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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

 

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

FOR THE QUARTER ENDED SEPTEMBER 30, 2012

 

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

COMMISSION FILE NUMBER: 000-51233

 

 

GLADSTONE INVESTMENT CORPORATION

(Exact name of registrant as specified in its charter)

 

 

 

DELAWARE   83-0423116

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

1521 WESTBRANCH DRIVE, SUITE 200

MCLEAN, VIRGINIA 22102

(Address of principal executive office)

(703) 287-5800

(Registrant’s telephone number, including area code)

 

 

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

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

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

 

Large accelerated filer   ¨    Accelerated filer   x
Non-accelerated filer   ¨    Smaller reporting company   ¨.

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. The number of shares of the issuer’s Common Stock, $0.001 par value per share, outstanding as of October 26, 2012, was 26,080,133.

 

 

 


Table of Contents

GLADSTONE INVESTMENT CORPORATION

TABLE OF CONTENTS

 

PART I.

  

FINANCIAL INFORMATION:

  

Item 1.

  

Financial Statements (Unaudited)

  
  

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

     3   
  

Condensed Consolidated Statements of Operations for the three and six months ended September 30, 2012 and 2011

     4   
  

Condensed Consolidated Statements of Changes in Net Assets for the six months ended September 30, 2012 and 2011

     5   
  

Condensed Consolidated Statements of Cash Flows for the six months ended September 30, 2012 and 2011

     6   
  

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

     7   
  

Notes to Condensed Consolidated Financial Statements

     12   

Item 2.

  

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

     30   
  

Overview

     30   
  

Results of Operations

     35   
  

Liquidity and Capital Resources

     45   

Item 3.

  

Quantitative and Qualitative Disclosures About Market Risk

     53   

Item 4.

  

Controls and Procedures

     54   

PART II.

  

OTHER INFORMATION:

  

Item 1.

  

Legal Proceedings

     54   

Item 1A.

  

Risk Factors

     54   

Item 2.

  

Unregistered Sales of Equity Securities and Use of Proceeds

     54   

Item 3.

  

Defaults Upon Senior Securities

     54   

Item 4.

  

Mine Safety Disclosures

     54   

Item 5.

  

Other Information

     54   

Item 6.

  

Exhibits

     54   

SIGNATURES

     55   

 

2


Table of Contents

GLADSTONE INVESTMENT CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES

(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

(UNAUDITED)

 

     September 30,
2012
    March 31,
2012
 

ASSETS

    

Investments at fair value

    

Control investments (Cost of $245,475 and $186,743, respectively)

   $ 208,922      $ 157,544   

Affiliate investments (Cost of $61,473 and $70,015, respectively)

     48,715        58,831   

Non-Control/Non-Affiliate investments (Cost of $10,083 and $9,637, respectively)

     9,049        9,277   
  

 

 

   

 

 

 

Total investments at fair value (Cost of $317,031 and $266,395, respectively)

     266,686        225,652   

Cash and cash equivalents

     92,940        91,546   

Restricted cash

     1,041        1,928   

Interest receivable

     1,295        1,250   

Due from custodian

     8,152        1,527   

Deferred financing costs

     2,411        2,792   

Other assets

     1,007        602   
  

 

 

   

 

 

 

TOTAL ASSETS

   $ 373,532      $ 325,297   
  

 

 

   

 

 

 

LIABILITIES

    

Borrowings:

    

Short-term loan at fair value (Cost of $71,525 and $76,005, respectively)

   $ 71,525      $ 76,005   

Line of credit at fair value (Cost of $56,000 and $0, respectively)

     57,209        —     

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

     5,000        —     
  

 

 

   

 

 

 

Total borrowings (Cost of $132,525 and $76,005, respectively)

     133,734        76,005   

Mandatorily redeemable preferred stock, $0.001 par value per share, $25 liquidation preference per share; 1,610,000 shares authorized, 1,600,000 shares issued and outstanding at September 30 and March 31, 2012

     40,000        40,000   

Accounts payable and accrued expenses

     1,311        506   

Fees due to Adviser(A)

     595        496   

Fee due to Administrator(A)

     189        218   

Other liabilities

     480        856   
  

 

 

   

 

 

 

TOTAL LIABILITIES

     176,309        118,081   
  

 

 

   

 

 

 

Commitments and contingencies(B)

    

NET ASSETS

   $ 197,223      $ 207,216   
  

 

 

   

 

 

 

ANALYSIS OF NET ASSETS

    

Common stock, $0.001 par value per share, 100,000,000 shares authorized and 22,080,133 shares issued and outstanding at September 30 and March 31, 2012

   $ 22      $ 22   

Capital in excess of par value

     257,131        257,131   

Cumulative net unrealized depreciation of investments

     (50,345     (40,743

Cumulative net unrealized depreciation of other

     (1,236     (68

Net investment income in excess of distributions

     321        321   

Accumulated net realized loss

     (8,670     (9,447
  

 

 

   

 

 

 

TOTAL NET ASSETS

   $ 197,223      $ 207,216   
  

 

 

   

 

 

 

NET ASSET VALUE PER COMMON SHARE AT END OF PERIOD

   $ 8.93      $ 9.38   
  

 

 

   

 

 

 

 

(A) 

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

(B) 

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

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

 

3


Table of Contents

GLADSTONE INVESTMENT CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)

(UNAUDITED)

 

     Three Months Ended
September 30,
    Six Months Ended
September 30,
 
     2012     2011     2012     2011  

INVESTMENT INCOME

        

Interest income

        

Control investments

   $ 4,548      $ 2,926      $ 7,977      $ 5,560   

Affiliate investments

     1,573        1,363        3,344        2,732   

Non-Control/Non-Affiliate investments

     339        401        647        806   

Cash and cash equivalents

     1        2        3        6   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income

     6,461        4,692        11,971        9,104   

Other income

        

Control investments

     112        341        506        1,176   

Affiliate investments

     401        —          401        —     

Non-Control/Non-Affiliate investments

     —          1        —          17   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other income

     513        342        907        1,193   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total investment income

     6,974        5,034        12,878        10,297   
  

 

 

   

 

 

   

 

 

   

 

 

 

EXPENSES

        

Base management fee(A)

     1,308        1,063        2,499        2,071   

Incentive fee(A)

     541        —          541        19   

Administration fee(A)

     189        135        372        286   

Interest expense on borrowings

     484        233        576        365   

Dividends on mandatorily redeemable preferred stock

     713        —          1,425        —     

Amortization of deferred financing fees

     203        108        403        215   

Professional fees

     177        105        371        315   

Other general and administrative expenses

     423        592        702        942   
  

 

 

   

 

 

   

 

 

   

 

 

 

Expenses before credits from Adviser

     4,038        2,236        6,889        4,213   

Credits to fees(A)

     (515     (511     (700     (726
  

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses net of credits to fees

     3,523        1,725        6,189        3,487   
  

 

 

   

 

 

   

 

 

   

 

 

 

NET INVESTMENT INCOME

     3,451        3,309        6,689        6,810   
  

 

 

   

 

 

   

 

 

   

 

 

 

REALIZED AND UNREALIZED GAIN (LOSS)

        

Net realized gain (loss):

        

Control investments

     798        (543     753        5,192   

Non-Control/Non-Affiliate investments

     —          (1     —          4   

Other

     —          —          (41     (39
  

 

 

   

 

 

   

 

 

   

 

 

 

Total net realized gain (loss)

     798        (544     712        5,157   

Net unrealized (depreciation) appreciation:

        

Control investments

     (9,708     8,886        (7,354     935   

Affiliate investments

     6,139        1,662        (1,573     3,740   

Non-Control/Non-Affiliate investments

     (315     (211     (674     609   

Other

     (718     (407     (1,169     (368
  

 

 

   

 

 

   

 

 

   

 

 

 

Total net unrealized (depreciation) appreciation

     (4,602     9,930        (10,770     4,916   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net realized and unrealized (loss) gain

     (3,804     9,386        (10,058     10,073   
  

 

 

   

 

 

   

 

 

   

 

 

 

NET (DECREASE) INCREASE IN NET ASSETS RESULTING FROM OPERATIONS

   $ (353   $ 12,695      $ (3,369   $ 16,883   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

        

Basic and diluted

   $ (0.02   $ 0.57      $ (0.15   $ 0.76   
  

 

 

   

 

 

   

 

 

   

 

 

 

WEIGHTED AVERAGE SHARES OF COMMON STOCK OUTSTANDING:

        

Basic and diluted

     22,080,133        22,080,133        22,080,133        22,080,133   

 

(A) 

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

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

 

4


Table of Contents

GLADSTONE INVESTMENT CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS

(IN THOUSANDS)

(UNAUDITED)

 

     Six Months Ended
September 30,
 
     2012     2011  

Operations:

    

Net investment income

   $ 6,689      $ 6,810   

Net realized gain on investments

     753        5,196   

Net realized loss on other

     (41     (39

Net unrealized (depreciation) appreciation of investments

     (9,601     5,284   

Net unrealized depreciation of other

     (1,169     (368
  

 

 

   

 

 

 

Net (decrease) increase in net assets from operations

     (3,369     16,883   

Distributions to common stockholders:

     (6,624     (6,293
  

 

 

   

 

 

 

Total (decrease) increase in net assets

     (9,993     10,590   

Net assets at beginning of period

     207,216        198,829   
  

 

 

   

 

 

 

Net assets at end of period

   $ 197,223      $ 209,419   
  

 

 

   

 

 

 

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

 

5


Table of Contents

GLADSTONE INVESTMENT CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN THOUSANDS)

(UNAUDITED)

 

     Six Months Ended
September 30,
 
     2012     2011  

CASH FLOWS FROM OPERATING ACTIVITIES

    

Net (decrease) increase in net assets resulting from operations

   $ (3,369   $ 16,883   

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

    

Purchase of investments

     (63,263     (67,378

Principal repayments of investments

     12,090        5,560   

Proceeds from the sale of investments

     1,291        7,527   

Net realized gain on investments

     (753     (5,196

Net realized loss on other

     41        39   

Net unrealized depreciation (appreciation) of investments

     9,601        (5,284

Net unrealized depreciation of other

     1,169        368   

Amortization of deferred financing costs

     403        215   

Decrease in restricted cash

     887        3,113   

Increase in interest receivable

     (45     (628

(Increase) decrease in due from custodian

     (6,625     134   

Increase in other assets

     (406     (86

Increase in accounts payable and accrued expenses

     912        675   

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

     99        (458

Decrease in administration fee payable to Administrator(A)

     (29     (36

Decrease in other liabilities

     (376     (425
  

 

 

   

 

 

 

Net cash used in operating activities

     (48,373     (44,977

CASH FLOWS FROM FINANCING ACTIVITIES

    

Proceeds from borrowings

     243,535        124,001   

Repayments on borrowings

     (187,015     (80,500

Deferred financing costs

     (129     (107

Distributions paid to common stockholders

     (6,624     (6,293
  

 

 

   

 

 

 

Net cash provided by financing activities

     49,767        37,101   
  

 

 

   

 

 

 

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

     1,394        (7,876

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD

     91,546        80,580   
  

 

 

   

 

 

 

CASH AND CASH EQUIVALENTS, END OF PERIOD

   $ 92,940      $ 72,704   
  

 

 

   

 

 

 

 

(A) 

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

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

 

6


Table of Contents

GLADSTONE INVESTMENT CORPORATION

CONDENSED CONSOLIDATED SCHEDULE OF INVESTMENTS

SEPTEMBER 30, 2012

(DOLLAR AMOUNTS IN THOUSANDS)

(UNAUDITED)

 

Company(A)

  

Industry

  

Investment(B)

   Principal      Cost      Fair Value  

CONTROL INVESTMENTS:

              

Acme Cryogenics, Inc.

  

Machinary

  

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

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

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

        6,984         11,480   
     

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

        1,045         194   
     

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

        25         41   
           

 

 

    

 

 

 
              22,554         26,215   

ASH Holdings Corp.

  

Automobile

  

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

     7,150         7,093         —     
     

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

     6,250         6,050         —     
     

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

        2,500         —     
     

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

        —           —     
     

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

        4         —     
     

Guarantee ($500)

        
           

 

 

    

 

 

 
              15,647         —     

Country Club Enterprises, LLC

  

Automobile

  

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

     4,000         4,000         4,000   
     

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

        7,725         2,926   
     

Guarantee ($2,000)

        
     

Guarantee ($1,437)

        
           

 

 

    

 

 

 
              11,725         6,926   

Danco Acquisition Corp.(I)

  

Diversified/Conglomerate Manufacturing

  

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

     2,250         2,250         900   
     

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

     2,575         2,575         1,030   
     

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

     8,795         8,795         3,518   
     

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

     700         700         245   
     

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

     350         350         123   
     

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

        2,500         —     
     

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

        3         —     
           

 

 

    

 

 

 
              17,173         5,816   

Drew Foam Companies, inc.

  

Chemicals, Plastics and Rubber

  

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

     10,913         10,913         10,913   
     

Preferred Stock (51,421 shares)(C)(F)(H)

        5,142         5,142   
     

Common Stock (8,184
shares)
(C)(F)(H)

        96         96   
           

 

 

    

 

 

 
              16,151         16,151   

Galaxy Tool Holding Corp.

  

Aerospace and Defense

  

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

     3,220         3,220         3,220   
     

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

        19,658         6,090   
     

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

        48         —     
           

 

 

    

 

 

 
              22,926         9,310   

Ginsey Holdings, Inc.

  

Home and Office Furnishings, Housewares and Durable

  

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

     13,050         13,050         13,050   
  

Consumer Products

  

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

        9,394         9,394   
     

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

        8         8   
           

 

 

    

 

 

 
              22,452         22,452   

Mathey Investments, Inc.

  

Machinary

  

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

     1,375         1,375         1,375   
     

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

     3,727         3,727         3,727   
     

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

     3,500         3,500         3,500   
     

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

        777         5,170   
           

 

 

    

 

 

 
              9,379         13,772   

Mitchell Rubber Products, Inc.

  

Chemicals, Plastics and Rubber

  

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

     13,560         13,560         13,526   
     

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

        2,790         3,044   
     

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

        28         820   
           

 

 

    

 

 

 
              16,378         17,390   

Precision Southeast, Inc.

  

Containers, Packaging and Glass

  

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

     7,775         7,775         7,775   
     

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

        1,909         2,187   
     

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

        91         354   
           

 

 

    

 

 

 
              9,775         10,316   

SBS, Industries, LLC

  

Machinary

  

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

     11,355         11,355         11,355   
     

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

        1,994         2,167   
     

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

        221         4,705   
           

 

 

    

 

 

 
              13,570         18,227   

 

7


Table of Contents

GLADSTONE INVESTMENT CORPORATION

CONDENSED CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

SEPTEMBER 30, 2012

(DOLLAR AMOUNTS IN THOUSANDS)

(UNAUDITED)

 

Company(A)

  

Industry

  

Investment(B)

   Principal      Cost      Fair Value  

CONTROL INVESTMENTS (Continued):

        

SOG Specialty K&T, LLC

  

Leisure, Amusement, Motion

  

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

   $ 6,200       $ 6,200       $ 6,200   
  

Pictures, Entertainment

  

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

     12,199         12,199         12,199   
     

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

        9,749         11,332   
           

 

 

    

 

 

 
              28,148         29,731   

Tread Corp.

  

Oil and Gas

  

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

     7,750         7,750         7,169   
     

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

     3,010         3,010         2,784   
     

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

        3,333         —     
     

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

        501         —     
     

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

        3         —     
           

 

 

    

 

 

 
              14,597         9,953   

Venyu Solutions, Inc.

  

Electronics

  

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

     7,000         7,000         7,000   
     

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

     12,000         12,000         12,000   
     

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

        6,000         3,663   
           

 

 

    

 

 

 
              25,000         22,663   

Total Control Investments (represents 78.3% of total investments at fair value)

      $ 245,475       $ 208,922   
           

 

 

    

 

 

 

AFFILIATE INVESTMENTS:

        

Cavert II Holding Corp.

  

Containers, Packaging and Glass

  

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

   $ 4,700       $ 4,700       $ 4,788   
     

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

     4,671         4,671         4,764   
     

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

        1,844         2,699   
           

 

 

    

 

 

 
              11,215         12,251   

Channel Technologies Group, LLC

  

Diversified/Conglomerate Manufacturing

  

Revolving Credit Facility, $850 available (7.0%, Due 12/2012)(D)

     400         400         398   
     

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

     5,853         5,853         5,824   
     

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

     10,750         10,750         10,696   
     

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

        1,599         517   
     

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

        —           —     
           

 

 

    

 

 

 
              18,602         17,435   

Noble Logistics, Inc.

  

Cargo Transport

  

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

     800         800         440   
     

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

     7,227         7,227         3,975   
     

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

     3,650         3,650         2,008   
     

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

     3,650         3,650         2,007   
     

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

        1,750         —     
     

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

        1,682         —     
           

 

 

    

 

 

 
              18,759         8,430   

Packerland Whey Products, Inc.

  

Beverage, Food and Tobacco

  

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

     7,000         7,000         6,939   
     

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

        2,479         1,071   
     

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

        21         —     
           

 

 

    

 

 

 
              9,500         8,010   

Quench Holdings Corp.

  

Home and Office Furnishings,

  

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

        2,950         2,589   
  

Housewares and Durable Consumer

  

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

        447         —     
           

 

 

    

 

 

 
  

Consumer Products

           3,397         2,589   
           

 

 

    

 

 

 

Total Affiliate Investments (represents 18.3% of total investments at fair value)

      $ 61,473       $ 48,715   
           

 

 

    

 

 

 

NON-CONTROL/NON-AFFILIATE INVESTMENTS:

        

B-Dry, LLC

  

Buildings and Real Estate

  

Revolving Credit Facility, $250 available (6.5%,
Due 5/2014)
(D)

   $ 500       $ 500       $ 462   
     

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

     6,443         6,443         5,960   
     

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

     2,840         2,840         2,627   
     

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

        300         —     
           

 

 

    

 

 

 
              10,083         9,049   
           

 

 

    

 

 

 

Total Non-Control/Non-Affiliate Investments (represents 3.4% of total investments at fair value)

      $ 10,083       $ 9,049   
           

 

 

    

 

 

 

TOTAL INVESTMENTS

      $ 317,031       $ 266,686   
           

 

 

    

 

 

 

 

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GLADSTONE INVESTMENT CORPORATION

CONDENSED CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

SEPTEMBER 30, 2012

(DOLLAR AMOUNTS IN THOUSANDS)

(UNAUDITED)

 

(A) 

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

(B) 

Percentages represent the weighted average cash interest rates in effect at September 30, 2012, and due date represents the contractual maturity date. If applicable, paid in kind (“PIK”) interest rates are noted separately from the cash interest rates.

(C) 

Security is non-income producing.

(D) 

Fair value based primarily on opinions of value submitted by Standard & Poor’s Securities Evaluations, Inc. as of September 30, 2012.

(E) 

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

(F) 

Aggregates all shares of such class of stock owned without regard to specific series owned within such class (some series of which may or may not be voting shares) or aggregates all warrants to purchase shares of such class of stock owned without regard to specific series of such class of stock such warrants allow us to purchase.

(G) 

Debt security is on non-accrual status.

(H) 

New proprietary portfolio investment valued at cost, as it was determined that the price paid during the three months ended September 30, 2012, best represents fair value as of September 30, 2012.

(I) 

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

(J) 

$5.0 million of the debt security participated to a third party but accounted for as collateral for a secured borrowing for GAAP purposes.

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

 

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GLADSTONE INVESTMENT CORPORATION

CONDENSED CONSOLIDATED SCHEDULES OF INVESTMENTS

MARCH 31, 2012

(DOLLAR AMOUNTS IN THOUSANDS)

(UNAUDITED)

 

Company(A)

  

Industry

  

Investment(B)

   Principal      Cost      Fair Value  

CONTROL INVESTMENTS:

              

Acme Cryogenics, Inc.

  

Machinery

  

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

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

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

        6,984         10,994   
     

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

        1,045         2,132   
     

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

        25         675   
           

 

 

    

 

 

 
              22,554         28,301   

ASH Holdings Corp.

  

Automobile

  

Revolving Credit Facility, $570 available (3.0%, Due 3/2013)(G)

     6,430         6,388         —     
     

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

     6,250         6,060         —     
     

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

        2,500         —     
     

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

        —           —     
     

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

        4         —     
     

Guarantee ($750)

        
           

 

 

    

 

 

 
              14,952         —     

Country Club Enterprises, LLC

  

Automobile

  

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

     4,000         4,000         —     
     

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

        7,725         —     
     

Guarantee ($2,000)

        
     

Guarantee ($1,998)

        
           

 

 

    

 

 

 
              11,725         —     

Galaxy Tool Holding Corp.

  

Aerospace and Defense

  

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

     5,220         5,220         5,220   
     

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

        19,658         1,493   
     

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

        48         —     
           

 

 

    

 

 

 
              24,926         6,713   

Mathey Investments, Inc.

  

Machinery

  

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

     2,375         2,375         2,375   
     

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

     3,727         3,727         3,727   
     

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

     3,500         3,500         3,500   
     

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

        777         4,164   
           

 

 

    

 

 

 
              10,379         13,766   

Mitchell Rubber Products, Inc.

  

Chemicals, Plastics and Rubber

  

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

     13,560         13,560         13,679   
     

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

        2,790         2,954   
     

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

        28         1,858   
           

 

 

    

 

 

 
              16,378         18,491   

Precision Southeast, Inc.

  

Containers, Packaging and Glass

  

Revolving Credit Facility, $251 available (7.5%, Due 9/2012)

     749         749         749   
     

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

     7,775         7,775         7,775   
     

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

        1,909         1,634   
     

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

        91         —     
           

 

 

    

 

 

 
              10,524         10,158   

SBS, Industries, LLC

  

Machinery

  

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

     11,355         11,355         11,355   
     

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

        1,994         2,087   
     

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

        221         3,563   
           

 

 

    

 

 

 
              13,570         17,005   

SOG Specialty K&T, LLC

  

Leisure, Amusement, Motion

  

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

     6,200         6,200         6,200   
  

Pictures, Entertainment

  

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

     12,199         12,199         12,199   
     

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

        9,749         11,697   
           

 

 

    

 

 

 
              28,148         30,096   

Tread Corp.

  

Oil and Gas

  

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

     7,750         7,750         7,750   
     

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

        833         1,080   
     

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

        1         96   
     

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

        3         758   
           

 

 

    

 

 

 
              8,587         9,684   

Venyu Solutions, Inc.

  

Electronics

  

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

     7,000         7,000         7,000   
     

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

     12,000         12,000         12,000   
     

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

        6,000         4,330   
           

 

 

    

 

 

 
              25,000         23,330   
           

 

 

    

 

 

 

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

      $ 186,743       $ 157,544   
           

 

 

    

 

 

 

 

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GLADSTONE INVESTMENT CORPORATION

CONDENSED CONSOLIDATED SCHEDULES OF INVESTMENTS (Continued)

MARCH 31, 2012

(DOLLAR AMOUNTS IN THOUSANDS)

(UNAUDITED)

 

Company(A)

  

Industry

  

Investment(B)

   Principal      Cost      Fair Value  

AFFILIATE INVESTMENTS:

           

Cavert II Holding Corp.

  

Containers, Packaging and Glass

  

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

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

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

     5,700         5,700         5,771   
     

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

     4,671         4,671         4,741   
     

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

        1,844         2,596   
           

 

 

    

 

 

 
              13,265         14,175   

Channel Technologies Group, LLC

  

Diversified/Conglomerate Manufacturing

  

Revolving Credit Facility, $400 available (7.0%, Due 12/2012)(D)

     850         850         843   
     

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

     5,926         5,926         5,875   
     

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

     10,750         10,750         10,642   
     

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

        1,599         1,631   
     

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

        —           75   
           

 

 

    

 

 

 
              19,125         19,066   

Danco Acquisition Corp.

  

Diversified/Conglomerate Manufacturing

  

Revolving Credit Facility, $450 available (10.0%, Due 10/2012)(D)

     1,800         1,800         1,350   
     

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

     2,575         2,575         1,931   
     

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

     8,891         8,891         6,669   
     

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

        2,500         —     
     

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

        3         —     
           

 

 

    

 

 

 
              15,769         9,950   

Noble Logistics, Inc.

  

Cargo Transport

  

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

     500         500         315   
     

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

     7,227         7,227         4,553   
     

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

     3,650         3,650         2,300   
     

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

     3,650         3,650         2,299   
     

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

        1,750         3,550   
     

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

        1,682         —     
           

 

 

    

 

 

 
              18,459         13,017   

Quench Holdings Corp.

  

Home and Office Furnishings,

  

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

        2,950         2,623   
  

Housewares and Durable

  

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

        447         —     
           

 

 

    

 

 

 
  

Consumer Products

           3,397         2,623   
           

 

 

    

 

 

 

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

      $ 70,015       $ 58,831   
           

 

 

    

 

 

 

NON-CONTROL/NON-AFFILIATE INVESTMENTS:

        

B-Dry, LLC

  

Buildings and Real Estate

  

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

     6,477         6,477         6,356   
     

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

     2,860         2,860         2,806   
     

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

        300         115   
           

 

 

    

 

 

 
              9,637         9,277   
           

 

 

    

 

 

 

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

      $ 9,637       $ 9,277   
           

 

 

    

 

 

 

TOTAL INVESTMENTS

      $ 266,395       $ 225,652   
           

 

 

    

 

 

 

 

(A) 

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

(B) 

Percentages represent the weighted average interest rates in effect at March 31, 2012, and due date represents the contractual maturity date. If applicable, PIK interest rates are noted separately from the cash interest rates.

(C) 

Security is non-income producing.

(D) 

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

(E) 

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

(F) 

Aggregates all shares of such class of stock owned without regard to specific series owned within such class (some series of which may or may not be voting shares) or aggregates all warrants to purchase shares of such class of stock owned without regard to specific series of such class of stock such warrants allow us to purchase.

(G) 

Debt security is on non-accrual status.

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

 

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Table of Contents

GLADSTONE INVESTMENT CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2012

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

NOTE 1. ORGANIZATION

Gladstone Investment Corporation (“Gladstone Investment”) was incorporated under the General Corporation Law of the State of Delaware on February 18, 2005 and completed an initial public offering on June 22, 2005. The terms “the Company,” “we,” “our” and “us” all refer to Gladstone Investment and its consolidated subsidiaries. We are a closed-end, non-diversified management investment company that has elected to be treated as a business development company (“BDC”) under the Investment Company Act of 1940, as amended (the “1940 Act”). In addition, we have elected to be treated for tax purposes as a regulated investment company (“RIC”) under the Internal Revenue Code of 1986, as amended (the “Code”). We were established for the purpose of investing in debt and equity securities of established private businesses in the United States (“U.S.”). These investments primarily come in the form of senior debt securities, senior subordinated debt securities, junior subordinated debt securities, preferred stock, common stock and warrants to purchase common stock of small and medium-sized companies in connection with buyouts and other recapitalizations. To a much lesser extent, we also invest in senior and subordinated syndicated loans. Our investment objective is to generate both current income and capital gains through these debt and equity instruments.

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

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

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Unaudited Interim Financial Statements and Basis of Presentation

We prepare our interim financial statements in accordance with accounting principles generally accepted in the U.S. (“GAAP”) for interim financial information and pursuant to the requirements for reporting on Form 10-Q and Article 10 of Regulation S-X under the Securities Act of 1933, as amended (the “Securities Act”). Accordingly, we have omitted certain disclosures accompanying annual financial statements prepared in accordance with GAAP. The accompanying condensed consolidated financial statements include our accounts and those of our wholly-owned subsidiaries. All 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 American Institute of CPAs (“AICPA”) Audit and Accounting Guide for Investment Companies, we are not permitted to consolidate any portfolio company investments, including those in which we have a controlling interest. In our opinion, all adjustments, consisting solely of normal recurring accruals, necessary for the fair statement of financial statements for the interim periods have been included. The results of operations for the three and six months ended September 30, 2012, are not necessarily indicative of results that ultimately may be achieved for the year. The interim financial statements and notes thereto should be read in conjunction with the financial statements and notes thereto included in our annual report on Form 10-K for the fiscal year ended March 31, 2012, as filed with the Securities and Exchange Commission (the “SEC”) on May 21, 2012.

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

Reclassifications

Certain amounts in the prior period’s financial statements have been reclassified to conform to the presentation for the three and six months ended September 30, 2012, with no effect to net (decrease) increase in net assets resulting from operations.

Investment Valuation Policy

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

 

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Table of Contents

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 scope used to value our investments. When we obtain these specific, third-party appraisals, we 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 our investments.

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

Publicly-traded securities: 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. At September 30 and March 31, 2012, we did not have any investments in publicly-traded securities.

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, which are non-binding. In valuing these assets, we assess trading activity in the asset class and evaluate variances in prices and other market insights to determine if any available quoted prices are reliable. In general, if we conclude that quotes based on active markets or trading activity may be relied upon, firm bid prices are requested; however, if firm bid prices are unavailable, we base the value of the security upon the price in the range of 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 we use the IBP as a basis for valuing the security, the Adviser may take further steps to consider additional information to validate that price in accordance with the Policy, including, but not limited to, reviewing a range of indicative bids to the extent the Adviser has ready access to such qualified information.

In the event these limited markets become illiquid to a degree that market prices are no longer readily available, we will value our syndicated loans using alternative methods, such as estimated net present values of the future cash flows, or discounted cash flows (“DCF”). The use of a DCF methodology follows that prescribed by the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 820, “Fair Value Measurements and Disclosures,” which provides guidance on the use of a reporting entity’s own assumptions about future cash flows and risk-adjusted discount rates when relevant, observable inputs, such as quotes in active markets, are not available. When relevant, observable market data does not exist, an alternative outlined in ASC 820 is the valuation of investments based on DCF. For the purposes of using DCF to provide fair value estimates, 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 other things, increased probability of default, higher loss given default and 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 apply the DCF methodology in illiquid markets until quoted prices are available or are deemed reliable based on trading activity. At September 30 and March 31, 2012, we had no syndicated investments.

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

 

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

 

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

 

   

the issuer’s ability to make payments;

 

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

 

(C) 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, we have defined our “unit of account” at the investment level (either debt or equity) and as such determine our fair value of these non-control investments assuming the sale of an individual security using the standalone 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. 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 based on factors such as the overall value of the issuer, the relative fair value of other units of account, including debt, or other relative value approaches. Consideration is also given to capital structure and other contractual obligations that may impact the fair value of the equity. Furthermore, we may utilize comparable values of similar companies, recent investments and indices with similar structures and risk characteristics or DCF valuation techniques and, in the absence of other observable market data, our own assumptions.

 

(D) Investments comprised of non-publicly traded, non-control equity securities of other funds: We generally 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. At September 30 and March 31, 2012, we had no non-control equity securities of other funds.

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

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

Interest Income Recognition

Interest income, adjusted for amortization of premiums and acquisition costs, the accretion of discounts and the amortization of amendment fees, is recorded on the accrual basis to the extent that such amounts are expected to be collected. Generally, when a loan becomes 90 days or more past due, or if our qualitative assessment indicates that the debtor is unable to service its debt or other obligations, we will place the loan on non-accrual status and cease recognizing interest income on that loan until the borrower has demonstrated the ability and intent to pay contractual amounts due. However, we remain contractually entitled to this interest. Interest payments received on non-accrual loans may be recognized as income or applied to the cost basis, depending upon management’s judgment. Generally, non-accrual loans are restored to accrual status when past-due principal and interest are paid and, in management’s judgment, are likely to remain current, or due to a restructuring such that the interest income is deemed to be collectible. At September 30, 2012, loans to two portfolio companies, ASH Holdings Corp. (“ASH”) and Country Club Enterprises, LLC (“CCE”), were on non-accrual. These non-accrual loans had an aggregate cost value of $17.1 million, or 7.7% of the cost basis of debt investments in our portfolio, and an aggregate fair value of $4.0 million, or 2.1% of the fair value of all debt investments in our portfolio. At March 31, 2012, ASH and CCE were on non-accrual with an aggregate debt cost basis of $16.4 million, or 8.6% of the cost basis of debt investments in our portfolio, and an aggregate fair value of $0.

 

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We did not hold any loans in our portfolio that contained a PIK provision at September 30, 2012, and no PIK income was recorded during the three and six months ended September 30, 2012. During the three and six months ended September 30, 2011, we recorded PIK income of $1 and $6, respectively. PIK interest, computed at the contractual rate specified in the loan agreement, is added to the principal balance of the loan and recorded as interest income. To maintain our status as a RIC, this non-cash source of income must be included in our calculation of distributable income for purposes of complying with our distribution requirements, even though we have not yet collected the cash. The sole loan with a PIK provision was paid off, at par, during the quarter ended September 30, 2011.

Other Income Recognition

We generally record success fees upon receipt of cash. Success fees are contractually due upon a change of control in a portfolio company and are recorded in other income in our accompanying Condensed Consolidated Statements of Operations. We recorded $0.4 million and $0.8 million of success fees during the three and six months ended September 30, 2012, respectively, representing prepayments received from Mathey Investments, Inc. (“Mathey”) and Cavert II Holding Corp. (“Cavert”). During the three and six months ended September, 30, 2011, we recorded success fees of $0.3 million and $0.4 million, respectively, representing prepayments received from Mathey and Cavert. As of September 30, 2012, we have an off-balance sheet success fee receivable of approximately $11.0 million.

We accrue dividend income on preferred equity securities to the extent that such amounts are expected to be collected and if we have the option to collect such amounts in cash, and it is recorded in Other income in our accompanying Condensed Consolidated Statements of Operations. We recorded $0.1 million in dividend income during the three and six months ended September 30, 2012, on accrued preferred shares of Drew Foam Companies, Inc. (“Drew Foam”). We did not record any dividend income during the three months ended September 30, 2011; however, during the six months ended September 30, 2011, we recorded and collected $0.7 million of dividends on accrued preferred shares in connection with the recapitalization of Cavert.

Recent Accounting Pronouncements

In May 2011, the FASB issued Accounting Standards Update No. 2011-04, “Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs,” (“ASU 2011-04”) which results in a consistent definition of fair value and common requirements for measurement of and disclosure about fair value between GAAP and IFRS. ASU 2011-04 is effective for interim and annual periods beginning after December 15, 2011. The adoption of ASU 2011-04 did not have a significant impact on our financial position or results of operations.

NOTE 3. INVESTMENTS

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

 

 

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

 

 

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

 

 

Level 3 — inputs to the valuation methodology are unobservable and significant to the fair value measurement. Unobservable inputs are those inputs that reflect assumptions that market participants would use when pricing the asset or liability and can include our own assumptions based upon the best available information.

We transfer investments in and out of Level 1, 2 and 3 securities as of the beginning balance sheet date, based on changes in the use of observable and unobservable inputs utilized to perform the valuation for the period. During the three months ended September 30, 2012 and 2011, there were no transfers in or out of Level 1, 2 and 3.

 

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The following table presents the financial assets carried at fair value as of September 30 and March 31, 2012, by caption on our accompanying Condensed Consolidated Statements of Assets and Liabilities and by security type for each of the three applicable levels of hierarchy established by ASC 820 that we used to value our financial assets:

 

     As of September 30, 2012      As of March 31, 2012  
     Level 1      Level 3      Total Recurring Fair
Value Measurement
Reported in 
Condensed
Consolidated Statements
of Assets and Liabilities
     Level 1      Level 3      Total Recurring Fair
Value Measurement
Reported in 
Condensed
Consolidated Statements
of Assets and Liabilities
 

Control Investments

                 

Senior debt

   $ —         $ 62,860       $ 62,860       $ —         $ 47,880       $ 47,880   

Senior subordinated debt

     —           77,249         77,249         —           60,149         60,149   

Preferred equity

     —           57,424         57,424         —           36,269         36,269   

Common equity/equivalents

     —           11,389         11,389         —           13,246         13,246   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Control investments

     —           208,922         208,922         —           157,544         157,544   

Affiliate Investments

                 

Senior debt

     —           25,348         25,348         —           37,844         37,844   

Senior subordinated debt

     —           16,491         16,491         —           10,512         10,512   

Preferred equity

     —           6,876         6,876         —           10,400         10,400   

Common equity/equivalents

     —           —           —           —           75         75   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Affiliate investments

     —           48,715         48,715         —           58,831         58,831   

Non-Control/Non-Affiliate Investments

                 

Senior debt

     —           9,049         9,049         —           9,162         9,162   

Common equity/equivalents

     —           —           —           —           115         115   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Non-Control/Non-Affiliate Investments

     —           9,049         9,049         —           9,277         9,277   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Investments at fair value

   $ —         $ 266,686       $ 266,686       $ —         $ 225,652       $ 225,652   

Cash Equivalents

     80,000         —           80,000         85,000         —           85,000   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Investments and Cash Equivalents

   $ 80,000       $ 266,686       $ 346,686       $ 85,000       $ 225,652       $ 310,652   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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

 

     Quantitative Information about Level 3 Fair Value Measurements  
     Fair Value as of
September 30,
2012
    Valuation
Techniques/

Methodologies
  Unobservable Input   Range    Weighted
Average
 

Investments in controlled companies

   $ 191,531 (A)    TEV   EBITDA  multiples(C)   4.9x – 7.9x      6.1x   

comprised of a bundle of investments

       EBITDA(C)   ($992) – $6,615    $ 3,944   
     SPSE(B)   EBITDA(C)   ($197) – $710    $ 187   
       Risk Ratings(D)   2.0 – 5.3      3.9   

Investments in non-controlled companies

     72,566      TEV   EBITDA  multiples(C)   4.0x – 8.4x      6.3x   

comprised of a bundle of investments

       EBITDA(C)   $700 – $6,023    $ 3,566   
     SPSE(B)   EBITDA(C)   $700 – $6,023    $ 3,311   
       Risk Ratings(D)   1.3 – 5.7      4.5   

Other investments

     2,589            
  

 

 

          

Total Fair Value for Level 3 Investments

   $ 266,686            
  

 

 

          

 

(A) 

Includes two new portfolio company investments which were valued at cost, as it was determined that the price paid during the three months ended September 30, 2012, best represents fair value as of September 30, 2012.

 

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(B) 

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

(C) 

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

(D) 

As part of our valuation procedures, we risk rate all of our investments in debt securities. We use a proprietary risk rating system for all our proprietary debt securities. Our risk rating system uses a scale of 0 to 10, with 10 representing the lowest probability of default. The risk rating system covers both qualitative and quantitative aspects of the portfolio company business and the securities we hold.

Significant unobservable inputs generally included in our internally-assessed TEV models used to value our proprietary debt and equity investments are the portfolio company’s EBITDA and EBITDA multiples. Holding all other factors constant, increases (decreases) in the EBITDA and/or the EBITDA multiples inputs would result in a higher (lower) fair value measurement. Per our valuation policy, we generally use an indexed EBITDA multiple. EBITDA and EBITDA multiple inputs do not have to directionally correlate since EBITDA is a company performance metric and EBITDA multiples can be influenced by market, industry, size and other factors.

Changes in Level 3 Fair Value Measurements of Investments

The following tables provide the changes in fair value, broken out by security type, during the three and six months ended September 30, 2012 and 2011 for all investments for which we determine fair value using unobservable (Level 3) factors. When a determination is made to classify a financial instrument within Level 3 of the valuation hierarchy, such determination is based upon the significance of the unobservable factors to the overall fair value measurement. However, Level 3 financial instruments typically include, in addition to the unobservable, or Level 3, inputs, observable inputs (that is, components that are actively quoted and can be validated to external sources). In these cases, we categorize all of the inputs as the lowest level input within the hierarchy. 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 of Investments Using Significant Unobservable Inputs (Level 3)

Periods Ended September 30, 2012:

 

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

Three months ended September 30, 2012:

          

Fair value as of June 30, 2012

   $ 90,081      $ 80,398      $ 44,192      $ 15,099      $ 229,770   

Total (losses) gains:

          

Net realized gains(A)(D)

     —          —          —          798        798   

Net unrealized (depreciation) appreciation(B)

     (3,084     442        3,073        (4,315     (3,884

New investments, repayments and settlements(C):

          

Issuances / Originations

     17,820        17,500        15,074        105        50,499   

Settlements / Repayments

     (7,560     (1,600     —          —          (9,160

Sales(D)

     —          —          (539     (798     (1,337

Transfers(E)

     —          (3,000     2,500        500        —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Fair value as of September 30, 2012

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Six months ended September 30, 2012:

          

Fair value as of March 31, 2012

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

Total (losses) gains:

          

Net realized gains(A)(D)

     —          —          —          753        753   

Net unrealized (depreciation) appreciation(B)

     (8,075     3,030        (1,884     (2,672     (9,601

New investments, repayments and settlements(C):

          

Issuances / Originations

     18,770        26,815        17,553        125        63,263   

Settlements / Repayments

     (8,324     (3,766     —          —          (12,090

Sales(D)

     —          —          (538     (753     (1,291

Transfers(E)

     —          (3,000     2,500        500        —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Fair value as of September 30, 2012

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Periods Ended September 30, 2011:

 

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

Three months ended September 30, 2011:

          

Fair value as of June 30, 2011

   $ 57,932      $ 75,862      $ 30,068      $ 1,433      $ 165,295   

Total (losses) gains:

          

Net realized losses(A)(D)

     (1     —          —          (543     (544

Net unrealized (depreciation) appreciation(B)

     (569     1,473        5,642        3,790        10,336   

Reversal of previously-recorded depreciation upon realization(B)

     1        —          —          —          1   

New investments, repayments and settlements(C):

          

Issuances / Originations

     30,205        2,750        11,742        222        44,919   

Settlements / Repayments

     (2,493     —          —          —          (2,493

Sales(D)

     —          —          —          542        542   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Fair value as of September 30, 2011

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Six months ended September 30, 2011:

          

Fair value as of March 31, 2011

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

Total (losses) gains:

          

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

     (1     5        —          5,192        5,196   

Net unrealized appreciation (depreciation) (B)

     788        (4,182     10,474        4,317        11,397   

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

     95        (14     (686     (5,508     (6,113

New investments, repayments and settlements(C):

          

Issuances / Originations

     30,211        22,385        14,532        250        67,378   

Settlements / Repayments

     (4,645     (915     —          —          (5,560

Sales(D)

     —          —          (2,266     (5,261     (7,527
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Fair value as of September 30, 2011

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(A) 

Included in Net realized (loss) gain on our accompanying Condensed Consolidated Statements of Operations for the periods ended September 30, 2012 and 2011.

(B) 

Included in Net unrealized appreciation (depreciation) on our accompanying Condensed Consolidated Statements of Operations for the periods ended September 30, 2012 and 2011.

(C) 

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

(D) 

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

(E) 

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

Investment Activity

During the six months ended September 30, 2012, the following significant transactions occurred:

 

   

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

 

   

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

 

   

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

 

   

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

 

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Investment Concentrations

As of September 30, 2012, we had investments in 20 portfolio companies located across a total of 15 states in 13 different industries with an aggregate fair value of $266.7 million, of which SOG Specialty K&T, LLC (“SOG”), Acme Cryogenics, Inc. (“Acme”), and Venyu Solutions, Inc. (“Venyu”), collectively, comprised approximately $78.6 million, or 29.5%, of our total investment portfolio at fair value. The following table outlines our investments by security type at September 30 and March 31, 2012:

 

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

Senior debt

   $ 120,921         38.1   $ 97,257         36.5   $ 110,475         41.5   $ 94,886         42.0

Senior subordinated debt

     100,511         31.7        93,740         35.1        80,461         30.2        70,661         31.3   

Preferred equity

     90,299         28.5        64,300         24.1        71,084         26.6        46,669         20.7   

Common equity/equivalents

     5,300         1.7        11,389         4.3        4,375         1.7        13,436         6.0   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total investments

   $ 317,031         100.0   $ 266,686         100.0   $ 266,395         100.0   $ 225,652         100.0
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

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

 

     September 30, 2012     March 31, 2012  
     Fair Value      Percentage of
Total Investments
    Fair Value      Percentage of
Total Investments
 

Chemicals, Plastics, and Rubber

   $ 59,756         22.4   $ 46,793         20.7

Machinery (Nonagriculture, Nonconstruction, Nonelectronic)

     31,999         12.0        30,770         13.6   

Leisure, Amusement, Motion Pictures, Entertainment

     29,731         11.1        30,096         13.3   

Home and Office Furnishings, Housewares, and Durable Consumer Products

     25,040         9.4        2,623         1.2   

Diversified/Conglomerate Manufacturing

     23,251         8.7        29,017         12.9   

Electronics

     22,663         8.5        23,330         10.3   

Containers, Packaging, and Glass

     22,568         8.5        24,332         10.8   

Oil and Gas

     9,953         3.7        9,684         4.3   

Aerospace and Defense

     9,310         3.5        6,713         3.0   

Buildings and Real Estate

     9,049         3.4        9,277         4.1   

Cargo Transport

     8,430         3.2        13,017         5.8   

Beverage, Food and Tobacco

     8,010         3.0        —           —     

Automobile

     6,926         2.6        —           —     
  

 

 

    

 

 

   

 

 

    

 

 

 

Total Investments

   $ 266,686         100.0   $ 225,652         100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

The investments, at fair value, were included in the following geographic regions of the U.S. as of September 30 and March 31, 2012:

 

     September 30, 2012     March 31, 2012  
     Fair Value      Percentage of
Total Investments
    Fair Value      Percentage of
Total  Investments
 

South

   $ 120,812         45.3   $ 128,902         57.1

West

     70,373         26.4        59,112         26.2   

Northeast

     58,181         21.8        30,924         13.7   

Midwest

     17,320         6.5        6,714         3.0   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total Investments

   $ 266,686         100.0   $ 225,652         100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

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

 

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Investment Principal Repayments

The following table summarizes the contractual principal repayments and maturity of our investment portfolio by fiscal year, assuming no voluntary prepayments, at September 30, 2012:

 

          Amount  

For the remaining six months ending March 31:

  

2013

   $ 29,274   

For the fiscal year ending March 31:

  

2014

     34,083   
  

2015

     36,109   
  

2016

     27,825   
  

2017

     63,435   
  

Thereafter

     30,962   
     

 

 

 
  

Total contractual repayments

   $ 221,688   
  

Investments in equity securities

     95,599   
  

Adjustments to cost basis on debt securities

     (256
     

 

 

 
  

Total cost basis of investments held at September 30, 2012:

   $ 317,031   
     

 

 

 

Receivables from Portfolio Companies

Receivables from portfolio companies represent non-recurring costs that we incurred on behalf of portfolio companies and are included in other assets on our accompanying Condensed Consolidated Statements of Assets and Liabilities. We maintain an allowance for uncollectible receivables from portfolio companies, which is determined based on historical experience and management’s expectations of future losses. We charge the accounts receivable to the established provision when collection efforts have been exhausted and the receivables are deemed uncollectible. As of September 30 and March 31, 2012, we had gross receivables from portfolio companies of $0.5 million and $0.3 million, respectively. The allowance for uncollectible receivables was $0 at both September 30 and March 31, 2012.

NOTE 4. RELATED PARTY TRANSACTIONS

Investment Advisory and Management Agreement

We have entered into an investment advisory and management agreement with the Adviser (the “Advisory Agreement”), which is controlled by our chairman and chief executive officer. In accordance with the Advisory Agreement, we pay the Adviser certain fees as compensation for its services, such fees consisting of a base management fee and an incentive fee. On July 10, 2012, the Board of Directors approved the renewal of the Advisory Agreement through August 31, 2013.

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

 

     Three Months Ended
September 30,
    Six Months Ended
September 30,
 
     2012     2011     2012     2011  

Average total assets subject to base management fee

   $ 261,600      $ 212,600      $ 249,900      $ 207,100   

Multiplied by prorated annual base management fee of 2%

     0.5     0.5     1.0     1.0
  

 

 

   

 

 

   

 

 

   

 

 

 

Base management fee(A)

     1,308        1,063        2,499        2,071   

Reduction for loan servicing fees

     (949     (715     (1,817     (1,392
  

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted base management fee

   $ 359      $ 348      $ 682      $ 679   

Credit for fees received by Adviser from the portfolio companies(A)

     (515     (511     (700     (726
  

 

 

   

 

 

   

 

 

   

 

 

 

Net base management fee

   $ (156   $ 163      $ (18   $ (47
  

 

 

   

 

 

   

 

 

   

 

 

 

Incentive fee(A)

   $ 541      $ —        $ 541      $ 19   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(A) 

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

Base Management Fee

The base management fee is payable quarterly and assessed at an annual rate of 2.0%, computed on the basis of the value of our average total assets at the end of the two most recently-completed quarters. Average total assets is defined as total assets, including investments made with proceeds of borrowings, less any uninvested cash or cash equivalents resulting from borrowings, valued at the end of the applicable quarters within the respective periods and adjusted appropriately for any share issuances or repurchases during the periods. In addition, the following three items are adjustments to the base management fee calculation:

 

   

Loan Servicing Fees

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

 

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Portfolio Company Fees

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

Incentive Fee

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

 

   

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

 

   

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

 

   

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

The second part of the incentive fee is a capital gains-based incentive fee that will be determined and payable in arrears as of the end of each fiscal year (or upon termination of the Advisory Agreement, as of the termination date) and equals 20% of our realized capital gains as of the end of the fiscal year. In determining the capital gains-based incentive fee payable to the Adviser, we will calculate the cumulative aggregate realized capital gains and cumulative aggregate realized capital losses since our inception, and the aggregate 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. No capital gains-based incentive fee has been recorded since our inception through September 30, 2012, as cumulative unrealized capital depreciation has exceeded cumulative realized capital gains net of cumulative realized capital losses.

Additionally, in accordance with GAAP, a capital gains-based incentive fee accrual is calculated using the aggregate cumulative realized capital gains and losses and aggregate cumulative unrealized capital depreciation included in the calculation of the capital gains-based incentive fee plus the aggregate cumulative unrealized capital appreciation. If such amount is positive at the end of a period, then GAAP requires us to record a capital gains-based incentive fee equal to 20% of such amount, less the aggregate amount of actual capital gains-based incentive fees paid in all prior years. If such amount is negative, then there is no accrual for such year. GAAP requires that the capital gains-based incentive fee accrual consider the cumulative aggregate unrealized capital appreciation in the calculation, as a capital gains-based incentive fee would be payable if such unrealized capital appreciation were realized. There can be no assurance that such unrealized capital appreciation will be realized in the future. No GAAP accrual for a capital gains-based incentive fee has been recorded since our inception through September 30, 2012.

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

 

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Administration Agreement

We have entered into an administration agreement (the “Administration Agreement”) with Gladstone Administration, LLC (the “Administrator”), an affiliate of the Adviser, whereby we pay separately for administrative services. The Administration Agreement provides for payments equal to our allocable portion of the Administrator’s overhead expenses in performing its obligations under the Administration Agreement, including, but not limited to, rent and the salaries and benefits expenses of our chief financial officer and treasurer, chief compliance officer, internal counsel and their respective staffs. Our allocable portion of administrative expenses is generally derived by multiplying the Administrator’s total allocable expenses by the percentage of our total assets at the beginning of the quarter in comparison to the total assets at the beginning of the quarter of all companies managed by the Adviser under similar agreements. On July 10, 2012, our Board of Directors approved the renewal of the Administration Agreement through August 31, 2013.

Related Party Fees Due

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

 

     As of
September 30,
2012
    As of
March 31,
2012
 

Net base management fee due (from) to Adviser

   $ (156   $ 295   

Loan servicing fee due to Adviser

     234        218   

Incentive fee due to (from) Adviser

     541        (54

Other due (from) to Adviser

     (24     37   
  

 

 

   

 

 

 

Total fees due to Adviser

   $ 595      $ 496   
  

 

 

   

 

 

 

Fee due to Administrator

   $ 189      $ 218   
  

 

 

   

 

 

 

Total related party fees due

   $ 784      $ 714   
  

 

 

   

 

 

 

NOTE 5. BORROWINGS

Line of Credit

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

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

On October 26, 2011, we entered into a fourth amended and restated credit agreement to increase the commitment amount under the Credit Facility to $60.0 million, reduce the interest rate and extend the maturity date. Subject to certain terms and conditions, the Credit Facility may be expanded up to a total of $175.0 million through the addition of other committed lenders to the facility. The Credit Facility matures on October 25, 2014 (the “Maturity Date”), and, if not renewed or extended by the Maturity Date, all principal and interest will be due and payable on or before October 25, 2015 (one year after the Maturity Date). Advances under the Credit Facility will generally bear interest at 30-day LIBOR, plus 3.75% per annum, with an unused fee of 0.50% on undrawn amounts. There are two one-year extension options, to be agreed upon by all parties, which may be exercised, subject to compliance with the covenants set forth in the credit agreement, on or before October 26, 2012 and October 26, 2013, as applicable.

Refer to Note 13, “Subsequent Events,” for a description of the first of the one-year extension options, which was exercised subsequent to September 30, 2012.

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

 

     As of
September 30,
2012
     As of
March 31,
2012
 

Commitment amount

   $ 60,000       $ 60,000   

Borrowings outstanding at cost

     56,000         —     

Availability

     2,900         58,399   

 

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Table of Contents
     For the Three Months Ended
September 30,
    For the Six Months Ended
September 30,
 
     2012     2011     2012     2011  

Weighted average borrowings outstanding

   $ 39,022      $ 6,913      $ 20,011      $ 3,475   

Effective interest rate(A)

     4.4     13.0     5.1     20.2

Commitment (unused) fees incurred

   $ 27      $ 110      $ 102      $ 237   

 

(A) 

Excludes the impact of deferred financing fees.

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

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

The Credit Facility contains covenants that require Business Investment to, among other things, maintain its status as a separate legal entity, prohibit certain significant corporate transactions (such as mergers, consolidations, liquidations or dissolutions) and restrict certain material changes to our credit and collection policies without the lenders’ consent. The Credit Facility also limits payments on distributions to the aggregate net investment income for each of the twelve-month periods ending March 31, 2012, 2013, 2014 and 2015. Business Investment is also subject to certain limitations on the type of loan investments it can apply toward availability credit in the borrowing base, including restrictions on geographic concentrations, sector concentrations, loan size, dividend payout, payment frequency and status, average life and lien property. The Credit Facility further requires Business Investment to comply with other financial and operational covenants, which obligate Business Investment to, among other things, maintain certain financial ratios, including asset and interest coverage and a minimum number of obligors required in the borrowing base of the credit agreement. Additionally, we are subject to a performance guaranty that requires us to maintain (i) a minimum net worth (defined in the Credit Facility to include our Term Preferred Stock) of $155.0 million plus 50% of all equity and subordinated debt raised after October 26, 2011, (ii) “asset coverage” with respect to “senior securities representing indebtedness” of at least 200%, in accordance with Section 18 of the 1940 Act and (iii) our status as a BDC under the 1940 Act and as a RIC under the Code. As of September 30, 2012, and as defined in the performance guaranty of our Credit Facility, we had a minimum net worth of $237.2 million, an asset coverage of 210% and an active status as a BDC and RIC. Our Credit Facility requires a minimum of 12 obligors in the borrowing base, and, as of September 30, 2012, Business Investment had 17 obligors. As of September 30, 2012, we were in compliance with all of the Credit Facility covenants.

Short-Term Loan

Similar to previous quarter ends, to maintain our status as a RIC, we purchased $80.0 million of short-term U.S. Treasury Bills (“T-Bills”) through Jefferies & Company, Inc. (“Jefferies”) on September 25, 2012. As these T-Bills have a maturity of less than three months, we consider them to be cash equivalents and include them in cash and cash equivalents on our accompanying Condensed Consolidated Statement of Assets and Liabilities as of September 30, 2012. The T-Bills were purchased on margin using $8.5 million in cash and the proceeds from a $71.5 million short-term loan from Jefferies with an effective annual interest rate of approximately 1.42%. On October 4, 2012, when the T-Bills matured, we repaid the $71.5 million loan from Jefferies and we received back the $8.5 million margin payment sent to Jefferies to complete the transaction.

Secured Borrowing

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

Fair Value

We elected to apply ASC 825, “Financial Instruments,” specifically for our Credit Facility and short-term loan, which was consistent with the application of ASC 820 to our investments. Generally, we estimate the fair value of our Credit Facility using estimates of value provided by an independent third party and our own assumptions in the absence of observable market data, including estimated remaining life, counterparty credit risk, current market yield and interest rate spreads of similar securities as of the measurement date. Additionally, due to the eight-day duration of the short-term loan, cost was deemed to approximate fair value. At each of September 30 and March 31, 2012, all of our borrowings were valued using Level 3 inputs. The following tables present the short-term loan and

 

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Credit Facility carried at fair value as of September 30 and March 31, 2012, by caption on our accompanying Condensed Consolidated Statements of Assets and Liabilities for Level 3 of the hierarchy established by ASC 820 and a roll-forward of the changes in fair value during the three and six months ended September 30, 2012 and 2011:

 

     Level 3 – Borrowings  
     Total Recurring Fair Value Measurement
Reported in Condensed Consolidated
Statements of Assets and Liabilities
 
     September 30, 2012      March 31, 2012  

Short-Term Loan

   $ 71,525       $ 76,005   

Credit Facility

     57,209         —     
  

 

 

    

 

 

 

Total

   $ 128,734       $ 76,005   
  

 

 

    

 

 

 

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

 

     Short-Term
Loan
    Credit
Facility
    Total  

Three months ended September 30, 2012:

      

Fair value at June 30, 2012

   $ 76,010      $ 31,492      $ 107,502   

Borrowings

     71,525        60,000        131,525   

Repayments

     (76,010     (35,000     (111,010

Net unrealized appreciation(A)

     —          717        717   
  

 

 

   

 

 

   

 

 

 

Fair value at September 30, 2012

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

 

 

   

 

 

   

 

 

 

Six months ended September 30, 2012:

      

Fair value at March 31, 2012

   $ 76,005      $ —        $ 76,005   

Borrowings

     147,535        91,000        238,535   

Repayments

     (152,015     (35,000     (187,015

Net unrealized appreciation(A)

     —          1,209        1,209   
  

 

 

   

 

 

   

 

 

 

Fair value at September 30, 2012

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

 

 

   

 

 

   

 

 

 

 

     Short-Term
Loan
    Credit
Facility
    Total  

Three months ended September 30, 2011:

      

Fair value at June 30, 2011

   $ 40,000      $ —        $ 40,000   

Borrowings

     62,501        21,500        84,001   

Repayments

     (40,000     (500     (40,500

Net unrealized appreciation(A)

     —          405        405   
  

 

 

   

 

 

   

 

 

 

Fair value at September 30, 2011

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

 

 

   

 

 

   

 

 

 

Six months ended September 30, 2011:

      

Fair value at March 31, 2011

   $ 40,000      $ —        $ 40,000   

Borrowings

     102,501        21,500        124,001   

Repayments

     (80,000     (500     (80,500

Net unrealized appreciation(A)

     —          405        405   
  

 

 

   

 

 

   

 

 

 

Fair value at September 30, 2011

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

 

 

   

 

 

   

 

 

 

 

(A) 

Included in net unrealized (depreciation) appreciation on our accompanying Condensed Consolidated Statement of Operations for periods ended September 30, 2012.

The fair value of the collateral under our Credit Facility was approximately $254.4 million and $228.3 million at September 30 and March 31, 2012, respectively. The fair value of the collateral under the short-term loan was approximately $80.0 million and $85.0 million at September 30 and March 31, 2012, respectively.

NOTE 6. INTEREST RATE CAP AGREEMENTS

We have entered into multiple interest rate cap agreements with BB&T that effectively limit the interest rate on a portion of our borrowings under the line of credit pursuant to the terms of our Credit Facility. The agreements provide that the interest rate on a portion of our borrowings is capped at a certain interest rate when 30-day LIBOR is in excess of that certain interest rate. The fair value of the interest rate cap agreements is recorded in other assets on our accompanying Condensed Consolidated Statements of Assets and Liabilities. We record changes in the fair value of the interest rate cap agreements quarterly based on the current market valuations at quarter end as net unrealized appreciation (depreciation) of other on our accompanying Condensed Consolidated Statements of Operations. Generally, we will estimate the fair value of our interest rate caps using estimates of value provided by the

 

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counterparty and our own assumptions in the absence of observable market data, including estimated remaining life, counterparty credit risk, current market yield and interest rate spreads of similar securities as of the measurement date. At both September 30 and March 31, 2012, our interest rate cap agreement(s) were valued using Level 3 inputs. The following table summarizes the key terms of each interest rate cap agreement:

 

Interest

Rate Cap(A)

  Notional
Amount
    LIBOR
Cap
    Effective
Date
  Maturity
Date
  As of September 30,
2012
    As of March 31,
2012
 
          Cost     Fair
Value
    Cost     Fair
Value
 
April 2010   $ 45,000        6.0   May 2011   May 2012   $ —   (B)    $ —        $ 41      $ —     
December 2011     50,000        6.0      May 2012   October 2013     29        1        29        2   

 

(A) 

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

(B) 

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

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

NOTE 7. MANDATORILY REDEEMABLE PREFERRED STOCK

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

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

Our Board of Directors declared the following monthly distributions to preferred stockholders for the six months ended September 30, 2012:

 

Fiscal
Year

  Time Period   Declaration
Date
  Record Date   Payment Date   Distribution per Term
Preferred Share
 
2013   April 1 – 30   April 11, 2012   April 20, 2012   April 30, 2012   $ 0.1484375   
  May 1 – 31   April 11, 2012   May 18, 2012   May 31, 2012     0.1484375   
  June 1 – 30   April 11, 2012   June 20, 2012   June 29, 2012     0.1484375   
  July 1 – 31   July 10, 2012   July 20, 2012   July 31, 2012     0.1484375   
  August 1 – 31   July 10, 2012   August 22, 2012   August 31, 2012     0.1484375   
  September 1 – 30   July 10, 2012   September 19, 2012   September 28, 2012     0.1484375   
         

 

 

 
     

Six months ended September 30, 2012:

  $ 0.8906250   
         

 

 

 

In accordance with ASC 480, “Distinguishing Liabilities from Equity,” mandatorily redeemable financial instruments should be classified as liabilities on the balance sheet and, therefore, the related dividend payments are treated as dividend expense on our accompanying Condensed Consolidated Statements of Operations at the ex-dividend date.

Aggregate Term Preferred Stock distributions declared and paid for the three and six months ended September 30, 2012 were approximately $0.7 million and $1.4 million, respectively. The tax character of distributions paid by us to preferred stockholders is from ordinary income.

 

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NOTE 8. COMMON STOCK

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

Refer to Note 13, “Subsequent Events,” for a description of our common stock offering which occurred subsequent to September 30, 2012.

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

The following table sets forth the computation of basic and diluted net (decrease) increase in net assets resulting from operations per weighted average common share for the three and six months ended September 30, 2012 and 2011:

 

     Three Months Ended
September 30,
     Six Months Ended
September 30,
 
     2012     2011      2012     2011  

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

   $ (353   $ 12,695       $ (3,369   $ 16,883   

Denominator for basic and diluted weighted average common shares

     22,080,133        22,080,133         22,080,133        22,080,133   
  

 

 

   

 

 

    

 

 

   

 

 

 

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

   $ (0.02   $ 0.57       $ (0.15   $ 0.76   
  

 

 

   

 

 

    

 

 

   

 

 

 

NOTE 10. DISTRIBUTIONS TO COMMON STOCKHOLDERS

We are required to pay out as distributions 90% of our ordinary income and short-term capital gains for each taxable year to maintain our status as a RIC under Subtitle A, Chapter 1 of Subchapter M of the Code. The amount to be paid out as a distribution is determined by our Board of Directors each quarter and is based on our estimated taxable income by management. Based on that estimate, three monthly distributions are declared each quarter.

Our Board of Directors declared the following monthly distributions to common stockholders for the six months ended September 30, 2012 and 2011:

 

Fiscal Year

  Declaration Date   Record Date   Payment Date   Distribution
per Common Share
 
2013   April 11, 2012   April 20, 2012   April 30, 2012   $ 0.050   
  April 11, 2012   May 18, 2012   May 31, 2012     0.050   
  April 11, 2012   June 20, 2012   June 29, 2012     0.050   
  July 10, 2012   July 20, 2012   July 31, 2012     0.050   
  July 10, 2012   August 22, 2012   August 31, 2012     0.050   
  July 10, 2012   September 19, 2012   September 28, 2012     0.050   
       

 

 

 
   

Six months ended September 30, 2012:

  $ 0.300   
       

 

 

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

 

 

 
   

Six months ended September 30, 2011:

  $ 0.285   
       

 

 

 

Aggregate common distributions declared quarterly and paid for the six months ended September 30, 2012 and 2011 were approximately $6.6 million and $6.3 million, respectively, which were declared based on estimates of net investment income for the respective fiscal years. For the fiscal year ended March 31, 2012, taxable income available for common distributions exceeded distributions declared and paid, and, in accordance with Section 855(a) of the Code, we elected to treat $0.7 million of the first common distribution paid in fiscal year 2013 as having been paid in the prior year.

 

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NOTE 11. COMMITMENTS AND CONTINGENCIES

At September 30, 2012, we have lines of credit commitments to certain of 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.

In addition to the lines of credit to certain portfolio companies, we have also extended certain guarantees on behalf of some of our portfolio companies. As of September 30, 2012, we have not been required to make any payments on the guarantees discussed below, and we consider the credit risk to be remote and the fair values of the guarantees to be minimal.

 

   

In October 2008, we executed a guarantee of a vehicle finance facility agreement (the “Finance Facility”) between Ford Motor Credit Company (“Ford”) and ASH. The Finance Facility provides ASH with a line of credit of up to $0.5 million for component Ford parts used by ASH to build truck bodies under a separate contract. Ford retains title and ownership of the parts. The guarantee of the Finance Facility will expire upon termination of the separate parts supply contract with Ford or upon replacement of us as guarantor.

 

   

In February 2010, we executed a guarantee of a wholesale financing facility agreement (the “Floor Plan Facility”) between Agricredit Acceptance, LLC (“Agricredit”) and CCE. The Floor Plan Facility provides CCE with financing of up to $2.0 million to bridge the time and cash flow gap between the order and delivery of golf carts to customers. The guarantee was renewed in February 2011 and again in February 2012 and expires in February 2013, unless it is renewed again by us, CCE and Agricredit. In connection with this guarantee and its subsequent renewals, we recorded aggregate premiums of $0.2 million from CCE.

 

   

In April 2010, we executed a guarantee of vendor recourse for up to $2.0 million in individual customer transactions (the “Recourse Facility”) between Wells Fargo Financial Leasing, Inc. and CCE. The Recourse Facility provides CCE with the ability to provide vendor recourse up to a limit of $2.0 million on transactions with long-time customers who lack the financial history to qualify for third-party financing. The terms to maturity of these individual transactions range from October 2014 to October 2016. In connection with this guarantee, we received aggregate premiums of $0.1 million from CCE.

The following table summarizes the dollar balance of unused line of credit commitments and guarantees as of September 30 and March 31, 2012:

 

     As of September 30,      As of March 31,  
     2012      2012  

Unused line of credit commitments

   $ 1,450       $ 1,671   

Guarantees

     3,937         4,748   
  

 

 

    

 

 

 

Total

   $ 5,387       $ 6,419   
  

 

 

    

 

 

 

Escrow Holdbacks

From time to time, we will enter into arrangements relating to exits of certain investments whereby specific amounts of the proceeds are held in escrow to be used to satisfy potential obligations, as stipulated in the sales agreements. We record escrow amounts in restricted cash on our accompanying Condensed Consolidated Statements of Assets and Liabilities. We establish a contingent liability against the escrow amounts if we determine that it is probable and estimable that a portion of the escrow amounts will not be ultimately received at the end of the escrow period. The aggregate contingent liability recorded against the escrow amounts was $0.1 million and $0.3 million as of September 30 and March 31, 2012, respectively, and is included in other liabilities on our accompanying Condensed Consolidated Statements of Assets and Liabilities.

NOTE 12. FINANCIAL HIGHLIGHTS

 

     Three Months  Ended
September 30,
    Six Months Ended
September 30,
 
     2012     2011     2012     2011  

Per Common Share Data

        

Net asset value at beginning of period(A)

   $ 9.10      $ 9.06      $ 9.38      $ 9.00   

Net investment income(B)

     0.16        0.15        0.31        0.31   

Realized gain (loss) on sale of investments and other(B)

     0.03        (0.03     0.03        0.23   

Net unrealized (depreciation) appreciation of investments and other(B)