) |
|
BERTL, KMBQ, Lindmark, LocalTel, SCI Cable and U.S. Healthcare
are currently past due on interest payments and are on
non-accrual. |
| |
|
(11) |
|
BERTL’s interest includes paid in kind interest. Please
refer to Note 2 “Summary of Significant Accounting
Policies.” Subsequent to September 30, 2010,
BERTL’s line of credit maturity date was extended to
October 2011. |
| |
|
(12) |
|
Subsequent to September 30, 2010, Pinnacle’s line of
credit maturity date was extended to January 2011. |
| |
|
(13) |
|
Subsequent to September 30, 2010, Precision’s
equipment note and senior term loan maturity dates were extended
to November 2010. |
| |
|
(14) |
|
Subsequent to September 30, 2010, Reliable’s line of
credit limit was reduced to $3,500, the interest rate floor was
increased to 10.0% and the maturity date was extended to January
2011. |
| |
|
(15) |
|
Aggregate gross unrealized depreciation for federal income tax
purposes is $1,919; aggregate gross unrealized appreciation for
federal income tax purposes is $43,023. Net unrealized
depreciation is $41,104 based on a tax cost of $298,186. |
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED
FINANCIAL STATEMENTS.
F-13
GLADSTONE
CAPITAL CORPORATION
CONSOLIDATED
SCHEDULE OF INVESTMENTS
SEPTEMBER
30, 2009
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Company(1)
|
|
Industry
|
|
Investment(2)
|
|
Cost
|
|
|
Fair Value
|
|
|
|
|
|
|
|
|
(Dollar amounts in thousands)
|
|
|
|
|
NON-CONTROL/NON-AFFILIATE INVESTMENTS
|
|
|
|
|
|
|
|
|
|
Non-syndicated Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Access Television Network, Inc.
|
|
Service-cable airtime (infomercials)
|
|
Senior Term Debt (14.5%, Due
12/2009)(5)(9)
|
|
$
|
963
|
|
|
$
|
868
|
|
|
ACE Expediters, Inc
|
|
Service-over-the-ground logistics
|
|
Senior Term Debt (13.5%, Due
9/2014)(5)(13)
|
|
|
5,106
|
|
|
|
4,864
|
|
|
|
|
|
|
Common Stock
Warrants(8)
|
|
|
200
|
|
|
|
564
|
|
|
ActivStyle Acquisition Co.
|
|
Service-medical products distribution
|
|
Senior Term Debt (13.0%, Due
4/2014)(3)(5)
|
|
|
4,000
|
|
|
|
3,940
|
|
|
Allison Publications, LLC
|
|
Service-publisher of consumer oriented magazines
|
|
Senior Term Debt (10.0%, Due
9/2012)(5)
|
|
|
9,709
|
|
|
|
8,746
|
|
|
|
|
|
|
Senior Term Debt (13.0%, Due
12/2010)(5)
|
|
|
260
|
|
|
|
246
|
|
|
Anitox Acquisition Company
|
|
Manufacturing-preservatives for animal feed
|
|
Line of Credit, $3,000 available (4.5%, Due
1/2010)(5)
|
|
|
1,700
|
|
|
|
1,681
|
|
|
|
|
|
|
Senior Term Debt (8.5%, Due
1/2012)(5)
|
|
|
2,877
|
|
|
|
2,823
|
|
|
|
|
|
|
Senior Term Debt (10.5%, Due
1/2012)(3)(5)
|
|
|
3,688
|
|
|
|
3,582
|
|
|
BAS Broadcasting
|
|
Service-radio station operator
|
|
Senior Term Debt (11.5%, Due
7/2013)(5)
|
|
|
7,300
|
|
|
|
5,840
|
|
|
|
|
|
|
Senior Term Debt (12.0%, Due
7/2009)(3)(5)(12)
|
|
|
950
|
|
|
|
475
|
|
|
CCS, LLC
|
|
Service-cable TV franchise owner
|
|
Senior Term Debt (non-accrual, Due
8/2008)(5)(10)(12)
|
|
|
631
|
|
|
|
126
|
|
|
Chinese Yellow Pages Company
|
|
Service-publisher of Chinese language directories
|
|
Line of Credit, $700 available (7.3%, Due
9/2010)(5)
|
|
|
450
|
|
|
|
427
|
|
|
|
|
|
|
Senior Term Debt (7.3%, Due
9/2010)(5)
|
|
|
518
|
|
|
|
488
|
|
|
CMI Acquisition, LLC
|
|
Service-recycling
|
|
Senior Subordinated Term Debt (10.3%, Due
11/2012)(5)
|
|
|
6,233
|
|
|
|
5,890
|
|
|
Doe & Ingalls Management LLC
|
|
Distributor-specialty chemicals
|
|
Senior Term Debt (6.8%, Due
11/2010)(5)
|
|
|
2,300
|
|
|
|
2,266
|
|
|
|
|
|
|
Senior Term Debt (7.8%, Due
11/2010)(3)(5)
|
|
|
4,365
|
|
|
|
4,267
|
|
|
Finn Corporation
|
|
Manufacturing-landscape equipment
|
|
Common Stock
Warrants(8)
|
|
|
37
|
|
|
|
1,223
|
|
F-14
GLADSTONE
CAPITAL CORPORATION
CONSOLIDATED
SCHEDULE OF
INVESTMENTS — (Continued)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Company(1)
|
|
Industry
|
|
Investment(2)
|
|
Cost
|
|
|
Fair Value
|
|
|
|
|
|
|
|
|
(Dollar amounts in thousands)
|
|
|
|
|
GFRC Holdings LLC
|
|
Manufacturing-glass-fiber reinforced concrete
|
|
Line of Credit, $2,000 available (4.5%, Due 12/2010)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
Senior Term Debt (9.0%, Due
12/2012)(5)
|
|
|
6,599
|
|
|
|
6,450
|
|
|
|
|
|
|
Senior Subordinated Term Debt (11.5%, Due
12/2012)(3)(5)
|
|
|
6,665
|
|
|
|
6,432
|
|
|
Global Materials Technologies, Inc.
|
|
Manufacturing-steel wool products and metal fibers
|
|
Senior Term Debt (13.0%, Due
6/2010)(3)(5)
|
|
|
4,410
|
|
|
|
3,528
|
|
|
Heartland Communications Group
|
|
Service-radio station operator
|
|
Senior Term Debt (10.0%, Due
5/2011)(5)
|
|
|
4,567
|
|
|
|
2,726
|
|
|
Interfilm Holdings, Inc.
|
|
Service-slitter and distributor of plastic films
|
|
Senior Term Debt (12.3%, Due
10/2012)(5)
|
|
|
4,950
|
|
|
|
4,715
|
|
|
International Junior Golf Training Acquisition Company
|
|
Service-golf training
|
|
Line of Credit, $1,500 available (9.0%, Due
5/2010)(5)
|
|
|
700
|
|
|
|
690
|
|
|
|
|
|
|
Senior Term Debt (8.5%, Due
5/2012)(5)
|
|
|
2,120
|
|
|
|
2,036
|
|
|
|
|
|
|
Senior Term Debt (10.5%, Due
5/2012)(3)(5)
|
|
|
2,500
|
|
|
|
2,366
|
|
|
KMBQ Corporation
|
|
Service-AM/FM radio broadcaster
|
|
Line of Credit, $200 available (11.0%, Due
3/2010)(5)
|
|
|
153
|
|
|
|
69
|
|
|
|
|
|
|
Senior Term Debt (11.0%, Due
3/2010)(5)
|
|
|
1,785
|
|
|
|
801
|
|
|
Legend Communications of Wyoming LLC
|
|
Service-operator of radio stations
|
|
Line of Credit, $500 available (12.0%, Due
6/2011)(5)
|
|
|
497
|
|
|
|
450
|
|
|
|
|
|
|
Senior Term Debt (12.0%, Due
6/2013)(5)
|
|
|
9,373
|
|
|
|
8,482
|
|
|
Newhall Holdings, Inc.
|
|
Service-distributor of personal care products and supplements
|
|
Line of Credit, $3,000 available (11.3%, Due
5/2010)(5)
|
|
|
1,000
|
|
|
|
945
|
|
|
|
|
|
|
Senior Term Debt (5)(11.3%, Due
5/2012)(5)
|
|
|
3,870
|
|
|
|
3,657
|
|
|
|
|
|
|
Senior Term Debt (14.3%, Due
5/2012)(3)(5)
|
|
|
4,410
|
|
|
|
4,112
|
|
|
Northern Contours, Inc.
|
|
Manufacturing-veneer and laminate components
|
|
Senior Subordinated Term Debt (10.0%, Due
5/2010)(5)
|
|
|
6,562
|
|
|
|
5,414
|
|
|
Pinnacle Treatment Centers, Inc.
|
|
Service-Addiction treatment centers
|
|
Line of Credit, $500 available (4.5%, Due 12/2009)
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
Senior Term Debt (10.5%, Due
12/2011)(5)
|
|
|
2,750
|
|
|
|
2,633
|
|
|
|
|
|
|
Senior Term Debt (10.5%, Due
12/2011)(3)(5)
|
|
|
7,500
|
|
|
|
7,059
|
|
F-15
GLADSTONE
CAPITAL CORPORATION
CONSOLIDATED
SCHEDULE OF
INVESTMENTS — (Continued)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Company(1)
|
|
Industry
|
|
Investment(2)
|
|
Cost
|
|
|
Fair Value
|
|
|
|
|
|
|
|
|
(Dollar amounts in thousands)
|
|
|
|
|
Precision Acquisition Group Holdings, Inc.
|
|
Manufacturing-consumable components for the aluminum industry
|
|
Equipment Note (8.5%, Due
10/2011)(5)
|
|
$
|
1,000
|
|
|
$
|
988
|
|
|
|
|
|
|
Senior Term Debt (8.5%, Due
10/2010)(5)
|
|
|
4,250
|
|
|
|
4,192
|
|
|
|
|
|
|
Senior Term Debt (11.5%, Due
10/2010)(3)(5)
|
|
|
4,074
|
|
|
|
4,023
|
|
|
PROFITSystems Acquisition Co.
|
|
Service-design and develop ERP software
|
|
Line of Credit, $350 available (4.5%, Due 7/2010)
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
Senior Term Debt (8.5%, Due
7/2011)(5)
|
|
|
1,600
|
|
|
|
1,468
|
|
|
|
|
|
|
Senior Term Debt (10.5%, Due
7/2011)(3)(5)
|
|
|
2,900
|
|
|
|
2,632
|
|
|
RCS Management Holding Co.
|
|
Service-healthcare supplies
|
|
Senior Term Debt (8.5%, Due
1/2011)(3)(5)
|
|
|
2,437
|
|
|
|
2,383
|
|
|
|
|
|
|
Senior Term Debt (10.5%, Due
1/2011)(4)(5)
|
|
|
3,060
|
|
|
|
2,949
|
|
|
Reliable Biopharmaceutical Holdings, Inc.
|
|
Manufacturing-pharmaceutical and biochemical intermediates
|
|
Line of Credit, $5,000 available (9.0%, Due
10/2010)(5)
|
|
|
800
|
|
|
|
788
|
|
|
|
|
|
|
Mortgage Note (9.5%, Due
10/2014)(5)
|
|
|
7,335
|
|
|
|
7,261
|
|
|
|
|
|
|
Senior Term Debt (9.0%, Due
10/2012)(5)
|
|
|
1,530
|
|
|
|
1,507
|
|
|
|
|
|
|
Senior Term Debt (11.0%, Due
10/2012)(3)(5)
|
|
|
11,813
|
|
|
|
11,518
|
|
|
|
|
|
|
Senior Subordinated Term Debt (12.0%, Due
10/2013)(5)
|
|
|
6,000
|
|
|
|
5,640
|
|
|
|
|
|
|
Common Stock Warrants(8)
|
|
|
209
|
|
|
|
282
|
|
|
Saunders & Associates
|
|
Manufacturing-equipment provider for frequency control devices
|
|
Senior Term Debt (9.8%, Due
5/2013)(5)
|
|
|
10,780
|
|
|
|
10,618
|
|
|
SCI Cable, Inc.
|
|
Service-cable, internet, voice provider
|
|
Senior Term Debt (9.3%, Due
10/2008)(5)(12)
|
|
|
2,881
|
|
|
|
576
|
|
|
Sunburst Media — Louisiana, LLC
|
|
Service-radio station operator
|
|
Senior Term Debt (10.5%, Due
6/2011)(5)
|
|
|
6,411
|
|
|
|
5,817
|
|
|
Sunshine Media Holdings
|
|
Service-publisher regional B2B trade magazines
|
|
Senior Term Debt (11.0%, Due
5/2012)(5)
|
|
|
16,948
|
|
|
|
15,973
|
|
|
|
|
|
|
Senior Term Debt (13.5%, Due
5/2012)(3)(5)
|
|
|
10,700
|
|
|
|
9,978
|
|
F-16
GLADSTONE
CAPITAL CORPORATION
CONSOLIDATED
SCHEDULE OF
INVESTMENTS — (Continued)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Company(1)
|
|
Industry
|
|
Investment(2)
|
|
Cost
|
|
|
Fair Value
|
|
|
|
|
|
|
|
|
(Dollar amounts in thousands)
|
|
|
|
|
Thibaut Acquisition Co.
|
|
Service-design and distribute wall covering
|
|
Line of Credit, $1,000 available (9.0%, Due
1/2011)(5)
|
|
$
|
1,000
|
|
|
$
|
933
|
|
|
|
|
|
|
Senior Term Debt (8.5%, Due
1/2011)(5)
|
|
|
1,487
|
|
|
|
1,387
|
|
|
|
|
|
|
Senior Term Debt (12.0%, Due
1/2011)(3)(5)
|
|
|
3,000
|
|
|
|
2,745
|
|
|
Tulsa Welding School
|
|
Service-private welding school
|
|
Line of credit, $750 available (9.5%, Due 9/2011)
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
Senior Term Debt (9.5%, Due
9/2013)(5)
|
|
|
4,144
|
|
|
|
4,144
|
|
|
|
|
|
|
Senior Term Debt (12.8%, Due
9/2013)(5)
|
|
|
7,960
|
|
|
|
7,950
|
|
|
VantaCore
|
|
Service-acquisition of aggregate quarries
|
|
Senior Subordinated Term Debt (12.0%, Due
8/2013)(5)
|
|
|
13,726
|
|
|
|
13,589
|
|
|
Viapack, Inc.
|
|
Manufacturing-polyethylene film
|
|
Senior Real Estate Term Debt (10.0%, Due
3/2011)(5)
|
|
|
775
|
|
|
|
743
|
|
|
|
|
|
|
Senior Term Debt (13.0%, Due
3/2011)(3)(5)
|
|
|
4,061
|
|
|
|
3,893
|
|
|
Visual Edge Technology, Inc.
|
|
Service-office equipment distribution
|
|
Line of credit, $3,000 available (10.8%, Due
9/2011)(5)
|
|
|
2,981
|
|
|
|
2,340
|
|
|
|
|
|
|
Senior Subordinated Term Debt (15.5%, Due
8/2011)(5)
|
|
|
5,000
|
|
|
|
3,925
|
|
|
Westlake Hardware, Inc.
|
|
Retail-hardware and variety
|
|
Senior Subordinated Term Debt (9.0%, Due
1/2011)(5)
|
|
|
15,000
|
|
|
|
14,269
|
|
|
|
|
|
|
Senior Subordinated Term Debt (10.3%, Due
1/2011)(5)
|
|
|
10,000
|
|
|
|
9,400
|
|
|
Winchester Electronics
|
|
Manufacturing-high bandwidth connectors and cables
|
|
Senior Term Debt (5.3%, Due
5/2013)(5)
|
|
|
1,147
|
|
|
|
1,136
|
|
|
|
|
|
|
Senior Term Debt (5.7%, Due
5/2013)(5)
|
|
|
1,690
|
|
|
|
1,642
|
|
|
|
|
|
|
Senior Subordinated Term Debt (14.0%, Due
6/2013)(5)
|
|
|
9,925
|
|
|
|
9,478
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal — Non-syndicated loans
|
|
|
|
|
|
|
298,322
|
|
|
|
277,048
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Syndicated Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GTM Holdings, Inc.
|
|
Manufacturing-socks
|
|
Senior Subordinated Term Debt (11.8%, Due
4/2014)(6)
|
|
$
|
500
|
|
|
$
|
220
|
|
F-17
GLADSTONE
CAPITAL CORPORATION
CONSOLIDATED
SCHEDULE OF
INVESTMENTS — (Continued)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Company(1)
|
|
Industry
|
|
Investment(2)
|
|
Cost
|
|
|
Fair Value
|
|
|
|
|
|
|
|
|
(Dollar amounts in thousands)
|
|
|
|
|
Kinetek Acquisition Corp.
|
|
Manufacturing-custom engineered motors & controls
|
|
Senior Term Debt (3.6%, Due
11/2013)(7)
|
|
$
|
1,438
|
|
|
$
|
925
|
|
|
Puerto Rico Cable Acquisition Company, Inc.
|
|
Service-telecommunications
|
|
Senior Subordinated Term Debt (7.8%, Due
1/2012)(6)
|
|
|
7,174
|
|
|
|
5,713
|
|
|
Wesco Holdings, Inc.
|
|
Service-aerospace parts and distribution
|
|
Senior Subordinated Term Debt (6.0%, Due
3/2014)(7)
|
|
|
2,264
|
|
|
|
1,856
|
|
|
WP Evenflo Group Holdings Inc.
|
|
Manufacturing-infant and juvenile products
|
|
Senior Term Debt (8.0%, Due
2/2013)(6)
|
|
|
1,901
|
|
|
|
1,235
|
|
|
|
|
|
|
Senior Preferred
Equity(8)
|
|
|
333
|
|
|
|
—
|
|
|
|
|
|
|
Junior Preferred
Equity(8)
|
|
|
111
|
|
|
|
—
|
|
|
|
|
|
|
Common
Stock(8)
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal — Syndicated loans
|
|
|
|
|
|
|
13,721
|
|
|
|
9,949
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Non-Control/Non-Affiliate Investments
|
|
|
|
|
|
$
|
312,043
|
|
|
$
|
286,997
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONTROL INVESTMENTS
|
|
BERTL, Inc.
|
|
Service-web-based evaluator of digital imaging products
|
|
Line of Credit, $842 available (non-accrual, Due
10/2009)(10)(13)(15)
|
|
$
|
930
|
|
|
$
|
—
|
|
|
|
|
|
|
Common
Stock(8)(15)
|
|
|
424
|
|
|
|
—
|
|
|
Clinton Holdings, LLC
|
|
Distribution-aluminum sheets and stainless steel
|
|
Senior Subordinated Term Debt (12.0%, Due
1/2013)(5)(14)
|
|
|
15,500
|
|
|
|
12,013
|
|
|
|
|
|
|
Escrow Funding Note (12.0%, Due
1/2013)(5)(14)
|
|
|
640
|
|
|
|
496
|
|
|
|
|
|
|
Common Stock
Warrants(8)(15)
|
|
|
109
|
|
|
|
—
|
|
|
Defiance Integrated Technologies, Inc.
|
|
Manufacturing-trucking parts
|
|
Senior Term Debt (11.0%, Due
4/2010)(3)(11)
|
|
|
6,005
|
|
|
|
6,005
|
|
|
|
|
|
|
Senior Term Debt (11.0%, Due
4/2010)(3)(11)
|
|
|
1,178
|
|
|
|
1,178
|
|
|
|
|
|
|
Common
Stock(8)(15)
|
|
|
1
|
|
|
|
816
|
|
|
|
|
|
|
Guaranty ($250)
|
|
|
|
|
|
|
|
|
|
Lindmark Acquisition, LLC
|
|
Service-advertising
|
|
Senior Subordinated Term Debt (11.3%, Due
10/2012)(5)(16)
|
|
|
10,000
|
|
|
|
8,675
|
|
|
|
|
|
|
Senior Subordinated Term Debt (11.3%, Due
10/2012)(5)(16)
|
|
|
2,000
|
|
|
|
1,735
|
|
|
|
|
|
|
Senior Subordinated Term Debt (13.0%, Due Upon
Demand)(5)(16)
|
|
|
1,553
|
|
|
|
1,049
|
|
|
|
|
|
|
Common
Stock(8)(15)
|
|
|
1
|
|
|
|
—
|
|
F-18
GLADSTONE
CAPITAL CORPORATION
CONSOLIDATED
SCHEDULE OF
INVESTMENTS — (Continued)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Company(1)
|
|
Industry
|
|
Investment(2)
|
|
Cost
|
|
|
Fair Value
|
|
|
|
|
|
|
|
|
(Dollar amounts in thousands)
|
|
|
|
|
LocalTel, LLC
|
|
Service-yellow pages publishing
|
|
Line of credit, $1,250 available (10.0%, Due
7/2010)(15)
|
|
$
|
1,168
|
|
|
$
|
1,168
|
|
|
|
|
|
|
Senior Term Debt (12.5%, Due
2/2012)(15)
|
|
|
325
|
|
|
|
325
|
|
|
|
|
|
|
Line of Credit, $3,000 available (non-accrual, Due
6/2010)(10)(15)
|
|
|
1,170
|
|
|
|
421
|
|
|
|
|
|
|
Senior Term Debt (non-accrual, Due
6/2011)(10)(15)
|
|
|
2,688
|
|
|
|
—
|
|
|
|
|
|
|
Senior Term Debt (non-accrual, Due
6/2011)(3)(10)(15)
|
|
|
2,750
|
|
|
|
—
|
|
|
|
|
|
|
Common Stock
Warrants(8)(15)
|
|
|
—
|
|
|
|
—
|
|
|
U.S. Healthcare Communications, Inc.
|
|
Service-magazine publisher/ operator
|
|
Line of credit, $200 available (non-accrual, Due
3/2010)(10)(15)
|
|
|
169
|
|
|
|
91
|
|
|
|
|
|
|
Line of credit, $450 available (non-accrual, Due
3/2010)(10)(15)
|
|
|
450
|
|
|
|
—
|
|
|
|
|
|
|
Common
Stock(8)(15)
|
|
|
2,470
|
|
|
|
—
|
|
|
Western Directories, Inc.
|
|
Service-directory publisher
|
|
Line of credit, $1,250 available (non-accrual, Due
12/2009)(10)(15)
|
|
|
1,234
|
|
|
|
—
|
|
|
|
|
|
|
Preferred
Stock(8)(15)
|
|
|
1,584
|
|
|
|
—
|
|
|
|
|
|
|
Common
Stock(8)(15)
|
|
|
1
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Control Investments
|
|
|
|
|
|
$
|
52,350
|
|
|
$
|
33,972
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Investments(17)
|
|
|
|
|
|
$
|
364,393
|
|
|
$
|
320,969
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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(1) |
|
Certain of the listed securities are issued by affiliate(s) of
the indicated portfolio company. |
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|
(2) |
|
Percentage represents interest rates in effect at
September 30, 2009 and due date represents the contractual
maturity date. |
| |
|
(3) |
|
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. |
| |
|
(4) |
|
LOT of senior debt, meaning if the portfolio company is
liquidated, the holder of the LOT is paid after the senior debt,
however, the debt is also junior to another LOT. |
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|
(5) |
|
Fair value was based on opinions of value submitted by
Standard & Poor’s Securities Evaluations, Inc. |
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(6) |
|
Security valued based on the indicative bid price on or near
September 30, 2009, offered by the respective syndication
agent’s trading desk or secondary desk. |
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(7) |
|
Security valued based on the transaction sale price subsequent
to September 30, 2009 (see Note 12). |
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(8) |
|
Security is non-income producing. |
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(9) |
|
Access Television includes a success fee with a fair value of $1. |
F-19
GLADSTONE
CAPITAL CORPORATION
CONSOLIDATED
SCHEDULE OF
INVESTMENTS — (Continued)
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(10) |
|
BERTL, CCS, U.S. Healthcare, Western Directories and a portion
of LocalTel are currently past due on interest payments and are
on non-accrual. BERTL’s loan matured in October 2009 and
the Company is actively working to recover amounts due under
this loan. However, there is no assurance that there will be any
recovery of amounts past due. |
| |
|
(11) |
|
Fair value of security estimated to be equal to cost due to
recent recapitalization. |
| |
|
(12) |
|
BAS Broadcasting’s loan matured in July 2009, CCS’
loan matured in August 2008 and SCI Cable’s loan matured in
October 2008. The Company is actively working to recover amounts
due under these loans, however, there is no assurance that there
will be any recovery of amounts past due. |
| |
|
(13) |
|
ACE Expediters’ interest and BERTL’s interest include
paid in kind (“PIK”) interest. Please refer to
Note 2 “Summary of Significant Accounting
Policies.” |
| |
|
(14) |
|
Subsequent to September 30, 2009, Clinton Aluminum’s
senior subordinated term debt and escrow funding note were
combined into one term note, with an interest rate of 12.0% and
maturity date of January 2013. In addition, a term loan was
entered into for $320, with an interest rate of 12.0% and
maturity date of January 2013. |
| |
|
(15) |
|
Fair value was based on the total enterprise value of the
portfolio company using a liquidity waterfall approach. |
| |
|
(16) |
|
Lindmark’s loan agreement was amended in March 2009 such
that any unpaid current interest accrues at a conditional
interest rate. The conditional interest is not recorded until
paid (see Note 2, “Summary of Significant Accounting
Policies — Interest Income Recognition”). |
| |
|
(17) |
|
Aggregate gross unrealized depreciation for federal income tax
purposes is $45,863; aggregate gross unrealized appreciation for
federal income tax purposes is $2,439. Net unrealized
depreciation is $43,424 based on a tax cost of $364,393. |
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED
FINANCIAL STATEMENTS.
F-20
GLADSTONE
CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2010
(DOLLAR AMOUNTS IN THOUSANDS,
EXCEPT PER SHARE DATA AND AS OTHERWISE INDICATED)
Gladstone Capital Corporation (the “Company”) was
incorporated under the General Corporation Laws of the State of
Maryland on May 30, 2001. The Company is 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, the Company has
elected to be treated for tax purposes as a regulated investment
company (“RIC”) under the Internal Revenue Code of
1986, as amended (the “Code”). The Company’s
investment objectives are to achieve a high level of current
income by investing in debt securities, consisting primarily of
senior notes, senior subordinated notes and junior subordinated
notes, of established private businesses that are substantially
owned by leveraged buyout funds, individual investors or are
family-owned businesses, with a particular focus on senior
notes. In addition, the Company may acquire from others existing
loans that meet this profile.
Gladstone Business Loan, LLC (“Business Loan”), a
wholly-owned subsidiary of the Company, was established on
February 3, 2003 for the purpose of holding the
Company’s portfolio of loan investments. Gladstone Capital
Advisers, Inc. is also a wholly-owned subsidiary of the Company,
which was established on December 30, 2003.
Northern Virginia SBIC, LP (“Northern Virginia SBIC”)
and Northern Virginia SBIC GP, LLC, the general partner of
Northern Virginia SBIC, were established on December 4,
2008 as wholly-owned subsidiaries of the Company for the purpose
of applying for and holding a license to enable the Company,
through Northern Virginia SBIC, to make investments in
accordance with the United States Small Business Administration
guidelines for small business investment companies.
Gladstone Financial Corporation (“Gladstone
Financial”), a wholly-owned subsidiary of the Company, 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. This
will enable the Company, 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 subsidiaries are consolidated
with those of the Company.
The Company is externally managed by Gladstone Management
Corporation (the “Adviser”), an unconsolidated
affiliate of the Company.
|
|
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Note 2.
|
Summary
of Significant Accounting Policies
|
Basis
of Presentation
The accompanying consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiaries. All
significant intercompany balances and transactions have been
eliminated.
Reclassifications
Certain amounts in the prior years’ financial statements
have been reclassified to conform to the current year
presentation with no effect to net increase in net assets
resulting from operations.
F-21
GLADSTONE
CAPITAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Consolidation
Under Article 6 of
Regulation S-X
under the Securities Act of 1933, as amended, and the
authoritative accounting guidance provided by the AICPA Audit
and Accounting Guide for Investment Companies, the Company is
not permitted to consolidate any subsidiary or other entity that
is not an investment company.
Use of
Estimates
The consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the
United States of America (“GAAP”) that require
management to make estimates and assumptions that affect the
amounts reported in the financial statements and accompanying
notes. Actual results may differ from those estimates.
Out-of-Period
Adjustment
During the year ended September 30, 2010, the Company
recorded adjustments to interest income, operating expenses and
certain balance sheet accounts to reverse interest income and
record additional expenses primarily related to professional
fees that were not correctly recorded in prior periods. The net
adjustments resulted in reductions of $651 in net investment
income for the year ended September 30, 2010, respectively.
These adjustments reduced net investment income per share by
$0.03 for the year ended September 30, 2010, respectively.
These adjustments both individually and in the aggregate were
not material to any of the fiscal 2009 interim or full year
consolidated financial statements nor were they material to full
year fiscal 2010 results.
Cash
and Cash Equivalents
Cash and cash equivalents consist of demand deposits and highly
liquid investments with original maturities of three months or
less when purchased. Cash is carried at cost which approximated
fair value as of September 30, 2010 and September 30,
2009. There were no cash equivalents as of September 30,
2010 or September 30, 2009.
Concentration
of Credit Risk
The Company places its cash and cash equivalents with financial
institutions and, at times, cash held in accounts may exceed the
Federal Deposit Insurance Corporation insured limit. The Company
seeks to mitigate this risk by depositing funds with major
financial institutions.
Classification
of Investments
In accordance with the 1940 Act, the Company classifies
portfolio investments on its consolidated balance sheets and its
consolidated schedules of investments into the following
categories:
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|
|
| |
•
|
Control Investments — Investments in which the
Company owns more than 25% of the voting securities or has
greater than 50% representation on the board of directors;
|
| |
| |
•
|
Affiliate Investments — Investments in which
the Company owns between 5% and 25% of the voting securities and
has less than 50% representation on the board of
directors; and
|
| |
| |
•
|
Non-Control/Non-Affiliate Investments —
Investments in which the Company owns less than 5% of the voting
securities.
|
Investment
Valuation Policy
The Company carries its investments at market value to the
extent that market quotations are readily available and
reliable, and otherwise at fair value, as determined in good
faith by its Board of Directors. In determining the fair value
of the Company’s investments, the Adviser has established
an investment valuation policy (the “Policy”).
F-22
GLADSTONE
CAPITAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The Policy is approved by the Company’s Board of Directors
and each quarter the Board of Directors reviews whether the
Adviser has applied the Policy consistently and votes whether or
not to accept the recommended valuation of the Company’s
investment portfolio.
The Company uses generally accepted valuation techniques to
value its portfolio unless the Company has specific information
about the value of an investment to determine otherwise. From
time to time the Company may accept an appraisal of a business
in which the Company holds securities. These appraisals are
expensive and occur infrequently but provide a third-party
valuation opinion that may differ in results, techniques and
scopes used to value the Company’s investments. When these
specific third-party appraisals are engaged or accepted, the
Company 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 the investment the Company has
in that business.
The Policy, which is 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 Company
determines the value of publicly-traded securities based on the
closing price for the security on the exchange or securities
market on which it is listed and primarily traded on the
valuation date. To the extent that the Company owns restricted
securities that are not freely tradable, but for which a public
market otherwise exists, the Company will use the market value
of that security adjusted for any decrease in value resulting
from the restrictive feature.
Securities for which a limited market
exists: The Company 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. In valuing these assets, the Company
assesses trading activity in an asset class and evaluates
variances in prices and other market insights to determine if
any available quote prices are reliable. If the Company
concludes that quotes based on active markets or trading
activity may be relied upon, firm bid prices are requested;
however, if a firm bid price is unavailable, the Company 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 Company 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.
In the event these limited markets become illiquid such that
market prices are no longer readily available, the Company will
value its syndicated loans using alternative methods, such as
estimated net present values of the future cash flows or
discounted cash flows (“DCF”). The use of a DCF
methodology follows that prescribed by the Financial Accounting
Standards Board (“FASB”) Accounting Standards
Codification (“ASC”) 820, “Fair Value
Measurements and Disclosures,” which provides guidance on
the use of a reporting entity’s own assumptions about
future cash flows and risk-adjusted discount rates when relevant
observable inputs, such as quotes in active markets, are not
available. When relevant observable market data does not exist,
the alternative outlined in ASC 820 is the use of valuing
investments based on DCF. For the purposes of using DCF to
provide fair value estimates, the Company 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 Company
develops a modified discount rate approach that incorporates
risk premiums including, among others, increased probability of
default, or higher loss given default or increased liquidity
risk. The DCF valuations applied to the syndicated loans provide
an estimate of what the Company believes a market participant
would pay to purchase a syndicated loan in an active market,
thereby establishing a fair value. The Company will apply the
DCF methodology in illiquid markets until quoted prices are
available or are deemed reliable based on trading activity.
As of September 30, 2010, the Company assessed trading
activity in its syndicated loan assets and determined that there
continued to be market liquidity and a secondary market for
these assets. Thus, firm bid prices or IBPs were used to fair
value the Company’s remaining syndicated loans as of
September 30, 2010.
F-23
GLADSTONE
CAPITAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Securities for which no market exists: The
valuation methodology for securities for which no market exists
falls into three categories: (1) portfolio investments
comprised solely of debt securities; (2) portfolio
investments in controlled companies comprised of a bundle of
securities, which can include debt and equity securities; and
(3) portfolio investments in non-controlled companies
comprised of a bundle of investments, which can include debt and
equity securities.
(1) Portfolio investments comprised solely of debt
securities: Debt securities that are not
publicly-traded on an established securities market, or for
which a limited market does not exist (“Non-Public Debt
Securities”), and that are issued by portfolio companies
where the Company has no equity or equity-like securities, are
fair valued in accordance with the terms of the Policy, which
utilizes opinions of value submitted to the Company by
Standard & Poor’s Securities Evaluations, Inc.
(“SPSE”). The Company 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.
(2) 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 the
Company’s 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 the Company has 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 acquisition market as the principal market,
generally through a sale or recapitalization of the portfolio
company. In accordance with ASC 820, the Company applies
the in-use premise of value which assumes the debt and equity
securities are sold together. Under this liquidity waterfall
approach, the Company first calculates the TEV of the issuer by
incorporating some or all of the following factors to determine
the TEV of the issuer:
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•
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the issuer’s ability to make payments;
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•
|
the earnings of the issuer;
|
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•
|
recent sales to third parties of similar securities;
|
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•
|
the comparison to publicly traded securities; and
|
| |
| |
•
|
DCF or other pertinent factors.
|
In gathering the sales to third parties of similar securities,
the Company may reference industry statistics and use outside
experts. Once the Company has estimated the TEV of the issuer,
the Company 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 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 the Company use a
valuation by SPSE, or if that is unavailable, a DCF valuation
technique.
(3) Portfolio investments in non-controlled companies
comprised of a bundle of investments, which can include debt and
equity securities: The Company values Non-Public
Debt Securities that are purchased together with equity or
equity-like securities from the same portfolio company, or
issuer, for which the Company does not control or cannot gain
control as of the measurement date, using a hypothetical
secondary market as the Company’s principal market. In
accordance with ASC 820, the Company determines its fair
value of these debt securities of non-control investments
assuming the sale of an individual debt security using the
in-exchange premise of value. As such, the Company 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.
Subsequent to
F-24
GLADSTONE
CAPITAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
June 30, 2009, for equity or equity-like securities of
investments for which the Company does not control or cannot
gain control as of the measurement date, the Company estimates
the fair value of the equity using the in-exchange premise of
value 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. Further, the
Company may utilize comparable values of similar companies,
recent investments and indices with similar structures and risk
characteristics or its own assumptions in the absence of other
observable market data and may also employ DCF valuation
techniques.
(4) Portfolio investments comprised of non-publicly
traded non-control equity securities of other
funds: The Company values any uninvested capital
of the non-control fund at par value and value any invested
capital at the value provided by the non-control fund.
Due to the uncertainty inherent in the valuation process, such
estimates of fair value may differ significantly from the values
that would have been obtained had a ready market for the
securities existed, and the differences could be material.
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 Company might
reasonably expect to receive upon the current sale of the
security in an arms-length transaction in the security’s
principal market.
Refer to Note 3 for additional information regarding fair
value measurements and the Company’s adoption of
ASC 820.
Interest
Income Recognition
Interest income, adjusted for amortization of premiums and
acquisition costs and for the accretion of discounts, is
recorded on the accrual basis to the extent that such amounts
are expected to be collected. Generally, when a loan becomes
90 days or more past due or if the Company’s
qualitative assessment indicates that the debtor is unable to
service its debt or other obligations, the Company 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, the
Company remains contractually entitled to this interest.
Interest payments received on non-accrual loans may be
recognized as income or applied to principal depending upon
management’s judgment. Non-accrual loans are restored to
accrual status when past due principal and interest is paid and
in management’s judgment, are likely to remain current. As
of September 30, 2010, two Non-Control/Non-Affiliate
investment and four Control investments were on non-accrual with
an aggregate cost basis of approximately $29,926, or 10.0% of
the cost basis of all loans in the Company’s portfolio. As
of September 30, 2009, one Non-Control/Non-Affiliate
investment and four Control investments were on non-accrual with
an aggregate cost basis of approximately $10,022, or 2.8% of the
cost basis of all loans in the Company’s portfolio.
Conditional interest, or a success fee, is recorded when earned
or upon full repayment of a loan investment. Success fees are
recorded upon receipt. Success fees are contractually due upon a
change of control in a portfolio company and are recorded in
Other income in the Company’s consolidated statements of
operations.
Paid
in Kind Interest and Original Issue Discount
The Company has one loan in its portfolio which contains a paid
in kind (“PIK”) provision. The PIK interest, computed
at the contractual rate specified in each loan agreement, is
added to the principal balance of the loan and recorded as
income. To maintain the Company’s status as a RIC, this
non-cash source of income must be paid out to stockholders in
the form of distributions, even though the Company has not yet
collected the cash. The Company recorded PIK income of $53, $166
and $58 for the fiscal years ended September 30, 2010, 2009
and 2008, respectively.
F-25
GLADSTONE
CAPITAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The Company also transfers past due interest to the principal
balance as stipulated in certain loan amendments with portfolio
companies. For the fiscal years ended September 30, 2010,
2009 and 2008, respectively, the Company rolled over past due
interest to the principal balance of $529, $1,455 and $0. For
the fiscal year ended September 30, 2010, the Company also
rolled over past due interest to a portfolio company’s
principal balance of $715, and then recorded an adjustment
against that principal balance since the loan was on non-accrual
and the collectability of the additional principal was
uncertain. This adjustment had no net impact to the consolidated
statement of operations.
The Company has four original issue discount (“OID”)
loans. The Company recorded OID income of $21, $206 and $0 for
the fiscal years ended September 30, 2010, 2009 and 2008,
respectively.
Realized
Gain or Loss and Unrealized Appreciation or Depreciation of
Portfolio Investments
Gains or losses on the sale of investments are calculated by
using the specific identification method. Realized gain or loss
is recognized when an investment is disposed of and is computed
as the difference between the Company’s cost basis in the
investment at the disposition date and the net proceeds received
from such disposition. Unrealized appreciation or depreciation
displays the difference between the fair market value of the
investment and the cost basis of such investment. The Company
must determine the fair value of each individual investment on a
quarterly basis and record changes in fair value as unrealized
appreciation or depreciation in its consolidated statement of
operations.
Costs
Related to Shelf Registration Statements
Costs related to shelf registration statement filings are
recorded as prepaid assets. These expenses are charged as a
reduction of capital upon utilization, in accordance with
ASC 946-20,
“Investment Company Activities.”
Deferred
Finance Costs
Costs associated with the Company’s line of credit are
deferred and amortized over the life of the credit facility.
These costs are amortized in the consolidated statement of
operations as amortization of deferred financing fees using the
straight line method.
Receivables
from Portfolio Companies
Receivables from portfolio companies represent non-recurring
costs incurred on behalf of the portfolio companies. The Company
maintains an allowance for uncollectible receivables from
portfolio companies, which is determined based on historical
experience and management’s expectations of future losses.
The Company charges the accounts receivable to the established
provision when collection efforts have been exhausted and the
receivables are deemed uncollectible. As of September 30,
2010 and 2009, the Company had gross receivables from portfolio
companies of $611 and $1,528, respectively. The allowance for
uncollectible receivables were $322 and $0 as of
September 30, 2010 and 2009, respectively.
Related
Party Costs
The Company has entered into an investment advisory and
management agreement (the “Advisory Agreement”) with
the Adviser, which is controlled by the Company’s chairman
and chief executive officer. In accordance with the Advisory
Agreement, the Company pays the Adviser fees as compensation for
its services, consisting of a base management fee and an
incentive fee. The Company has entered into an administration
agreement (the “Administration Agreement”) with
Gladstone Administration, LLC (the “Administrator) whereby
it pays separately for administrative services. These fees are
accrued when the services are performed and generally paid one
month in arrears. Refer to Note 4 for additional
information regarding these related party costs and agreements.
F-26
GLADSTONE
CAPITAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Federal
Income Taxes
The Company intends to continue to qualify for treatment as a
RIC under subchapter M of the Code. As a RIC, the Company will
not be subject to federal income tax on the portion of its
taxable income and gains distributed to stockholders. To qualify
as a RIC, the Company must meet certain
source-of-income,
asset diversification, and annual distribution requirements.
Under the annual distribution requirement, the Company is
required to distribute at least 90% of its investment company
taxable income, as defined by the Code. The Company intends to
distribute at least 90% of its ordinary income, and as a result,
no income tax provisions have been recorded. The Company may,
but does not intend to, pay out a return of capital.
ASC 740-10,
“Income Taxes” requires the evaluation of tax
positions taken or expected to be taken in the course of
preparing the Company’s tax returns to determine whether
the tax positions are “more-likely-than-not” of being
sustained by the applicable tax authorities. Tax positions not
deemed to satisfy the “more-likely-than-not” threshold
would be recorded as a tax benefit or expense in the current
year. As of September 30, 2010 tax years 2006, 2007, 2008
and 2009 were open. The Company has evaluated the implications
of ASC 740, for all open tax years and in all major tax
jurisdictions, and determined that there is no material impact
on the consolidated financial statements.
Dividends
and Distributions
Distributions to stockholders are recorded on the ex-dividend
date. The Company is required to pay out at least 90% of its
ordinary income and short-term capital gains for each taxable
year as a dividend to its stockholders in order to maintain its
status as a RIC under Subtitle A, Chapter 1 of Subchapter M
of the Code. It is the policy of the Company to pay out as a
dividend up to 100% of those amounts. The amount to be paid out
as a dividend is determined by the Board of Directors each
quarter and is based on the annual earnings estimated by the
management of the Company. Based on that estimate, a dividend is
declared each quarter and is paid out monthly over the course of
the respective quarter. At year-end the Company may pay a bonus
dividend, in addition to the monthly dividends, to ensure that
it has paid out at least 90% of its ordinary income and
short-term capital gains for the year. The Company may retain
long-term capital gains, if any, and not pay them out as
dividends. If the Company decides to retain long-term capital
gains, the portion of the retained capital gains will be subject
to a 35% tax.
Recent
Accounting Pronouncements
In August 2009, the FASB issued Accounting Standard Update
(“ASU”)
No. 2009-05,
“Fair Value Measurements and Disclosures: Measuring
Liabilities at Fair Value.” The update provides
clarification to ASC 820 for the valuation techniques
required to measure the fair value of liabilities. ASU
No. 2009-05
also provides clarification around required inputs to the fair
value measurement of a liability and definition of a
Level 1 liability. ASU
No. 2009-05
is effective for interim and annual periods beginning after
August 28, 2009. The Company adopted ASU
No. 2009-05
beginning with the quarter ended December 31, 2009. The
adoption of this standard did not have a material effect on the
Company’s financial position and results of operations.
In September 2009, the FASB issued ASU
No. 2009-12,
“Measuring Fair Value Measurements and Disclosures:
Investments in Certain Entities That Calculate Net Asset Value
per Share (or Its Equivalent),” that provides additional
guidance on how companies should estimate the fair value of
certain alternative investments, such as hedge funds, private
equity funds and venture capital funds. The fair value of such
investments can now be determined using net asset value
(“NAV”) as a practical expedient, unless it is
probable that the investment will not be sold at a price equal
to NAV. In those situations, the practical expedient cannot be
used and disclosure of the remaining actions necessary to
complete the sale will be required. New disclosures of the
attributes of all investments within the scope of the new
guidance is required, regardless of whether an entity used the
practical expedient to measure the fair value of any of its
investments. ASU
No. 2009-12
is effective for the first annual or interim reporting period
ending after December 15, 2009, with early application
permitted. The Company determined that the adoption of this
standard did not have a material effect on its financial
position and results of operations as of and for the year ended
September 30, 2010.
F-27
GLADSTONE
CAPITAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
In December 2009, the FASB issued ASU
No. 2009-17,
“Consolidations: Improvements to Financial Reporting by
Enterprises Involved with Variable Interest Entities,” that
amends the FASB ASC for the issuance of FASB Statement
No. 167, “Amendments to FASB Interpretation
No. 46(R).” The amendments in this ASU replace the
quantitative-based risks and rewards calculation for determining
which reporting entity, if any, has a controlling financial
interest in a variable interest entity with an approach focused
on identifying which reporting entity has the power to direct
the activities of a variable interest entity that most
significantly impact such entity’s economic performance and
(1) the obligation to absorb losses of such entity or
(2) the right to receive benefits from such entity. An
approach that is expected to be primarily qualitative will be
more effective for identifying which reporting entity has a
controlling financial interest in a variable interest entity.
The amendments in ASU
No. 2009-17
also require additional disclosures about a reporting
entity’s involvement in variable interest entities, which
will enhance the information provided to users of financial
statements. ASU
No. 2009-17
is effective for annual periods beginning after
November 15, 2009. The Company does not believe the
adoption of this standard will have a material effect on its
financial position and results of operations.
In January 2010, the FASB issued ASU
No. 2010-06,
“Fair Value Measurements and Disclosures,” that
requires reporting entities to make new disclosures about
recurring or nonrecurring fair-value measurements including
significant transfers into and out of Level 1 and
Level 2 fair-value measurements and information on
purchases, sales, issuances, and settlements on a gross basis in
the reconciliation of Level 3 fair-value measurements. The
FASB also clarified existing fair-value measurement disclosure
guidance about the level of disaggregation, inputs, and
valuation techniques. The new and revised disclosures are
required to be implemented in interim or annual periods
beginning after December 15, 2009, except for the gross
presentation of the Level 3 rollforward, which is required
for annual reporting periods beginning after December 15,
2010. The Company adopted ASU
No. 2010-06
during the year ended September 30, 2010. The adoption of
this standard did not have a material effect on the
Company’s financial position and results of operations.
In February 2010, the FASB issued ASU
No. 2010-09,
“Subsequent Events,” that amended its guidance on
subsequent events. Securities and Exchange Commission
(“SEC”) filers are not required to disclose the date
through which an entity has evaluated subsequent events. The
amended guidance was effective upon issuance for all entities.
In February 2010, the FASB issued ASU
2010-10,
“Consolidations” to defer FAS 167, Amendments to
FASB Interpretation No. 46(R), for certain investment
entities that have the attributes of entities subject to
ASC 946 (the “investment company guide”). In
addition, the ASU (1) amends the requirements for
evaluating whether a decision maker or service contract is a
variable interest to clarify that a quantitative approach should
not be the sole consideration in assessing the criteria and
(2) clarifies that related parties should be considered in
applying all of the decision maker and service contract
criteria. The Company’s adoption of this standard did not
have a material effect on its financial position and results of
operations.
The Company adopted ASC 820 on October 1, 2008. In
part, ASC 820 defines fair value, establishes a framework
for measuring fair value and expands disclosures about assets
and liabilities measured at fair value. ASC 820 provides a
consistent definition of fair value that focuses on exit price
in the principal, or most advantageous, market and prioritizes,
within a measurement of fair value, the use of market-based
inputs over entity-specific inputs. ASC 820 also
establishes the following three-level hierarchy for fair value
measurements based upon the transparency of inputs to the
valuation of an asset or liability as of the measurement date.
|
|
|
| |
•
|
Level 1 — inputs to the valuation
methodology are quoted prices (unadjusted) for identical assets
or liabilities in active markets;
|
| |
| |
•
|
Level 2 — inputs to the valuation
methodology include quoted prices for similar assets and
liabilities in active 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
|
F-28
GLADSTONE
CAPITAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
|
|
|
| |
|
few transactions, the prices are not current, little public
information exists or instances where prices vary substantially
over time or among brokered market makers; and
|
|
|
|
| |
•
|
Level 3 — inputs to the
valuation methodology are unobservable and significant to the
fair value measurement. Unobservable inputs are those inputs
that reflect the Company’s own assumptions that market
participants would use to price the asset or liability based
upon the best available information.
|
As of September 30, 2010, all of the Company’s assets
were valued using Level 3 inputs.
The following tables present the financial instruments carried
at fair value as of September 30, 2010 and 2009, by caption
on the accompanying consolidated statements of assets and
liabilities for each of the three levels of hierarchy:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reported in
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Statements of
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Assets and Liabilities
|
|
|
|
|
Non-Control/Non-Affiliate Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Term Loans
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
163,203
|
|
|
$
|
163,203
|
|
|
Senior Subordinated Term Loans
|
|
|
—
|
|
|
|
—
|
|
|
|
59,463
|
|
|
|
59,463
|
|
|
Preferred Equity
|
|
|
—
|
|
|
|
—
|
|
|
|
387
|
|
|
|
387
|
|
|
Common Equity/Equivalents
|
|
|
—
|
|
|
|
—
|
|
|
|
684
|
|
|
|
684
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments at fair value
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
223,737
|
|
|
$
|
223,737
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Control Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Term Loans
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
9,393
|
|
|
$
|
9,393
|
|
|
Senior Subordinated Term Loans
|
|
|
—
|
|
|
|
—
|
|
|
|
22,436
|
|
|
|
22,436
|
|
|
Common Equity/Equivalents
|
|
|
—
|
|
|
|
—
|
|
|
|
1,543
|
|
|
|
1,543
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments at fair value
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
33,372
|
|
|
$
|
33,372
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments at fair value
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
257,109
|
|
|
$
|
257,109
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reported in
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Statements of
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Assets and Liabilities
|
|
|
|
|
Non-Control/Non-Affiliate Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Term Loans
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
203,102
|
|
|
$
|
203,102
|
|
|
Senior Subordinated Term Loans
|
|
|
—
|
|
|
|
—
|
|
|
|
81,826
|
|
|
|
81,826
|
|
|
Common Equity/Equivalents
|
|
|
—
|
|
|
|
—
|
|
|
|
2,069
|
|
|
|
2,069
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments at fair value
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
286,997
|
|
|
$
|
286,997
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Control Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Term Loans
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
9,189
|
|
|
$
|
9,189
|
|
|
Senior Subordinated Term Loans
|
|
|
—
|
|
|
|
—
|
|
|
|
23,967
|
|
|
|
23,967
|
|
|
Common Equity/Equivalents
|
|
|
—
|
|
|
|
—
|
|
|
|
816
|
|
|
|
816
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments at fair value
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
33,972
|
|
|
$
|
33,972
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments at fair value
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
320,969
|
|
|
$
|
320,969
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-29
GLADSTONE
CAPITAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Changes
in Level 3 Fair Value Measurements
The following tables provide a roll-forward in the changes in
fair value during the year ended September 30, 2010 and
2009 for all investments for which the Company determines fair
value using unobservable (Level 3) factors. When a
determination is made to classify a financial instrument within
Level 3 of the valuation hierarchy, the 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 components, observable components (that is,
components that are actively quoted and can be validated to
external sources). Accordingly, the gains and losses in the
tables below include changes in fair value due in part to
observable factors that are part of the valuation methodology.
Fair
value measurements using unobservable data inputs
(Level 3)
Fiscal
Year 2010:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Control/
|
|
|
|
|
|
|
|
|
|
|
Non-Affiliate
|
|
|
Control
|
|
|
|
|
|
Twelve Months Ended September 30, 2010:
|
|
Investments
|
|
|
Investments
|
|
|
Total
|
|
|
|
|
Fair value as of September 30, 2009
|
|
$
|
286,997
|
|
|
$
|
33,972
|
|
|
$
|
320,969
|
|
|
Total gains or losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized
losses(a)
|
|
|
(28
|
)
|
|
|
(2,865
|
)
|
|
|
(2,893
|
)
|
|
Reversal of prior period depreciation on
realization(b)
|
|
|
3,546
|
|
|
|
2,865
|
|
|
|
6,411
|
|
|
Unrealized appreciation
(depreciation)(b)
|
|
|
1,098
|
|
|
|
(5,192
|
)
|
|
|
(4,094
|
)
|
|
New investments, repayments and
settlements(c)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuances/New investments
|
|
|
17,774
|
|
|
|
4,627
|
|
|
|
22,401
|
|
|
Settlements/Repayments
|
|
|
(82,531
|
)
|
|
|
(35
|
)
|
|
|
(82,566
|
)
|
|
Sales
|
|
|
(3,119
|
)
|
|
|
—
|
|
|
|
(3,119
|
)
|
|
Transfers into/out of Level 3
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value as of September 30, 2010
|
|
$
|
223,737
|
|
|
$
|
33,372
|
|
|
$
|
257,109
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior
|
|
|
Senior
|
|
|
|
|
|
Common
|
|
|
|
|
|
|
|
Term
|
|
|
Subordinated
|
|
|
Preferred
|
|
|
Equity/
|
|
|
|
|
|
Twelve Months Ended September 30, 2010:
|
|
Loans
|
|
|
Term Loans
|
|
|
Equity
|
|
|
Equivalents
|
|
|
Total
|
|
|
|
|
Fair value as of September 30, 2009
|
|
$
|
212,290
|
|
|
$
|
105,794
|
|
|
$
|
—
|
|
|
$
|
2,885
|
|
|
$
|
320,969
|
|
|
Total gains or losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized (losses)
gains(a)
|
|
|
(2,104
|
)
|
|
|
(571
|
)
|
|
|
(1,584
|
)
|
|
|
1,366
|
|
|
|
(2,893
|
)
|
|
Reversal of prior period depreciation (appreciation) on
realization(b)
|
|
|
3,453
|
|
|
|
1,620
|
|
|
|
1,584
|
|
|
|
(246
|
)
|
|
|
6,411
|
|
|
Unrealized (depreciation)
appreciation(b)
|
|
|
(3,016
|
)
|
|
|
(758
|
)
|
|
|
386
|
|
|
|
(706
|
)
|
|
|
(4,094
|
)
|
|
New investments, repayments, and settlements,
net(c)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuances/New investments
|
|
|
19,551
|
|
|
|
2,355
|
|
|
|
—
|
|
|
|
495
|
|
|
|
22,401
|
|
|
Settlements/Repayments
|
|
|
(56,653
|
)
|
|
|
(24,347
|
)
|
|
|
—
|
|
|
|
(1,566
|
)
|
|
|
(82,566
|
)
|
|
Sales
|
|
|
(925
|
)
|
|
|
(2,194
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(3,119
|
)
|
|
Transfers into/out of Level 3
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value as of September 30, 2010
|
|
$
|
172,596
|
|
|
$
|
81,899
|
|
|
$
|
386
|
|
|
$
|
2,228
|
|
|
$
|
257,109
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-30
GLADSTONE
CAPITAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Fiscal
Year 2009:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Control/
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Affiliate
|
|
|
Control
|
|
|
|
|
|
|
|
|
Twelve Months Ended September 30, 2009:
|
|
Investments
|
|
|
Investments
|
|
|
Derivative
|
|
|
Total
|
|
|
|
|
Fair value as of September 30, 2008
|
|
$
|
407,153
|
|
|
$
|
780
|
|
|
$
|
—
|
|
|
$
|
407,933
|
|
|
Total gains or losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized
losses(a)
|
|
|
(26,411
|
)
|
|
|
—
|
|
|
|
(304
|
)
|
|
|
(26,715
|
)
|
|
Reversal of prior period depreciation on
realization(b)
|
|
|
24,531
|
|
|
|
—
|
|
|
|
304
|
|
|
|
24,835
|
|
|
Unrealized (depreciation)
appreciation(b)
|
|
|
(16,582
|
)
|
|
|
1,564
|
|
|
|
—
|
|
|
|
(15,018
|
)
|
|
New investments, repayments, and settlements,
net(c)
|
|
|
(101,694
|
)
|
|
|
31,628
|
|
|
|
—
|
|
|
|
(70,066
|
)
|
|
Transfers in (out) of Level 3
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value as of September 30, 2009
|
|
$
|
286,997
|
|
|
$
|
33,972
|
|
|
$
|
—
|
|
|
$
|
320,969
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior
|
|
|
Senior
|
|
|
|
|
|
Common
|
|
|
|
|
|
|
|
|
|
|
Term
|
|
|
Subordinated
|
|
|
Preferred
|
|
|
Equity/
|
|
|
|
|
|
|
|
|
Twelve Months Ended September 30, 2009:
|
|
Loans
|
|
|
Term Loans
|
|
|
Equity
|
|
|
Equivalents
|
|
|
Derivative
|
|
|
Total
|
|
|
|
|
Fair value as of September 30, 2008
|
|
$
|
265,297
|
|
|
$
|
140,676
|
|
|
$
|
—
|
|
|
$
|
1,960
|
|
|
$
|
—
|
|
|
$
|
407,933
|
|
|
Total gains or losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized
losses(a)
|
|
|
(5,595
|
)
|
|
|
(20,816
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(304
|
)
|
|
|
(26,715
|
)
|
|
Reversal of prior period depreciation on
realization(b)
|
|
|
4,773
|
|
|
|
19,758
|
|
|
|
—
|
|
|
|
—
|
|
|
|
304
|
|
|
|
24,835
|
|
|
Unrealized (depreciation)
appreciation(b)
|
|
|
(43
|
)
|
|
|
(15,455
|
)
|
|
|
(444
|
)
|
|
|
924
|
|
|
|
—
|
|
|
|
(15,018
|
)
|
|
New investments, repayments, and settlements,
net(c)
|
|
|
(52,142
|
)
|
|
|
(18,369
|
)
|
|
|
444
|
|
|
|
1
|
|
|
|
—
|
|
|
|
(70,066
|
)
|
|
Transfers into/out of Level 3
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value as of September 30, 2009
|
|
$
|
212,290
|
|
|
$
|
105,794
|
|
|
$
|
—
|
|
|
$
|
2,885
|
|
|
$
|
—
|
|
|
$
|
320,969
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Included in net realized loss on investments on the accompanying
consolidated statements of operations for the years ended
September 30, 2010 and 2009. |
| |
|
(b) |
|
Included in unrealized appreciation (depreciation) on
investments on the accompanying consolidated statements of
operations for the years ended September 30, 2010 and 2009. |
| |
|
(c) |
|
Includes increases in the cost basis of investments resulting
from new portfolio investments, the amortization of discounts,
premiums and closing fees as well as decreases in the cost basis
of investments resulting from principal repayments or sales. |
Non-Control/Non-Affiliate
Investments
As of September 30, 2010 and 2009, the Company held
Non-Control/Non-Affiliate investments in the aggregate of
approximately $223,737 and $286,997, at fair value, respectively.
Control
and Affiliate Investments
As of September 30, 2010 and 2009, the Company held Control
investments in the aggregate of approximately $33,372 and
$33,972, at fair value, respectively. As of September 30,
2010, the Control investments were comprised
F-31
GLADSTONE
CAPITAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
of BERTL, Inc. (“BERTL”), Defiance Integrated
Technologies, Inc. (“Defiance”), Lindmark Acquisition,
LLC (“Lindmark”), LocalTel, LLC
(“LocalTel”), Midwest Metal Distribution, Inc
(“Midwest Metal”) and U.S. Healthcare
Communications, Inc. (“U.S. Healthcare”).
|
|
|
| |
•
|
BERTL: The Company originally purchased a past
due debt instrument in MCA Communications, LLC, and the Company
accepted a deed in lieu of foreclosure in satisfaction of
BERTL’s obligations under the debt instrument in September
2007. BERTL is a web-based evaluator of digital imaging products.
|
| |
| |
•
|
Defiance: In July 2009, the Company acquired
from the previous owner certain assets of Defiance Acquisition
Corp., consisting of tangible and intangible personal property.
The Company acquired these assets through a newly formed
subsidiary, Defiance, and intends to continue the business under
its control. Defiance is a manufacturer of trucking parts.
|
| |
| |
•
|
Lindmark: In March 2009, the Company acquired
from the previous owner certain assets of Lindmark Outdoor
Advertising, LLC, consisting of all tangible and intangible
personal property. The Company acquired these assets through a
newly formed subsidiary, Lindmark Holdings Corp., and intends to
continue the business under its control. Lindmark is a billboard
advertising company.
|
| |
| |
•
|
LocalTel: In July 2008, the Company acquired
from the previous owner certain assets of LocalTel, Inc.,
consisting of all tangible and intangible personal property. The
Company acquired these assets through a newly formed subsidiary,
LYP Holdings Corp., and intends to continue the business under
its control. LocalTel is a publisher of community yellow page
directories.
|
| |
| |
•
|
Midwest Metal: In September 2009, the Company
took control of certain entities of Clinton Holdings, LLC by
exercising contractual rights under the investment documents. In
July 2010, the Company acquired stock ownership through a newly
formed subsidiary, Gladstone Metal, LLC, and intends to continue
the business under its control. Midwest Metal is a metal service
center for aluminum and stainless steel products.
|
| |
| |
•
|
U.S. Healthcare: The Company offered at
public sale certain assets of U.S. Healthcare
Communications, LLC in January 2008, consisting generally of all
fixtures of tangible and intangible personal property. The
Company acquired these assets in the sale through a newly formed
subsidiary, U.S. Healthcare, and intends to continue the
business under its control. U.S. Healthcare is a trade
magazine operator.
|
Investment
Concentrations
As of September 30, 2010, the Company had aggregate
investments in 39 portfolio companies and approximately 67.1% of
the aggregate fair value of such investments was senior term
loans, approximately 31.9% was senior subordinated term loans,
no investments were in junior subordinated loans and
approximately 1.0% was in equity securities. The following table
outlines the Company’s investments by type as of
September 30, 2010 and 2009:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2010
|
|
|
September 30, 2009
|
|
|
|
|
Cost
|
|
|
Fair Value
|
|
|
Cost
|
|
|
Fair Value
|
|
|
|
|
Senior Term Loans
|
|
$
|
200,041
|
|
|
$
|
172,596
|
|
|
$
|
240,172
|
|
|
$
|
212,290
|
|
|
Senior Subordinated Term Loans
|
|
|
93,987
|
|
|
|
81,899
|
|
|
|
118,743
|
|
|
|
105,794
|
|
|
Preferred Equity
|
|
|
444
|
|
|
|
387
|
|
|
|
2,028
|
|
|
|
—
|
|
|
Common Equity/Equivalents
|
|
|
3,744
|
|
|
|
2,227
|
|
|
|
3,450
|
|
|
|
2,885
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Investments
|
|
$
|
298,216
|
|
|
$
|
257,109
|
|
|
$
|
364,393
|
|
|
$
|
320,969
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-32
GLADSTONE
CAPITAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Investments at fair value consisted of the following industry
classifications as of September 30, 2010 and 2009:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2010
|
|
|
September 30, 2009
|
|
|
|
|
|
|
|
Percentage of
|
|
|
|
|
|
Percentage of
|
|
|
Industry Classification
|
|
Fair Value
|
|
|
Total Investments
|
|
|
Fair Value
|
|
|
Total Investments
|
|
|
|
|
Broadcast (TV & Radio)
|
|
$
|
44,562
|
|
|
|
17.3
|
%
|
|
$
|
43,403
|
|
|
|
13.5
|
%
|
|
Healthcare, Education & Childcare
|
|
|
41,098
|
|
|
|
16.0
|
%
|
|
|
58,054
|
|
|
|
18.1
|
%
|
|
Printing & Publishing
|
|
|
37,705
|
|
|
|
14.7
|
%
|
|
|
37,864
|
|
|
|
11.8
|
%
|
|
Electronics
|
|
|
25,080
|
|
|
|
9.8
|
%
|
|
|
27,899
|
|
|
|
8.7
|
%
|
|
Mining, Steel, Iron & Non-Precious Metals
|
|
|
24,343
|
|
|
|
9.5
|
%
|
|
|
21,926
|
|
|
|
6.8
|
%
|
|
Retail Stores
|
|
|
19,620
|
|
|
|
7.6
|
%
|
|
|
23,669
|
|
|
|
7.4
|
%
|
|
Buildings & Real Estate
|
|
|
12,454
|
|
|
|
4.8
|
%
|
|
|
12,882
|
|
|
|
4.0
|
%
|
|
Home & Office Furnishings
|
|
|
10,666
|
|
|
|
4.1
|
%
|
|
|
16,744
|
|
|
|
5.2
|
%
|
|
Automobile
|
|
|
9,868
|
|
|
|
3.8
|
%
|
|
|
7,999
|
|
|
|
2.5
|
%
|
|
Personal & Non-durable Consumer Products
|
|
|
9,230
|
|
|
|
3.6
|
%
|
|
|
8,714
|
|
|
|
2.7
|
%
|
|
Machinery
|
|
|
8,719
|
|
|
|
3.4
|
%
|
|
|
9,202
|
|
|
|
2.9
|
%
|
|
Chemicals, Plastics & Rubber
|
|
|
7,044
|
|
|
|
2.7
|
%
|
|
|
15,884
|
|
|
|
4.9
|
%
|
|
Leisure, Amusement, Movies & Entertainment
|
|
|
3,994
|
|
|
|
1.6
|
%
|
|
|
5,091
|
|
|
|
1.6
|
%
|
|
Diversified/Conglomerate Manufacturing
|
|
|
2,042
|
|
|
|
0.8
|
%
|
|
|
1,236
|
|
|
|
0.4
|
%
|
|
Aerospace & Defense
|
|
|
400
|
|
|
|
0.2
|
%
|
|
|
1,857
|
|
|
|
0.6
|
%
|
|
Farming & Agriculture
|
|
|
284
|
|
|
|
0.1
|
%
|
|
|
9,309
|
|
|
|
2.9
|
%
|
|
Diversified Natural Resources, Precious Metals &
Minerals
|
|
|
—
|
|
|
|
—
|
|
|
|
13,589
|
|
|
|
4.2
|
%
|
|
Cargo Transport
|
|
|
—
|
|
|
|
—
|
|
|
|
5,427
|
|
|
|
1.7
|
%
|
|
Textiles & Leather
|
|
|
—
|
|
|
|
—
|
|
|
|
220
|
|
|
|
0.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
257,109
|
|
|
|
100.0
|
%
|
|
$
|
320,969
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The investments at fair value consisted of the following
geographic regions of the United States as of September 30,
2010 and 2009:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2010
|
|
|
September 30, 2009
|
|
|
|
|
|
|
|
Percent of
|
|
|
|
|
|
Percentage of
|
|
|
Geographic Region
|
|
Fair Value
|
|
|
Total Investments
|
|
|
Fair Value
|
|
|
Total Investments
|
|
|
|
|
Midwest
|
|
$
|
142,357
|
|
|
|
55.4
|
%
|
|
$
|
172,263
|
|
|
|
53.7
|
%
|
|
West
|
|
|
59,892
|
|
|
|
23.3
|
%
|
|
|
65,678
|
|
|
|
20.5
|
%
|
|
Northeast
|
|
|
22,913
|
|
|
|
8.9
|
%
|
|
|
14,170
|
|
|
|
4.4
|
%
|
|
Mid-Atlantic
|
|
|
14,482
|
|
|
|
5.6
|
%
|
|
|
28,437
|
|
|
|
8.8
|
%
|
|
Southeast
|
|
|
11,038
|
|
|
|
4.3
|
%
|
|
|
34,708
|
|
|
|
10.8
|
%
|
|
U.S. Territory
|
|
|
6,427
|
|
|
|
2.5
|
%
|
|
|
5,713
|
|
|
|
1.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
257,109
|
|
|
|
100.0
|
%
|
|
$
|
320,969
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The geographic region depicts the location of the headquarters
for the Company’s portfolio companies. A portfolio company
may have a number of other locations in other geographic regions.
F-33
GLADSTONE
CAPITAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Investment
Principal Repayment
The following table summarizes the contractual principal
repayment and maturity of the Company’s investment
portfolio by fiscal year, assuming no voluntary prepayments:
| |
|
|
|
|
|
Fiscal Year Ending September 30,
|
|
Amount
|
|
|
2011
|
|
$
|
59,575
|
|
|
2012
|
|
|
72,201
|
|
|
2013
|
|
|
124,496
|
|
|
2014
|
|
|
31,840
|
|
|
2015
|
|
|
6,850
|
|
|
|
|
|
|
|
|
Total Contractual Repayments
|
|
$
|
294,962
|
|
|
Investments in equity securities
|
|
|
4,189
|
|
|
Unamortized premiums, discounts and investment acquisition costs
on debt securities
|
|
|
(935
|
)
|
|
|
|
|
|
|
|
Total
|
|
$
|
298,216
|
|
|
|
|
|
|
|
|
|
|
Note 4.
|
Related
Party Transactions
|
Loans
to Employees
The Company provided loans to employees of the Adviser, who at
the time the loans were provided were joint employees of the
Company and either the Adviser or the Company’s previous
investment adviser, Gladstone Capital Advisers, Inc., for the
exercise of options under the Company’s Amended and
Restated 2001 Equity Incentive Plan, which has since been
terminated. The loans require the quarterly payment of interest
at the market rate in effect at the date of issue, have varying
terms not exceeding ten years and have been recorded as a
reduction of net assets. The loans are evidenced by full
recourse notes that are due upon maturity or 60 days
following termination of employment, and the shares of common
stock purchased with the proceeds of the loan are posted as
collateral. No new loans were issued during the years ended
September 30, 2010 or 2009. The Company received $1,400 and
$6 of principal repayments during the years ended
September 30, 2010 and 2009, respectively. The Company
recognized interest income from all employee stock option loans
of $437, $468 and $471 for the years ended September 30,
2010, 2009 and 2008, respectively.
During the year ended September 30, 2010, $515 of an
employee stock option loan to a former employee of the Adviser
was transferred from notes receivable — employees to
other assets in connection with the termination of her
employment with the Adviser and the later amendment of the loan.
The interest on the loan from the time the employee’s
employment ended with the Adviser is included in other income on
the accompanying consolidated statement of operations.
On September 7, 2010, the Company entered into redemption
agreements (the “Redemption Agreements”) with
David Gladstone, the Company’s Chairman and Chief Executive
Officer, and Laura Gladstone, the daughter of
Mr. Gladstone, in connection with the maturity of secured
promissory notes executed by Mr. Gladstone and
Ms. Gladstone in favor of the Company on August 23,
2001, in the principal amounts of $5,900 and $275 (the
“Notes”). Mr. and Ms. Gladstone executed the
Notes in payment of the exercise price of certain stock options
(the “Options”) to acquire shares of the
Company’s common stock. Concurrently with the execution of
the Notes, the Company and Mr. and Ms. Gladstone entered
into a Stock Pledge Agreements (the “Pledge
Agreements”), pursuant to which Mr. and Ms. Gladstone
granted to the Company a first priority security interest in the
Pledged Collateral (as defined in the Pledge Agreement), which
includes 393,334 and 18,334 shares, respectively, of the
Company’s common stock that Mr. and Ms. Gladstone
acquired pursuant to the exercise of the Options (the
“Pledged Shares”). An event of default was triggered
under the Notes by virtue of Mr. and Ms. Gladstone’s
failure to repay the amounts outstanding under the Notes within
five business days of August 23, 2010. The
Redemption Agreements provide
F-34
GLADSTONE
CAPITAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
that, pursuant to the terms and conditions thereof, the Company
will automatically accept and retire the Pledged Shares in
partial or full satisfaction, as applicable, of Mr. and
Ms. Gladstone’s obligations to the Company under the
Notes at such time, if ever, that the trading price of the
Company’s common stock reaches $15 per share. In entering
into the Redemption Agreements, the Company reserved all of
its 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.
Compensation
Expense
During the year ended September 30, 2010, the employee
stock option loans of two former employees were converted from
recourse to non-recourse loans. In connection with these
conversions, the Company repurchased and retired the shares of
common stock pledged as collateral for the loans, which shares
had previously been acquired upon the exercise of the stock
options in consideration for the issuance of the loans. The
repurchases were accounted for as treasury stock transactions at
the fair value of the shares, based on the trading price of the
Company’s common stock on the date of the transactions,
totaling $420. Since the value of the stock option loans totaled
$665, the Company recorded non-cash compensation expense of $245.
Investment
Advisory and Management Agreement
In accordance with the Advisory Agreement, the Company pays the
Adviser fees as compensation for its services, consisting of a
base management fee and an incentive fee. On July 7, 2010,
the Company’s Board of Directors approved the renewal of
the Advisory Agreement through August 31, 2011.
The following tables summarize the management fees, incentive
fees and associated credits reflected in the accompanying
consolidated statements of operations:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30,
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
|
Average total assets subject to base management
fee(1)
|
|
$
|
304,250
|
|
|
$
|
381,250
|
|
|
$
|
416,450
|
|
|
Multiplied by pro-rated annual base management fee of 2.0%
|
|
|
2.0
|
%
|
|
|
2.0
|
%
|
|
|
2.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unadjusted base management fee
|
|
|
6,085
|
|
|
|
7,625
|
|
|
|
8,329
|
|
|
Reduction for loan servicing
fees(2)
|
|
|
3,412
|
|
|
|
5,620
|
|
|
|
6,117
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Base management
fee(2)
|
|
|
2,673
|
|
|
|
2,005
|
|
|
|
2,212
|
|
|
Credit for fees received by Adviser from the portfolio companies
|
|
|
(213
|
)
|
|
|
(89
|
)
|
|
|
(1,678
|
)
|
|
Fee reduction for the voluntary, irrevocable waiver of 2% fee on
senior syndicated loans to 0.5% per
annum(3)
|
|
|
(42
|
)
|
|
|
(265
|
)
|
|
|
(408
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net base management fee
|
|
$
|
2,418
|
|
|
$
|
1,651
|
|
|
$
|
126
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incentive fee
|
|
$
|
1,823
|
|
|
$
|
3,326
|
|
|
$
|
5,311
|
|
|
Credit from voluntary, irrevocable waiver issued by
Adviser’s board of directors
|
|
|
(165
|
)
|
|
|
(3,326
|
)
|
|
|
(5,311
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net incentive fee
|
|
$
|
1,658
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit for fees received by Adviser from the portfolio companies
|
|
$
|
(213
|
)
|
|
$
|
(89
|
)
|
|
$
|
(1,678
|
)
|
|
Fee reduction for the voluntary, irrevocable waiver of 2% fee on
senior syndicated loans to 0.5% per annum
|
|
|
(42
|
)
|
|
|
(265
|
)
|
|
|
(408
|
)
|
|
Incentive fee credit
|
|
|
(165
|
)
|
|
|
(3,326
|
)
|
|
|
(5,311
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit to base management and incentive fees from Adviser
|
|
$
|
(420
|
)
|
|
$
|
(3,680
|
)
|
|
$
|
(7,397
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-35
GLADSTONE
CAPITAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
|
|
|
|
(1) |
|
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 and cash
equivalents resulting from borrowings, valued at the end of the
four most recently completed quarters and appropriately adjusted
for any share issuances or repurchases during the current year. |
| |
|
(2) |
|
Reflected as a line item on the consolidated statement of
operations located elsewhere in this report. |
| |
|
(3) |
|
The board of our Adviser voluntarily, irrevocably and
unconditionally waived on a quarterly basis the annual 2.0% base
management fee to 0.5% for senior syndicated loan participations
for the years ended September 30, 2010, 2009 and 2008. Fees
waived cannot be recouped by the Adviser in the future. |
Base
Management Fee
The base management fee is payable quarterly and assessed at a
rate of 2.0%, computed on the basis of the Company’s
average gross 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 resulted from borrowings. In
addition, the following three items are adjustments to the base
management fee calculation:
The Adviser also services the loans held by Business Loan, in
return for which it receives a 2.0% annual fee based on the
monthly aggregate outstanding balance of loans pledged under the
Company’s line of credit. Since the Company owns these
loans, all loan servicing fees paid to the Adviser are treated
as reductions directly against the 2.0% base management fee
under the Advisory Agreement.
|
|
|
| |
•
|
Senior Syndicated Loan Fee Waiver
|
The Company’s 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 syndicated loan
participations, for the years ended September 30, 2010 and
2009.
Under the Advisory Agreement, the Adviser has also provided, and
continues to provide, managerial assistance and other services
to the Company’s portfolio companies and may receive fees
for services other than managerial assistance. 50% of certain of
these fees are credited against the base management fee that the
Company 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 incentive fee. The
income-based incentive fee rewards the Adviser if the
Company’s quarterly net investment income (before giving
effect to any incentive fee) exceeds 1.75% of the Company’s
net assets (the “hurdle rate”). The Company will pay
the Adviser an income-based incentive fee with respect to the
Company’s pre-incentive fee net investment income in each
calendar quarter as follows:
|
|
|
| |
•
|
no incentive fee in any calendar quarter in which its
pre-incentive fee net investment income does not exceed the
hurdle rate (7% annualized);
|
| |
| |
•
|
100% of 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 pre-incentive fee net investment income, if
any, that exceeds 2.1875% in any calendar quarter (8.75%
annualized).
|
F-36
GLADSTONE
CAPITAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The second part of the incentive fee is a capital gains-based
incentive fee that is 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 the
Company’s realized capital gains as of the end of the
fiscal year. In determining the capital gains-based incentive
fee payable to the Adviser, the Company calculates the
cumulative aggregate realized capital gains and cumulative
aggregate realized capital losses since the Company’s
inception, and the aggregate unrealized capital depreciation as
of the date of the calculation, as applicable, with respect to
each of the investments in its portfolio.
In addition to the base management and incentive fees under the
Advisory Agreement, certain fees received by the Adviser from
the Company’s portfolio companies are paid by the Adviser
and credited under the Advisory Agreement. Effective
April 1, 2007, 50% of certain of the fees received by the
Adviser are credited against the base management fee, whereas
prior to such date 100% of those fees were credited against the
base management fee. In addition, the Company continues to pay
its direct expenses including, but not limited to,
directors’ fees, legal and accounting fees, stockholder
related expenses, and directors and officers insurance under the
Advisory Agreement.
As a business development company, the Company makes available
significant managerial assistance to our portfolio companies and
provide other services to such portfolio companies. Although,
neither we nor our Adviser currently receives fees in connection
with managerial assistance, our Adviser provides other services
to our portfolio companies and receives fees for these other
services. For example, certain of our portfolio companies
contract directly with our Adviser for the provision of
consulting services.
Administration
Agreement
Under the Administration Agreement, the Company pays separately
for administrative services. The Administration Agreement
provides for payments equal to the Company’s allocable
portion of the Administrator’s overhead expenses in
performing its obligations under the Administration Agreement,
including, but not limited to, rent and the allocable portion of
salaries and benefits expenses of the Company’s chief
financial officer, chief compliance officer, internal counsel,
treasurer and their respective staffs. For the fiscal years
ended September 30, 2010 and 2009, the Company recorded
administration fees of $807 and $872, respectively. On
July 7, 2010, the Company’s Board of Directors
approved the renewal of the Administration Agreement with the
Administrator through August 31, 2011.
Related
Party Fees Due
Amounts due to related parties in the accompanying consolidated
statements of assets and liabilities were as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
As of September 30,
|
|
|
As of September 30,
|
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
Unpaid base management fee to Adviser
|
|
$
|
319
|
|
|
$
|
617
|
|
|
Unpaid incentive fee to Adviser
|
|
|
158
|
|
|
|
—
|
|
|
Unpaid loan servicing fees to Adviser
|
|
|
196
|
|
|
|
217
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Fees due to Adviser
|
|
|
673
|
|
|
|
834
|
|
|
|
|
|
|
|
|
|
|
|
|
Unpaid administration fee due to Administrator
|
|
|
267
|
|
|
|
216
|
|
|
|
|
|
|
|
|
|
|
|
|
Total related party fees due
|
|
$
|
940
|
|
|
$
|
1,050
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2010 and September 30, 2009, Due
from Adviser totaled $0 and $69, respectively, which included
reimbursements for non-recurring costs incurred on behalf of the
portfolio companies.
On March 15, 2010, the Company, through Business Loan,
entered into a fourth amended and restated credit agreement
which currently provides for a $127,000 revolving line of credit
arranged by Key Equipment Finance Inc. as administrative agent
(the “Credit Facility”). Branch Banking and
Trust Company and ING Capital LLC also joined the Credit
Facility as committed lenders. Subject to certain terms and
conditions, the Credit Facility may be expanded up to
F-37
GLADSTONE
CAPITAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
$202,000 through the addition of other committed lenders to the
facility. Advances under the Credit Facility will generally bear
interest at the
30-day
London Interbank Offered Rate (“LIBOR”) (subject to a
minimum rate of 2.0%), plus 4.5% per annum, with a commitment
fee of 0.5% per annum on undrawn amounts. As of
September 30, 2010, there was a cost basis of approximately
$16,800 of borrowings outstanding under the Credit Facility at
an average interest rate of 6.5%. Available borrowings are
subject to various constraints imposed under the Credit
Facility, based on the aggregate loan balance pledged by
Business Loan. Interest is payable monthly during the term of
the Credit Facility. The Credit Facility matures on
March 15, 2012, and, if the facility is not renewed or
extended by this date, all unpaid principal and interest will be
due and payable on March 15, 2013. In addition, if the
Credit Facility is not renewed on or before March 15, 2012,
the Company will be required to use all principal collections
from its loans to pay outstanding principal on the Credit
Facility.
In addition to the annual interest rate on borrowings
outstanding, under the Credit Facility the Company will be
obligated to pay an annual minimum earnings shortfall fee to the
committed lenders on March 15, 2011. The minimum earnings
shortfall fee will be calculated as the difference between the
weighted average of borrowings outstanding under the Credit
Facility and 50.0% of the commitment amount of the Credit
Facility, multiplied by 4.5% per annum, less commitment fees
paid during the year. As of September 30, 2010, the Company
had accrued approximately $590 in minimum earnings shortfall
fees.
The Credit Facility contains covenants that require Business
Loan to maintain its status as a separate entity, prohibit
certain significant corporate transactions (such as mergers,
consolidations, liquidations or dissolutions), and restrict
material changes to the Company’s credit and collection
policies. The facility requires a minimum of 20 obligors in the
borrowing base and also limits payments of distributions. As of
September 30, 2010, Business Loan had 23 obligors and the
Company was in compliance with all of the facility covenants.
See Note 13 for a discussion of a recent amendment to the
Credit Facility.
Fair
Value
The Company elected to apply ASC 825, “Financial
Instruments,” specifically for the Credit Facility, which
was consistent with its application of ASC 820 to its
investments. The Company estimated the fair value of the Credit
Facility using estimates of value provided by an independent
third party and its own assumptions in the absence of observable
market data, including estimated remaining life, credit party
risk, current market yield and interest rate spreads of similar
securities as of the measurement date. The following table
presents the Credit Facility carried at fair value as of
September 30, 2010 and September 30, 2009, by caption
on the accompanying consolidated statements of assets and
liabilities for each of the three levels of hierarchy
established by ASC 820:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings under Line of Credit
|
|
|
|
|
|
|
|
|
|
Total Fair Value
|
|
|
|
|
|
|
|
|
|
Reported in
|
|
|
|
|
|
|
|
|
|
Consolidated Statement of
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Assets and Liabilities
|
|
|
|
September 30, 2010
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
17,940
|
|
|
$
|
17,940
|
|
|
September 30, 2009
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
83,350
|
|
|
$
|
83,350
|
|
The following table provides a roll-forward in the changes in
fair value during the year ended September 30, 2010 and
2009, for the Credit Facility for which the Company determines
fair value using unobservable (Level 3) factors. When
a determination is made to classify a financial instrument
within Level 3 of the valuation hierarchy, the
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 components,
observable components (that is, components that are actively
quoted and can be validated by external
F-38
GLADSTONE
CAPITAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
sources). Accordingly, the losses in the table below include
changes in fair value due in part to observable factors that are
part of the valuation methodology.
Fair
value measurements using unobservable data inputs
(Level 3)
| |
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30,
|
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
Fair value as of September 30, 2009 and 2008,
respectively(a)
|
|
$
|
83,350
|
|
|
$
|
151,030
|
|
|
Unrealized
appreciation(b)
|
|
|
790
|
|
|
|
350
|
|
|
Borrowings
|
|
|
24,900
|
|
|
|
48,800
|
|
|
Repayments
|
|
|
(91,100
|
)
|
|
|
(116,830
|
)
|
|
Transfers into/out of Level 3
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value as of September 30, 2010 and 2009, respectively
|
|
$
|
17,940
|
|
|
$
|
83,350
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
ASC 825 was not adopted until the quarter ended June 30,
2009; therefore, the Credit Facility is shown at its principal
balance outstanding at September 30, 2008 in the table
above. |
| |
|
(b) |
|
Included in unrealized appreciation on borrowings under line of
credit on the accompanying consolidated statements of operations
for the years ended September 30, 2010 and 2009. |
The fair value of the collateral under the Credit Facility was
approximately $212,571 and $229,033 as of September 30,
2010 and 2009, respectively.
|
|
|
Note 6.
|
Interest
Rate Cap Agreement
|
Pursuant to its previous revolving credit facility (the “DB
Facility”), the Company had an interest rate cap agreement,
with an initial notional amount of $35,000 at a cost of $304
that effectively limited the interest rate on a portion of the
borrowings under the line of credit. The interest rate cap
agreement expired in February 2009.
The Company recorded changes in the fair market value of the
interest rate cap agreement monthly based on the current market
valuation at month end as unrealized depreciation or
appreciation on derivative on the Company’s consolidated
statement of operations. The agreement provided that the
Company’s floating interest rate or cost of funds on a
portion of the portfolio’s borrowings would be capped at 5%
when the LIBOR was in excess of 5%. During the year ended
September 30, 2009, the Company recorded $304 of loss from
the interest rate cap agreement, recorded as a realized loss on
the settlement of derivative on the Company’s consolidated
statements of operations. During the year ended
September 30, 2008, the Company recorded $7 of income from
the interest rate cap agreement, recorded as a realized gain on
the settlement of derivative on the Company’s consolidated
statements of operations.
|
|
|
Note 7.
|
Common
Stock Transactions
|
On October 20, 2009, the Company filed a registration
statement on
Form N-2
(File
No. 333-162592)
that was declared effective by the SEC on January 28, 2010
and such registration statement will permit the Company to
issue, through one or more transactions, up to an aggregate of
$300,000 in securities, consisting of common stock, senior
common stock, preferred stock, subscription rights, debt
securities and warrants to purchase common stock, or a
combination of these securities.
On May 17, 2010, the Company and the Adviser entered into
an equity distribution agreement (the “Agreement”)
with BB&T Capital Markets, a division of Scott &
Stringfellow, LLC (the “Agent”), under which the
Company may, from time to time, issue and sell through the
Agent, as sales agent, up to 2,000,000 shares (the
“Shares”) of the Company’s common stock, par
value $0.001 per share, based upon instructions from the Company
(including, at a minimum, the number of shares to be offered,
the time period during which sales are requested to be made, any
limitation on the number of shares that may be sold in any one
day and any minimum price below which sales may not be made).
Sales of Shares through the Agent, if any, will be executed by
means of either ordinary brokers’ transactions on the
NASDAQ Global Select Market in accordance with Rule 153
under the Securities Act of 1933, as amended, or such other
sales of the Shares
F-39
GLADSTONE
CAPITAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
as shall be agreed by the Company and the Agent. The
compensation payable to the Agent for sales of Shares with
respect to which the Agent acts as sales agent shall be equal to
2.0% of the gross sales price of the Shares for amounts of
Shares sold pursuant to the Agreement. To date, the Company has
not issued any shares pursuant to this Agreement.
Transactions in common stock were as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
Total Value
|
|
|
|
|
Balance as of September 30, 2008
|
|
|
21,087,574
|
|
|
$
|
334,164
|
|
|
Shelf offering costs
|
|
|
—
|
|
|
|
(41
|
)
|
|
Return of capital statement of position
adjustment(1)
|
|
|
—
|
|
|
|
(5,899
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of September 30, 2009
|
|
|
21,087,574
|
|
|
$
|
328,224
|
|
|
Conversion of recourse to non-recourse
loans(2)
|
|
|
—
|
|
|
|
(420
|
)
|
|
Retirement of employee loan
shares(3)
|
|
|
(48,332
|
)
|
|
|
—
|
|
|
Shelf offering costs
|
|
|
|
|
|
|
(28
|
)
|
|
Return of capital statement of position
adjustment(1)
|
|
|
—
|
|
|
|
(820
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of September 30, 2010
|
|
|
21,039,242
|
|
|
$
|
326,956
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The timing and characterization of certain income and capital
gains distributions are determined annually in accordance with
federal tax regulations which may differ from GAAP. These
differences primarily relate to items recognized as income for
financial statement purposes and realized gains for tax
purposes. As a result, net investment income and net realized
gain (loss) on investment transactions for a reporting period
may differ significantly from distributions during such period.
Accordingly, the Company made a reclassification among certain
of its capital accounts without impacting the net asset value of
the Company. |
| |
|
(2) |
|
During the year ended September 30, 2010, the employee
stock option loans of two former employees of the Adviser were
converted from recourse to non-recourse loans. The conversions
were non-cash transactions and were accounted for as repurchases
of the shares previously received by the employees of the
Adviser upon exercise of the stock options in exchange for the
non-recourse notes. The repurchases were accounted for as
treasury stock transactions at the fair value of the shares,
which totaled $420. |
| |
|
(3) |
|
During the year ended September 30, 2010, subsequent to the
conversion of the stock option loans of two former employees of
the Adviser from recourse to non-recourse, the loans came due
when the underlying market value for the collateral reached the
outstanding loan amount. As such, and consistent with the loan
agreements, the shares pledged as collateral were retired in
March 2010. Since these shares were already accounted for during
the conversion to non-recourse above, these became non-cash
events that did not require journal entries to the financial
statements. However, they resulted in a reduction of the number
of shares of common stock outstanding. |
The following table is a summary of all outstanding notes issued
to employees of the Adviser for the exercise of stock options:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
Strike Price of
|
|
|
Amount of
|
|
|
Balance of
|
|
|
|
|
|
|
|
|
|
Options
|
|
|
Options
|
|
|
Promissory Note
|
|
|
Employee Loans
|
|
|
Maturity
|
|
Interest
|
|
|
Issue Date
|
|
Exercised
|
|
|
Exercised
|
|
|
Issued to Employees
|
|
|
at 9/30/10
|
|
|
Date
|
|
Rate on Note
|
|
|
|
|
Aug-01
|
|
|
393,334
|
|
|
|
15.00
|
|
|
$
|
5,900
|
(1)
|
|
$
|
5,900
|
|
|
Aug-10
|
|
|
4.90
|
%(2)
|
|
Aug-01
|
|
|
18,334
|
|
|
|
15.00
|
|
|
|
275
|
(1)
|
|
|
255
|
|
|
Aug-10
|
|
|
4.90
|
%(2)
|
|
Aug-01
|
|
|
18,334
|
|
|
|
15.00
|
|
|
|
275
|
|
|
|
275
|
|
|
Aug-11
|
|
|
4.90
|
%
|
|
Sep-04
|
|
|
13,332
|
|
|
|
15.00
|
|
|
|
200
|
|
|
|
198
|
|
|
Sep-13
|
|
|
5.00
|
%
|
|
Jul-06
|
|
|
13,332
|
|
|
|
15.00
|
|
|
|
200
|
|
|
|
200
|
|
|
Jul-15
|
|
|
8.26
|
%
|
|
Jul-06
|
|
|
18,334
|
|
|
|
15.00
|
|
|
|
275
|
|
|
|
275
|
|
|
Jul-15
|
|
|
8.26
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
475,000
|
|
|
|
|
|
|
$
|
7,125
|
|
|
$
|
7,103
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-40
GLADSTONE
CAPITAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
|
|
|
|
(1) |
|
On September 7, 2010, the Company entered into redemption
agreements (the “Redemption Agreements”) with David
Gladstone, the Company’s Chairman and Chief Executive
Officer, and Laura Gladstone, the daughter of
Mr. Gladstone, in connection with the maturity of secured
promissory notes executed by Mr. Gladstone and
Ms. Gladstone in favor of the Company on August 23,
2001, in the principal amounts of $5,900 and $275 (the
“Notes”). Mr. and Ms. Gladstone executed the
Notes in payment of the exercise price of certain stock options
(the “Options”) to acquire shares of the
Company’s common stock. Concurrently with the execution of
the Notes, the Company and Mr. and Ms. Gladstone entered
into a Stock Pledge Agreements (the “Pledge
Agreements”), pursuant to which Mr. and Ms. Gladstone
granted to the Company a first priority security interest in the
Pledged Collateral (as defined in the Pledge Agreement), which
includes 393,334 and 18,334 shares, respectively, of the
Company’s common stock that Mr. and Ms. Gladstone
acquired pursuant to the exercise of the Options (the
“Pledged Shares”). An event of default was triggered
under the Notes by virtue of Mr. and Ms. Gladstone’s
failure to repay the amounts outstanding under the Notes within
five business days of August 23, 2010. The
Redemption Agreements provide that, pursuant to the terms
and conditions thereof, the Company will automatically accept
and retire the Pledged Shares in partial or full satisfaction,
as applicable, of Mr. and Ms. Gladstone’s obligations
to the Company under the Notes at such time, if ever, that the
trading price of the Company’s common stock reaches $15 per
share. In entering into the Redemption Agreements, the
Company reserved all of its 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. |
| |
|
(2) |
|
An event of default was triggered under the Note by virtue of
the employee’s failure to repay the amounts outstanding
within five business days of August 23, 2010. As such, the
Company charged a default rate of 2% under the Note for periods
following the date of default. |
In accordance with
ASC 505-10-45-2,
“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, these recourse notes
were recorded as loans to employees and are included in the
equity section of the accompanying consolidated statements of
assets and liabilities. As of September 30, 2010, the
Company determined that these notes were still recourse.
|
|
|
Note 8.
|
Net
Increase (Decrease) in Net Assets Resulting from Operations per
Share
|
The following table sets forth the computation of basic and
diluted net increase (decrease) in net assets resulting from
operations per share for the fiscal years ended
September 30, 2010, 2009 and 2008:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30,
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
|
Numerator for basic and diluted net increase (decrease) in net
assets resulting from operations per share
|
|
$
|
16,394
|
|
|
$
|
3,783
|
|
|
$
|
(21,262
|
)
|
|
Denominator for basic and diluted shares
|
|
|
21,060,351
|
|
|
|
21,087,574
|
|
|
|
19,699,796
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net increase (decrease) in net assets resulting from
operations per common share
|
|
$
|
0.78
|
|
|
$
|
0.18
|
|
|
$
|
(1.08
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions
The Company is required to pay out as a dividend 90% of its
ordinary income and short-term capital gains for each taxable
year in order to maintain its status as a RIC under Subtitle A,
Chapter 1 of Subchapter M of the Code. It is the policy of
the Company to pay out as a dividend up to 100% of those
amounts. The amount to be paid out as a dividend is determined
by the Board of Directors each quarter and is based on the
annual earnings estimated by the management of the Company.
Based on that estimate, three monthly dividends are declared
each quarter. At year-end the Company may
F-41
GLADSTONE
CAPITAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
pay a bonus dividend, in addition to the monthly dividends, to
ensure that it has paid out at least 90% of its ordinary income
and realized net short-term capital gains for the year.
Long-term capital gains are composed of success fees, prepayment
fees and gains from the sale of securities held for one year or
more. The Company may decide to retain long-term capital gains
from the sale of securities, if any, and not pay them out as
dividends, however, the Board of Directors may decide to declare
and pay out capital gains during any fiscal year. If the Company
decides to retain long-term capital gains, the portion of the
retained capital gains will be subject to a 35% tax. The tax
characteristics of all dividends will be reported to
stockholders on Form 1099 at the end of each calendar year.
The following table lists the per share dividends paid for the
fiscal years ended September 30, 2010 and 2009:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividend per
|
|
|
Fiscal Year
|
|
Record Date
|
|
Payment Date
|
|
Share
|
|
|
|
|
2010
|
|
October 22, 2009
|
|
October 30, 2009
|
|
$
|
0.070
|
|
|
|
|
November 19, 2009
|
|
November 30, 2009
|
|
|
0.070
|
|
|
|
|
December 22, 2009
|
|
December 31, 2009
|
|
|
0.070
|
|
|
|
|
January 21, 2010
|
|
January 29, 2010
|
|
|
0.070
|
|
|
|
|
February 18, 2010
|
|
February 26, 2010
|
|
|
0.070
|
|
|
|
|
March 23, 2010
|
|
March 31, 2010
|
|
|
0.070
|
|
|
|
|
April 22, 2010
|
|
April 30, 2010
|
|
|
0.070
|
|
|
|
|
May 20, 2010
|
|
May 28, 2010
|
|
|
0.070
|
|
|
|
|
June 22, 2010
|
|
June 30, 2010
|
|
|
0.070
|
|
|
|
|
July 22, 2010
|
|
July 30, 2010
|
|
|
0.070
|
|
|
|
|
August 23, 2010
|
|
August 31, 2010
|
|
|
0.070
|
|
|
|
|
September 22, 2010
|
|
September 30, 2010
|
|
|
0.070
|
|
|
|
|
|
|
|
|
|
|
|
|
Annual Total:
|
|
$
|
0.840
|
|
|
|
|
|
|
|
|
2009
|
|
October 23, 2008
|
|
October 31, 2008
|
|
$
|
0.140
|
|
|
|
|
November 19, 2008
|
|
November 28, 2008
|
|
|
0.140
|
|
|
|
|
December 22, 2008
|
|
December 31, 2008
|
|
|
0.140
|
|
|
|
|
January 22, 2009
|
|
January 30, 2009
|
|
|
0.140
|
|
|
|
|
February 19, 2009
|
|
February 27, 2009
|
|
|
0.140
|
|
|
|
|
March 23, 2009
|
|
March 31, 2009
|
|
|
0.140
|
|
|
|
|
April 27, 2009
|
|
May 8, 2009
|
|
|
0.070
|
|
|
|
|
May 29, 2009
|
|
June 11, 2009
|
|
|
0.070
|
|
|
|
|
June 22, 2009
|
|
June 30, 2009
|
|
|
0.070
|
|
|
|
|
July 23, 2009
|
|
July 31, 2009
|
|
|
0.070
|
|
|
|
|
August 21, 2009
|
|
August 31, 2009
|
|
|
0.070
|
|
|
|
|
September 22, 2009
|
|
September 30, 2009
|
|
|
0.070
|
|
|
|
|
|
|
|
|
|
|
|
|
Annual Total:
|
|
$
|
1.260
|
|
|
|
|
|
|
|
Aggregate distributions declared and paid for the 2010 and 2009
fiscal years were approximately $17,690 and $26,570,
respectively, which were declared based on an estimate of net
investment income for each year.
Distribution of Income and Gains Net
investment income of the Company is declared and distributed to
stockholders monthly. Net realized gains from investment
transactions, in excess of available capital loss carryforwards,
would be taxable to the Company if not distributed, and,
therefore, generally will be distributed at least annually.
F-42
GLADSTONE
CAPITAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The timing and characterization of certain income and capital
gains distributions are determined annually in accordance with
federal tax regulations which may differ from GAAP. These
differences primarily relate to items recognized as income for
financial statement purposes and realized gains for tax
purposes. As a result, net investment income and net realized
gain (loss) on investment transactions for a reporting period
may differ significantly from distributions during such period.
Accordingly, the Company may periodically make reclassifications
among certain of its capital accounts without impacting the net
asset value of the Company. Additionally, the following tables
also include these adjustments for the years ended
September 30, 2010 and 2009, respectively.
The Company’s components of net assets on a tax-basis were
as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30,
|
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
Common stock
|
|
$
|
21
|
|
|
$
|
21
|
|
|
Paid in capital
|
|
|
326,935
|
|
|
|
328,203
|
|
|
Notes receivable — employees
|
|
|
(7,103
|
)
|
|
|
(9,019
|
)
|
|
Net unrealized depreciation on investments
|
|
|
(41,800
|
)
|
|
|
(43,425
|
)
|
|
Net unrealized appreciation on borrowings under line of credit
|
|
|
(1,140
|
)
|
|
|
(350
|
)
|
|
Capital loss carryforward
|
|
|
(26,354
|
)
|
|
|
—
|
|
|
Post-October tax loss
|
|
|
(901
|
)
|
|
|
(26,354
|
)
|
|
Other temporary differences
|
|
|
(412
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Assets
|
|
$
|
249,246
|
|
|
$
|
249,076
|
|
|
|
|
|
|
|
|
|
|
|
The Company intends to retain realized gains to the extent of
available capital loss carryforwards. As of September 30,
2010 the Company had $26,354 of capital loss carryforwards that
expire in 2018.
For the years ended September 30, 2010 and 2009, the
Company recorded the following adjustments to reflect tax
character. Reclassifications between income and gains primarily
relate to the character of prepayment and success fees and
accrued interest written off for GAAP purposes. Adjustments to
paid-in-capital
relate primarily to distributions in excess of net investment
income. Results of operations and net assets were not affected
by these revisions.
| |
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30,
|
|
|
|
2010
|
|
2009
|
|
|
|
Overdistributed net investment income
|
|
$
|
(1,172
|
)
|
|
$
|
5,539
|
|
|
Accumulated Net Realized Losses
|
|
|
1,992
|
|
|
|
360
|
|
|
Paid-in-capital
|
|
|
(820
|
)
|
|
|
(5,899
|
)
|
The tax character of distributions paid to stockholders by the
Company is summarized as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30,
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
|
Distributions from:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ordinary Income
|
|
$
|
16,907
|
|
|
$
|
20,795
|
|
|
$
|
26,110
|
|
|
Long Term Capital Gains
|
|
|
—
|
|
|
|
27
|
|
|
|
120
|
|
|
Return of Capital
|
|
|
783
|
|
|
|
5,748
|
|
|
|
7,149
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Distributions
|
|
$
|
17,690
|
|
|
$
|
26,570
|
|
|
$
|
33,379
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-43
GLADSTONE
CAPITAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
|
|
|
Note 10.
|
Commitments
and Contingencies
|
As of September 30, 2010, the Company had a commitment to
purchase a $3,000 syndicated loan. In addition, the Company has
certain lines of credit with its portfolio companies that have
not been fully drawn. Since these lines of credit have
expiration dates and the Company expects many will never be
fully drawn, the total line of credit commitment amounts do not
necessarily represent future cash requirements. The Company
estimates the fair value of these unused lines of credit
commitments as of September 30, 2010 and 2009 to be nominal.
In July 2009, the Company executed a guaranty of a line of
credit agreement between Comerica Bank and Defiance, one of its
Control investments. If Defiance has a payment default, the
guaranty is callable once the bank has reduced its claim by
using commercially reasonable efforts to collect through
disposition of the Defiance collateral. The guaranty is limited
to $250 plus interest on that amount accrued from the date
demand payment is made under the guaranty, and all costs
incurred by the bank in its collection efforts. As of
September 30, 2010, the Company had not been required to
make any payments on the guaranty of the line of credit
agreement and the Company considers the credit risk to be
remote. The Company reports off-balance sheet guarantees on its
consolidated schedule of investments, as required by the 1940
Act.
In accordance with GAAP, the unused portions of the lines of
credit commitments are not recorded on the accompanying
consolidated statements of assets and liabilities. The following
table summarizes the nominal dollar balance of unused line of
credit commitments and guarantees as of September 30, 2010
and September 30, 2009:
| |
|
|
|
|
|
|
|
|
|
|
|
As of September 30,
|
|
As of September 30,
|
|
|
|
2010
|
|
2009
|
|
|
|
Unused lines of credit
|
|
$
|
9,304
|
|
|
$
|
14,055
|
|
|
Guarantees
|
|
|
250
|
|
|
|
250
|
|
|
|
|
Note 11.
|
Federal
and State Income Taxes
|
The Company has historically operated, and intends to continue
to operate, in a manner to qualify for treatment as a RIC under
Subchapter M of the Code. As a RIC, the Company is not subject
to federal or state income tax on the portion of its taxable
income and gains distributed to stockholders. To qualify as a
RIC, the Company is required to distribute to its stockholders
at least 90% of investment company taxable income, as defined by
the Code and as such no income tax provisions have been recorded
for the individual companies of Gladstone Capital Corporation
and Gladstone Business Loan, LLC.
F-44
GLADSTONE
CAPITAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
|
|
|
Note 12.
|
Financial
Highlights
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30,
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
Per Share
Data(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net asset value at beginning of period
|
|
$
|
11.81
|
|
|
$
|
12.89
|
|
|
$
|
14.97
|
|
|
$
|
14.02
|
|
|
$
|
13.41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from investment
operations(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
0.84
|
|
|
|
1.00
|
|
|
|
1.35
|
|
|
|
1.69
|
|
|
|
1.70
|
|
|
Net realized loss on the sale of investments
|
|
|
(0.14
|
)
|
|
|
(1.25
|
)
|
|
|
(0.04
|
)
|
|
|
—
|
|
|
|
(0.08
|
)
|
|
Realized loss on settlement of derivative
|
|
|
—
|
|
|
|
(0.01
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Net unrealized appreciation on derivative
|
|
|
—
|
|
|
|
0.01
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Net unrealized appreciation (depreciation) on investments
|
|
|
0.11
|
|
|
|
0.45
|
|
|
|
(2.39
|
)
|
|
|
(0.56
|
)
|
|
|
0.53
|
|
|
Net unrealized appreciation on borrowings under line of credit
|
|
|
(0.03
|
)
|
|
|
(0.02
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total from investment operations
|
|
|
0.78
|
|
|
|
0.18
|
|
|
|
(1.08
|
)
|
|
|
1.13
|
|
|
|
2.15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions to stockholders
from(2)(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
(0.80
|
)
|
|
|
(0.99
|
)
|
|
|
(1.31
|
)
|
|
|
(1.48
|
)
|
|
|
(1.64
|
)
|
|
Gains
|
|
|
—
|
|
|
|
—
|
|
|
|
(0.01
|
)
|
|
|
—
|
|
|
|
—
|
|
|
Tax return on capital
|
|
|
(0.04
|
)
|
|
|
(0.27
|
)
|
|
|
(0.36
|
)
|
|
|
(0.20
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total distributions
|
|
|
(0.84
|
)
|
|
|
(1.26
|
)
|
|
|
(1.68
|
)
|
|
|
(1.68
|
)
|
|
|
(1.64
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital share transactions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock under shelf offering
|
|
|
—
|
|
|
|
—
|
|
|
|
0.72
|
|
|
|
1.55
|
|
|
|
—
|
|
|
Issuance of common stock under stock option plan
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1.19
|
|
|
Offering costs
|
|
|
—
|
|
|
|
—
|
|
|
|
(0.04
|
)
|
|
|
(0.05
|
)
|
|
|
—
|
|
|
Repayment of principal on notes receivable
|
|
|
0.07
|
|
|
|
—
|
|
|
|
—
|
|
|
|
0.06
|
|
|
|
0.02
|
|
|
Conversion of recourse to non-recourse notes
|
|
|
(0.02
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification of principal on employee note
|
|
|
0.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock compensation expense
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
0.02
|
|
|
Stock surrendered to settle withholding tax obligation
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(0.06
|
)
|
|
|
—
|
|
|
Dilutive effect of common stock issuance
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(1.13
|
)
|
|
Anti-dilutive effect of common stock reduction
|
|
|
0.03
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total from capital share transactions
|
|
|
0.10
|
|
|
|
—
|
|
|
|
0.68
|
|
|
|
1.50
|
|
|
|
0.10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net asset value at end of period
|
|
$
|
11.85
|
|
|
$
|
11.81
|
|
|
$
|
12.89
|
|
|
$
|
14.97
|
|
|
$
|
14.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per share market value at beginning of period
|
|
$
|
8.93
|
|
|
$
|
15.24
|
|
|
$
|
19.52
|
|
|
$
|
22.01
|
|
|
$
|
22.55
|
|
|
Per share market value at end of period
|
|
$
|
11.27
|
|
|
$
|
8.93
|
|
|
$
|
15.24
|
|
|
$
|
19.52
|
|
|
$
|
22.01
|
|
|
Total
return(4)
|
|
|
37.46
|
%
|
|
|
(30.94
|
)%
|
|
|
(13.90
|
)%
|
|
|
(4.40
|
)%
|
|
|
5.21
|
%
|
|
Shares outstanding at end of period
|
|
|
21,039,242
|
|
|
|
21,087,574
|
|
|
|
21,087,574
|
|
|
|
14,762,574
|
|
|
|
12,305,008
|
|
|
Statement of Assets and Liabilities Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net assets at end of period
|
|
$
|
249,246
|
|
|
$
|
249,076
|
|
|
$
|
271,748
|
|
|
$
|
220,959
|
|
|
$
|
172,570
|
|
|
Average net
assets(5)
|
|
$
|
249,968
|
|
|
$
|
253,316
|
|
|
$
|
284,304
|
|
|
$
|
189,732
|
|
|
$
|
155,868
|
|
|
Senior Securities Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowing under line of credit
|
|
$
|
17,940
|
|
|
$
|
83,350
|
|
|
$
|
151,030
|
|
|
$
|
144,440
|
|
|
$
|
49,993
|
|
|
Asset coverage
ratio(6)(7)
|
|
|
1,419
|
%
|
|
|
396
|
%
|
|
|
279
|
%
|
|
|
252
|
%
|
|
|
443
|
%
|
|
Average coverage per
unit(7)
|
|
$
|
14,187
|
|
|
$
|
3,963
|
|
|
$
|
2,792
|
|
|
$
|
2,524
|
|
|
$
|
4,435
|
|
|
Ratios/Supplemental Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio of expenses to average net
assets(8)
|
|
|
7.28
|
%
|
|
|
9.97
|
%
|
|
|
9.34
|
%
|
|
|
10.75
|
%
|
|
|
6.16
|
%
|
|
Ratio of net expenses to average net
assets(9)
|
|
|
7.11
|
%
|
|
|
8.52
|
%
|
|
|
6.74
|
%
|
|
|
7.60
|
%
|
|
|
4.84
|
%
|
|
Ratio of net investment income to average net assets
|
|
|
7.10
|
%
|
|
|
8.30
|
%
|
|
|
9.34
|
%
|
|
|
11.73
|
%
|
|
|
12.42
|
%
|
F-45
GLADSTONE
CAPITAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
|
|
|
|
(1) |
|
Based on actual shares outstanding
at the end of the corresponding period.
|
| |
|
(2) |
|
Based on weighted average basic per
share data.
|
| |
|
(3) |
|
Distributions are determined based
on taxable income calculated in accordance with income tax
regulations which may differ from amounts determined under
accounting principles generally accepted in the United States of
America.
|
| |
|
(4) |
|
Total return equals the change in
the ending market value of the Company’s common stock from
the beginning of the period taking into account distributions
reinvested in accordance with the terms of the Company’s
dividend reinvestment plan. Total return does not take into
account distributions that may be characterized as a return of
capital. For further information on the estimated character of
the Company’s distributions please refer to Note 9.
|
| |
|
(5) |
|
Average net assets are computed
using the average of the balance of net assets at the end of
each month of the reporting period.
|
| |
|
(6) |
|
As a business development company,
the Company is generally required to maintain a ratio of at
least 200% of total consolidated assets, less all liabilities
and indebtedness not represented by senior securities, to total
borrowings and guaranty commitments.
|
| |
|
(7) |
|
Asset coverage ratio is the ratio
of the carrying value of the Company’s total consolidated
assets, less all liabilities and indebtedness not represented by
senior securities, to the aggregate amount of senior securities
representing indebtedness (including interest payable and
guarantees). Asset coverage per unit is the asset coverage ratio
expressed in terms of dollar amounts per one thousand dollars of
indebtedness.
|
| |
|
(8) |
|
Ratio of expenses to average net
assets is computed using expenses before credits from Adviser to
the base management and incentive fees and including income tax
expense.
|
| |
|
(9) |
|
Ratio of net expenses to average
net assets is computed using total expenses net of credits from
Adviser to the base management and incentive fees and including
income tax expense.
|
|
|
|
Note 13.
|
Subsequent
Events
|
Distributions
On October 5, 2010, the Company’s Board of Directors
declared the following monthly cash distributions to
stockholders:
| |
|
|
|
|
|
|
|
Record Date
|
|
Payment Date
|
|
Dividend per Share
|
|
|
|
October 21, 2010
|
|
October 29, 2010
|
|
$
|
0.07
|
|
|
November 19, 2010
|
|
November 30, 2010
|
|
$
|
0.07
|
|
|
December 23, 2010
|
|
December 31, 2010
|
|
$
|
0.07
|
|
Investment
Activity
Subsequent to September 30, 2010, the Company extended
$8,366 in revolver draws and investments, including $7,000 for
three new syndicated loans (Covad Communications, Global
Brass & Copper and HGI Holding). The Company also
received $1,775 in scheduled and unscheduled loan repayments.
Credit
Facility
On November 22, 2010 (the “Amendment Date”), the
Company amended its Credit Facility. Prior to the Amendment
Date, advances under the Credit Facility bore interest at LIBOR
subject to a minimum rate of 2.0%, plus 4.5% per annum, with a
commitment fee of 0.5% per annum on undrawn amounts. As of the
Amendment Date, advances under the Credit Facility bear interest
at 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 the facility is drawn more than 50% and 1.0% per
annum on undrawn amounts when the facility is drawn less than
50%. In addition, effective as of the Amendment Date, the
Company is no longer obligated to pay an annual minimum earnings
shortfall fee to the committed lenders, which was calculated as
the difference between the weighted average of borrowings
outstanding
F-46
GLADSTONE
CAPITAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
under the Credit Facility and 50.0% of the commitment amount of
the Credit Facility, multiplied by 4.5% per annum, less
commitment fees paid during the year. As of the Amendment Date,
the Company paid a $665 fee.
|
|
|
Note 14.
|
Selected
Quarterly Data (Unaudited)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30, 2010
|
|
|
|
Quarter
|
|
Quarter
|
|
Quarter
|
|
Quarter
|
|
|
|
Ended
|
|
Ended
|
|
Ended
|
|
Ended
|
|
|
|
December 31,
|
|
March 31,
|
|
June 30,
|
|
September 30,
|
|
|
|
2009
|
|
2010
|
|
2010
|
|
2010
|
|
|
|
Total Investment Income
|
|
$
|
9,804
|
|
|
$
|
9,814
|
|
|
$
|
7,969
|
|
|
$
|
7,952
|
|
|
Net Investment Income
|
|
|
4,428
|
|
|
|
4,474
|
|
|
|
4,429
|
|
|
|
4,428
|
|
|
Net Increase (Decrease) in Net Assets Resulting From Operations
|
|
|
6,326
|
|
|
|
7,980
|
|
|
|
(1,748
|
)
|
|
|
3,836
|
|
|
Basic and Diluted Earnings (Loss) per Weighted Average Common
Share
|
|
$
|
0.30
|
|
|
$
|
0.38
|
|
|
$
|
(0.08
|
)
|
|
$
|
0.18
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30, 2009
|
|
|
|
Quarter
|
|
Quarter
|
|
Quarter
|
|
Quarter
|
|
|
|
Ended
|
|
Ended
|
|
Ended
|
|
Ended
|
|
|
|
December 31,
|
|
March 31,
|
|
June 30,
|
|
September 30,
|
|
|
|
2008
|
|
2009
|
|
2009
|
|
2009
|
|
|
|
Total Investment Income
|
|
$
|
11,808
|
|
|
$
|
10,929
|
|
|
$
|
10,598
|
|
|
$
|
9,283
|
|
|
Net Investment Income
|
|
|
5,881
|
|
|
|
5,555
|
|
|
|
5,435
|
|
|
|
4,160
|
|
|
Net (Decrease) Increase in Net Assets Resulting From Operations
|
|
|
(9,103
|
)
|
|
|
10,280
|
|
|
|
(788
|
)
|
|
|
3,394
|
|
|
Basic and Diluted (Loss) Earnings per Weighted Average Common
Share
|
|
$
|
(0.43
|
)
|
|
$
|
0.48
|
|
|
$
|
(0.04
|
)
|
|
$
|
0.17
|
|
F-47
GLADSTONE
CAPITAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF ASSETS AND
LIABILITIES
| |
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
September 30,
|
|
|
|
|
2010
|
|
|
2010
|
|
|
|
|
(Dollar amounts in thousands, except per share amounts)
(Unaudited)
|
|
|
|
|
ASSETS
|
|
Cash
|
|
$
|
6,434
|
|
|
$
|
7,734
|
|
|
Investments at fair value
|
|
|
|
|
|
|
|
|
|
Non-Control/Non-Affiliate investments (Cost of $242,058
and $244,140, respectively)
|
|
|
216,612
|
|
|
|
223,737
|
|
|
Control investments (Cost of $54,499 and $54,076,
respectively)
|
|
|
35,893
|
|
|
|
33,372
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments at fair value (Cost of $296,557 and
$298,216, respectively)
|
|
|
252,505
|
|
|
|
257,109
|
|
|
Interest receivable — investments in debt securities
|
|
|
2,722
|
|
|
|
2,648
|
|
|
Interest receivable —
employees(1)
|
|
|
112
|
|
|
|
104
|
|
|
Due from custodian
|
|
|
10,764
|
|
|
|
255
|
|
|
Deferred financing fees
|
|
|
1,651
|
|
|
|
1,266
|
|
|
Prepaid assets
|
|
|
814
|
|
|
|
799
|
|
|
Other assets
|
|
|
495
|
|
|
|
603
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
275,497
|
|
|
$
|
270,518
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
Borrowings at fair value (Cost of $24,600 and $16,800,
respectively)
|
|
$
|
25,301
|
|
|
$
|
17,940
|
|
|
Accounts payable and accrued expenses
|
|
|
379
|
|
|
|
752
|
|
|
Interest payable
|
|
|
115
|
|
|
|
693
|
|
|
Fee due to
Administrator(1)
|
|
|
186
|
|
|
|
267
|
|
|
Fees due to
Adviser(1)
|
|
|
1,816
|
|
|
|
673
|
|
|
Other liabilities
|
|
|
740
|
|
|
|
947
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES
|
|
|
28,537
|
|
|
|
21,272
|
|
|
|
|
|
|
|
|
|
|
|
|
NET ASSETS
|
|
$
|
246,960
|
|
|
$
|
249,246
|
|
|
|
|
|
|
|
|
|
|
|
|
ANALYSIS OF NET ASSETS
|
|
|
|
|
|
|
|
|
|
Common stock, $0.001 par value, 50,000,000 shares
authorized and 21,039,242 shares issued and outstanding at
December 31, 2010 and September 30, 2010
|
|
$
|
21
|
|
|
$
|
21
|
|
|
Capital in excess of par value
|
|
|
326,935
|
|
|
|
326,935
|
|
|
Notes receivable —
employees(1)
|
|
|
(7,103
|
)
|
|
|
(7,103
|
)
|
|
Net unrealized depreciation on investments
|
|
|
(44,052
|
)
|
|
|
(41,108
|
)
|
|
Net unrealized appreciation on borrowings
|
|
|
(701
|
)
|
|
|
(1,140
|
)
|
|
Overdistributed net investment income
|
|
|
—
|
|
|
|
(1,103
|
)
|
|
Accumulated net realized losses
|
|
|
(28,140
|
)
|
|
|
(27,256
|
)
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL NET ASSETS
|
|
$
|
246,960
|
|
|
$
|
249,246
|
|
|
|
|
|
|
|
|
|
|
|
|
NET ASSETS PER SHARE
|
|
$
|
11.74
|
|
|
$
|
11.85
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Refer to Note 4 — Related Party Transactions
for additional information. |
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS.
F-48
GLADSTONE
CAPITAL CORPORATION
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
| |
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
December 31,
|
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
(Dollar amounts in thousands, except per share amounts)
(Unaudited)
|
|
|
|
|
INVESTMENT INCOME
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
|
|
|
|
|
|
|
Non-Control/Non-Affiliate investments
|
|
$
|
6,597
|
|
|
$
|
8,445
|
|
|
Control investments
|
|
|
1,126
|
|
|
|
693
|
|
|
Notes receivable from
employees(1)
|
|
|
122
|
|
|
|
113
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income
|
|
|
7,845
|
|
|
|
9,251
|
|
|
Other income
|
|
|
161
|
|
|
|
553
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment income
|
|
|
8,006
|
|
|
|
9,804
|
|
|
|
|
|
|
|
|
|
|
|
|
EXPENSES
|
|
|
|
|
|
|
|
|
|
Loan servicing
fee(1)
|
|
|
842
|
|
|
|
929
|
|
|
Base management
fee(1)
|
|
|
505
|
|
|
|
721
|
|
|
Incentive
fee(1)
|
|
|
1,159
|
|
|
|
375
|
|
|
Administration
fee(1)
|
|
|
186
|
|
|
|
178
|
|
|
Interest expense
|
|
|
(120
|
)
|
|
|
1,535
|
|
|
Amortization of deferred financing fees
|
|
|
297
|
|
|
|
494
|
|
|
Professional fees
|
|
|
332
|
|
|
|
912
|
|
|
Other expenses
|
|
|
220
|
|
|
|
261
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses before credits from Adviser
|
|
|
3,421
|
|
|
|
5,405
|
|
|
Credits to fees from
Adviser(1)
|
|
|
(52
|
)
|
|
|
(29
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses net of credits to fees
|
|
|
3,369
|
|
|
|
5,376
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INVESTMENT INCOME
|
|
|
4,637
|
|
|
|
4,428
|
|
|
|
|
|
|
|
|
|
|
|
|
REALIZED AND UNREALIZED (LOSS) GAIN ON:
|
|
|
|
|
|
|
|
|
|
Net realized loss on investments
|
|
|
—
|
|
|
|
(920
|
)
|
|
Net unrealized (depreciation) appreciation on investments
|
|
|
(2,944
|
)
|
|
|
2,599
|
|
|
Net unrealized depreciation on borrowings
|
|
|
439
|
|
|
|
219
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) gain on investments and borrowings
|
|
|
(2,505
|
)
|
|
|
1,898
|
|
|
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS
|
|
$
|
2,132
|
|
|
$
|
6,326
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS PER COMMON
SHARE:
|
|
|
|
|
|
|
|
|
|
Basic and Diluted
|
|
$
|
0.10
|
|
|
$
|
0.30
|
|
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED AVERAGE SHARES OF COMMON STOCK OUTSTANDING:
|
|
|
|
|
|
|
|
|
|
Basic and Diluted
|
|
|
21,039,242
|
|
|
|
21,087,574
|
|
|
|
|
|
(1) |
|
Refer to Note 4 — Related Party Transactions
for additional information. |
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS.
F-49
GLADSTONE
CAPITAL CORPORATION
CONDENSED
CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS
| |
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
December 31,
|
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
(Dollar amounts in thousands) (Unaudited)
|
|
|
|
|
Operations:
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
$
|
4,637
|
|
|
$
|
4,428
|
|
|
Net realized loss on investments
|
|
|
—
|
|
|
|
(920
|
)
|
|
Net unrealized (depreciation) appreciation on investments
|
|
|
(2,944
|
)
|
|
|
2,599
|
|
|
Net unrealized depreciation on borrowings
|
|
|
439
|
|
|
|
219
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in net assets from operations
|
|
|
2,132
|
|
|
|
6,326
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital transactions:
|
|
|
|
|
|
|
|
|
|
Shelf offering costs
|
|
|
—
|
|
|
|
(39
|
)
|
|
Distributions to stockholders
|
|
|
(4,418
|
)
|
|
|
(4,428
|
)
|
|
Reclassification of principal on employee note
|
|
|
—
|
|
|
|
514
|
|
|
|
|
|
|
|
|
|
|
|
|
Net decrease in net assets from capital transactions
|
|
|
(4,418
|
)
|
|
|
(3,953
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total (decrease) increase in net assets
|
|
|
(2,286
|
)
|
|
|
2,373
|
|
|
Net assets at beginning of year
|
|
|
249,246
|
|
|
|
249,076
|
|
|
|
|
|
|
|
|
|
|
|
|
Net assets at end of period
|
|
$
|
246,960
|
|
|
$
|
251,449
|
|
|
|
|
|
|
|
|
|
|
|
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS.
F-50
GLADSTONE
CAPITAL CORPORATION
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
| |
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
December 31,
|
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
(Dollar amounts in thousands) (Unaudited)
|
|
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
Net increase in net assets resulting from operations
|
|
$
|
2,132
|
|
|
$
|
6,326
|
|
|
Adjustments to reconcile net increase in net assets resulting
from operations to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
Purchase of investments
|
|
|
(11,794
|
)
|
|
|
(2,064
|
)
|
|
Principal repayments on investments
|
|
|
13,208
|
|
|
|
15,404
|
|
|
Proceeds from sale of investments
|
|
|
37
|
|
|
|
2,782
|
|
|
Increase in investment balance due to paid in kind interest
|
|
|
(4
|
)
|
|
|
(55
|
)
|
|
Increase in investment balance due to transferred interest
|
|
|
—
|
|
|
|
(103
|
)
|
|
Net change in premiums, discounts and amortization
|
|
|
213
|
|
|
|
45
|
|
|
Net realized loss on investments
|
|
|
—
|
|
|
|
920
|
|
|
Net unrealized depreciation (appreciation) on investments
|
|
|
2,944
|
|
|
|
(2,599
|
)
|
|
Net unrealized depreciation on borrowings
|
|
|
(439
|
)
|
|
|
(219
|
)
|
|
Amortization of deferred financing fees
|
|
|
297
|
|
|
|
494
|
|
|
Increase in interest receivable
|
|
|
(82
|
)
|
|
|
(139
|
)
|
|
Increase in due from custodian
|
|
|
(10,509
|
)
|
|
|
(6,711
|
)
|
|
Increase in prepaid assets
|
|
|
(15
|
)
|
|
|
(40
|
)
|
|
Decrease in due from
Adviser(1)
|
|
|
—
|
|
|
|
69
|
|
|
Decrease in other assets
|
|
|
108
|
|
|
|
908
|
|
|
Decrease in accounts payable and accrued expenses
|
|
|
(373
|
)
|
|
|
(121
|
)
|
|
Decrease in interest payable
|
|
|
(578
|
)
|
|
|
(39
|
)
|
|
Increase in fees due to
Adviser(1)
|
|
|
1,143
|
|
|
|
451
|
|
|
Decrease in administration fee due to
Administrator(1)
|
|
|
(81
|
)
|
|
|
(38
|
)
|
|
Decrease in other liabilities
|
|
|
(207
|
)
|
|
|
(202
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by operating activities
|
|
|
(4,000
|
)
|
|
|
15,069
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
Shelf offering costs
|
|
|
—
|
|
|
|
(39
|
)
|
|
Proceeds from borrowings
|
|
|
10,000
|
|
|
|
2,900
|
|
|
Repayments on borrowings
|
|
|
(2,200
|
)
|
|
|
(12,500
|
)
|
|
Distributions paid
|
|
|
(4,418
|
)
|
|
|
(4,428
|
)
|
|
Deferred financing fees
|
|
|
(682
|
)
|
|
|
96
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
2,700
|
|
|
|
(13,971
|
)
|
|
|
|
|
|
|
|
|
|
|
|
NET (DECREASE) INCREASE IN CASH
|
|
|
(1,300
|
)
|
|
|
1,098
|
|
|
CASH, BEGINNING OF PERIOD
|
|
|
7,734
|
|
|
|
5,276
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH, END OF PERIOD
|
|
$
|
6,434
|
|
|
$
|
6,374
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Refer to Note 4 — Related Party Transactions
for additional information. |
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS.
F-51
GLADSTONE
CAPITAL CORPORATION
CONDENSED
CONSOLIDATED SCHEDULE OF INVESTMENTS
AS OF
DECEMBER 31, 2010
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Company(1)
|
|
Industry
|
|
Investment(2)
|
|
Cost
|
|
|
Fair Value
|
|
|
|
|
|
|
|
|
(Dollar amounts in thousands)
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
NON-CONTROL/NON-AFFILIATE INVESTMENTS
|
|
|
|
|
|
|
|
|
|
Non-syndicated Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Access Television Network, Inc.
|
|
Service-cable airtime (infomercials)
|
|
Senior Term Debt (14.0%, Due
12/2011)(4)
|
|
$
|
948
|
|
|
$
|
711
|
|
|
Allison Publications, LLC
|
|
Service-publisher of consumer oriented magazines
|
|
Senior Term Debt (10.5%, Due
9/2012)(4)
|
|
|
8,940
|
|
|
|
8,413
|
|
|
BAS Broadcasting
|
|
Service-radio station operator
|
|
Senior Term Debt (11.5%, Due
7/2013)(4)
|
|
|
7,465
|
|
|
|
6,606
|
|
|
Chinese Yellow Pages Company
|
|
Service-publisher of Chinese language directories
|
|
Line of Credit, $450 available (7.3%, Due
11/2011)(4)
|
|
|
450
|
|
|
|
425
|
|
|
|
|
|
|
Senior Term Debt (7.3%, Due
11/2011)(4)
|
|
|
288
|
|
|
|
273
|
|
|
CMI Acquisition, LLC
|
|
Service-recycling
|
|
Senior Subordinated Term Debt (10.3%, Due
11/2012)(4)
|
|
|
5,976
|
|
|
|
5,901
|
|
|
FedCap Partners, LLC
|
|
Private equity fund
|
|
Class A Membership
Units(7)
|
|
|
400
|
|
|
|
400
|
|
|
|
|
|
|
Uncalled Capital Commitment ($1,600)
|
|
|
|
|
|
|
|
|
|
GFRC Holdings LLC
|
|
Manufacturing-glass-fiber reinforced concrete
|
|
Senior Term Debt (11.5%, Due
12/2012)(4)
|
|
|
6,011
|
|
|
|
5,681
|
|
|
|
|
|
|
Senior Subordinated Term Debt (14.0%, Due
12/2012)(3)(4)
|
|
|
6,632
|
|
|
|
6,267
|
|
|
Global Materials Technologies, Inc.
|
|
Manufacturing-steel wool products and metal fibers
|
|
Senior Term Debt (13.0%, Due
6/2012)(3)(4)
|
|
|
3,360
|
|
|
|
2,780
|
|
|
Heartland Communications Group
|
|
Service-radio station operator
|
|
Line of Credit, $100 available (8.5%, Due 3/2013)
|
|
|
100
|
|
|
|
58
|
|
|
|
|
|
|
Line of Credit, $100 available (8.5%, Due 3/2013)
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
Senior Term Debt (8.5%, Due
3/2013)(4)
|
|
|
4,305
|
|
|
|
2,508
|
|
|
|
|
|
|
Common Stock
Warrants(6)(7)
|
|
|
66
|
|
|
|
—
|
|
|
International Junior Golf Training Acquisition Company
|
|
Service-golf training
|
|
Line of Credit, $1,000 available (9.0%, Due
5/2011)(4)
|
|
|
1,000
|
|
|
|
972
|
|
|
|
|
|
|
Senior Term Debt (8.5%, Due
5/2012)(4)
|
|
|
1,391
|
|
|
|
1,353
|
|
|
|
|
|
|
Senior Term Debt (10.5%, Due
5/2012)(3)(4)
|
|
|
2,500
|
|
|
|
2,431
|
|
|
KMBQ Corporation
|
|
Service-AM/FM radio broadcaster
|
|
Line of Credit, $200 available (non-accrual, Due
7/2010)(4)(8)(7)
|
|
|
162
|
|
|
|
16
|
|
|
|
|
|
|
Senior Term Debt (non-accrual, Due
7/2010)(4)(8)(7)
|
|
|
2,063
|
|
|
|
204
|
|
|
Legend Communications of Wyoming, LLC
|
|
Service-operator of radio stations
|
|
Senior Term Debt (12.0%, Due
6/2013)(4)
|
|
|
9,880
|
|
|
|
6,274
|
|
F-52
GLADSTONE
CAPITAL CORPORATION
CONDENSED
CONSOLIDATED SCHEDULE OF
INVESTMENTS — (Continued)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Company(1)
|
|
Industry
|
|
Investment(2)
|
|
Cost
|
|
|
Fair Value
|
|
|
|
|
|
|
|
|
(Dollar amounts in thousands)
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
Newhall Holdings, Inc.
|
|
Service-distributor of personal care products and supplements
|
|
Line of Credit, $1,350 available (8.0%, Due
12/2012)(4)
|
|
$
|
1,350
|
|
|
$
|
1,276
|
|
|
|
|
|
|
Senior Term Debt Term
A(5)
(8.5%, Due
12/2012)(4)
|
|
|
1,870
|
|
|
|
1,767
|
|
|
|
|
|
|
Senior Term
Debt(5)
(3.5%, Due
12/2012)(4)
|
|
|
2,000
|
|
|
|
1,860
|
|
|
|
|
|
|
Senior Term Debt (3.5%, Due
12/2012)(3)(4)
|
|
|
4,648
|
|
|
|
4,276
|
|
|
|
|
|
|
Preferred
Equity(6)(7)
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
Common
Stock(6)(7)
|
|
|
—
|
|
|
|
—
|
|
|
Northern Contours, Inc.
|
|
Manufacturing-veneer and laminate components
|
|
Senior Subordinated Term Debt (13.0%, Due
9/2012)(4)
|
|
|
6,258
|
|
|
|
5,741
|
|
|
Northstar Broadband, LLC
|
|
Service-cable TV franchise owner
|
|
Senior Term Debt (0.7%, Due
12/2012)(4)
|
|
|
104
|
|
|
|
92
|
|
|
Pinnacle Treatment Centers, Inc.
|
|
Service-Addiction treatment centers
|
|
Line of Credit, $500 available (12.0%, Due
1/2011)(4)(8)
|
|
|
100
|
|
|
|
100
|
|
|
|
|
|
|
Senior Term Debt (10.5%, Due
12/2011)(4)(8)
|
|
|
1,750
|
|
|
|
1,750
|
|
|
|
|
|
|
Senior Term Debt (10.5%, Due
12/2011)(3)(4)(8)
|
|
|
7,500
|
|
|
|
7,500
|
|
|
Precision Acquisition Group Holdings, Inc.
|
|
Manufacturing-consumable components for the aluminum industry
|
|
Equipment Note (13.0%, Due
11/2011)(4)
|
|
|
1,000
|
|
|
|
940
|
|
|
|
|
|
|
Senior Term Debt (13.0%, Due
11/2011)(4)
|
|
|
4,125
|
|
|
|
3,877
|
|
|
|
|
|
|
Senior Term Debt (13.0%, Due
11/2011)(3)(4)
|
|
|
4,053
|
|
|
|
3,810
|
|
|
PROFITSystems Acquisition Co.
|
|
Service-design and develop ERP software
|
|
Line of Credit, $350 available (4.5%, Due 7/2011)
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
Senior Term Debt (8.5%, Due
7/2011)(4)
|
|
|
750
|
|
|
|
711
|
|
|
|
|
|
|
Senior Term Debt (10.5%, Due
7/2011)(3)(4)
|
|
|
2,900
|
|
|
|
2,719
|
|
|
RCS Management Holding Co.
|
|
Service-healthcare supplies
|
|
Senior Term Debt (9.5%, Due
1/2011)(3)(4)(9)
|
|
|
1,813
|
|
|
|
1,785
|
|
|
|
|
|
|
Senior Term Debt (11.5%, Due
1/2011)(4)(9)
|
|
|
3,060
|
|
|
|
3,014
|
|
|
Reliable Biopharmaceutical Holdings, Inc.
|
|
Manufacturing-pharmaceutical and biochemical intermediates
|
|
Line of Credit, $3,500 available (10.0%, Due
1/2011)(4)(9)
|
|
|
1,500
|
|
|
|
1,491
|
|
|
|
|
|
|
Mortgage Note (9.5%, Due
10/2014)(4)
|
|
|
7,234
|
|
|
|
7,198
|
|
|
|
|
|
|
Senior Term Debt (9.0%, Due
10/2012)(4)
|
|
|
967
|
|
|
|
961
|
|
|
|
|
|
|
Senior Term Debt (11.0%, Due
10/2012)(3)(4)
|
|
|
11,663
|
|
|
|
11,415
|
|
|
|
|
|
|
Senior Subordinated Term Debt (12.0%, Due
10/2013)(4)
|
|
|
6,000
|
|
|
|
5,760
|
|
|
|
|
|
|
Common Stock
Warrants(6)(7)
|
|
|
209
|
|
|
|
136
|
|
|
Saunders & Associates
|
|
Manufacturing-equipment provider for frequency control devices
|
|
Senior Term Debt (9.8%, Due
5/2013)(4)
|
|
|
8,947
|
|
|
|
8,947
|
|
F-53
GLADSTONE
CAPITAL CORPORATION
CONDENSED
CONSOLIDATED SCHEDULE OF
INVESTMENTS — (Continued)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Company(1)
|
|
Industry
|
|
Investment(2)
|
|
Cost
|
|
|
Fair Value
|
|
|
|
|
|
|
|
|
(Dollar amounts in thousands)
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
SCI Cable, Inc.
|
|
Service-cable, internet, voice provider
|
|
Senior Term Debt (non-accrual, Due
10/2012)(4)(7)
|
|
$
|
601
|
|
|
$
|
132
|
|
|
|
|
|
|
Senior Term Debt (non-accrual, Due
10/2012)(4)(7)
|
|
|
2,931
|
|
|
|
293
|
|
|
Sunburst Media — Louisiana, LLC
|
|
Service-radio station operator
|
|
Senior Term Debt (10.5%, Due
6/2011)(4)
|
|
|
6,335
|
|
|
|
4,997
|
|
|
Sunshine Media Holdings
|
|
Service-publisher regional B2B trade magazines
|
|
Line of credit, $2,000 available (10.5%, Due
2/2011)(4)(10)
|
|
|
1,999
|
|
|
|
1,499
|
|
|
|
|
|
|
Senior Term Debt (10.5%, Due
5/2012)(4)(10)
|
|
|
16,948
|
|
|
|
12,711
|
|
|
|
|
|
|
Senior Term Debt (13.3%, Due
5/2012)(3)(4)(10)
|
|
|
10,700
|
|
|
|
8,025
|
|
|
Thibaut Acquisition Co.
|
|
Service-design and distribute wall covering
|
|
Line of Credit, $750 available (9.0%, Due
1/2011)(4)(9)
|
|
|
750
|
|
|
|
731
|
|
|
|
|
|
|
Senior Term Debt (8.5%, Due
1/2011)(4)(9)
|
|
|
813
|
|
|
|
792
|
|
|
|
|
|
|
Senior Term Debt (12.0%, Due
1/2011)(3)(4)(9)
|
|
|
3,000
|
|
|
|
2,903
|
|
|
Viapack, Inc.
|
|
Manufacturing-polyethylene film
|
|
Senior Real Estate Term Debt (10.0%, Due
3/2011)(4)
|
|
|
650
|
|
|
|
647
|
|
|
|
|
|
|
Senior Term Debt (13.0%, Due
3/2011)(3)(4)
|
|
|
3,978
|
|
|
|
3,958
|
|
|
Westlake Hardware, Inc.
|
|
Retail-hardware and variety
|
|
Senior Subordinated Term Debt (12.3%, Due
1/2014)(4)
|
|
|
12,000
|
|
|
|
11,835
|
|
|
|
|
|
|
Senior Subordinated Term Debt (13.5%, Due
1/2014)(4)
|
|
|
8,000
|
|
|
|
7,810
|
|
|
Winchester Electronics
|
|
Manufacturing-high bandwidth connectors and cables
|
|
Senior Term Debt (5.3%, Due
5/2012)(4)
|
|
|
1,250
|
|
|
|
1,247
|
|
|
|
|
|
|
Senior Term Debt (5.7%, Due
5/2013)(4)
|
|
|
1,686
|
|
|
|
1,669
|
|
|
|
|
|
|
Senior Subordinated Term Debt (14.0%, Due
6/2013)(4)
|
|
|
9,875
|
|
|
|
9,653
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal — Non-syndicated loans
|
|
|
|
|
|
|
223,254
|
|
|
|
197,301
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Syndicated Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Airvana Network Solutions, Inc
|
|
Service-telecommunications
|
|
Senior Term Debt (11.0%, Due
8/2014)(5)
|
|
$
|
7,702
|
|
|
$
|
7,918
|
|
|
Applied Systems
|
|
Service - software for property & casualty insurance
industry
|
|
Senior Subordinated Term Debt (10%, Due
6/2017)(5)
|
|
|
990
|
|
|
|
1,000
|
|
|
Ascend Learning
|
|
Service - technology-based learning solutions
|
|
Senior Subordinated Term Debt (12.3%, Due
12/2017)(5)
|
|
|
970
|
|
|
|
975
|
|
|
Covad Communications
|
|
Service-telecommunications
|
|
Senior Term Debt (12.0%, Due
11/2015)(5)
|
|
|
1,961
|
|
|
|
2,025
|
|
|
Global Brass
|
|
Service-telecommunications
|
|
Senior Term Debt (10.3%, Due
8/2015)(5)
|
|
|
2,905
|
|
|
|
3,168
|
|
|
HGI
|
|
Service-telecommunications
|
|
Senior Term Debt (6.3%, Due
10/2016)(5)
|
|
|
1,956
|
|
|
|
1,998
|
|
F-54
GLADSTONE
CAPITAL CORPORATION
CONDENSED
CONSOLIDATED SCHEDULE OF
INVESTMENTS — (Continued)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Company(1)
|
|
Industry
|
|
Investment(2)
|
|
Cost
|
|
|
Fair Value
|
|
|
|
|
|
|
|
|
(Dollar amounts in thousands)
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
WP Evenflo Group Holdings Inc.
|
|
Manufacturing-infant and juvenile products
|
|
Senior Term Debt (8.0%, Due
2/2013)(5)
|
|
$
|
1,876
|
|
|
$
|
1,651
|
|
|
|
|
|
|
Senior Preferred
Equity(6)(7)
|
|
|
333
|
|
|
|
389
|
|
|
|
|
|
|
Junior Preferred
Equity(6)(7)
|
|
|
111
|
|
|
|
134
|
|
|
|
|
|
|
Common
Stock(6)(7)
|
|
|
—
|
|
|
|
53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal — Syndicated loans
|
|
|
|
|
|
|
18,804
|
|
|
|
19,311
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Non-Control/Non-Affiliate Investments (represents 85.8%
of total investments at fair value)
|
|
|
|
|
|
$
|
242,058
|
|
|
$
|
216,612
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONTROL INVESTMENTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BERTL, Inc.
|
|
Service-web-based evaluator of digital imaging products
|
|
Line of Credit, $1,621 available (non-accrual, Due
10/2011)(6)(7)
|
|
$
|
1,399
|
|
|
$
|
—
|
|
|
|
|
|
|
Common
Stock(6)(7)
|
|
|
424
|
|
|
|
—
|
|
|
Defiance Integrated Technologies, Inc.
|
|
Manufacturing-trucking parts
|
|
Senior Term Debt (11.0%, Due
4/2013)(3)(4)
|
|
|
8,245
|
|
|
|
8,245
|
|
|
|
|
|
|
Common
Stock(6)(7)
|
|
|
1
|
|
|
|
4,512
|
|
|
|
|
|
|
Guaranty ($250)
|
|
|
|
|
|
|
|
|
|
Lindmark Acquisition, LLC
|
|
Service-advertising
|
|
Senior Subordinated Term Debt (non-accrual, Due
10/2012)(4)(7)
|
|
|
10,000
|
|
|
|
4,500
|
|
|
|
|
|
|
Senior Subordinated Term Debt (non-accrual, Due
12/2012)(4)(7)
|
|
|
2,000
|
|
|
|
900
|
|
|
|
|
|
|
Senior Subordinated Term Debt (non-accrual, Due Upon
Demand)(4)(7)
|
|
|
1,874
|
|
|
|
843
|
|
|
|
|
|
|
Common
Stock(6)(7)
|
|
|
317
|
|
|
|
—
|
|
|
LocalTel, LLC
|
|
Service-yellow pages publishing
|
|
Line of credit, $1,850 available (non-accrual, Due
12/2011)(6)(7)
|
|
|
1,723
|
|
|
|
1,075
|
|
|
|
|
|
|
Senior Term Debt (non-accrual, Due
2/2012)(6)(7)
|
|
|
325
|
|
|
|
—
|
|
|
|
|
|
|
Line of Credit, $3,000 available (non-accrual, Due
6/2011)(6)(7)
|
|
|
1,170
|
|
|
|
—
|
|
|
|
|
|
|
Senior Term Debt (non-accrual, Due
6/2011)(6)(7)
|
|
|
2,688
|
|
|
|
—
|
|
|
|
|
|
|
Senior Term Debt (non-accrual, Due
6/2011)(3)(6)(7)
|
|
|
2,750
|
|
|
|
—
|
|
|
|
|
|
|
Common Stock
Warrants(6)(7)
|
|
|
—
|
|
|
|
—
|
|
|
Midwest Metal Distribution, Inc.
|
|
Distribution-aluminum sheets and stainless steel
|
|
Senior Subordinated Term
Debt(4)
(12.0%, Due
7/2013)(4)
|
|
|
18,256
|
|
|
|
15,813
|
|
|
|
|
|
|
Common
Stock(6)(7)
|
|
|
138
|
|
|
|
—
|
|
F-55
GLADSTONE
CAPITAL CORPORATION
CONDENSED
CONSOLIDATED SCHEDULE OF
INVESTMENTS — (Continued)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Company(1)
|
|
Industry
|
|
Investment(2)
|
|
Cost
|
|
|
Fair Value
|
|
|
|
|
|
|
|
|
(Dollar amounts in thousands)
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
U.S. Healthcare Communications, Inc.
|
|
Service-magazine publisher/operator
|
|
Line of credit, $400 available (non-accrual, Due
12/2010)(6)(7)
|
|
$
|
269
|
|
|
$
|
5
|
|
|
|
|
|
|
Line of credit, $450 available (non-accrual, Due
12/2010)(6)(7)
|
|
|
450
|
|
|
|
—
|
|
|
|
|
|
|
Common
Stock(6)(7)
|
|
|
2,470
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Control Investments (represents 14.2% of total
investments at fair value)
|
|
|
|
|
|
$
|
54,499
|
|
|
$
|
35,893
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Investments
|
|
|
|
|
|
$
|
296,557
|
|
|
$
|
252,505
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Certain of the listed securities are issued by affiliate(s) of
the indicated portfolio company. |
| |
|
(2) |
|
Percentage represents interest rates in effect at
December 31, 2010 and due date represents the contractual
maturity date. |
| |
|
(3) |
|
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. |
| |
|
(4) |
|
Fair value was primarily based on opinions of value submitted by
Standard & Poor’s Securities Evaluations, Inc. |
| |
|
(5) |
|
Security valued based on the indicative bid price on or near
December 31, 2010, offered by the respective syndication
agent’s trading desk or secondary desk. |
| |
|
(6) |
|
Fair value was primarily based on the total enterprise value of
the portfolio company using a liquidity waterfall approach. The
Company also considered discounted cash flow methodologies. |
| |
|
(7) |
|
Security is non-income producing. |
| |
|
(8) |
|
Security was paid off, at par, subsequent to December 31,
2010 and was valued based on the exit. |
| |
|
(9) |
|
Loan was amended or restructured subsequent to December 31,
2010, resulting in an extension to the maturity date. |
| |
|
(10) |
|
In January, the Company disbursed $1.5 million to purchase
common stock from existing shareholders of Sunshine Media
Holdings. This purchase resulted in the Company taking a
controlling position in Sunshine Media Holdings. |
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF
THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
F-56
GLADSTONE
CAPITAL CORPORATION
CONSOLIDATED
SCHEDULE OF INVESTMENTS
SEPTEMBER
30, 2010
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Company(1)
|
|
Industry
|
|
Investment(2)
|
|
Cost
|
|
|
Fair Value
|
|
|
|
|
|
|
|
|
(Dollar amounts in thousands)
|
|
|
|
|
NON-CONTROL/NON-AFFILIATE INVESTMENTS
|
|
|
|
|
|
|
|
|
|
Non-syndicated Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Access Television Network, Inc.
|
|
Service-cable airtime (infomercials)
|
|
Senior Term Debt (14.0%, Due
12/2011)(5)
|
|
$
|
963
|
|
|
$
|
809
|
|
|
Allison Publications, LLC
|
|
Service-publisher of consumer oriented magazines
|
|
Senior Term Debt (10.5%, Due
9/2012)(5)
|
|
|
9,094
|
|
|
|
8,543
|
|
|
|
|
|
|
Senior Term Debt (13.0%, Due
12/2010)(5)
|
|
|
65
|
|
|
|
64
|
|
|
BAS Broadcasting
|
|
Service-radio station operator
|
|
Senior Term Debt (11.5%, Due
7/2013)(5)
|
|
|
7,465
|
|
|
|
6,644
|
|
|
Chinese Yellow Pages Company
|
|
Service-publisher of Chinese language directories
|
|
Line of Credit, $700 available (7.3%, Due
11/2010)(5)
|
|
|
450
|
|
|
|
428
|
|
|
|
|
|
|
Senior Term Debt (7.3%, Due
11/2010)(5)
|
|
|
333
|
|
|
|
317
|
|
|
CMI Acquisition, LLC
|
|
Service-recycling
|
|
Senior Subordinated Term Debt (10.3%, Due
11/2012)(5)
|
|
|
5,972
|
|
|
|
5,868
|
|
|
FedCap Partners, LLC
|
|
Private equity fund
|
|
Class A Membership
Units(8)
|
|
|
400
|
|
|
|
400
|
|
|
|
|
|
|
Uncalled Capital Commitment ($1,600)
|
|
|
|
|
|
|
|
|
|
Finn Corporation
|
|
Manufacturing-landscape equipment
|
|
Common Stock
Warrants(7)(8)
|
|
|
37
|
|
|
|
284
|
|
|
GFRC Holdings LLC
|
|
Manufacturing-glass-fiber reinforced concrete
|
|
Senior Term Debt (11.5%, Due
12/2012)(5)
|
|
|
6,111
|
|
|
|
6,004
|
|
|
|
|
|
|
Senior Subordinated Term Debt (14.0%, Due
12/2012)(3)(5)
|
|
|
6,632
|
|
|
|
6,450
|
|
|
Global Materials Technologies, Inc.
|
|
Manufacturing-steel wool products and metal fibers
|
|
Senior Term Debt (13.0%, Due
6/2012)(3)(5)
|
|
|
3,560
|
|
|
|
2,937
|
|
|
Heartland Communications Group
|
|
Service-radio station operator
|
|
Line of Credit, $100 available (8.5%, Due 3/2013)
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
Line of Credit, $100 available (8.5%, Due 3/2013)
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
Senior Term Debt (8.5%, Due
3/2013)(5)
|
|
|
4,301
|
|
|
|
2,519
|
|
|
|
|
|
|
Common Stock
Warrants(7)(8)
|
|
|
66
|
|
|
|
—
|
|
|
Interfilm Holdings, Inc.
|
|
Service-slitter and distributor of plastic films
|
|
Senior Term Debt (12.3%, Due
10/2012)(5)
|
|
|
2,400
|
|
|
|
2,382
|
|
|
International Junior Golf Training Acquisition Company
|
|
Service-golf training
|
|
Line of Credit, $1,500 available (9.0%, Due
5/2011)(5)
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
Senior Term Debt (8.5%, Due
5/2012)(5)
|
|
|
1,557
|
|
|
|
1,537
|
|
|
|
|
|
|
Senior Term Debt (10.5%, Due
5/2012)(3)(5)
|
|
|
2,500
|
|
|
|
2,456
|
|
|
KMBQ Corporation
|
|
Service-AM/FM radio broadcaster
|
|
Line of Credit, $200 available (non-accrual, Due
7/2010)(5)(8)(10)
|
|
|
161
|
|
|
|
16
|
|
|
|
|
|
|
Senior Term Debt (non-accrual, Due
7/2010)(5)(8)(10)
|
|
|
1,921
|
|
|
|
192
|
|
|
Legend Communications of Wyoming LLC
|
|
Service-operator of radio stations
|
|
Senior Term Debt (12.0%, Due
6/2013)(5)
|
|
|
9,880
|
|
|
|
6,422
|
|
F-57
GLADSTONE
CAPITAL CORPORATION
CONSOLIDATED
SCHEDULE OF
INVESTMENTS — (Continued)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Company(1)
|
|
Industry
|
|
Investment(2)
|
|
Cost
|
|
|
Fair Value
|
|
|
|
|
|
|
|
|
(Dollar amounts in thousands)
|
|
|
|
|
Newhall Holdings, Inc.
|
|
Service-distributor of personal care products and supplements
|
|
Line of Credit, $1,350 available (5.0%, Due
12/2012)(5)
|
|
|
1,350
|
|
|
|
1,269
|
|
|
|
|
|
|
Senior Term
Debt(5)
(5.0%, Due
12/2012)(5)
|
|
|
3,870
|
|
|
|
3,638
|
|
|
|
|
|
|
Senior Term Debt (5.0%, Due
12/2012)(3)(5)
|
|
|
4,648
|
|
|
|
4,323
|
|
|
|
|
|
|
Preferred
Equity(7)(8)
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
Common
Stock(7)(8)
|
|
|
—
|
|
|
|
—
|
|
|
Northern Contours, Inc.
|
|
Manufacturing-veneer and laminate components
|
|
Senior Subordinated Term Debt (13.0%, Due
9/2012)(5)
|
|
|
6,301
|
|
|
|
5,765
|
|
|
Northstar Broadband, LLC
|
|
Service-cable TV franchise owner
|
|
Senior Term Debt (0.7%, Due
12/2012)(5)
|
|
|
117
|
|
|
|
102
|
|
|
Pinnacle Treatment Centers, Inc.
|
|
Service-Addiction treatment centers
|
|
Line of Credit, $500 available (12.0%, Due
10/2010)(5)(12)
|
|
|
150
|
|
|
|
150
|
|
|
|
|
|
|
Senior Term Debt (10.5%, Due
12/2011)(5)
|
|
|
1,950
|
|
|
|
1,945
|
|
|
|
|
|
|
Senior Term Debt (10.5%, Due
12/2011)(3)(5)
|
|
|
7,500
|
|
|
|
7,481
|
|
|
Precision Acquisition Group Holdings, Inc.
|
|
Manufacturing-consumable components for the aluminum industry
|
|
Equipment Note (13.0%, Due
10/2010)(5)(13)
|
|
|
1,000
|
|
|
|
950
|
|
|
|
|
|
|
Senior Term Debt (13.0%, Due
10/2010)(5)(13)
|
|
|
4,125
|
|
|
|
3,919
|
|
|
|
|
|
|
Senior Term Debt (13.0%, Due
10/2010)(3)(5)(13)
|
|
|
4,053
|
|
|
|
3,850
|
|
|
PROFITSystems Acquisition Co.
|
|
Service-design and develop ERP software
|
|
Line of Credit, $350 available (4.5%, Due 7/2011)
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
Senior Term Debt (8.5%, Due
7/2011)(5)
|
|
|
1,000
|
|
|
|
940
|
|
|
|
|
|
|
Senior Term Debt (10.5%, Due
7/2011)(3)(5)
|
|
|
2,900
|
|
|
|
2,697
|
|
|
RCS Management Holding Co.
|
|
Service-healthcare supplies
|
|
Senior Term Debt (9.5%, Due
1/2011)(3)(5)
|
|
|
1,937
|
|
|
|
1,918
|
|
|
|
|
|
|
Senior Term Debt (11.5%, Due
1/2011)(4)(5)
|
|
|
3,060
|
|
|
|
3,029
|
|
|
Reliable Biopharmaceutical Holdings, Inc.
|
|
Manufacturing-pharmaceutical and biochemical intermediates
|
|
Line of Credit, $5,000 available (9.0%, Due
10/2010)(5)(14)
|
|
|
1,200
|
|
|
|
1,188
|
|
|
|
|
|
|
Mortgage Note (9.5%, Due
10/2014)(5)
|
|
|
7,255
|
|
|
|
7,201
|
|
|
|
|
|
|
Senior Term Debt (9.0%, Due
10/2012)(5)
|
|
|
1,080
|
|
|
|
1,069
|
|
|
|
|
|
|
Senior Term Debt (11.0%, Due
10/2012)(3)(5)
|
|
|
11,693
|
|
|
|
11,386
|
|
|
|
|
|
|
Senior Subordinated Term Debt (12.0%, Due
10/2013)(5)
|
|
|
6,000
|
|
|
|
5,730
|
|
|
|
|
|
|
Common Stock
Warrants(7)(8)
|
|
|
209
|
|
|
|
—
|
|
|
Saunders & Associates
|
|
Manufacturing-equipment provider for frequency control devices
|
|
Senior Term Debt (9.8%, Due
5/2013)(5)
|
|
|
8,947
|
|
|
|
8,935
|
|
F-58
GLADSTONE
CAPITAL CORPORATION
CONSOLIDATED
SCHEDULE OF
INVESTMENTS — (Continued)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Company(1)
|
|
Industry
|
|
Investment(2)
|
|
Cost
|
|
|
Fair Value
|
|
|
|
|
|
|
|
|
(Dollar amounts in thousands)
|
|
|
|
|
SCI Cable, Inc.
|
|
Service-cable, internet, voice provider
|
|
Senior Term Debt (non-accrual, Due
10/2012)(5)(8)(10)
|
|
|
450
|
|
|
|
140
|
|
|
|
|
|
|
Senior Term Debt (non-accrual, Due
10/2012)(5)(8)(10)
|
|
|
2,931
|
|
|
|
352
|
|
|
Sunburst Media — Louisiana, LLC
|
|
Service-radio station operator
|
|
Senior Term Debt (10.5%, Due
6/2011)(5)
|
|
|
6,391
|
|
|
|
5,100
|
|
|
Sunshine Media Holdings
|
|
Service-publisher regional B2B trade magazines
|
|
Line of credit, $2,000 available (10.5%, Due
2/2011)(5)
|
|
|
1,599
|
|
|
|
1,499
|
|
|
|
|
|
|
Senior Term Debt (10.5%, Due
5/2012)(5)
|
|
|
16,948
|
|
|
|
15,889
|
|
|
|
|
|
|
Senior Term Debt (13.3%, Due
5/2012)(3)(5)
|
|
|
10,700
|
|
|
|
9,898
|
|
|
Thibaut Acquisition Co.
|
|
Service-design and distribute wall covering
|
|
Line of Credit, $1,000 available (9.0%, Due
1/2011)(5)
|
|
|
1,000
|
|
|
|
970
|
|
|
|
|
|
|
Senior Term Debt (8.5%, Due
1/2011)(5)
|
|
|
1,075
|
|
|
|
1,043
|
|
|
|
|
|
|
Senior Term Debt (12.0%, Due
1/2011)(3)(5)
|
|
|
3,000
|
|
|
|
2,888
|
|
|
Viapack, Inc.
|
|
Manufacturing-polyethylene film
|
|
Senior Real Estate Term Debt (10.0%, Due
3/2011)(5)
|
|
|
675
|
|
|
|
672
|
|
|
|
|
|
|
Senior Term Debt (13.0%, Due
3/2011)(3)(5)
|
|
|
4,005
|
|
|
|
3,990
|
|
|
Westlake Hardware, Inc.
|
|
Retail-hardware and variety
|
|
Senior Subordinated Term Debt (12.3%, Due
1/2014)(5)
|
|
|
12,000
|
|
|
|
11,820
|
|
|
|
|
|
|
Senior Subordinated Term Debt (13.5%, Due
1/2014)(5)
|
|
|
8,000
|
|
|
|
7,800
|
|
|
Winchester Electronics
|
|
Manufacturing-high bandwidth connectors and cables
|
|
Senior Term Debt (5.3%, Due
5/2012)(5)
|
|
|
1,250
|
|
|
|
1,244
|
|
|
|
|
|
|
Senior Term Debt (6.0%, Due
5/2013)(5)
|
|
|
1,686
|
|
|
|
1,661
|
|
|
|
|
|
|
Senior Subordinated Term Debt (14.0%, Due
6/2013)(5)
|
|
|
9,875
|
|
|
|
9,603
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal — Non-syndicated loans
|
|
|
|
|
|
|
225,798
|
|
|
|
206,326
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Syndicated Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Airvana Network Solutions, Inc
|
|
Service-telecommunications
|
|
Senior Term Debt (11.0%, Due
8/2014)(6)
|
|
$
|
8,858
|
|
|
$
|
8,942
|
|
|
Puerto Rico Cable Acquisition Company, Inc.
|
|
Service-telecommunications
|
|
Senior Subordinated Term Debt (7.9%, Due
1/2012)(6)
|
|
|
7,159
|
|
|
|
6,427
|
|
|
WP Evenflo Group Holdings Inc.
|
|
Manufacturing-infant and juvenile products
|
|
Senior Term Debt (8.0%, Due
2/2013)(6)
|
|
|
1,881
|
|
|
|
1,655
|
|
|
|
|
|
|
Senior Preferred
Equity(7)(8)
|
|
|
333
|
|
|
|
379
|
|
|
|
|
|
|
Junior Preferred
Equity(7)(8)
|
|
|
111
|
|
|
|
8
|
|
|
|
|
|
|
Common
Stock(7)(8)
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal — Syndicated loans
|
|
|
|
|
|
|
18,342
|
|
|
|
17,411
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Non-Control/ Non-Affiliate Investments
|
|
|
|
|
|
$
|
244,140
|
|
|
$
|
223,737
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-59
GLADSTONE
CAPITAL CORPORATION
CONSOLIDATED
SCHEDULE OF
INVESTMENTS — (Continued)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Company(1)
|
|
Industry
|
|
Investment(2)
|
|
Cost
|
|
|
Fair Value
|
|
|
|
|
|
|
|
|
(Dollar amounts in thousands)
|
|
|
|
|
CONTROL INVESTMENTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BERTL, Inc.
|
|
Service-web-based evaluator of digital imaging products
|
|
Line of Credit, $1,621 available (non-accrual, Due
10/2010)(7)(8)(10)(11)
|
|
$
|
1,319
|
|
|
$
|
—
|
|
|
|
|
|
|
Common
Stock(7)(8)
|
|
|
424
|
|
|
|
—
|
|
|
Defiance Integrated Technologies, Inc.
|
|
Manufacturing-trucking parts
|
|
Senior Term Debt (11.0%, Due
4/2013)(3)(5)
|
|
|
8,325
|
|
|
|
8,325
|
|
|
|
|
|
|
Common
Stock(7)(8)
|
|
|
1
|
|
|
|
1,543
|
|
|
|
|
|
|
Guaranty ($250)
|
|
|
|
|
|
|
|
|
|
Lindmark Acquisition, LLC
|
|
Service-advertising
|
|
Senior Subordinated Term Debt (non-accrual, Due
10/2012)(5)(8)(9)(10)
|
|
|
10,000
|
|
|
|
5,000
|
|
|
|
|
|
|
Senior Subordinated Term Debt (non-accrual, Due
12/2010)(5)(8)(9)(10)
|
|
|
2,000
|
|
|
|
1,000
|
|
|
|
|
|
|
Senior Subordinated Term Debt (non-accrual, Due Upon
Demand)(5)(8)(9)(10)
|
|
|
1,794
|
|
|
|
897
|
|
|
|
|
|
|
Common
Stock(7)(8)
|
|
|
1
|
|
|
|
—
|
|
|
LocalTel, LLC
|
|
Service-yellow pages publishing
|
|
Line of credit, $1,850 available (non-accrual, Due
12/2010)(7)(8)(10)
|
|
|
1,698
|
|
|
|
1,063
|
|
|
|
|
|
|
Senior Term Debt (non-accrual, Due
2/2012)(7)(8)(10)
|
|
|
325
|
|
|
|
—
|
|
|
|
|
|
|
Line of Credit, $3,000 available (non-accrual, Due
6/2011)(7)(8)(10)
|
|
|
1,170
|
|
|
|
—
|
|
|
|
|
|
|
Senior Term Debt (non-accrual, Due
6/2011)(7)(8)(10)
|
|
|
2,688
|
|
|
|
—
|
|
|
|
|
|
|
Senior Term Debt (non-accrual, Due
6/2011)(3)(7)(8)(10)
|
|
|
2,750
|
|
|
|
—
|
|
|
|
|
|
|
Common Stock
Warrants(7)(8)
|
|
|
—
|
|
|
|
—
|
|
|
Midwest Metal Distribution, Inc.
|
|
Distribution-aluminum sheets and stainless steel
|
|
Senior Subordinated Term Debt (12.0%, Due
7/2013)(5)
|
|
|
18,254
|
|
|
|
15,539
|
|
|
|
|
|
|
Common
Stock(7)(8)
|
|
|
138
|
|
|
|
—
|
|
|
U.S. Healthcare Communications, Inc.
|
|
Service-magazine publisher/ operator
|
|
Line of credit, $400 available (non-accrual, Due
12/2010)(7)(8)(10)
|
|
|
269
|
|
|
|
5
|
|
|
|
|
|
|
Line of credit, $450 available (non-accrual, Due
12/2010)(7)(8)(10)
|
|
|
450
|
|
|
|
—
|
|
|
|
|
|
|
Common
Stock(7)(8)
|
|
|
2,470
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Control Investments
|
|
|
|
|
|
$
|
54,076
|
|
|
$
|
33,372
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Investments(15)
|
|
|
|
|
|
$
|
298,216
|
|
|
$
|
257,109
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Certain of the listed securities are issued by affiliate(s) of
the indicated portfolio company. |
| |
|
(2) |
|
Percentage represents interest rates in effect at
September 30, 2010 and due date represents the contractual
maturity date. |
| |
|
(3) |
|
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. |
F-60
GLADSTONE
CAPITAL CORPORATION
CONSOLIDATED
SCHEDULE OF
INVESTMENTS — (Continued)
|
|
|
|
(4) |
|
LOT of senior debt, meaning if the portfolio company is
liquidated, the holder of the LOT is paid after the senior debt,
however, the debt is also junior to another LOT. |
| |
|
(5) |
|
Fair value was primarily based on opinions of value submitted by
Standard & Poor’s Securities Evaluations, Inc. |
| |
|
(6) |
|
Security valued based on the indicative bid price on or near
September 30, 2010, offered by the respective syndication
agent’s trading desk or secondary desk. |
| |
|
(7) |
|
Fair value was primarily based on the total enterprise value of
the portfolio company using a liquidity waterfall approach. The
Company also considered discounted cash flow methodologies. |
| |
|
(8) |
|
Security is non-income producing. |
| |
|
(9) |
|
Lindmark’s loan agreement was amended in March 2009 such
that any unpaid current interest accrues at a success fee rate.
The success fee is not recorded until paid (see Note 2,
“Summary of Significant Accounting Policies —
Interest Income Recognition”). |
| |
|
(10) |
|
BERTL, KMBQ, Lindmark, LocalTel, SCI Cable and U.S. Healthcare
are currently past due on interest payments and are on
non-accrual. |
| |
|
(11) |
|
BERTL’s interest includes paid in kind interest. Please
refer to Note 2 “Summary of Significant Accounting
Policies.” Subsequent to September 30, 2010,
BERTL’s line of credit maturity date was extended to
October 2011. |
| |
|
(12) |
|
Subsequent to September 30, 2010, Pinnacle’s line of
credit maturity date was extended to January 2011. |
| |
|
(13) |
|
Subsequent to September 30, 2010, Precision’s
equipment note and senior term loan maturity dates were extended
to November 2010. |
| |
|
(14) |
|
Subsequent to September 30, 2010, Reliable’s line of
credit limit was reduced to $3,500, the interest rate floor was
increased to 10.0% and the maturity date was extended to January
2011. |
| |
|
(15) |
|
Aggregate gross unrealized depreciation for federal income tax
purposes is $1,919; aggregate gross unrealized appreciation for
federal income tax purposes is $43,023. Net unrealized
depreciation is $41,104 based on a tax cost of $298,186. |
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF
THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
F-61
GLADSTONE
CAPITAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
DECEMBER 31, 2010
(DOLLAR AMOUNTS IN THOUSANDS,
EXCEPT PER SHARE DATA AND AS OTHERWISE INDICATED)
Gladstone Capital Corporation (the “Company”) was
incorporated under the General Corporation Laws of the State of
Maryland on May 30, 2001. The Company is a closed-end,
non-diversified management investment company that has elected
to be treated as a business development company under the
Investment Company Act of 1940, as amended (the “1940
Act”). In addition, the Company has elected to be treated
for tax purposes as a regulated investment company
(“RIC”) under the Internal Revenue Code of 1986, as
amended (the “Code”). The Company’s investment
objective is to achieve a high level of current income by
investing in debt securities, consisting primarily of senior
notes, senior subordinated notes and junior subordinated notes,
of established private businesses that are substantially owned
by leveraged buyout funds, individual investors or are
family-owned businesses, with a particular focus on senior
notes. In addition, the Company may acquire from others existing
loans that meet this profile.
Gladstone Business Loan, LLC (“Business Loan”), a
wholly-owned subsidiary of the Company, was established on
February 3, 2003 for the purpose of holding the
Company’s portfolio of loan investments. Gladstone Capital
Advisers, Inc. established on December 30, 2003, is also a
wholly-owned subsidiary of the Company.
Northern Virginia SBIC, LP (“Northern Virginia SBIC”)
and Northern Virginia SBIC GP, LLC, the general partner of
Northern Virginia SBIC, were established on December 4,
2008 as wholly-owned subsidiaries of the Company for the purpose
of applying for and holding a license to enable the Company,
through Northern Virginia SBIC, to make investments in
accordance with the United States Small Business Administration
guidelines for small business investment companies.
Gladstone Financial Corporation (“Gladstone
Financial”), a wholly-owned subsidiary of the Company, 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. This
will enable the Company, 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 all of the aforementioned
subsidiaries are consolidated with those of the Company.
The Company is externally managed by Gladstone Management
Corporation (the “Adviser”), an affiliate of the
Company.
|
|
|
NOTE 2.
|
Summary
of Significant Accounting Policies
|
Unaudited
Interim Financial Statements and Basis of
Presentation
Interim financial statements of the Company are prepared in
accordance with accounting principles generally accepted in the
United States of America (“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, certain disclosures
accompanying annual financial statements prepared in accordance
with GAAP are omitted. The accompanying condensed consolidated
financial statements include the accounts of the Company and its
wholly-owned subsidiaries. All significant 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 AICPA Audit and Accounting Guide
for Investment Companies, the Company is not permitted to
consolidate any portfolio company investments, including those
in which the Company has a controlling interest. In the opinion
of the Company’s management, all adjustments, consisting
solely of normal recurring accruals, necessary for the fair
statement of financial statements for the interim periods have
been
F-62
included. The results of operations for the three months ended
December 31, 2010 are not necessarily indicative of results
that ultimately may be achieved for the year. The interim
financial statements and notes thereto should be read in
conjunction with the financial statements and notes thereto
included in the Company’s
Form 10-K
for the fiscal year ended September 30, 2010, as filed with
the Securities and Exchange Commission (the “SEC”) on
November 22, 2010.
The year-end Condensed Consolidated Statement of Assets and
Liabilities contained elsewhere in this report was derived
from audited financial statements but does not include all
disclosures required by GAAP.
Reclassifications
Certain amounts in the prior period’s financial statements
have been reclassified to conform to the presentation for the
period ended December 31, 2010 with no effect to net
decrease in net assets resulting from operations.
Investment
Valuation Policy
The Company carries its investments at market value to the
extent that market quotations are readily available and
reliable, and otherwise at fair value, as determined in good
faith by its Board of Directors. In determining the fair value
of the Company’s investments, the Adviser has established
an investment valuation policy (the “Policy”). The
Policy has been approved by the Company’s Board of
Directors, and each quarter the Board of Directors reviews
whether the Adviser has applied the Policy consistently and
votes whether or not to accept the recommended valuation of the
Company’s investment portfolio.
The Company uses generally accepted valuation techniques to
value its portfolio unless the Company has specific information
about the value of an investment to determine otherwise. From
time to time the Company may accept an appraisal of a business
in which the Company holds securities. These appraisals are
expensive and occur infrequently but provide a third-party
valuation opinion that may differ in results, techniques and
scopes used to value the Company’s investments. When these
specific third-party appraisals are sought, the Company 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 the investment the Company has in
that business.
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 Company
determines the value of publicly-traded securities based on the
closing price for the security on the exchange or securities
market on which it is listed and primarily traded on the
valuation date. To the extent that the Company owns restricted
securities that are not freely tradable, but for which a public
market otherwise exists, the Company will use the market value
of that security adjusted for any decrease in value resulting
from the restrictive feature.
Securities for which a limited market
exists: The Company 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. In valuing these assets, the Company
assesses trading activity in an asset class and evaluates
variances in prices and other market insights to determine if
any available quote prices are reliable. If the Company
concludes that quotes based on active markets or trading
activity may be relied upon, firm bid prices are requested;
however, if a firm bid price is unavailable, the Company 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 Company 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.
In the event these limited markets become illiquid such that
market prices are no longer readily available, the Company will
value its syndicated loans using alternative methods, such as
estimated net present values of the future cash flows or
discounted cash flows (“DCF”). The use of a DCF
methodology follows that prescribed by the Financial Accounting
Standards Board (“FASB”) Accounting Standards
Codification (“ASC”) 820, “Fair Value
Measurements and Disclosures,” which provides guidance on
the use of a reporting entity’s own assumptions about
F-63
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,
the 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 Company 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 Company
develops a modified discount rate approach that incorporates
risk premiums including, among others, increased probability of
default, or higher loss given default or increased liquidity
risk. The DCF valuations applied to the syndicated loans provide
an estimate of what the Company believes a market participant
would pay to purchase a syndicated loan in an active market,
thereby establishing a fair value. The Company will apply the
DCF methodology in illiquid markets until quoted prices are
available or are deemed reliable based on trading activity.
As of December 31, 2010, the Company assessed trading
activity in its syndicated loan assets and determined that there
continued to be market liquidity and a secondary market for
these assets. Thus, firm bid prices, or IBPs, were used to fair
value the Company’s syndicated loans as of
December 31, 2010.
Securities for which no market exists: The
valuation methodology for securities for which no market exists
falls into three categories: (1) portfolio investments
comprised solely of debt securities; (2) portfolio
investments in controlled companies comprised of a bundle of
securities, which can include debt and equity securities; and
(3) portfolio investments in non-controlled companies
comprised of a bundle of investments, which can include debt and
equity securities.
(1) Portfolio investments comprised solely of debt
securities: Debt securities that are not publicly
traded on an established securities market, or for which a
limited market does not exist (“Non-Public Debt
Securities”), and that are issued by portfolio companies in
which the Company has no equity or equity-like securities, are
fair valued in accordance with the terms of the Policy, which
utilizes opinions of value submitted to the Company by
Standard & Poor’s Securities Evaluations, Inc.
(“SPSE”). The Company 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.
(2) 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 the
Company’s 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 the Company has 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 acquisition market as the principal market,
generally through a sale or recapitalization of the portfolio
company. In accordance with ASC 820, the Company applies
the in-use premise of value which assumes the debt and equity
securities are sold together. Under this liquidity waterfall
approach, the Company first calculates the TEV of the issuer by
incorporating some or all of the following factors to determine
the TEV of the issuer:
|
|
|
| |
•
|
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 Company may reference industry statistics and use outside
experts. Once the Company has estimated the TEV of the issuer,
the Company 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 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
F-64
Adviser may recommend that the Company use a valuation by SPSE,
or, if that is unavailable, a DCF valuation technique.
(3) Portfolio investments in non-controlled companies
comprised of a bundle of investments, which can include debt and
equity securities: The Company values Non-Public
Debt Securities that are purchased together with equity or
equity-like securities from the same portfolio company, or
issuer, for which the Company does not control or cannot gain
control as of the measurement date, using a hypothetical
secondary market as the Company’s principal market. In
accordance with ASC 820, the Company determines its fair
value of these debt securities of non-control investments
assuming the sale of an individual debt security using the
in-exchange premise of value. As such, the Company 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.
Subsequent to June 30, 2009, for equity or equity-like
securities of investments for which the Company does not control
or cannot gain control as of the measurement date, the Company
estimates the fair value of the equity using the in-exchange
premise of value 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. Further, the Company may utilize comparable values of
similar companies, recent investments and indices with similar
structures and risk characteristics or its own assumptions in
the absence of other observable market data and may also employ
DCF valuation techniques.
(4) Portfolio investments comprised of non-publicly
traded non-control equity securities of other
funds: The Company values any uninvested capital
of the non-control fund at par value and values any invested
capital at the value provided by the non-control fund.
Due to the uncertainty inherent in the valuation process, such
estimates of fair value may differ significantly from the values
that would have been obtained had a ready market for the
securities existed, and the differences could be material.
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 Company might
reasonably expect to receive upon the current sale of the
security in an arms-length transaction in the security’s
principal market.
Refer to Note 3 below for additional information regarding
fair value measurements and the Company’s adoption 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 the Company’s qualitative assessment indicates that the
debtor is unable to service its debt or other obligations, the
Company 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, the Company remains contractually entitled to this
interest. Interest payments received on non-accrual loans may be
recognized as income or applied to principal depending upon
management’s judgment. Non-accrual loans are restored to
accrual status when past due principal and interest are paid
and, in management’s judgment, are likely to remain
current, or due to a restructuring such that the interest income
is deemed to be collectible. As of December 31, 2010, two
Non-Control/Non-Affiliate investment and four Control
investments were on non-accrual with an aggregate cost basis of
approximately $30.4 million, or 10.3% of the cost basis of
all loans in the Company’s portfolio. As of
September 30, 2010, two Non-Control/Non-Affiliate
investment and four Control investments were on non-accrual with
an aggregate cost basis of approximately $29.9 million, or
10.0% of the cost basis of all loans in the Company’s
portfolio.
As of December 31, 2010, the Company had loans in its
portfolio which contain a PIK provision. The PIK interest,
computed at the contractual rate specified in each loan
agreement, is added to the principal balance of the loan and
recorded as income. To maintain the Company’s status as a
RIC, this non-cash source of income must be
F-65
paid out to stockholders in the form of distributions, even
though the Company has not yet collected the cash. The Company
recorded PIK income of $4 and $55 for the three months ended
December 31, 2010 and 2009, respectively.
The Company also transfers past due interest to the principal
balance as stipulated in certain loan amendments with portfolio
companies. For the three months ended December 31, 2010 and
2009, respectively, the Company transferred past due interest to
the principal balance of $0 and $103.
As of December 31, 2010, the Company had nine original
issue discount (“OID”) loans. The Company recorded OID
income of $25 and $0 for the three months ended
December 31, 2010 and 2009, respectively.
Success fees are recorded upon receipt. Success fees are
contractually due upon a change of control in a portfolio
company and are recorded in Other income in the accompanying
Condensed Consolidated Statements of Operations. The
Company recorded $0.1 million of success fees during the
quarter ended December 31, 2010, which resulted from the
exit and payoff of Interfilm Corp. During the quarter ended
December 31, 2009, the Company received $0.3 million
in prepaid success fees from Doe & Ingalls Management
LLC and $0.3 million in success fees from the
Company’s exit in Tulsa Welding School.
ASC 820 defines fair value, establishes a framework for
measuring fair value and expands disclosures about assets and
liabilities measured at fair value. ASC 820 provides a
consistent definition of fair value that focuses on exit price
in the principal, or most advantageous, market and prioritizes,
within a measurement of fair value, the use of market-based
inputs over entity-specific inputs. ASC 820 also
establishes the following three-level hierarchy for fair value
measurements based upon the transparency of inputs to the
valuation of an asset or liability as of the measurement date.
|
|
|
| |
•
|
Level 1 — inputs to the valuation
methodology are quoted prices (unadjusted) for identical assets
or liabilities in active markets;
|
|
|
|
| |
•
|
Level 2 — inputs to the valuation
methodology include quoted prices for similar assets and
liabilities in active 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 significant to the fair value
measurement. Unobservable inputs are those inputs that reflect
the Company’s own assumptions that market participants
would use to price the asset or liability based upon the best
available information.
|
As of December 31, 2010, all of the Company’s
investments were valued using Level 3 inputs.
F-66
The following table presents the financial instruments carried
at fair value as of December 31, 2010, by caption on the
accompanying Condensed Consolidated Statements of Assets and
Liabilities for each of the three levels of hierarchy
established by ASC 820:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reported in Condensed
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statements of
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Assets and Liabilities
|
|
|
|
|
Non-Control/Non-Affiliate Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior term debt
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
160,557
|
|
|
$
|
160,557
|
|
|
Senior subordinated term debt
|
|
|
—
|
|
|
|
—
|
|
|
|
54,943
|
|
|
|
54,943
|
|
|
Preferred equity
|
|
|
—
|
|
|
|
—
|
|
|
|
523
|
|
|
|
523
|
|
|
Common equity/equivalents
|
|
|
—
|
|
|
|
—
|
|
|
|
589
|
|
|
|
589
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Non-Control/Non-Affiliate investments at fair value
|
|
|
—
|
|
|
|
—
|
|
|
|
216,612
|
|
|
|
216,612
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Control Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior term debt
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
9,325
|
|
|
$
|
9,325
|
|
|
Senior subordinated term debt
|
|
|
—
|
|
|
|
—
|
|
|
|
22,056
|
|
|
|
22,056
|
|
|
Common equity/equivalents
|
|
|
—
|
|
|
|
—
|
|
|
|
4,512
|
|
|
|
4,512
|
|
|
Total Control investments at fair value
|
|
|
—
|
|
|
|
—
|
|
|
|
35,893
|
|
|
|
35,893
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments at fair value
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
252,505
|
|
|
$
|
252,505
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes
in Level 3 Fair Value Measurements of
Investments
The following tables provide a roll-forward in the changes in
fair value during the three months ended December 31, 2010
and December 31, 2009 for all investments for which the
Company determines fair value using unobservable
(Level 3) factors. When a determination is made to
classify a financial instrument within Level 3 of the
valuation hierarchy, the 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 components, observable components (that is,
components that are actively quoted and can be validated to
external sources). Accordingly, the gains and losses in the
table below include changes in fair value due in part to
observable factors that are part of the valuation methodology.
Two tables are provided for each period: the first table is
broken out by Control and Non-Control/Non-Affiliate investment
classification, and the second table is broken out by major
security type.
Fair
value measurements using unobservable data inputs
(Level 3)
Period
ended December 31, 2010:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Control/
|
|
|
|
|
|
|
|
|
|
|
Non-Affiliate
|
|
|
Control
|
|
|
|
|
|
Three months ended December 31, 2010:
|
|
Investments
|
|
|
Investments
|
|
|
Total
|
|
|
|
|
Fair value at September 30, 2010
|
|
$
|
223,737
|
|
|
$
|
33,372
|
|
|
$
|
257,109
|
|
|
Unrealized (depreciation)
appreciation(1)
|
|
|
(5,041
|
)
|
|
|
2,097
|
|
|
|
(2,944
|
)
|
|
Issuances/Originations
|
|
|
11,295
|
|
|
|
503
|
|
|
|
11,798
|
|
|
Settlements/Repayments
|
|
|
(13,342
|
)
|
|
|
(79
|
)
|
|
|
(13,421
|
)
|
|
Sales
|
|
|
(37
|
)
|
|
|
—
|
|
|
|
(37
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value as of December 31, 2010
|
|
$
|
216,612
|
|
|
$
|
35,893
|
|
|
$
|
252,505
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-67
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior
|
|
|
Senior
|
|
|
|
|
|
Common
|
|
|
|
|
|
|
|
Term
|
|
|
Subordinated
|
|
|
Preferred
|
|
|
Equity/
|
|
|
|
|
|
Three months ended December 31, 2010:
|
|
Debt
|
|
|
Term Debt
|
|
|
Equity
|
|
|
Equivalents
|
|
|
Total
|
|
|
|
|
Fair value at September 30, 2010
|
|
$
|
172,596
|
|
|
$
|
81,899
|
|
|
$
|
386
|
|
|
$
|
2,228
|
|
|
$
|
257,109
|
|
|
Unrealized (depreciation)
appreciation(1)
|
|
|
(5,930
|
)
|
|
|
256
|
|
|
|
137
|
|
|
|
2,593
|
|
|
|
(2,944
|
)
|
|
Issuances/Originations
|
|
|
9,398
|
|
|
|
2,083
|
|
|
|
—
|
|
|
|
317
|
|
|
|
11,798
|
|
|
Settlements/Repayments
|
|
|
(6,182
|
)
|
|
|
(7,239
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(13,421
|
)
|
|
Sales
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(37
|
)
|
|
|
(37
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value as of December 31, 2010
|
|
$
|
169,882
|
|
|
$
|
76,999
|
|
|
$
|
523
|
|
|
$
|
5,101
|
|
|
$
|
252,505
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period
ended December 31, 2009:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Control/
|
|
|
|
|
|
|
|
|
|
|
Non-Affiliate
|
|
|
Control
|
|
|
|
|
|
Three months ended December 31, 2009:
|
|
Investments
|
|
|
Investments
|
|
|
Total
|
|
|
|
|
Fair value at September 30, 2009
|
|
$
|
286,997
|
|
|
$
|
33,972
|
|
|
$
|
320,969
|
|
|
Realized
losses(2)
|
|
|
(920
|
)
|
|
|
—
|
|
|
|
(920
|
)
|
|
Unrealized appreciation
(depreciation)(1)
|
|
|
3,599
|
|
|
|
(1,000
|
)
|
|
|
2,599
|
|
|
Issuances/Originations
|
|
|
935
|
|
|
|
1,286
|
|
|
|
2,221
|
|
|
Settlements/Repayments
|
|
|
(15,449
|
)
|
|
|
—
|
|
|
|
(15,449
|
)
|
|
Sales
|
|
|
(2,782
|
)
|
|
|
—
|
|
|
|
(2,782
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value as of December 31, 2009
|
|
$
|
272,380
|
|
|
$
|
34,258
|
|
|
$
|
306,638
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior
|
|
|
Senior
|
|
|
|
|
|
Common
|
|
|
|
|
|
|
|
Term
|
|
|
Subordinated
|
|
|
Preferred
|
|
|
Equity/
|
|
|
|
|
|
Three months ended December 31, 2009:
|
|
Debt
|
|
|
Term Debt
|
|
|
Equity
|
|
|
Equivalents
|
|
|
Total
|
|
|
|
|
Fair value at September 30, 2009
|
|
$
|
212,290
|
|
|
$
|
105,794
|
|
|
$
|
—
|
|
|
$
|
2,885
|
|
|
$
|
320,969
|
|
|
Realized
losses(2)
|
|
|
(511
|
)
|
|
|
(409
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(920
|
)
|
|
Unrealized appreciation
(depreciation)(1)
|
|
|
1,796
|
|
|
|
2,236
|
|
|
|
—
|
|
|
|
(1,433
|
)
|
|
|
2,599
|
|
|
Issuances/Originations
|
|
|
1,218
|
|
|
|
1,003
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,221
|
|
|
Settlements/Repayments
|
|
|
(15,293
|
)
|
|
|
(156
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(15,449
|
)
|
|
Sales
|
|
|
(923
|
)
|
|
|
(1,859
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(2,782
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value as of December 31, 2009
|
|
$
|
198,577
|
|
|
$
|
106,609
|
|
|
$
|
—
|
|
|
$
|
1,452
|
|
|
$
|
306,638
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Included in unrealized appreciation (depreciation) on
investments on the accompanying Condensed Consolidated
Statements of Operations for the three months ended
December 31, 2010 and 2009. |
|
|
|
|
(2) |
|
Included in net realized loss on investments on the accompanying
Condensed Consolidated Statements of Operations for the
three months ended December 31, 2009. |
Non-Control/Non-Affiliate
Investments
As of December 31, 2010 and September 30, 2010, the
Company held Non-Control/Non-Affiliate investments in the
aggregate of approximately $216.6 million and
$223.7 million, at fair value, respectively. During the
period ended December 31, 2010, the Company added five new
Non-Control/Non-Affiliate investments, with an aggregate fair
value of $9.2 million as of December 31, 2010, exited
two Non-Control/Non-Affiliate investments, for which the Company
received aggregate payments of $9.5 million, and sold one
Non-Control/Non-Affiliate investment for $37. As of
December 31, 2010, the Company had a total of 35
Non-Control/Non-Affiliate investments, of which seven were
syndicated loans.
F-68
Control
Investments
As of December 31, 2010 and September 30, 2010, the
Company held six Control investments in the aggregate of
approximately $35.9 million and $33.4 million, at fair
value, respectively. During the period ending December 31,
2010, three Control investments made draws, totaling
$0.2 million, on their lines of credit. The Company did not
exit any Control investments during the three months ended
December 31, 2010.
Investment
Concentrations
As of December 31, 2010, the Company had aggregate
investments in 41 portfolio companies. Approximately 67.3% of
the aggregate fair value of such investments at
December 31, 2010 was comprised of senior term debt, 30.5%
was senior subordinated term debt and 2.2% was in equity
securities. The following table outlines the Company’s
investments by type at December 31, 2010 and
September 30, 2010:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010
|
|
|
September 30, 2010
|
|
|
|
|
Cost
|
|
|
Fair Value
|
|
|
Cost
|
|
|
Fair Value
|
|
|
|
|
Senior term debt
|
|
$
|
203,258
|
|
|
$
|
169,882
|
|
|
$
|
200,041
|
|
|
$
|
172,596
|
|
|
Senior subordinated term debt
|
|
|
88,830
|
|
|
|
76,999
|
|
|
|
93,987
|
|
|
|
81,899
|
|
|
Preferred equity
|
|
|
445
|
|
|
|
523
|
|
|
|
444
|
|
|
|
387
|
|
|
Common equity/equivalents
|
|
|
4,024
|
|
|
|
5,101
|
|
|
|
3,744
|
|
|
|
2,227
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments
|
|
$
|
296,557
|
|
|
$
|
252,505
|
|
|
$
|
298,216
|
|
|
$
|
257,109
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-69
Investments at fair value consisted of the following industry
classifications as of December 31, 2010 and
September 30, 2010:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010
|
|
|
September 30, 2010
|
|
|
|
|
|
|
|
Percentage of
|
|
|
|
|
|
Percentage of
|
|
|
Industry Classification
|
|
Fair Value
|
|
|
Total Investments
|
|
|
Fair Value
|
|
|
Total Investments
|
|
|
|
|
Healthcare, education & childcare
|
|
$
|
42,085
|
|
|
|
16.6
|
%
|
|
$
|
41,098
|
|
|
|
16.0
|
%
|
|
Broadcast (TV & radio)
|
|
|
36,052
|
|
|
|
14.3
|
|
|
|
44,562
|
|
|
|
17.3
|
|
|
Printing & publishing
|
|
|
32,425
|
|
|
|
12.8
|
|
|
|
37,705
|
|
|
|
14.7
|
|
|
Electronics
|
|
|
24,945
|
|
|
|
9.9
|
|
|
|
25,080
|
|
|
|
9.8
|
|
|
Mining, steel, iron & non-precious metals
|
|
|
24,495
|
|
|
|
9.7
|
|
|
|
24,343
|
|
|
|
9.5
|
|
|
Retail stores
|
|
|
19,645
|
|
|
|
7.8
|
|
|
|
19,620
|
|
|
|
7.6
|
|
|
Automobile
|
|
|
12,757
|
|
|
|
5.1
|
|
|
|
9,868
|
|
|
|
3.8
|
|
|
Buildings & real estate
|
|
|
11,948
|
|
|
|
4.7
|
|
|
|
12,454
|
|
|
|
4.8
|
|
|
Personal & non-durable consumer products
|
|
|
11,177
|
|
|
|
4.4
|
|
|
|
9,230
|
|
|
|
3.6
|
|
|
Home & office furnishings
|
|
|
10,167
|
|
|
|
4.0
|
|
|
|
10,666
|
|
|
|
4.1
|
|
|
Machinery
|
|
|
8,627
|
|
|
|
3.4
|
|
|
|
8,719
|
|
|
|
3.4
|
|
|
Chemicals, plastics & rubber
|
|
|
4,605
|
|
|
|
1.8
|
|
|
|
7,044
|
|
|
|
2.7
|
|
|
Leisure, amusement, movies & entertainment
|
|
|
4,757
|
|
|
|
1.9
|
|
|
|
3,994
|
|
|
|
1.6
|
|
|
Diversified natural resources, precious metals &
minerals
|
|
|
3,168
|
|
|
|
1.3
|
|
|
|
—
|
|
|
|
—
|
|
|
Diversified/conglomerate manufacturing
|
|
|
2,227
|
|
|
|
0.9
|
|
|
|
2,042
|
|
|
|
0.8
|
|
|
Telecommunications
|
|
|
2,025
|
|
|
|
0.8
|
|
|
|
—
|
|
|
|
—
|
|
|
Insurance
|
|
|
1,000
|
|
|
|
0.4
|
|
|
|
—
|
|
|
|
—
|
|
|
Aerospace & defense
|
|
|
400
|
|
|
|
0.2
|
|
|
|
400
|
|
|
|
0.2
|
|
|
Farming & agriculture
|
|
|
—
|
|
|
|
—
|
|
|
|
284
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments
|
|
$
|
252,505
|
|
|
|
100.0
|
%
|
|
$
|
257,109
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The investments at fair value were included in the following
geographic regions of the United States at December 31,
2010 and September 30, 2010:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010
|
|
|
September 30, 2010
|
|
|
|
|
|
|
|
Percent of
|
|
|
|
|
|
Percentage of
|
|
|
Geographic Region
|
|
Fair Value
|
|
|
Total Investments
|
|
|
Fair Value
|
|
|
Total Investments
|
|
|
|
|
Midwest
|
|
$
|
119,424
|
|
|
|
47.3
|
%
|
|
$
|
109,299
|
|
|
|
42.5
|
%
|
|
West
|
|
|
56,156
|
|
|
|
22.2
|
|
|
|
59,684
|
|
|
|
23.2
|
|
|
South
|
|
|
41,582
|
|
|
|
16.5
|
|
|
|
44,704
|
|
|
|
17.4
|
|
|
Northeast
|
|
|
35,343
|
|
|
|
14.0
|
|
|
|
36,995
|
|
|
|
14.4
|
|
|
U.S. Territory
|
|
|
—
|
|
|
|
—
|
|
|
|
6,427
|
|
|
|
2.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Investments
|
|
$
|
252,505
|
|
|
|
100.0
|
%
|
|
$
|
257,109
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The geographic region indicates the location of the headquarters
for the Company’s portfolio companies. A portfolio company
may have a number of other business locations in other
geographic regions.
F-70
Investment
Principal Repayments
The following table summarizes the contractual principal
repayments and maturity of the Company’s investment
portfolio by fiscal year, assuming no voluntary prepayments, at
December 31, 2010:
| |
|
|
|
|
|
For the remaining nine months ending September 30:
|
|
Amount
|
|
|
|
|
2011
|
|
$
|
50,640
|
|
|
For the fiscal year ending September 30:
|
|
|
|
|
|
2012
|
|
|
73,339
|
|
|
2013
|
|
|
123,043
|
|
|
2014
|
|
|
31,245
|
|
|
2015
|
|
|
9,925
|
|
|
2016 and thereafter
|
|
|
5,045
|
|
|
|
|
|
|
|
|
Total contractual repayments
|
|
$
|
293,237
|
|
|
Investments in equity securities
|
|
|
4,469
|
|
|
Adjustments to cost basis on debt securities
|
|
|
(1,149
|
)
|
|
|
|
|
|
|
|
Total cost basis of investments held at December 31,
2010:
|
|
$
|
296,557
|
|
|
|
|
|
|
|
Receivables
from Portfolio Companies
Receivables from portfolio companies represent non-recurring
costs incurred on behalf of portfolio companies. The Company
maintains an allowance for uncollectible receivables from
portfolio companies, which is determined based on historical
experience and management’s expectations of future losses.
The Company charges the accounts receivable to the established
provision when collection efforts have been exhausted and the
receivables are deemed uncollectible. As of December 31,
2010 and September 30, 2010, the Company had gross
receivables from portfolio companies of $0.5 million and
$0.6 million, respectively. The allowance for uncollectible
receivables was $0.4 million and $0.3 million as of
December 31, 2010 and September 30, 2010, respectively.
|
|
|
NOTE 4.
|
Related
Party Transactions
|
Loans
to Former Employees
The Company has outstanding loans to certain employees of the
Adviser, each of whom was a joint employee of the Adviser (or
the Company’s previous adviser, Gladstone Capital Advisers,
Inc.) and the Company at the time the loans were originally
provided, for the exercise of options under the Amended and
Restated 2001 Equity Incentive Plan, which has since been
terminated. The loans require the quarterly payment of interest
at the market rate in effect at the date of issue, have varying
terms not exceeding ten years and have been recorded as a
reduction of net assets. The loans are evidenced by full
recourse notes that are due upon maturity or 60 days
following termination of employment, and the shares of common
stock purchased with the proceeds of the loan are posted as
collateral. No new loans were issued during the three months
ended December 31, 2010 or 2009. The Company did not
receive any principal repayments during the three months ended
December 31, 2010 and 2009. The Company recognized interest
income from all employee stock option loans of $0.1 million
and $0.1 million for the three months ended
December 31, 2010 and 2009, respectively.
Investment
Advisory and Management Agreement
The Company has entered into an investment advisory and
management agreement with the Adviser (the “Advisory
Agreement”), which is controlled by the Company’s
chairman and chief executive officer. In accordance with the
Advisory Agreement, the Company pays the Adviser fees as
compensation for its services, consisting of a base management
fee and an incentive fee. On July 7, 2010, the
Company’s Board of Directors approved the renewal of the
Advisory Agreement through August 31, 2011.
F-71
The following tables summarize the management fees, incentive
fees and associated credits reflected in the accompanying
Condensed Consolidated Statements of Operations:
| |
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended December 31,
|
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
Average total assets subject to base management
fee(1)
|
|
$
|
269,408
|
|
|
$
|
330,000
|
|
|
Multiplied by pro-rated annual base management fee of 2.0%
|
|
|
0.5
|
%
|
|
|
0.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Unadjusted base management fee
|
|
$
|
1,347
|
|
|
$
|
1,650
|
|
|
Reduction for loan servicing
fees(2)
|
|
|
(842
|
)
|
|
|
(929
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Base management
fee(2)
|
|
|
505
|
|
|
|
721
|
|
|
Credit for fees received by Adviser from the portfolio companies
|
|
|
—
|
|
|
|
—
|
|
|
Fee reduction for the voluntary, irrevocable waiver of 2.0% fee
on senior syndicated loans to 0.5% per annum
|
|
|
(52
|
)
|
|
|
(7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net base management fee
|
|
$
|
453
|
|
|
$
|
714
|
|
|
|
|
|
|
|
|
|
|
|
|
Incentive fee
|
|
$
|
1,159
|
|
|
$
|
375
|
|
|
Credit from voluntary, irrevocable waiver issued by
Adviser’s board of directors
|
|
|
—
|
|
|
|
(22
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net incentive fee
|
|
$
|
1,159
|
|
|
$
|
353
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit for fees received by Adviser from the portfolio companies
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Fee reduction for the voluntary, irrevocable waiver of 2.0% fee
on senior syndicated loans to 0.5% per annum
|
|
|
(52
|
)
|
|
|
(7
|
)
|
|
Incentive fee credit
|
|
|
—
|
|
|
|
(22
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Credit to base management and incentive fees from
Adviser(2)
|
|
$
|
(52
|
)
|
|
$
|
(29
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
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 and cash
equivalents resulting from borrowings, valued at the end of the
applicable quarters within the respective periods and
appropriately adjusted for any share issuances or repurchases
during the periods. |
|
|
|
|
(2) |
|
Reflected as a line item on the Condensed Consolidated
Statement of Operations located elsewhere in this report. |
Base
Management Fee
The base management fee is payable quarterly and assessed at a
rate of 2.0%, computed on the basis of the value of the
Company’s average gross 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:
The Adviser also services the loans held by Business Loan, in
return for which it receives a 2.0% annual fee based on the
monthly aggregate outstanding balance of loans pledged under the
Company’s line of credit. Since the Company owns these
loans, all loan servicing fees paid to the Adviser are treated
as reductions directly against the 2.0% base management fee
under the Advisory Agreement.
|
|
|
| |
•
|
Senior Syndicated Loan Fee Waiver
|
The Company’s 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
F-72
the extent that proceeds resulting from borrowings were used to
purchase such syndicated loan participations, for the three
months ended December 31, 2010 and 2009.
Under the Advisory Agreement, the Adviser has also provided, and
continues to provide, managerial assistance and other services
to the Company’s portfolio companies and may receive fees
for services other than managerial assistance. 50% of certain of
these fees and 100% of others are credited against the base
management fee that the Company 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 the
Company’s quarterly net investment income (before giving
effect to any incentive fee) exceeds 1.75% of the Company’s
net assets (the “hurdle rate”). The Company will pay
the Adviser an income-based incentive fee with respect to the
Company’s pre-incentive fee net investment income in each
calendar quarter as follows:
|
|
|
| |
•
|
no incentive fee in any calendar quarter in which the
Company’s pre-incentive fee net investment income does not
exceed the hurdle rate (7% annualized);
|
| |
| |
•
|
100% of the Company’s 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 the Company’s pre-incentive fee net
investment income, if any, that exceeds 2.1875% in any calendar
quarter (8.75% annualized).
|
The second part of the incentive fee is a capital gains-based
incentive fee that will be determined and payable in arrears as
of the end of each fiscal year (or upon termination of the
Advisory Agreement, as of the termination date), and equals 20%
of the Company’s realized capital gains as of the end of
the fiscal year. In determining the capital gains-based
incentive fee payable to the Adviser, the Company will calculate
the cumulative aggregate realized capital gains and cumulative
aggregate realized capital losses since the Company’s
inception, and the aggregate unrealized capital depreciation as
of the date of the calculation, as applicable, with respect to
each of the investments in the Company’s 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 the Company’s 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 the
Company’s inception. Aggregate 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 the Company’s calculation of the
capital gains-based incentive fee equals the cumulative
aggregate realized capital gains less cumulative aggregate
realized capital losses, less aggregate unrealized capital
depreciation, with respect to the Company’s 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 the Company’s
portfolio in all prior years.
For the three months ended December 31, 2010 and 2009, the
Company recorded income-based incentive fees of
$1.2 million and $0.4 million, respectively, as its
pre-incentive fee net investment income was above the 1.75%
hurdle rate of net assets for both periods. No capital
gains-based incentive fee has been recorded for the Company from
its inception through December 31, 2010, as cumulative
unrealized capital depreciation exceeded cumulative realized
capital gains net of cumulative realized capital losses.
Administration
Agreement
The Company has entered into an administration agreement (the
“Administration Agreement”) with Gladstone
Administration, LLC (the “Administrator”), an
affiliate of the Adviser, whereby it pays separately for
administrative services. The Administration Agreement provides
for payments equal to the Company’s allocable portion of
F-73
its 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
the Company’s chief financial officer, chief compliance
officer, treasurer, internal counsel and their respective
staffs. The Company’s allocable portion of administrative
expenses is derived by multiplying the Administrator’s
total allocable expenses by the percentage of the Company’s
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 7, 2010, the Company’s Board of Directors
approved the renewal of the Administration Agreement through
August 31, 2011. For the three months ended
December 31, 2010 and 2009, the Company recorded fees to
the Administrator on the accompanying Condensed Consolidated
Statements of Operations of $0.2 million and
$0.2 million, respectively.
Related
Party Fees Due
Amounts due to related parties in the accompanying Condensed
Consolidated Statements of Assets and Liabilities were as
follows:
| |
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
As of September 30,
|
|
|
|
|
2010
|
|
|
2010
|
|
|
|
|
Unpaid base management fee to Adviser
|
|
$
|
453
|
|
|
$
|
319
|
|
|
Unpaid incentive fee to Adviser
|
|
|
1,159
|
|
|
|
158
|
|
|
Unpaid loan servicing fees to Adviser
|
|
|
204
|
|
|
|
196
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fees due to Adviser
|
|
|
1,816
|
|
|
|
673
|
|
|
|
|
|
|
|
|
|
|
|
|
Unpaid administration fee due to Administrator
|
|
|
186
|
|
|
|
267
|
|
|
|
|
|
|
|
|
|
|
|
|
Total related party fees due
|
|
$
|
2,002
|
|
|
$
|
940
|
|
|
|
|
|
|
|
|
|
|
|
On March 15, 2010, the Company, through Business Loan,
entered into a fourth amended and restated credit agreement
which currently provides for a $127.0 million revolving
line of credit arranged by Key Equipment Finance Inc. as
administrative agent (the “Credit Facility”). Branch
Banking and Trust Company (“BB&T”) and ING
Capital LLC (“ING”) also joined the Credit Facility as
committed lenders. Subject to certain terms and conditions, the
Credit Facility may be expanded up to $202.0 million
through the addition of other committed lenders to the facility.
On November 22, 2010 (the “Amendment Date”), the
Company amended its Credit Facility. Prior to the Amendment
Date, advances under the Credit Facility bore interest at LIBOR
subject to a minimum rate of 2.0%, plus 4.5% per annum, with a
commitment fee of 0.5% per annum on undrawn amounts. As of the
Amendment Date, advances under the Credit Facility bear interest
at 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 the facility is drawn more than 50% and 1.0% per
annum on undrawn amounts when the facility is drawn less than
50%. In addition, effective as of the Amendment Date, the
Company is no longer obligated to pay an annual minimum earnings
shortfall fee to the committed lenders, which was calculated as
the difference between the weighted average of borrowings
outstanding under the Credit Facility and 50.0% of the
commitment amount of the Credit Facility, multiplied by 4.5% per
annum, less commitment fees paid during the year. During the
quarter ended December 31, 2010, the Company reversed the
projected annual minimum earnings shortfall fee of $0.6 million
that had been accrued as of September 30, 2010. As of the
Amendment Date, the Company paid a $0.7 million fee.
As of December 31, 2010, there was a cost basis of
approximately $24.6 million of borrowings outstanding under
the Credit Facility at an average interest rate of 5.25%.
Available borrowings are subject to various constraints imposed
under the Credit Facility, based on the aggregate loan balance
pledged by Business Loan. Interest is payable monthly during the
term of the Credit Facility. The Credit Facility matures on
March 15, 2012, and, if the facility is not renewed or
extended by this date, all unpaid principal and interest will be
due and payable on March 15, 2013. In addition, if the
Credit Facility is not renewed on or before March 15, 2012,
the Company will be required to use all principal collections
from its loans to pay outstanding principal on the Credit
Facility.
The Credit Facility contains covenants that require Business
Loan to maintain its status as a separate entity, prohibit
certain significant corporate transactions (such as mergers,
consolidations, liquidations or dissolutions), and restrict
material changes to the Company’s credit and collection
policies. The facility requires a minimum of 20
F-74
obligors in the borrowing base and also limits payments of
distributions. As of December 31, 2010, Business Loan had
26 obligors and the Company was in compliance with all of the
facility covenants.
Fair
Value
The Company elected to apply ASC 825, “Financial
Instruments,” specifically for the Credit Facility, which
was consistent with its application of ASC 820 to its
investments. The Company estimated the fair value of the Credit
Facility using estimates of value provided by an independent
third party and its own assumptions in the absence of observable
market data, including estimated remaining life, credit party
risk, current market yield and interest rate spreads of similar
securities as of the measurement date. The following tables
present the Credit Facility carried at fair value as of
December 31, 2010 and September 30, 2010, by caption
on the accompanying Condensed Consolidated Statements of
Assets and Liabilities for each of the three levels of
hierarchy established by ASC 820 and a roll-forward in the
changes in fair value during the three months ended
December 31, 2010 and 2009, for the Credit Facility for
which the Company determines fair value using unobservable
(Level 3) factors:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings under Credit Facility
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reported in Condensed
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Statement of
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Assets and Liabilities
|
|
|
|
|
December 31, 2010
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
25,301
|
|
|
$
|
25,301
|
|
|
September 30, 2010
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
17,940
|
|
|
$
|
17,940
|
|
Fair
value measurements using unobservable data inputs
(Level 3)
| |
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended December 31,
|
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
Fair value as of September 30, 2010 and 2009, respectively
|
|
$
|
17,940
|
|
|
$
|
83,350
|
|
|
Unrealized
depreciation(1)
|
|
|
(439
|
)
|
|
|
(219
|
)
|
|
Borrowings
|
|
|
10,000
|
|
|
|
2,900
|
|
|
Repayments
|
|
|
(2,200
|
)
|
|
|
(12,500
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Fair value as of December 31, 2010 and 2009, respectively
|
|
$
|
25,301
|
|
|
$
|
73,531
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Included in unrealized depreciation on borrowings on the
accompanying Condensed Consolidated Statements of Operations
for the three months ended December 31, 2010 and 2009. |
The fair value of the collateral under the Credit Facility was
approximately $209.4 million and $212.6 million at
December 31, 2010 and September 30, 2010, respectively.
As of December 31, 2010 and September 30, 2010,
50,000,000 shares of common stock, $0.001 par value
per share, were authorized and 21,039,242 shares of common
stock were outstanding.
Registration
Statement
On October 20, 2009, the Company filed a registration
statement on
Form N-2
(File
No. 333-162592)
that was declared effective by the SEC on January 28, 2010.
Such registration statement permits the Company to issue,
through one or more transactions, up to an aggregate of
$300.0 million in securities, consisting of common stock,
senior common stock, preferred stock, subscription rights, debt
securities and warrants to purchase common stock, or a
combination of these securities.
On May 17, 2010, the Company and the Adviser entered into
an equity distribution agreement (the “Agreement”)
with BB&T Capital Markets, a division of Scott &
Stringfellow, LLC (the “Agent”), under which the
Company may, from time to time, issue and sell through the
Agent, as sales agent, up to 2.0 million shares (the
“Shares”) of the Company’s common stock, par
value $0.001 per share, based upon instructions from the Company
(including, at a minimum, the number of shares to be offered,
the time period during which sales are requested to be
F-75
made, any limitation on the number of shares that may be sold in
any one day and any minimum price below which sales may not be
made). Sales of Shares through the Agent, if any, will be
executed by means of either ordinary brokers’ transactions
on the NASDAQ Global Select Market in accordance with
Rule 153 under the Securities Act of 1933 or such other
sales of the Shares as shall be agreed by the Company and the
Agent. The compensation payable to the Agent for sales of Shares
with respect to which the Agent acts as sales agent shall be
equal to 2.0% of the gross sales price of the Shares for amounts
of Shares sold pursuant to the Agreement. To date, the Company
has not issued any shares pursuant to this Agreement.
Employee
Notes
The following table is a summary of all outstanding notes issued
to employees of the Adviser for the exercise of stock options:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
Strike Price of
|
|
|
Amount of
|
|
|
Balance of
|
|
|
|
|
|
|
|
|
|
Options
|
|
|
Options
|
|
|
Promissory Note
|
|
|
Employee Loans
|
|
|
Maturity
|
|
Interest
|
|
|
Issue Date
|
|
Exercised
|
|
|
Exercised
|
|
|
Issued to Employees
|
|
|
at 12/31/10
|
|
|
Date
|
|
Rate on Note
|
|
|
|
|
Aug-01
|
|
|
393,334
|
|
|
|
15.00
|
|
|
$
|
5,900
|
(1)
|
|
$
|
5,900
|
|
|
Aug-10
|
|
|
4.90
|
%(2)
|
|
Aug-01
|
|
|
18,334
|
|
|
|
15.00
|
|
|
|
275
|
(1)
|
|
|
255
|
|
|
Aug-10
|
|
|
4.90
|
(2)
|
|
Aug-01
|
|
|
18,334
|
|
|
|
15.00
|
|
|
|
275
|
|
|
|
275
|
|
|
Aug-11
|
|
|
4.90
|
|
|
Sep-04
|
|
|
13,332
|
|
|
|
15.00
|
|
|
|
200
|
|
|
|
198
|
|
|
Sep-13
|
|
|
5.00
|
|
|
Jul-06
|
|
|
13,332
|
|
|
|
15.00
|
|
|
|
200
|
|
|
|
200
|
|
|
Jul-15
|
|
|
8.26
|
|
|
Jul-06
|
|
|
18,334
|
|
|
|
15.00
|
|
|
|
275
|
|
|
|
275
|
|
|
Jul-15
|
|
|
8.26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
475,000
|
|
|
|
|
|
|
$
|
7,125
|
|
|
$
|
7,103
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
On September 7, 2010, the Company entered into redemption
agreements (the “Redemption Agreements”) with
David Gladstone, the Company’s Chairman and Chief Executive
Officer, and Laura Gladstone, the daughter of
Mr. Gladstone, in connection with the maturity of secured
promissory notes executed by Mr. Gladstone and
Ms. Gladstone in favor of the Company on August 23,
2001, in the principal amounts of $5,900 and $275 (the
“Notes”). Mr. and Ms. Gladstone executed the
Notes in payment of the exercise price of certain stock options
(the “Options”) to acquire shares of the
Company’s common stock. Concurrently with the execution of
the Notes, the Company and Mr. and Ms. Gladstone entered
into a Stock Pledge Agreements (the “Pledge
Agreements”), pursuant to which Mr. and Ms. Gladstone
granted to the Company a first priority security interest in the
Pledged Collateral (as defined in the Pledge Agreement), which
includes 393,334 and 18,334 shares, respectively, of the
Company’s common stock that Mr. and Ms. Gladstone
acquired pursuant to the exercise of the Options (the
“Pledged Shares”). An event of default was triggered
under the Notes by virtue of Mr. and Ms. Gladstone’s
failure to repay the amounts outstanding under the Notes within
five business days of August 23, 2010. The
Redemption Agreements provide that, pursuant to the terms
and conditions thereof, the Company will automatically accept
and retire the Pledged Shares in partial or full satisfaction,
as applicable, of Mr. and Ms. Gladstone’s obligations
to the Company under the Notes at such time, if ever, that the
trading price of the Company’s common stock reaches $15 per
share. In entering into the Redemption Agreements, the
Company reserved all of its 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. |
|
|
|
|
(2) |
|
An event of default was triggered under the Note by virtue of
the employee’s failure to repay the amounts outstanding
within five business days of August 23, 2010. As such, the
Company charged a default rate of 2% under the Note for periods
following the date of default. |
In accordance with
ASC 505-10-45-2,
“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, these recourse notes
were recorded as loans to employees and are included in the
equity section of the accompanying Condensed Consolidated
Statements of Assets and Liabilities. As of
December 31, 2010, the Company determined that these notes
were still recourse.
F-76
|
|
|
NOTE 7.
|
Net
Increase in Net Assets Resulting from Operations Per Common
Share
|
The following table sets forth the computation of basic and
diluted net increase in net assets resulting from operations per
common share for the three months ended December 31, 2010
and 2009:
| |
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
December 31,
|
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
Numerator for basic and diluted net increase in net assets
resulting from operations per common share
|
|
$
|
2,132
|
|
|
$
|
6,326
|
|
|
Denominator for basic and diluted shares
|
|
|
21,039,242
|
|
|
|
21,087,574
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net increase in net assets resulting from
operations per common share
|
|
$
|
0.10
|
|
|
$
|
0.30
|
|
|
|
|
|
|
|
|
|
|
|
The following table lists the per share distributions paid to
stockholders for the three months ended December 31, 2010
and 2009:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distribution per
|
|
|
Fiscal Year
|
|
Record Date
|
|
Payment Date
|
|
Share
|
|
|
|
|
2011
|
|
October 21, 2010
|
|
October 29, 2010
|
|
$
|
0.07
|
|
|
|
|
November 19, 2010
|
|
November 30, 2010
|
|
$
|
0.07
|
|
|
|
|
December 23, 2010
|
|
December 31, 2010
|
|
$
|
0.07
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
$
|
0.21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
October 22, 2009
|
|
October 30, 2009
|
|
$
|
0.07
|
|
|
|
|
November 19, 2009
|
|
November 30, 2009
|
|
$
|
0.07
|
|
|
|
|
December 22, 2009
|
|
December 31, 2009
|
|
$
|
0.07
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
$
|
0.21
|
|
|
|
|
|
|
|
|
|
Aggregate distributions declared and paid for both the three
months ended December 31, 2010 and 2009 were approximately
$4.4 million, which were declared based on estimates of net
investment income for the respective fiscal years. Distributions
declared for the fiscal year ended September 30, 2010 were
comprised of 95.6% from ordinary income and 4.4% from a return
of capital. The characterization of the distributions declared
and paid for the fiscal year ending September 30, 2011 will
be determined at year end and cannot be determined at this time.
The timing and characterization of certain income and capital
gains distributions are determined annually in accordance with
federal tax regulations which may differ from GAAP. These
differences primarily relate to items recognized as income for
financial statement purposes and realized gains for tax
purposes. As a result, net investment income and net realized
gain (loss) on investment transactions for a reporting period
may differ significantly from distributions during such period.
Accordingly, the Company may periodically make reclassifications
among certain of its capital accounts without impacting the net
asset value of the Company.
|
|
|
NOTE 9.
|
Commitments
and Contingencies
|
As of December 31, 2010, the Company was not party to any
signed commitments for potential investments. However, the
Company has certain line of credit and capital commitments with
its portfolio companies that have not been fully drawn or
called, respectively. Since these commitments have expiration
dates and the Company expects many will never be fully drawn or
called, the total commitment amounts do not necessarily
represent future cash requirements. The Company estimates the
fair value of these unused and uncalled commitments as of
December 31, 2010 and March 31, 2010 to be nominal.
In July 2009, the Company executed a guaranty of a line of
credit agreement between Comerica Bank and Defiance, one of its
Control investments. If Defiance has a payment default, the
guaranty is callable once the bank has reduced its claim by
using commercially reasonable efforts to collect through
disposition of the Defiance collateral. The guaranty is limited
to $250 plus interest on that amount accrued from the date
demand payment is
F-77
made under the guaranty, and all costs incurred by the bank in
its collection efforts. As of December 31, 2010, the
Company had not been required to make any payments on the
guaranty of the line of credit agreement, and the Company
considers the credit risk to be remote and the fair value of the
guaranty to be minimal.
|
|
|
NOTE 10.
|
Financial
Highlights
|
| |
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
December 31,
|
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
Per Share
Data(1)
|
|
|
|
|
|
|
|
|
|
Net asset value at beginning of period
|
|
$
|
11.85
|
|
|
$
|
11.81
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from investment operations:
|
|
|
|
|
|
|
|
|
|
Net investment
income(2)
|
|
|
0.22
|
|
|
|
0.21
|
|
|
Net realized loss on
investments(2)
|
|
|
—
|
|
|
|
(0.04
|
)
|
|
Net unrealized (depreciation) appreciation on
investments(2)
|
|
|
(0.14
|
)
|
|
|
0.12
|
|
|
Net unrealized appreciation on
borrowings(2)
|
|
|
0.02
|
|
|
|
0.01
|
|
|
|
|
|
|
|
|
|
|
|
|
Total from investment operations
|
|
|
0.10
|
|
|
|
0.30
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions to
stockholders(3)
|
|
|
(0.21
|
)
|
|
|
(0.21
|
)
|
|
Reclassification of principal on employee note
|
|
|
—
|
|
|
|
0.02
|
|
|
|
|
|
|
|
|
|
|
|
|
Net asset value at end of period
|
|
$
|
11.74
|
|
|
$
|
11.92
|
|
|
|
|
|
|
|
|
|
|
|
|
Per share market value at beginning of period
|
|
$
|
11.27
|
|
|
$
|
8.93
|
|
|
Per share market value at end of period
|
|
|
11.52
|
|
|
|
7.69
|
|
|
Total
return(4)(5)
|
|
|
4.11
|
%
|
|
|
(11.58
|
)%
|
|
Shares outstanding at end of period
|
|
|
21,039,242
|
|
|
|
21,087,574
|
|
|
Statement of Assets and Liabilities Data:
|
|
|
|
|
|
|
|
|
|
Net assets at end of period
|
|
$
|
246,960
|
|
|
$
|
251,449
|
|
|
Average net
assets(6)
|
|
|
247,513
|
|
|
|
248,874
|
|
|
Senior Securities Data:
|
|
|
|
|
|
|
|
|
|
Total borrowings
|
|
|
25,301
|
|
|
|
73,531
|
|
|
Asset coverage
ratio(7)(8)
|
|
|
1,061
|
%
|
|
|
442
|
%
|
|
Asset coverage per
unit(8)
|
|
$
|
10,612
|
|
|
$
|
4,420
|
|
|
Ratios/Supplemental Data:
|
|
|
|
|
|
|
|
|
|
Ratio of expenses to average net
assets-annualized(9)
|
|
|
5.53
|
%
|
|
|
8.69
|
%
|
|
Ratio of net expenses to average net
assets-annualized(10)
|
|
|
5.44
|
|
|
|
8.64
|
|
|
Ratio of net investment income to average net assets-annualized
|
|
|
7.49
|
|
|
|
7.12
|
|
|
|
|
|
(1) |
|
Based on actual shares outstanding at the end of the
corresponding period. |
|
|
|
|
(2) |
|
Based on weighted average basic per share data. |
|
|
|
|
(3) |
|
Distributions are determined based on taxable income calculated
in accordance with income tax regulations which may differ from
amounts determined under accounting principles generally
accepted in the United States of America. |
| |
|
(4) |
|
Total return equals the change in the ending market value of the
Company’s common stock from the beginning of the period
taking into account distributions reinvested in accordance with
the terms of the Company’s dividend reinvestment plan.
Total return does not take into account distributions that may
be characterized as a return of capital. For further information
on the estimated character of the Company’s distributions
please refer to Note 8. |
| |
|
(5) |
|
Amounts were not annualized. |
F-78
|
|
|
|
(6) |
|
Average net assets are computed using the average of the balance
of net assets at the end of each month of the reporting period. |
| |
|
(7) |
|
As a business development company, the Company is generally
required to maintain a ratio of at least 200% of total assets,
less all liabilities and indebtedness not represented by senior
securities, to total borrowings and guaranty commitments. |
|
|
|
|
(8) |
|
Asset coverage ratio is the ratio of the carrying value of the
Company’s total consolidated assets, less all liabilities
and indebtedness not represented by senior securities, to the
aggregate amount of senior securities representing indebtedness
(including interest payable and guarantees). Asset coverage per
unit is the asset coverage ratio expressed in terms of dollar
amounts per one thousand dollars of indebtedness. |
|
|
|
|
(9) |
|
Ratio of expenses to average net assets is computed using
expenses before credits from Adviser to the base management and
incentive fees but includes income tax expense. |
| |
|
(10) |
|
Ratio of net expenses to average net assets is computed using
total expenses net of credits from Adviser to the base
management and incentive fees but includes income tax expense. |
|
|
|
NOTE 11.
|
SUBSEQUENT
EVENTS
|
Distributions
In January 2011, the Company’s Board of Directors declared
the following monthly cash distributions to stockholders:
| |
|
|
|
|
|
|
|
Record Date
|
|
Payment Date
|
|
Distribution per Share
|
|
|
|
|
January 21, 2011
|
|
January 31, 2011
|
|
$
|
0.07
|
|
|
February 21, 2011
|
|
February 28, 2011
|
|
|
0.07
|
|
|
March 21, 2011
|
|
March 31, 2011
|
|
|
0.07
|
|
Investment
Activity
Subsequent to December 31, 2010, the Company extended an
aggregate amount of approximately $2.7 million in revolver
draws and additional investments to existing portfolio
companies. Of significance, the Company disbursed
$1.5 million to purchase common stock from existing
shareholders of Sunshine Media Holdings. This purchase resulted
in the Company taking a controlling position in Sunshine Media
Holdings.
Northern
Virginia SBIC License Application Not Granted
In January 2011, Northern Virginia SBIC, the Company’s
wholly-owned subsidiary, was informed by the United States Small
Business Administration that its application to obtain a license
as a small business investment company would not be granted.
F-79
Part C —
OTHER INFORMATION
|
|
|
Item 25.
|
Financial
Statements and Exhibits
|
The following financial statements of Gladstone Capital
Corporation (the “Company” or the
“Registrant”) are included in the Registration
Statement in “Part A: Information Required in a
Prospectus:”
GLADSTONE
CAPITAL CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
| |
|
|
|
|
|
Audited Consolidated Financial Statements
|
|
|
|
|
|
Report of Management on Internal Controls
|
|
|
F-2
|
|
|
Report of Independent Registered Public Accounting Firm
|
|
|
F-3
|
|
|
Consolidated Statements of Assets and Liabilities as of
September 30, 2010 and September 30, 2009
|
|
|
F-4
|
|
|
Consolidated Statements of Operations for the years ended
September 30, 2010, September 30, 2009 and
September 30, 2008
|
|
|
F-5
|
|
|
Consolidated Statements of Changes in Net Assets for the years
ended September 30, 2010, September 30, 2009 and
September 30, 2008
|
|
|
F-6
|
|
|
Consolidated Statements of Cash Flows for the years ended
September 30, 2010, September 30, 2009 and
September 30, 2008
|
|
|
F-7
|
|
|
Consolidated Schedules of Investments as of September 30,
2010 and 2009
|
|
|
F-8
|
|
|
Notes to Consolidated Financial Statements
|
|
|
F-21
|
|
|
Financial Statements (Unaudited)
|
|
|
|
|
|
Condensed Consolidated Statements of Assets and Liabilities as
of December 31, 2010 and September 30, 2010
|
|
|
F-48
|
|
|
Condensed Consolidated Statements of Operations for the three
months ended December 31, 2010 and 2009
|
|
|
F-49
|
|
|
Condensed Consolidated Statements of Changes in Net Assets for
the three months ended December 31, 2010 and 2009
|
|
|
F-50
|
|
|
Condensed Consolidated Statements of Cash Flows for the three
months ended December 31, 2010 and 2009
|
|
|
F-51
|
|
|
Condensed Consolidated Schedules of Investments as of
December 31, 2010 and September 30, 2010
|
|
|
F-52
|
|
|
Notes to Condensed Consolidated Financial Statements
|
|
|
F-62
|
|
| |
|
|
|
|
Exhibit
|
|
|
|
Number
|
|
Description
|
|
|
|
|
2
|
.a.1
|
|
Articles of Amendment and Restatement of the Articles of
Incorporation, incorporated by reference to Exhibit a.2 to
Pre-Effective Amendment No. 1 to the Registration Statement
on
Form N-2
(File
No. 333-63700),
filed July 27, 2001.
|
|
|
2
|
.b.1
|
|
By-laws, incorporated by reference to Exhibit b to Pre-Effective
Amendment No. 1 to the Registration Statement on
Form N-2
(File
No. 333-63700),
filed July 27, 2001.
|
|
|
2
|
.b.2
|
|
Amendment to By-laws, incorporated by reference to
Exhibit 3.3 to the Registrant’s Quarterly Report on
Form 10-Q
for the quarter ended December 31, 2003 (File
No. 814-00237),
filed February 17, 2004.
|
|
|
2
|
.b.3
|
|
Second Amendment to By-laws, incorporated by reference to
Exhibit 99.1 to the Registrant’s Current Report on
Form 8-K
(File
No. 814-00237),
filed July 10, 2007.
|
|
|
2
|
.c
|
|
Not applicable.
|
C-1
| |
|
|
|
|
Exhibit
|
|
|
|
Number
|
|
Description
|
|
|
|
|
2
|
.d.1
|
|
Form of Direct Registration Transaction Advice for the
Registrant’s common stock, par value $0.001 per share,
incorporated by reference to Exhibit d to Pre-Effective
Amendment No. 1 to the Registration Statement on
Form N-2
(File
No. 333-63700),
filed July 27, 2001.
|
|
|
2
|
.d.2
|
|
Specimen Stock Certificate, incorporated by reference to Exhibit
d.2 to Pre-Effective Amendment No. 3 to the Registration
Statement on
Form N-2
(File
No. 333-63700),
filed August 23, 2001.
|
|
|
2
|
.d.3*
|
|
Form of Senior Indenture.
|
|
|
2
|
.d.4*
|
|
Form of Subordinated. Indenture.
|
|
|
2
|
.e
|
|
Dividend Reinvestment Plan, incorporated by reference to
Exhibit 2.e to Pre-Effective Amendment No. 1 to the
Registration Statement on
Form N-2
(File
No. 333-63700),
filed July 27, 2001.
|
|
|
2
|
.f
|
|
Not applicable.
|
|
|
2
|
.g.1
|
|
Amended and Restated Investment Advisory and Management
Agreement between Gladstone Capital Corporation and Gladstone
Management Corporation, dated as of October 1, 2006
incorporated by reference to Exhibit 99.1 to the
Registrant’s Current Report on
Form 8-K
(File
No. 814-00237),
filed October 5, 2006 (renewed on July 7, 2010).
|
|
|
2
|
.h.1*
|
|
Equity Distribution Agreement, dated as of May 17, 2010, by
and among Gladstone Capital Corporation, Gladstone Management
Corporation and BB&T Capital Markets, a division of
Scott & Stringfellow, LLC.
|
|
|
2
|
.i
|
|
Not applicable.
|
|
|
2
|
.j
|
|
Custodian Agreement between Gladstone Capital Corporation and
The Bank of New York, dated as of May 5, 2006, incorporated
by reference to Exhibit 10.3 to the Registrant’s
Quarterly Report on
Form 10-Q
for the quarter ended June 30, 2006 (File
No. 814-00237),
filed August 1, 2006.
|
|
|
2
|
.k.1
|
|
Promissory Note of David Gladstone in favor of the Company,
dated August 23, 2001, incorporated by reference to
Exhibit 10.4 to the Registrant’s Quarterly Report on
Form 10-Q
for the period ended June 30, 2001, filed October 4,
2001.
|
|
|
2
|
.k.2
|
|
Redemption Agreement, dated as of September 7, 2010,
between Gladstone Capital Corporation and David Gladstone,
incorporated by reference to Exhibit 10.10 to the
Registrant’s Annual Report on
Form 10-K
(File
No. 814-00237),
filed November 22, 2010.
|
|
|
2
|
.k.3
|
|
Third Amended and Restated Credit Agreement dated as of
May 15, 2009 by and among Gladstone Business Loan, LLC as
Borrower, Gladstone Management Corporation as Servicer, the
Committed Lenders named therein, the CP Lenders named therein,
the Managing Agents named therein, and Key Equipment Finance
Inc. as Administrative Agent, incorporated by reference to
Exhibit 10.1 to the Registrant’s Current Report on
Form 8-K
(File
No. 814-00237),
filed May 19, 2009.
|
|
|
2
|
.k.4
|
|
Administration Agreement between Gladstone Capital Corporation
and Gladstone Administration, LLC, dated as of October 1,
2006 incorporated by reference to Exhibit 99.1 to the
Registrant’s Current Report on
Form 8-K
(File
No. 814-00237),
filed October 5, 2006 (renewed on July 7, 2010).
|
|
|
2
|
.k.5
|
|
Fourth Amended and Restated Credit Agreement dated as of
March 15, 2010 by and among Gladstone Business Loan, LLC as
Borrower, Gladstone Management Corporation as Servicer, the
Lenders named therein, the Managing Agents named therein, and
Key Equipment Finance Inc. as Administrative Agent, incorporated
by reference to Exhibit 10.1 to the Registrant’s
Current Report on
Form 8-K
(File
No. 814-00237),
filed March 16, 2010.
|
|
|
2
|
.k.6
|
|
Amendment No. 1 to Fourth Amended and Restated Credit
Agreement dated as of November 22, 2010 by and among
Gladstone Business Loan, LLC as Borrower, Gladstone Management
Corporation as Servicer, the Committed Lenders named therein,
the Managing Agents named therein, and Key Equipment Finance
Inc. as Administrative Agent, incorporated by reference to
Exhibit 10.8 to the Registrant’s Annual Report on
Form 10-K
(File
No. 814-00237),
filed November 22, 2010.
|
|
|
2
|
.l*
|
|
Opinion of Cooley Godward Kronish LLP.
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2
|
.m
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|
Not applicable.
|
|
|
2
|
.n.1
|
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Consent of Independent Registered Public Accounting Firm.
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|
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2
|
.n.2*
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|
Consent of Cooley Godward Kronish LLP (included in
Exhibit 2.1).
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|
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2
|
.o
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|
Not applicable.
|
C-2
| |
|
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Exhibit
|
|
|
|
Number
|
|
Description
|
|
|
|
|
2
|
.p
|
|
Subscription Agreement dated May 30, 2001, incorporated by
reference to incorporated by reference to Exhibit p to the
Registration Statement on
Form N-2
(File
No. 333-63700),
filed June 22, 2001.
|
|
|
2
|
.q
|
|
Not applicable.
|
|
|
2
|
.r
|
|
Code of Ethics and Business Conduct, incorporated by reference
to Exhibit 14.1 to the Registrant’s Current Report on
Form 8-K
(File
No. 814-00237),
filed October 12, 2005.
|
|
|
2
|
.s.1*
|
|
Power of Attorney.
|
|
|
2
|
.s.2
|
|
Power of Attorney.
|
|
|
|
Item 26.
|
Marketing
Arrangements
|
The information contained under the heading “Plan of
Distribution” on page 118 of the prospectus is
incorporated herein by reference, and any information concerning
any underwriters will be contained in the accompanying
prospectus supplement, if any.
|
|
|
Item 27.
|
Other
Expenses of Issuance and Distribution
|
| |
|
|
|
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|
Commission registration fee
|
|
$
|
16,740
|
|
|
FINRA fee
|
|
$
|
30,500
|
|
|
Accounting fees and expenses
|
|
$
|
200,000
|
*
|
|
Legal fees and expenses
|
|
$
|
200,000
|
*
|
|
Printing and engraving
|
|
$
|
200,000
|
*
|
|
Total
|
|
$
|
647,240
|
*
|
|
|
|
|
|
|
|
|
|
|
* |
|
These amounts are estimates. |
All of the expenses set forth above shall be borne by the
Registrant.
|
|
|
Item 28.
|
Persons
Controlled by or Under Common Control
|
Gladstone Capital Advisers, Inc., a Delaware corporation and
wholly-owned subsidiary of the Registrant.
U.S. Healthcare Communications, Inc., a Delaware
corporation and wholly-owned subsidiary of the Registrant.
USHC Legal Inc., a New Jersey corporation and wholly-owned
subsidiary of the Registrant.
Directories Holdings, Inc., a Delaware corporation and
wholly-owned subsidiary of the Registrant.
Western Directories, Inc., a Delaware corporation controlled by
Directories Holdings, Inc. through 100% ownership.
Gladstone Business Loan, LLC, a Delaware limited liability
company and wholly-owned subsidiary of the Registrant.
Gladstone Financial Corporation, a Delaware corporation and
wholly-owned subsidiary of the Registrant.
BERTL, Inc., a Delaware corporation controlled by the Registrant
through 29% common stock ownership.
LYP Holdings Corp., a Delaware corporation controlled by the
Registrant.
LocalTel, LLC, a Delaware limited liability company controlled
by LYP Holdings Corp., through 57% ownership.
LYP, LLC, a Delaware limited liability company controlled by LYP
Holdings Corp., through 100% ownership.
Lindmark Acquisition, LLC a Delaware limited liability company
controlled by Lindmark Holdings Corp., through 50% ownership.
C-3
Lindmark Holdings Corp., a Delaware corporation controlled by
the Registrant.
Gladstone SBIC GP, LLC, a Delaware limited liability company and
wholly-owned subsidiary of the Registrant.
Gladstone SBIC, LP, a Delaware limited partnership controlled by
Gladstone SBIC GP, LLC, its general partner.
Northern Virginia SBIC GP, LLC, a Delaware limited liability
company and wholly-owned subsidiary of the Registrant.
Northern Virginia SBIC, L.P., a Delaware partnership controlled
by Northern Virginia SBIC GP, LLC, its general partner.
Defiance Integrated Technologies, Inc., a Delaware corporation
controlled by the Registrant, through 58% ownership.
1090 Perry Acquisition Corp., a Delaware corporation
controlled by Defiance Integrated Technologies, Inc., through
100% ownership.
JBM Tool & Die, Inc., a Delaware corporation
controlled by Defiance Integrated Technologies, Inc., through
100% ownership.
Pro Shear Corporation, a Delaware corporation controlled by
Defiance Integrated Technologies, Inc., through 100% ownership.
Midwest Metal Distribution, Inc., a Delaware corporation
controlled by Gladstone Metal, LLC through 70% ownership.
Gladstone Metal, LLC, a Delaware limited liability company
controlled by the Registrant.
SCI Cable, Inc, a Kansas corporation controlled by the
Registrant by board control.
Kansas Cable Holdings, Inc., a Delaware corporation controlled
by the Registrant through 100% ownership.
Sunshine Media Group, Inc., a Delaware corporation controlled by
the Registrant through 50% ownership.
Publication Holdings, Inc., a Delaware corporation controlled by
the Registrant through 100% ownership.
Gladstone Investment Corporation, a Delaware corporation
controlled by the Registrant’s officers and directors.
Gladstone Business Investment, LLC, a Delaware limited liability
company and wholly-owned subsidiary of Gladstone Investment
Corporation.
Gladstone Investment Advisers, Inc., a Delaware corporation and
wholly-owned subsidiary of Gladstone Investment Corporation.
ACME Cryogenics Inc., a Pennsylvania corporation controlled by
Gladstone Investment Corporation through 53% ownership.
CCE Investment Corp., a Delaware corporation and wholly-owned
subsidiary of Gladstone Investment Corporation.
Mustang Eagle Partnership, LLC, a Delaware limited liability
company and wholly-owned subsidiary of CCE Investment Corp.
Country Club Enterprises, LLC, a Massachusetts limited liability
company, controlled by Mustang Eagle Partnership, LLC through
52% ownership.
ASH Holdings Corp., a Delaware corporation and wholly-owned
subsidiary of Gladstone Investment Corporation.
Auto Safety House, LLC, a Delaware limited liability company,
controlled by ASH Holdings, Corp. through 74% ownership.
Galaxy Tool Holding Corporation, a Delaware corporation
controlled by Gladstone Investment Corporation through 60%
ownership.
C-4
Mathey Investments, Inc., a Oklahoma corporation controlled by
the Gladstone Investment Corporation through 97% ownership.
Tread Corporation, a Delaware corporation controlled by
Gladstone Investment Corporation through 28% ownership.
Neville Limited, a Delaware corporation controlled by Gladstone
Investment Corporation through 100% stock ownership.
Quench Holdings Corp., a Delaware corporation controlled by
Gladstone Investment Corporation.
Precision Southeast Holdings, Inc., a Delaware corporation
controlled by Gladstone Investment Corporation through 91% stock
ownership.
Venyu Solutions, Inc, a Louisiana corporation controlled by
Venyu Holdings, LLC through 100% ownership.
Venyu Holdings, LLC, a Delaware limited liability company
controlled by Venyu Investments, LLC though 60% ownership.
Venyu Investments, LLC, a Delaware corporation controlled by
Gladstone Investment Corporation through 100% ownership.
Gladstone Commercial Corporation, a Maryland corporation
controlled by the Registrant’s officers and directors.
GCLP Business Trust I, a Massachusetts business trust
controlled by Gladstone Commercial Corporation.
GCLP Business Trust II, a Massachusetts business trust
controlled by Gladstone Commercial Partners, LLC.
Gladstone Commercial Partners, LLC, a Delaware limited liability
company and wholly-owned subsidiary of Gladstone Commercial
Corporation.
Gladstone Commercial Advisers, Inc., a Delaware corporation and
wholly-owned subsidiary of Gladstone Commercial Corporation.
First Park Ten COCO San Antonio GP LLC, a Delaware limited
liability company controlled by its manager, Gladstone
Commercial Limited Partnership.
First Park Ten COCO San Antonio LP, a Delaware limited
partnership controlled by its general partner, First Park Ten
COCO San Antonio GP LLC.
COCO04 Austin TX GP LLC, a Delaware limited liability company
controlled by its manager, Gladstone Commercial Limited
Partnership.
COCO04 Austin TX LP, a Delaware limited partnership controlled
by its general partner, COCO04 Austin TX GP LLC.
Pocono PA GCC, LP, a Delaware limited partnership controlled by
its general partner, Pocono PA GCC GP LLC.
Gladstone Commercial Limited Partnership, a Delaware limited
partnership controlled by its general partner GCLP Business
Trust II.
GCC Acquisition Holdings LLC, a Delaware limited liability
company controlled by its manager, Gladstone Commercial Limited
Partnership.
SLEE Grand Prairie LP, a Delaware limited partnership controlled
by its general partner, GCC Acquisition Holdings, Inc.
EE 208 South Rogers Lane, Raleigh, NC LLC, a Delaware limited
liability company controlled by its manager, Gladstone
Commercial Limited Partnership.
Gladstone Commercial Lending LLC, a Delaware limited liability
company controlled by its manager, Gladstone Commercial Limited
Partnership.
260 Springside Drive Akron OH LLC, a Delaware limited
liability company controlled by its manager, Gladstone
Commercial Limited Partnership.
C-5
Little Arch04 Charlotte NC Member LLC, a Delaware limited
liability company controlled by its manager, Gladstone
Commercial Limited Partnership.
Little Arch Charlotte NC LLC, a Delaware limited liability
company controlled by its sole member, Little Arch04 Charlotte
NC Member LLC.
CMI04 Canton NC LLC, a Delaware limited liability company
controlled by its manager, Gladstone Commercial Limited
Partnership.
OB Midway NC Gladstone Commercial LLC, a Delaware limited
liability company controlled by its manager, Gladstone
Commercial Limited Partnership.
GCC Granby LLC, a Delaware limited liability company controlled
by its manager, Gladstone Commercial Limited Partnership.
Granby Property Trust, a Delaware statutory trust controlled by
its grantor, GCC Granby LLC.
GCC Dorval LLC, a Delaware limited liability company controlled
by its manager, Gladstone Commercial Limited Partnership.
Dorval Property Trust, a Delaware statutory trust controlled by
its grantor, GCC Dorval LLC.
3094174 Nova Scotia Company, a Nova Scotia corporation
controlled by its sole stockholder, Gladstone Commercial Limited
Partnership.
3094175 Nova Scotia Company, a Nova Scotia corporation
controlled by its sole stockholder, Gladstone Commercial Limited
Partnership.
WMI05 Columbus OH LLC, a Delaware limited liability company
controlled by its manager, Gladstone Commercial Limited
Partnership.
2525 N Woodlawn Vstrm Wichita KS LLC, a Delaware limited
liability company controlled by its manager, Gladstone
Commercial Limited Partnership.
Corning Big Flats LLC, a Delaware limited liability company
controlled by its manager, Gladstone Commercial Limited
Partnership.
OB Crenshaw SPE GP LLC, a Delaware limited liability company
controlled by its manager, Gladstone Commercial Limited
Partnership.
OB Crenshaw GCC LP, a Delaware limited partnership controlled by
its general partner, OB Crenshaw SPE GP LLC.
HMBF05 Newburyport MA LLC, a Delaware limited liability company
controlled by its manager, Gladstone Commercial Limited
Partnership.
YorkTC05 Eatontown NJ LLC, a Delaware limited liability company
controlled by its manager, Gladstone Commercial Limited
Partnership.
STI05 Franklin NJ LLC, a Delaware limited liability company
controlled by its manager, Gladstone Commercial Limited
Partnership.
AFL05 Duncan SC Member LLC, a Delaware limited liability company
controlled by its manager, Gladstone Commercial Limited
Partnership.
AFL05 Duncan SC LLC, a Delaware limited liability company
controlled by its sole member, AFL05 Duncan SC Member LLC.
MSI05-3 LLC, a Delaware limited liability company controlled by
its manager, Gladstone Commercial Limited Partnership.
WMI05 Hazelwood MO LLC, a Delaware limited liability company
controlled by its manager, Gladstone Commercial Limited
Partnership.
C-6
CI05 Clintonville WI LLC, a Delaware limited liability company
controlled by its manager, Gladstone Commercial Limited
Partnership.
PZ05 Maple Heights OH LLC, a Delaware limited liability company
controlled by its manager, Gladstone Commercial Limited
Partnership.
YCC06 South Hadley MA LLC, a Delaware limited liability company
controlled by its manager, Gladstone Commercial Limited
Partnership.
NW05 Richmond VA LLC, a Delaware limited liability company
controlled by its manager, Gladstone Commercial Limited
Partnership.
SVMMC05 Toledo OH LLC, a Delaware limited liability company
controlled by its manager, Gladstone Commercial Limited
Partnership.
ACI06 Champaign IL LLC, a Delaware limited liability company
controlled by its manager, Gladstone Commercial Limited
Partnership.
UC06 Roseville MN LLC, a Delaware limited liability company
controlled by its manager, Gladstone Commercial Limited
Partnership.
TCI06 Burnsville MN LLC, a Delaware limited liability company
controlled by its manager, Gladstone Commercial Limited
Partnership.
RC06 Menomonee Falls WI LLC, a Delaware limited liability
company controlled by its manager, Gladstone Commercial Limited
Partnership.
SJMH06 Baytown TX GP LLC, a Delaware limited liability company
controlled by its manager, Gladstone Commercial Limited
Partnership.
SJMH06 Baytown TX LP, a Delaware limited partnership controlled
by its general partner, SJMH06 Baytown TX GP LLC.
NJT06 Sterling Heights MI LLC, a Delaware limited liability
company controlled by its manager, Gladstone Commercial Limited
Partnership.
CMS06-3 LLC, a Delaware limited liability company controlled by
its manager, Gladstone Commercial Limited Partnership.
MPI06 Mason OH LLC, a Delaware limited liability company,
controlled by its manager, Gladstone Commercial Limited
Partnership.
GCC Chicago Holdings, LLC, a Delaware limited liability company,
controlled by its manager, Gladstone Commercial Limited
Partnership.
AC07 Lawrenceville GA LLC, a Delaware limited liability company,
controlled by its manager, Gladstone Commercial Limited
Partnership.
EE07 Raleigh NC GP LLC, a Delaware limited liability company,
controlled by its manager, Gladstone Commercial Limited
Partnership.
EE07 Raleigh NC, L.P., a Delaware limited partnership,
controlled by its general partner, EE07 Raleigh NC GP LLC.
WPI07 Tulsa OK LLC, a Delaware limited liability company,
controlled by its manager, Gladstone Commercial Limited
Partnership.
APML07 Hialeah FL LLC, a Delaware limited liability company,
controlled by its manager, Gladstone Commercial Limited
Partnership.
EI07 Tewksbury MA LLC, a Delaware limited liability company,
controlled by its manager, Gladstone Commercial Limited
Partnership.
C-7
GBI07 Syracuse NY LLC, a Delaware limited liability company,
controlled by its manager, Gladstone Commercial Limited
Partnership.
CDLCI07 Mason OH LLC, a Delaware limited liability company,
controlled by its manager, Gladstone Commercial Limited
Partnership.
FTCH107 Grand Rapids MI LLC, a Delaware limited liability
company, controlled by its manager, Gladstone Commercial Limited
Partnership.
DBP107 Bolingbrook IL LLC, a Delaware limited liability company,
controlled by its manager, Gladstone Commercial Limited
Partnership.
Pocono PA GCC GP LLC, a Delaware limited liability company,
controlled by its manager, Gladstone Commercial Limited
Partnership.
RCOG07 Georgia LLC, a Delaware limited liability company,
controlled by its manager Gladstone Commercial Limited
Partnership.
C08 Fridley MN LLC, a Delaware limited liability company
controlled by its manager, Gladstone Commercial Limited
Partnership.
SRFF08 Reading PA GP LLC, a Delaware limited liability company
controlled by its manager, Gladstone Commercial Limited
Partnership.
SRFF08 Reading PA, L.P., a Delaware limited partnership
controlled by its general partner, SRFF08 Reading PA GP LLC.
OS08 Winchester VA LLC, a Delaware limited liability company
controlled by its manager, Gladstone Commercial Limited
Partnership.
RB08 Concord OH LLC, a Delaware limited liability company
controlled by its manager, Gladstone Commercial Limited
Partnership.
RPT08 Pineville NC GP LLC, a Delaware limited liability company
controlled by its manager, Gladstone Commercial Limited
Partnership.
RPT08 Pineville NC L.P., a Delaware limited partnership
controlled by its general partner, RPT08 Pineville NC GP LLC.
FMCT08 Chalfont PA GP LLC, a Delaware limited liability company
controlled by its manager, Gladstone Commercial Limited
Partnership.
FMCT08 Chalfont PA, L.P., a Delaware limited partnership
controlled by its general partner, FMCT08 Chalfont PA GP LLC.
D08 Marietta OH LLC, a Delaware limited liability company
controlled by its manager, Gladstone Commercial Limited
Partnership.
ELF08 Florida LLC, a Delaware limited liability company
controlled by its manager, Gladstone Commercial Limited
Partnership.
SCC10 Orange City IA LLC, a Delaware limited liability company
controlled by its manager, Gladstone Commercial Limited
Partnership.
TMC11 Springfield MO LLC, a Delaware limited liability company
controlled by its manager, Gladstone Commercial Limited
Partnership.
Gladstone Land Corporation, a Maryland corporation controlled by
David Gladstone through indirect 100% stock ownership.
Gladstone Land Partners, LLC, a Delaware limited liability
company controlled by its manager, Gladstone Land Corporation.
C-8
Gladstone Land Advisers, Inc., a Delaware corporation and
wholly-owned subsidiary of Gladstone Land Corporation.
Gladstone Land Limited Partnership, a Delaware limited
partnership controlled by its general partner, Gladstone Land
Partners, LLC.
San Andreas Road Watsonville LLC, a California limited
liability company controlled by its manager, Gladstone Land
Limited Partnership.
West Gonzales Road Oxnard LLC, a California limited liability
company controlled by its manager, Gladstone Land Limited
Partnership.
West Beach Street Watsonville, LLC, a California limited
liability company controlled by its manager, Gladstone Land
Limited Partnership.
Gladstone Holding Corporation, a Delaware corporation controlled
by David Gladstone through 100% indirect stock ownership.
Gladstone Management Corporation, a Delaware corporation
controlled by Gladstone Holding Corporation, through 100%
ownership.
Gladstone Administration, LLC, a Delaware limited liability
company and wholly-owned subsidiary of Gladstone Holding
Corporation.
Gladstone Securities, LLC, a Connecticut limited liability
company controlled by its member, Gladstone Holding Corporation.
Gladstone General Partner, LLC, a Delaware limited liability
company controlled by its manager, Gladstone Management
Corporation.
Gladstone Participation Fund LLC, a Delaware limited
liability company controlled by Gladstone General Partner, LLC.
Gladstone Partners Fund, LP, a Delaware limited partnership
controlled by its general partner, Gladstone Management
Corporation.
Gladstone Lending Corporation, a Maryland corporation controlled
by David Gladstone through 100% indirect stock ownership.
Gladstone Management II, LLC, a Delaware limited liability
company controlled by its managing member, Gladstone Management
Corporation.
|
|
|
Item 29.
|
Number
of Holders of Securities
|
The following table sets forth the approximate number of record
holders of our common stock at April 5, 2011.
| |
|
|
|
|
|
|
|
Number of
|
|
|
Title of Class
|
|
Record Holders
|
|
|
|
|
Common Stock, par value $0.001 per share
|
|
|
69
|
|
Subject to the Investment Company Act of 1940, as amended (the
“1940 Act”) or any valid rule, regulation or order of
the Securities and Exchange Commission (“SEC”)
thereunder, our articles of incorporation and bylaws provide
that we will indemnify any person who was or is a party or is
threatened to be made a party to any threatened action, suit or
proceeding whether civil, criminal, administrative or
investigative, by reason of the fact that he is or was our
director or officer, or is or was serving at our request as a
director, officer, partner or trustee of another corporation,
real estate investment trust, partnership, joint venture, trust,
employee benefit plan or other enterprise to the maximum extent
permitted by
Section 2-418
of the Annotated Code of Maryland, Corporations and Associations
(the “Maryland Law”). The 1940 Act provides that a
company may not indemnify any director or officer against
liability to it or its security holders to which he or she might
otherwise be subject by reason of his or
C-9
her willful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of his or her
office unless a determination is made by final decision of a
court, by vote of a majority of a quorum of directors who are
disinterested, non-party directors or by independent legal
counsel that the liability for which indemnification is sought
did not arise out of the foregoing conduct. In addition to any
indemnification to which our directors and officers are entitled
pursuant to our articles of incorporation and bylaws and
Maryland Law, our articles of incorporation and bylaws permit us
to indemnify our other employees and agents to the fullest
extent permitted by Maryland Law, whether such employees or
agents are serving us or, at our request, any other entity.
In addition, the investment advisory and management agreement
between us and our investment adviser, Gladstone Management
Corporation (the “Adviser”), as well as the
administration agreement between us and our administrator
Gladstone Administration, LLC (the “Administrator”),
each provide that, absent willful misfeasance, bad faith, or
gross negligence in the performance of their respective duties
or by reason of the reckless disregard of their respective
duties and obligations, our Adviser or our Administrator, as
applicable, and their respective officers, managers, partners,
agents, employees, controlling persons, members, and any other
person or entity affiliated with it are entitled to
indemnification from us for any damages, liabilities, costs, and
expenses (including reasonable attorneys’ fees and amounts
reasonably paid in settlement) arising from the rendering of our
Adviser’s services under the investment advisory and
management agreement or otherwise as our investment adviser, or
the rendering of our Administrator’s services under the
administration agreement, as applicable.
|
|
|
Item 31.
|
Business
and Other Connections of Investment Adviser
|
A description of any other business, profession, vocation or
employment of a substantial nature in which our Adviser, and
each director or executive officer of our Adviser, is or has
been during the past two fiscal years, engaged in for his or her
own account or in the capacity of director, officer, employee,
partner or trustee, is set forth in Part A of this
Registration Statement in the section entitled
“Management.” Additional information regarding our
Adviser and its officers and directors is set forth in its
Form ADV, as filed with the SEC, and is incorporated herein
by reference.
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|
Item 32.
|
Location
of Accounts and Records
|
All accounts, books or other documents required to be maintained
by Section 31(a) of the 1940 Act and the rules thereunder
are maintained at the offices of:
(1) the Registrant, Gladstone Capital Corporation,
1521 Westbranch Drive, Suite 200, McLean, VA 22102;
(2) the Transfer Agent, BNY Mellon Shareowner Services, 480
Washington Boulevard, Jersey City, NJ 07310;
(3) the Adviser, Gladstone Management Corporation,
1521 Westbranch Drive, Suite 200, McLean, VA 22102;
(4) the Custodian, The Bank of New York Mellon Corp., 2
Hanson Place, Sixth Floor, Brooklyn, NY 11217; and
(5) the Collateral Custodian, The Bank of New York Mellon
Corp., 2 Hanson Place, Sixth Floor, Brooklyn, NY 11217.
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Item 33.
|
Management
Services
|
Not applicable.
|
|
|
| |
1.
|
We hereby undertake to suspend the offering of shares until the
prospectus is amended if, subsequent to the effective date of
this registration statement, our net asset value declines more
than ten percent from our net asset value as of the effective
date of this registration statement.
|
C-10
2. We hereby undertake:
|
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| |
(a)
|
to file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
|
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|
| |
(i)
|
to include any prospectus required by Section 10(a)(3) of
the Securities Act of 1933, as amended, or the Securities Act;
|
|
|
|
| |
(ii)
|
to reflect in the prospectus any facts or events arising after
the effective date of this registration statement (or the most
recent post-effective amendment thereof) which, individually or
in the aggregate, represent a fundamental change in the
information set forth in the registration statement; and
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| |
(iii)
|
to include any material information with respect to the plan of
distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement.
|
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|
| |
(b)
|
that, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be
deemed to be a new registration statement relating to the
securities offered therein, and the offering of those securities
at that time shall be deemed to be the initial bona fide
offering thereof;
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| |
(c)
|
to remove from registration by means of a post-effective
amendment any of the securities being registered which remain
unsold at the termination of the offering; and
|
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| |
(d)
|
that, for the purpose of determining liability under the
Securities Act to any purchaser, if the Registrant is subject to
Rule 430C: Each prospectus filed pursuant to
Rule 497(b), (c), (d) or (e) under the Securities
Act as part of a registration statement relating to an offering,
other than prospectuses filed in reliance on Rule 430A
under the Securities Act, shall be deemed to be part of and
included in the registration statement as of the date it is
first used after effectiveness. Provided, however, that no
statement made in a registration statement or prospectus that is
part of the registration statement or made in a document
incorporated or deemed incorporated by reference into the
registration statement or prospectus that is part of the
registration statement will, as to a purchaser with a time of
contract of sale prior to such first use, supersede or modify
any statement that was made in the registration statement or
prospectus that was part of the registration statement or made
in any such document immediately prior to such date of first use;
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| |
(e)
|
that for the purpose of determining liability of the Registrant
under the Securities Act to any purchaser in the initial
distribution of securities: The undersigned Registrant
undertakes that in a primary offering of securities of the
undersigned Registrant pursuant to this registration statement,
regardless of the underwriting method used to sell the
securities to the purchaser, if the securities are offered or
sold to such purchaser by means of any of the following
communications, the undersigned Registrant will be a seller to
the purchaser and will be considered to offer or sell such
securities to the purchaser:
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| |
(i)
|
any preliminary prospectus or prospectus of the undersigned
Registrant relating to the offering required to be filed
pursuant to Rule 497 under the Securities Act;
|
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| |
(ii)
|
the portion of any advertisement pursuant to Rule 482 under
the Securities Act relating to the offering containing material
information about the undersigned Registrant or its securities
provided by or on behalf of the undersigned Registrant; and
|
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| |
(iii)
|
any other communication that is an offer in the offering made by
the undersigned Registrant to the purchaser.
|
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| |
(f)
|
To file a post-effective amendment to the registration
statement, and to suspend any offers or sales pursuant the
registration statement until such post-effective amendment has
been declared effective under the Securities Act, in the event
the shares of the Registrant are trading below its net asset
value and either (i) the Registrant receives, or has been
advised by its independent registered accounting
|
C-11
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| |
|
firm that it will receive, an audit report reflecting
substantial doubt regarding the Registrant’s ability to
continue as a going concern or (ii) the Registrant has
concluded that a material adverse change has occurred in its
financial position or results of operations that has caused the
financial statements and other disclosures on the basis of which
the offering would be made to be materially misleading.
|
3. We hereby undertake that:
|
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| |
(a)
|
for the purpose of determining any liability under the
Securities Act, the information omitted from the form of
prospectus filed as part of this registration statement in
reliance upon Rule 430A and contained in a form of
prospectus filed by us under Rule 497(h) under the
Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective; and
|
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| |
(b)
|
for the purpose of determining any liability under the
Securities Act, each post-effective amendment that contains a
form of prospectus shall be deemed to be a new registration
statement relating to the securities offered therein, and the
offering of the securities at that time shall be deemed to be
the initial bona fide offering thereof.
|
C-12
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as
amended, and the Investment Company Act of 1940, as amended, the
Registrant has duly caused this Post-Effective Amendment
No. 2 to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the
City of McLean and Commonwealth of Virginia, on the 7th day
of April 2011.
GLADSTONE CAPITAL CORPORATION
David Gladstone
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as
amended, this Post-Effective Amendment No. 2 to the
Registration Statement has been signed below by the following
persons in the capacities indicated on April 7, 2011:
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By:
|
|
/s/ DAVID
GLADSTONE David
Gladstone
Chief Executive Officer and Chairman of the
Board of Directors (principal executive officer)
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By:
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/s/ DAVID
WATSON David
Watson
Chief Financial Officer (principal financial and
accounting officer)
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By:
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* Terry
L. Brubaker
Vice Chairman, Chief Operating Officer,
Secretary and Director
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By:
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* George
Stelljes III
President, Chief Investment Officer and Director
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By:
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* David
A. R. Dullum
Director
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By:
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* Anthony
W. Parker
Director
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By:
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* Michela
A. English
Director
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C-13
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By:
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* Paul
W. Adelgren
Director
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By:
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* John
H. Outland
Director
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By:
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* Gerard
Mead
Director
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By:
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/s/ JOHN
REILLY John
Reilly
Director
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*By:
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/s/ DAVID
GLADSTONE David
Gladstone
(attorney-in-fact)
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C-14
Exhibits
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Exhibit
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Number
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Description
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2
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.a.1
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Articles of Amendment and Restatement of the Articles of
Incorporation, incorporated by reference to Exhibit a.2 to
Pre-Effective Amendment No. 1 to the Registration Statement
on
Form N-2
(File
No. 333-63700),
filed July 27, 2001.
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2
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.b.1
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By-laws, incorporated by reference to Exhibit b to Pre-Effective
Amendment No. 1 to the Registration Statement on
Form N-2
(File
No. 333-63700),
filed July 27, 2001.
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2
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.b.2
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Amendment to By-laws, incorporated by reference to
Exhibit 3.3 to the Registrant’s Quarterly Report on
Form 10-Q
for the quarter ended December 31, 2003 (File
No. 814-00237),
filed February 17, 2004.
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2
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.b.3
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Second Amendment to By-laws, incorporated by reference to
Exhibit 99.1 to the Registrant’s Current Report on
Form 8-K
(File
No. 814-00237),
filed July 10, 2007.
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2
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.c
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Not applicable.
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2
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.d.1
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Form of Direct Registration Transaction Advice for the
Registrant’s common stock, par value $0.001 per share,
incorporated by reference to Exhibit d to Pre-Effective
Amendment No. 1 to the Registration Statement on
Form N-2
(File
No. 333-63700),
filed July 27, 2001.
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2
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.d.2
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Specimen Stock Certificate, incorporated by reference to Exhibit
d.2 to Pre-Effective Amendment No. 3 to the Registration
Statement on
Form N-2
(File
No. 333-63700),
filed August 23, 2001.
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2
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.d.3*
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Form of Senior Indenture.
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2
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.d.4*
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Form of Subordinated Indenture.
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2
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.e
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Dividend Reinvestment Plan, incorporated by reference to
Exhibit 2.e to Pre-Effective Amendment No. 1 to the
Registration Statement on
Form N-2
(File
No. 333-63700),
filed July 27, 2001.
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2
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.f
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Not applicable.
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2
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.g.1
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Amended and Restated Investment Advisory and Management
Agreement between Gladstone Capital Corporation and Gladstone
Management Corporation, dated as of October 1, 2006
incorporated by reference to Exhibit 99.1 to the
Registrant’s Current Report on
Form 8-K
(File
No. 814-00237),
filed October 5, 2006 (renewed on July 7, 2010).
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2
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.h.1*
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Equity Distribution Agreement, dated as of May 17, 2010, by
and among Gladstone Capital Corporation, Gladstone Management
Corporation and BB&T Capital Markets, a division of
Scott & Stringfellow, LLC.
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2
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.i
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Not applicable.
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2
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.j
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Custodian Agreement between Gladstone Capital Corporation and
The Bank of New York, dated as of May 5, 2006, incorporated
by reference to Exhibit 10.3 to the Registrant’s
Quarterly Report on
Form 10-Q
for the quarter ended June 30, 2006 (File
No. 814-00237),
filed August 1, 2006.
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2
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.k.1
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Promissory Note of David Gladstone in favor of the Company,
dated August 23, 2001, incorporated by reference to
Exhibit 10.4 to the Registrant’s Quarterly Report on
Form 10-Q
for the period ended June 30, 2001, filed October 4,
2001.
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2
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.k.2
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Redemption Agreement, dated as of September 7, 2010,
between Gladstone Capital Corporation and David Gladstone,
incorporated by reference to Exhibit 10.10 to the
Registrant’s Annual Report on
Form 10-K
(File
No. 814-00237),
filed November 22, 2010.
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2
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.k.3
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Third Amended and Restated Credit Agreement dated as of
May 15, 2009 by and among Gladstone Business Loan, LLC as
Borrower, Gladstone Management Corporation as Servicer, the
Committed Lenders named therein, the CP Lenders named therein,
the Managing Agents named therein, and Key Equipment Finance
Inc. as Administrative Agent, incorporated by reference to
Exhibit 10.1 to the Registrant’s Current Report on
Form 8-K
(File
No. 814-00237),
filed May 19, 2009.
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2
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.k.4
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Administration Agreement between Gladstone Capital Corporation
and Gladstone Administration, LLC, dated as of October 1,
2006 incorporated by reference to Exhibit 99.1 to the
Registrant’s Current Report on
Form 8-K
(File
No. 814-00237),
filed October 5, 2006 (renewed on July 7, 2010).
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C-15
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Exhibit
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Number
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Description
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2
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.k.5
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Fourth Amended and Restated Credit Agreement dated as of
March 15, 2010 by and among Gladstone Business Loan, LLC as
Borrower, Gladstone Management Corporation as Servicer, the
Lenders named therein, the Managing Agents named therein, and
Key Equipment Finance Inc. as Administrative Agent, incorporated
by reference to Exhibit 10.1 to the Registrant’s
Current Report on
Form 8-K
(File
No. 814-00237),
filed March 16, 2010.
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2
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.k.6
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Amendment No. 1 to Fourth Amended and Restated Credit
Agreement dated as of November 22, 2010 by and among
Gladstone Business Loan, LLC as Borrower, Gladstone Management
Corporation as Servicer, the Committed Lenders named therein,
the Managing Agents named therein, and Key Equipment Finance
Inc. as Administrative Agent, incorporated by reference to
Exhibit 10.8 to the Registrant’s Annual Report on
Form 10-K
(File
No. 814-00237),
filed November 22, 2010.
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2
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.l*
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Opinion of Cooley Godward Kronish LLP.
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2
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.m
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Not applicable.
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2
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.n.1
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Consent of Independent Registered Public Accounting Firm.
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2
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.n.2*
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Consent of Cooley Godward Kronish LLP (included in
Exhibit 2.1).
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2
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.o
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Not applicable.
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2
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.p
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Subscription Agreement dated May 30, 2001, incorporated by
reference to incorporated by reference to Exhibit p to the
Registration Statement on
Form N-2
(File
No. 333-63700),
filed June 22, 2001.
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2
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.q
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Not applicable.
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2
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.r
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Code of Ethics and Business Conduct, incorporated by reference
to Exhibit 14.1 to the Registrant’s Current Report on
Form 8-K
(File
No. 814-00237),
filed October 12, 2005.
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2
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.s.1*
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Power of Attorney.
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2
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.s.2
|
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Power of Attorney.
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C-16
