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EX-31.1 - EX-31.1 - GLADSTONE INVESTMENT CORPORATION\DEd542870dex311.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

 

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

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2013

 

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

COMMISSION FILE NUMBER: 814-00704

 

 

GLADSTONE INVESTMENT CORPORATION

(Exact name of registrant as specified in its charter)

 

 

 

DELAWARE   83-0423116

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

1521 WESTBRANCH DRIVE, SUITE 200

MCLEAN, VIRGINIA 22102

(Address of principal executive office)

(703) 287-5800

(Registrant’s telephone number, including area code)

 

 

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

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

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

 

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

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

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

 

 

 


GLADSTONE INVESTMENT CORPORATION

TABLE OF CONTENTS

 

PART I.

   FINANCIAL INFORMATION:   

Item 1.

   Financial Statements (Unaudited)   
   Condensed Consolidated Statements of Assets and Liabilities as of June 30, 2013 and March 31, 2013      3   
   Condensed Consolidated Statements of Operations for the three months ended June 30, 2013 and 2012      4   
   Condensed Consolidated Statements of Changes in Net Assets for the three months ended June 30, 2013 and 2012      5   
   Condensed Consolidated Statements of Cash Flows for the three months ended June 30, 2013 and 2012      6   
   Condensed Consolidated Schedules of Investments as of June 30, 2013 and March 31, 2013      7   
   Notes to Condensed Consolidated Financial Statements      13   

Item 2.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations      29   
   Overview      29   
   Results of Operations      33   
   Liquidity and Capital Resources      37   

Item 3.

   Quantitative and Qualitative Disclosures About Market Risk      46   

Item 4.

   Controls and Procedures      46   

PART II.

   OTHER INFORMATION:   

Item 1.

   Legal Proceedings      46   

Item 1A.

   Risk Factors      46   

Item 2.

   Unregistered Sales of Equity Securities and Use of Proceeds      46   

Item 3.

   Defaults Upon Senior Securities      47   

Item 4.

   Mine Safety Disclosures      47   

Item 5.

   Other Information      47   

Item 6.

   Exhibits      47   

SIGNATURES

     48   

 

2


GLADSTONE INVESTMENT CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES

(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

(UNAUDITED)

 

     June 30,
2013
    March 31,
2013
 

ASSETS

    

Investments at fair value

    

Control investments (Cost of $289,472 and $263,522, respectively)

   $ 260,479      $ 243,803   

Affiliate investments (Cost of $51,116 and $52,566, respectively)

     36,087        36,659   

Non-Control/Non-Affiliate investments (Cost of $19,084 and $10,333, respectively)

     11,761        6,020   
  

 

 

   

 

 

 

Total investments at fair value (Cost of $359,672 and $326,421, respectively)

     308,327        286,482   

Cash and cash equivalents

     36,498        85,904   

Restricted cash

     626        626   

Interest receivable

     1,669        1,309   

Due from custodian

     1,678        1,677   

Deferred financing costs

     3,131        2,336   

Other assets

     1,018        1,469   
  

 

 

   

 

 

 

TOTAL ASSETS

   $ 352,947      $ 379,803   
  

 

 

   

 

 

 

LIABILITIES

    

Borrowings:

    

Short-term loan at fair value (Cost of $26,009 and $58,016, respectively)

   $ 26,009      $ 58,016   

Line of credit at fair value (Cost of $49,000 and $31,000, respectively)

     49,000        31,854   

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

     5,000        5,000   
  

 

 

   

 

 

 

Total borrowings (Cost of $80,009 and $94,016, respectively)

     80,009        94,870   

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 June 30 and March 31, 2013

     40,000        40,000   

Accounts payable and accrued expenses

     1,219        1,069   

Fees due to Adviser(A)

     447        2,067   

Fee due to Administrator(A)

     243        221   

Other liabilities

     557        613   
  

 

 

   

 

 

 

TOTAL LIABILITIES

     122,475        138,840   
  

 

 

   

 

 

 

Commitments and contingencies(B)

    

NET ASSETS

   $ 230,472      $ 240,963   
  

 

 

   

 

 

 

ANALYSIS OF NET ASSETS

    

Common stock, $0.001 par value per share, 100,000,000 shares authorized and 26,475,958 shares issued and outstanding at June 30 and March 31, 2013, respectively

   $ 26      $ 26   

Capital in excess of par value

     287,713        287,713   

Cumulative net unrealized depreciation of investments

     (51,345     (39,939

Cumulative net unrealized depreciation of other

     (29     (883

Net investment income in excess of distributions

     2,752        2,691   

Accumulated net realized loss

     (8,645     (8,645
  

 

 

   

 

 

 

TOTAL NET ASSETS

   $ 230,472      $ 240,963   
  

 

 

   

 

 

 

NET ASSET VALUE PER COMMON SHARE AT END OF PERIOD

   $ 8.70      $ 9.10   
  

 

 

   

 

 

 

 

(A) 

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

(B) 

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

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

 

3


GLADSTONE INVESTMENT CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

(UNAUDITED)

 

     Three Months Ended June 30,  
     2013     2012  

INVESTMENT INCOME

    

Interest income

    

Control investments

   $ 5,637      $ 3,430   

Affiliate investments

     1,108        1,771   

Non-Control/Non-Affiliate investments

     436        308   

Cash and cash equivalents

     1        2   
  

 

 

   

 

 

 

Total interest income

     7,182        5,511   

Other income

    

Control investments

     216        394   
  

 

 

   

 

 

 

Total investment income

     7,398        5,905   
  

 

 

   

 

 

 

EXPENSES

    

Base management fee(A)

     1,549        1,191   

Incentive fee(A)

     165        —     

Administration fee(A)

     243        183   

Interest expense on borrowings

     477        92   

Dividends on mandatorily redeemable preferred stock

     713        713   

Amortization of deferred financing fees

     244        200   

Professional fees

     120        194   

Other general and administrative expenses

     365        278   
  

 

 

   

 

 

 

Expenses before credits from Adviser

     3,876        2,851   

Credits to fees(A)

     (511     (184
  

 

 

   

 

 

 

Total expenses net of credits to fees

     3,365        2,667   
  

 

 

   

 

 

 

NET INVESTMENT INCOME

   $ 4,033      $ 3,238   
  

 

 

   

 

 

 

REALIZED AND UNREALIZED LOSS

    

Net realized loss:

    

Control investments

     —          (46

Other

     —          (41
  

 

 

   

 

 

 

Total net realized loss

     —          (87

Net unrealized (depreciation) appreciation:

    

Control investments

     (9,274     2,354   

Affiliate investments

     878        (7,712

Non-Control/Non-Affiliate investments

     (3,010     (359

Other

     854        (451
  

 

 

   

 

 

 

Total net unrealized (depreciation) appreciation

     (10,552     (6,168
  

 

 

   

 

 

 

Net realized and unrealized loss

     (10,552     (6,255
  

 

 

   

 

 

 

NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS

   $ (6,519   $ (3,017
  

 

 

   

 

 

 

NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS PER COMMON SHARE

    

Basic and diluted

   $ (0.25   $ (0.13
  

 

 

   

 

 

 

WEIGHTED AVERAGE SHARES OF COMMON STOCK OUTSTANDING:

    

Basic and diluted

     26,475,958        22,080,133   

 

(A) 

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

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

 

4


GLADSTONE INVESTMENT CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS

(IN THOUSANDS)

(UNAUDITED)

 

     Three Months Ended June 30,  
     2013     2012  

OPERATIONS:

    

Net investment income

   $ 4,033      $ 3,238   

Net realized loss on investments

     —          (46

Net realized loss on other

     —          (41

Net unrealized depreciation of investments

     (11,406     (5,717

Net unrealized appreciation (depreciation) of other

     854        (451
  

 

 

   

 

 

 

Net decrease in net assets from operations

     (6,519     (3,017

DISTRIBUTIONS TO COMMON STOCKHOLDERS:

     (3,972     (3,312
  

 

 

   

 

 

 

Total decrease in net assets

     (10,491     (6,329

Net assets at beginning of period

     240,963        207,216   
  

 

 

   

 

 

 

Net assets at end of period

   $ 230,472      $ 200,887   
  

 

 

   

 

 

 

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

 

5


GLADSTONE INVESTMENT CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN THOUSANDS)

(UNAUDITED)

 

     Three Months Ended June 30,  
     2013     2012  

CASH FLOWS FROM OPERATING ACTIVITIES

    

Net decrease in net assets resulting from operations

   $ (6,519   $ (3,017

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

    

Purchase of investments

     (35,590     (12,765

Principal repayments of investments

     2,340        2,930   

Proceeds from the sale of investments

     —          (46

Increase in investment balance due to paid in kind interest

     (1     —     

Net realized gain on investments

     —          46   

Net realized loss on other

     —          41   

Net unrealized depreciation of investments

     11,406        5,717   

Net unrealized (depreciation) appreciation of other

     (854     451   

Amortization of deferred financing costs

     244        200   

Decrease in restricted cash

            616   

(Increase) decrease in interest receivable

     (360     269   

Increase in due from custodian

     (1     (36

Decrease (increase) in other assets

     451        (106

Increase in accounts payable and accrued expenses

     89        229   

Decrease in fees due to Adviser(A)

     (1,620     (143

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

     22        (35

Decrease in other liabilities

     (56     (52
  

 

 

   

 

 

 

Net cash used in operating activities

     (30,449     (5,701

CASH FLOWS FROM FINANCING ACTIVITIES

    

Proceeds from short-term loans

     26,009        76,010   

Repayments on short-term loans

     (58,016     (76,005

Proceeds from Credit Facility

     28,500        31,000   

Repayments on Credit Facility

     (10,500     —     

Deferred financing costs

     (978     (107

Distributions paid to common stockholders

     (3,972     (3,312
  

 

 

   

 

 

 

Net cash (used in) provided by financing activities

     (18,957     27,586   
  

 

 

   

 

 

 

NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS

     (49,406     21,885   

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD

     85,904        91,546   
  

 

 

   

 

 

 

CASH AND CASH EQUIVALENTS, END OF PERIOD

   $ 36,498      $ 113,431   
  

 

 

   

 

 

 

 

(A)

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

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

 

6


GLADSTONE INVESTMENT CORPORATION

CONDENSED CONSOLIDATED SCHEDULE OF INVESTMENTS

JUNE 30, 2013

(DOLLAR AMOUNTS IN THOUSANDS)

(UNAUDITED)

 

Company(A)

  

Industry

  

Investment(B)

   Principal      Cost      Fair Value  

CONTROL INVESTMENTS:

              

Acme Cryogenics, Inc.

  

Manufacturing — manifolds and pipes for industrial gasses

  

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

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

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

        6,984         11,539   
     

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

        1,045         867   
     

Common Stock Warrants (465,639 shares)(C)(F)

        25         —     
           

 

 

    

 

 

 
              22,554         26,906   

ASH Holdings Corp.

  

Retail and Service — school buses and parts

  

Revolving Credit Facility, $288 available

(3.0%, Due 3/2015)(G)

     7,912         7,856         —     
     

Senior Subordinated Term Debt (2.0%, Due 3/2015)(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         —     
     

Guaranty ($500)

        
           

 

 

    

 

 

 
              16,410         —     

Country Club Enterprises, LLC

  

Service — golf cart distribution

  

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

     4,000         4,000         4,000   
     

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

        7,725         3,486   
      Guaranty ($2,000)         
      Guaranty ($1,269)         
           

 

 

    

 

 

 
              11,725         7,486   

Danco Acquisition Corp.

  

Manufacturing — machining and sheet metal work

  

Revolving Credit Facility, $282 available (4.0%, Due 8/2015)(D)

     2,868         2,868         674   
     

Senior Term Debt (4.0%, Due 8/2015)(D)

     2,575         2,575         605   
     

Senior Term Debt (4.0%, Due 8/2015)(D)

     8,795         8,795         2,067   
     

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

     1,150         1,150         270   
     

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

        2,500         —     
     

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

        3         —     
           

 

 

    

 

 

 
              17,891         3,616   

Drew Foam Company, Inc.

  

Manufacturing — molds and fabricates expanded polystyrene

  

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

     10,913         10,913         10,913   
     

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

        3,375         3,020   
     

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

        63         —     
           

 

 

    

 

 

 
              14,351         13,933   

Frontier Packaging, Inc.

  

Manufacturing — packaging products

  

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

     12,500         12,500         12,500   
     

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

        1,373         1,436   
     

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

        153         311   
           

 

 

    

 

 

 
              14,026         14,247   

Galaxy Tool Holding Corp.

  

Manufacturing — aerospace and plastics

  

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

     15,520         15,520         15,520   
     

Preferred Stock (5,373,186 shares)(C)(F)

        11,464         8,615   
     

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

        48         —     
           

 

 

    

 

 

 
              27,032         24,135   

Ginsey Home Solutions, Inc.

  

Retail and Service — children and home products

  

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

     13,050         13,050         13,050   
     

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

        9,393         5,081   
     

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

        8         —     
           

 

 

    

 

 

 
              22,451         18,131   

Jackrabbit, Inc.

  

Manufacturing — agricultural machinery

  

Revolving Credit Facility, $1,500 available (13.5% , Due 4/2014)(H)

     1,500         1,500         1,500   
     

Senior Term Debt (13.5%, Due 4/2018)(H)

     11,000         11,000         11,000   
     

Preferred Stock (3,556 shares)(C)(F)(H)

        3,556         3,556   
     

Common Stock (636 shares)(C)(F)(H)

        94         94   
           

 

 

    

 

 

 
              16,150         16,150   

Mathey Investments, Inc.

  

Manufacturing — pipe-cutting and pipe-fitting equipment

  

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         5,681   
           

 

 

    

 

 

 
              9,379         14,283   

Mitchell Rubber Products, Inc.

  

Manufacturing — rubber compounds

  

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

     13,560         13,560         13,577   
     

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

        2,790         2,228   
     

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

        28         —     
           

 

 

    

 

 

 
              16,378         15,805   

 

7


GLADSTONE INVESTMENT CORPORATION

CONDENSED CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

JUNE 30, 2013

(DOLLAR AMOUNTS IN THOUSANDS)

(UNAUDITED)

 

Company(A)

  

Industry

  

Investment(B)

   Principal      Cost      Fair
Value
 

Precision Southeast, Inc.

  

Manufacturing — injection molding and plastics

  

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

   $ 7,775       $ 7,775       $ 7,775   
     

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

        1,909         2,013   
     

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

        91         —     
           

 

 

    

 

 

 
              9,775         9,788   

SBS, Industries, LLC

  

Manufacturing — specialty fasteners and threaded screw products

  

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

     11,355         11,355         11,355   
     

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

        1,994         2,296   
     

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

        221         4,074   
           

 

 

    

 

 

 
              13,570         17,725   

SOG Specialty K&T, LLC

  

Manufacturing — specialty knives and tools

  

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

     6,200         6,200         6,200   
     

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

     12,199         12,199         12,199   
     

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

        9,749         8,500   
           

 

 

    

 

 

 
              28,148         26,899   

Star Seed, Inc.

  

Farming and Agriculture

  

Senior Term Debt (12.5%, Due 4/2018)(H)

     7,500         7,500         7,500   
     

Preferred Stock (1,499 shares)(C)(F)(H)

        1,499         1,499   
     

Common Stock (600 shares)(C)(F)(H)

        1         1   
           

 

 

    

 

 

 
              9,000         9,000   

Tread Corp.

  

Manufacturing — storage and transport equipment

  

Revolving Credit Facility, $714 available (12.5%, Due 6/2014)(G)

     2,535         2,535         —     
     

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

     5,000         5,000         —     
     

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

     2,750         2,750         —     
     

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

     1,000         1,000         —     
     

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

     510         510         —     
     

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

        3,333         —     
     

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

        501         —     
     

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

        3         —     
           

 

 

    

 

 

 
              15,632         —     

Venyu Solutions, Inc.

  

Service — online servicing suite

  

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         23,375   
           

 

 

    

 

 

 
              25,000         42,375   
           

 

 

    

 

 

 

Total Control Investments (represents 84.5% of total investments at fair value)

      $ 289,472       $ 260,479   
           

 

 

    

 

 

 

AFFILIATE INVESTMENTS:

           

Cavert II Holding Corp.

   Manufacturing — bailing wire   

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

     2,000         2,000         2,045   
     

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

     4,671         4,671         4,776   
     

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

        1,844         2,853   
           

 

 

    

 

 

 
              8,515         9,674   

Channel Technologies Group, LLC

  

Manufacturing — acoustic products

  

Senior Term Debt (9.0%, Due 12/2014)(D)

     5,596         5,596         5,540   
     

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

     10,750         10,750         10,643   
     

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

        1,599         197   
     

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

        —           —     
           

 

 

    

 

 

 
              17,945         16,380   

Noble Logistics, Inc.

  

Service — aftermarket auto parts delivery

  

Revolving Credit Facility, $0 available

(10.5%, Due 1/2015)(D)

     800         800         336   
     

Senior Term Debt (11.0%, Due 1/2015)(D)

     7,227         7,227         3,035   
     

Senior Term Debt (10.5%, Due 1/2015)(D)

     3,650         3,650         1,533   
     

Senior Term Debt (10.5%, Due 1/2015)(D)(E)

     3,650         3,650         1,533   
     

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

        1,750         —     
     

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

        1,682         —     
           

 

 

    

 

 

 
              18,759         6,437   

 

8


GLADSTONE INVESTMENT CORPORATION

CONDENSED CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

JUNE 30, 2013

(DOLLAR AMOUNTS IN THOUSANDS)

(UNAUDITED)

 

Company(A)

  

Industry

  

Investment(B)

   Principal      Cost      Fair
Value
 

Packerland Whey Products, Inc.

  

Manufacturing — dairy, meat, and protein supplements

  

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

      $ 2,479       $ 309   
     

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

        21         —     
           

 

 

    

 

 

 
              2,500         309   

Quench Holdings Corp.

  

Service — sales, installation and service of water coolers

  

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

        2,950         3,287   
      Common Stock (35,242 shares)(C)(F)         447         —     
           

 

 

    

 

 

 
              3,397         3,287   
           

 

 

    

 

 

 

Total Affiliate Investments (represents 11.7% of total investments at fair value)

      $ 51,116       $ 36,087   
           

 

 

    

 

 

 

NON-CONTROL/NON-AFFILIATE INVESTMENTS:

        

B-Dry, LLC

  

Service — basement waterproofer

  

Revolving Credit Facility, $0 available (6.5%, Due 5/2014)(D)

   $ 750       $ 750       $ 225   
     

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

     6,433         6,443         1,933   
     

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

     2,840         2,840         852   
     

Common Stock Warrants (85 shares)(C)(F)

        300         —     
           

 

 

    

 

 

 
              10,333         3,010   

Funko, LLC

  

Personal and Non-Durable Consumer Products

  

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

     7,501         7,501         7,501   
     

Preferred Stock (1,250 shares)(C)(F)(H)

        1,250         1,250   
           

 

 

    

 

 

 
              8,751         8,751   

Total Non-Control/Non-Affiliate Investments (represents 3.8% of total investments at fair value)

  

   $ 19,084       $ 11,761   
           

 

 

    

 

 

 

TOTAL INVESTMENTS

            $ 359,672       $ 308,327   
           

 

 

    

 

 

 

 

(A) 

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

(B) 

Percentages represent the weighted average interest rates in effect as of June 30, 2013, and due date represents the contractual maturity date.

(C) 

Security is non-income producing.

(D) 

Fair value based primarily on opinions of value submitted by Standard & Poor’s Securities Evaluations, Inc. as of June 30, 2013.

(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 and 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 June 30, 2013, best represents fair value as of June 30, 2013.

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

 

9


GLADSTONE INVESTMENT CORPORATION

CONDENSED CONSOLIDATED SCHEDULE OF INVESTMENTS

MARCH 31, 2013

(DOLLAR AMOUNTS IN THOUSANDS)

 

Company(A)

  

Industry

  

Investment(B)

   Principal      Cost      Fair Value  

CONTROL INVESTMENTS:

              

Acme Cryogenics, Inc.

  

Manufacturing — manifolds and pipes for industrial gasses

  

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

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

Preferred Stock (898,814 shares)(F)

        6,984         11,292   
     

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

        1,045         1,179   
     

Common Stock Warrants (465,639 shares)(C)(F)

        25         369   
           

 

 

    

 

 

 
              22,554         27,340   

ASH Holdings Corp.

  

Retail and Service — school buses and parts

  

Revolving Credit Facility, $288 available

(3.0%, Due 3/2015)(G)

     7,912         7,856         —     
     

Senior Subordinated Term Debt (2.0%, Due 3/2015)(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         —     
      Guaranty ($500)         
           

 

 

    

 

 

 
              16,410         —     

Country Club Enterprises, LLC

   Service — golf cart distribution   

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

     4,000         4,000         4,000   
     

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

        7,725         3,467   
      Guaranty ($2,000)         
      Guaranty ($1,370)         
           

 

 

    

 

 

 
              11,725         7,467   

Danco Acquisition Corp.

  

Manufacturing — machining and sheet metal work

  

Revolving Credit Facility, $282 available (4.0%, Due 8/2015)(D)

     2,868         2,868         717   
     

Senior Term Debt (4.0%, Due 8/2015)(D)

     2,575         2,575         644   
     

Senior Term Debt (4.0%, Due 8/2015)(D)

     8,795         8,795         2,199   
     

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

     1,150         1,150         287   
     

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

        2,500         —     
     

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

        3         —     
           

 

 

    

 

 

 
              17,891         3,847   

Drew Foam Company, Inc.

  

Manufacturing — molds and fabricates expanded polystyrene

  

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

     10,913         10,913         10,913   
     

Preferred Stock (34,045 shares)(F)

        3,375         3,511   
     

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

        63         676   
           

 

 

    

 

 

 
              14,351         15,100   

Frontier Packaging, Inc.

  

Manufacturing — packaging products

  

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

     12,500         12,500         12,500   
     

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

        1,373         653   
     

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

        153         —     
           

 

 

    

 

 

 
              14,026         13,153   

Galaxy Tool Holding Corp.

  

Manufacturing — aerospace and service of water coolers plastics

  

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

     15,520         15,520         15,520   
     

Preferred Stock (5,373,186 shares)(F)

        11,464         5,356   
     

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

        48         —     
           

 

 

    

 

 

 
              27,032         20,876   

Ginsey Home Solutions, Inc.

  

Retail and Service — children and home products

  

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

     13,050         13,050         13,050   
     

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

        9,393         8,783   
     

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

        8         —     
           

 

 

    

 

 

 
              22,451         21,833   

Mathey Investments, Inc.

  

Manufacturing — pipe-cutting and pipe-fitting equipment

  

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         5,817   
           

 

 

    

 

 

 
              9,379         14,419   

Mitchell Rubber Products, Inc.

  

Manufacturing — rubber compounds

  

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

     13,560         13,560         13,679   
      Preferred Stock (27,900 shares)(C)(F)         2,790         3,051   
      Common Stock (27,900 shares)(C)(F)         28         —     
           

 

 

    

 

 

 
              16,378         16,730   

Precision Southeast, Inc.

  

Manufacturing — injection molding and plastics

  

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

     7,775         7,775         7,775   
     

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

        1,909         2,273   
     

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

        91         955   
           

 

 

    

 

 

 
              9,775         11,003   

 

10


GLADSTONE INVESTMENT CORPORATION

CONDENSED CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

MARCH 31, 2013

(DOLLAR AMOUNTS IN THOUSANDS)

 

Company(A)

  

Industry

  

Investment(B)

   Principal      Cost      Fair
Value
 

SBS, Industries, LLC

  

Manufacturing — specialty fasteners and threaded screw products

  

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

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

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

        1,994         2,253   
     

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

        221         4,635   
           

 

 

    

 

 

 
              13,570         18,243   

SOG Specialty K&T, LLC

  

Manufacturing — specialty knives and tools

  

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

     6,200         6,200         6,200   
     

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

     12,199         12,199         12,199   
     

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

        9,749         11,423   
           

 

 

    

 

 

 
              28,148         29,822   

Tread Corp.

  

Manufacturing — storage and transport equipment

  

Revolving Credit Facility, $1,014 available (12.5%, Due 6/2013)(G)

     1,736         1,736         —     
     

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

     5,000         5,000         —     
     

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

     2,750         2,750         —     
     

Senior Subordinated Term Debt (12.5%, Due 5/2015)(G)

     1,000         1,000         —     
     

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

     510         510         —     
     

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

        3,333         —     
     

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

        501         —     
     

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

        3         —     
           

 

 

    

 

 

 
              14,833         —     

Venyu Solutions, Inc.

  

Service — online servicing suite

  

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         24,970   
           

 

 

    

 

 

 
              25,000         43,970   
           

 

 

    

 

 

 

Total Control Investments (represents 85.1% of total investments at fair value)

      $ 263,522       $ 243,803   
           

 

 

    

 

 

 

 

11


GLADSTONE INVESTMENT CORPORATION

CONDENSED CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

MARCH 31, 2013

(DOLLAR AMOUNTS IN THOUSANDS)

 

Company(A)

  

Industry

  

Investment(B)

   Principal      Cost      Fair
Value
 

AFFILIATE INVESTMENTS:

           

Cavert II Holding Corp.

  

Manufacturing — bailing wire

  

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

   $ 2,200       $ 2,200       $ 2,258   
     

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

     4,671         4,671         4,805   
     

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

        1,844         2,803   
           

 

 

    

 

 

 
              8,715         9,866   

Channel Technologies Group, LLC

  

Manufacturing — acoustic products

  

Revolving Credit Facility, $0 available

(7.0%, Due 5/2013)(D)

     1,250         1,250         1,248   
     

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

     5,596         5,596         5,589   
     

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

     10,750         10,750         10,737   
     

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

        1,599         275   
     

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

        —           —     
           

 

 

    

 

 

 
              19,195         17,849   

Noble Logistics, Inc.

  

Service — aftermarket auto parts delivery

  

Revolving Credit Facility, $0 available

(10.5%, Due 1/2015)(D)

     800         800         360   
     

Senior Term Debt (11.0%, Due 1/2015)(D)

     7,227         7,227         3,252   
     

Senior Term Debt (10.5%, Due 1/2015)(D)

     3,650         3,650         1,643   
     

Senior Term Debt (10.5%, Due 1/2015)(D)(E)

     3,650         3,650         1,643   
     

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

        1,750         —     
     

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

        1,682         —     
           

 

 

    

 

 

 
              18,759         6,898   

Packerland Whey Products, Inc.

  

Manufacturing — dairy, meat, and protein supplements

  

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

        2,479         367   
     

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

        21         —     
           

 

 

    

 

 

 
              2,500         367   

Quench Holdings Corp.

  

Service — sales, installation and service of water coolers

  

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

        2,950         1,679   
     

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

        447         —     
           

 

 

    

 

 

 
              3,397         1,679   
           

 

 

    

 

 

 

Total Affiliate Investments (represents 12.8% of total investments at fair value)

      $ 52,566       $ 36,659   
           

 

 

    

 

 

 

NON-CONTROL/NON-AFFILIATE INVESTMENTS:

        

B-Dry, LLC

  

Service — basement waterproofer

  

Revolving Credit Facility, $0 available (6.5%, Due 5/2014)(D)

   $ 750       $ 750       $ 450   
     

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

     6,433         6,443         3,866   
     

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

     2,840         2,840         1,704   
     

Common Stock Warrants (85 shares)(C)(F)

        300         —     
           

 

 

    

 

 

 
              10,333         6,020   
           

 

 

    

 

 

 

Total Non-Control/Non-Affiliate Investments (represents 2.1% of total investments at fair value)

      $ 10,333       $ 6,020   
           

 

 

    

 

 

 

TOTAL INVESTMENTS(H)

            $ 326,421       $ 286,482   
           

 

 

    

 

 

 

 

(A) 

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

(B) 

Percentages represent the weighted average interest rates in effect as of March 31, 2013, and due date represents the contractual maturity date.

(C) 

Security is non-income producing.

(D) 

Fair value based primarily on opinions of value submitted by Standard & Poor’s Securities Evaluations, Inc. as of March 31, 2013.

(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 and 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) 

Aggregate gross unrealized depreciation for federal income tax purposes is $78,959; aggregate gross unrealized appreciation for federal income tax purposes is $38,650. Net unrealized depreciation is $40,309 based on a tax cost of $326,792.

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

 

12


GLADSTONE INVESTMENT CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2013

(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT 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 an externally advised, closed-end, non-diversified management investment company that has elected to be treated as a business development company (“BDC”) under the Investment Company Act of 1940, as amended (the “1940 Act”). In addition, we have elected to be treated for tax purposes as a regulated investment company (“RIC”) under the Internal Revenue Code of 1986, as amended (the “Code”). We were established for the purpose of investing in debt and equity securities of established private businesses in the United States (“U.S.”). Debt investments primarily come in the form of three types of loans: senior term loans, senior subordinated loans and junior subordinated debt. Equity investments primarily take the form of preferred or common equity (or warrants or options to acquire the foregoing), often in connection with buyouts and other recapitalizations. To a much lesser extent, we also invest in senior and subordinated syndicated loans. Our investment objectives are (a) to achieve and grow current income by investing in debt securities of established businesses that we believe will provide stable earnings and cash flow to pay expenses, make principal and interest payments on our outstanding indebtedness and make distributions to stockholders that grow over time and (b) to provide our stockholders with long-term capital appreciation in the value of our assets by investing in equity securities of established businesses that we believe can grow over time to permit us to sell our equity investments for capital gains. We aim to maintain a portfolio consisting of approximately 80% debt investments and 20% equity investments, at cost.

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

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

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Unaudited Interim Financial Statements and Basis of Presentation

We prepare our interim financial statements in accordance with accounting principles generally accepted in the U.S. (“GAAP”) for interim financial information and pursuant to the requirements for reporting on Form 10-Q and Articles 6 and 10 of Regulation S-X. Accordingly, we have omitted certain disclosures accompanying annual financial statements prepared in accordance with GAAP. The accompanying condensed consolidated financial statements include our accounts and those of our wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated. Under Article 6 of Regulation S-X, and the authoritative accounting guidance provided by the American Institute of Certified Public Accountants Audit and Accounting Guide for Investment Companies, we are not permitted to consolidate any portfolio company investments, including those in which we have a controlling interest. In our opinion, all adjustments, consisting solely of normal recurring accruals, necessary for the fair statement of financial statements for the interim periods have been included. The results of operations for the three months ended June 30, 2013, 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, 2013, as filed with the SEC on May 14, 2013.

Our fiscal year-end Condensed Consolidated Statement of Assets and Liabilities presented in this Form 10-Q was derived from audited financial statements, but does not include all disclosures required by GAAP.

Investment Valuation Policy

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

 

13


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

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

Publicly-traded securities: The Adviser determines the value of publicly-traded securities based on the closing price for the security on the exchange or securities market on which it is listed and primarily traded on the valuation date. To the extent that we own restricted securities that are not freely tradable, but for which a public market otherwise exists, the Adviser will use the market value of that security, adjusted for any decrease in value resulting from the restrictive feature. As of June 30 and March 31, 2013, we did not have any investments in publicly traded securities.

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

In the event these limited markets become illiquid such that market prices are no longer readily available, the Adviser will value our syndicated loans using alternative methods, such as estimated net present values of the future cash flows, or discounted cash flows (“DCF”). The use of a DCF methodology follows that prescribed by the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 820, “Fair Value Measurements and Disclosures,” which provides guidance on the use of a reporting entity’s own assumptions about future cash flows and risk-adjusted discount rates when relevant, observable inputs, such as quotes in active markets, are not available. When relevant, observable market data does not exist, an alternative outlined in ASC 820 is the valuation of investments based on DCF. For the purposes of using DCF to provide fair value estimates, the Adviser considers multiple inputs, such as a risk-adjusted discount rate that incorporates adjustments that market participants would make, both for nonperformance and liquidity risks. As such, the Adviser develops a modified discount rate approach that incorporates risk premiums including, among other things, increased probability of default, higher loss given default or increased liquidity risk. The DCF valuations applied to the syndicated loans provide an estimate of what the Adviser believes a market participant would pay to purchase a syndicated loan in an active market, thereby establishing a fair value. The Adviser applies the DCF methodology in illiquid markets until quoted prices are available or are deemed reliable based on trading activity. As of June 30 and March 31, 2013, we had no securities for which a limited market exits.

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

 

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

 

(B)

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

 

14


  the liquidity waterfall approach to all of our investments in an issuer, the Adviser first calculates the TEV of the issuer by incorporating some or all of the following factors:

 

   

the issuer’s ability to make payments;

 

   

the earnings of the issuer;

 

   

recent sales to third parties of similar securities;

 

   

the comparison to publicly-traded securities; and

 

   

DCF or other pertinent factors.

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

 

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

 

(D) Portfolio investments comprised of non-publicly traded, non-control equity securities of other funds: The Adviser generally values any uninvested capital of the non-control fund at par value and values any invested capital at the value provided by the non-control fund. As of June 30 and March 31, 2013, we had no non-control equity securities of other funds.

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

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

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, the interest income is deemed to be collectible. As of June 30, 2013, loans to two portfolio companies, ASH Holdings Corp. (“ASH”) and Tread Corp. (“Tread”) were on non-accrual. These non-accrual loans had an aggregate cost basis of $25.7 million, or 9.7% of the cost basis of debt investments in our portfolio, and an aggregate fair value of $0. As of March 31, 2013, ASH and Tread were also on non-accrual and had an aggregate cost basis of $24.9 million, or 10.4% of the cost basis of debt investments in our portfolio, and an aggregate fair value of $0.

 

15


During the three months ended June 30, 2013, we recorded PIK income of $10. 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.

Other Income Recognition

We accrue dividend income on preferred and common equity securities to the extent that such amounts are expected to be collected and if we have the option to collect such amounts in cash or other consideration. We did not record any dividend income during the three months ended June 30, 2013 and 2012.

We generally record success fees upon receipt of cash. Success fees are contractually due upon a change of control in a portfolio company. We recorded $0.2 million and $0.4 million of success fees during the three months ended June 30, 2013 and 2012, respectively, representing prepayments received from Mathey Investments, Inc. (“Mathey”).

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

Recent Accounting Pronouncements

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

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

As of June 30 and March 31, 2013, all of our investments were valued using Level 3 inputs. 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 June 30, 2013 and 2012, there were no transfers in or out of Level 1, 2 and 3.

The following table presents the financial assets carried at fair value as of June 30 and March 31, 2013, 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:

 

16


     June 30, 2013      March 31, 2013  
     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

   $ —         $ 93,160       $ 93,160       $ —         $ 73,391       $ 73,391   

Senior subordinated debt

     —           79,647         79,647         —           79,748         79,748   

Preferred equity

     —           76,645         76,645         —           77,032         77,032   

Common equity/equivalents

     —           11,027         11,027         —           13,632         13,632   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Control Investments

     —           260,479         260,479         —           243,803         243,803   

Affiliate Investments

                 

Senior debt

     —           22,620         22,620         —           24,471         24,471   

Senior subordinated debt

     —           6,821         6,821         —           7,063         7,063   

Preferred equity

     —           6,646         6,646         —           5,125         5,125   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Affiliate Investments

     —           36,087         36,087         —           36,659         36,659   

Non-Control/Non-Affiliate Investments

                 

Senior debt

     —           3,010         3,010         —           6,020         6,020   

Senior subordinated debt

     —           7,501         7,501         —           —           —     

Preferred equity

     —           1,250         1,250         —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Non-Control/Non-Affiliate Investments

     —           11,761         11,761         —           6,020         6,020   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Investments at fair value

   $ —         $ 308,327       $ 308,327       $ —         $ 286,482       $ 286,482   

Cash Equivalents

     30,000         —           30,000         65,000         —           65,000   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Investments and Cash Equivalents

   $ 30,000       $ 308,327       $ 338,327       $ 65,000       $ 286,482       $ 351,482   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

In accordance with ASU 2011-04, the following table provides quantitative information about our Level 3 fair value measurements of our investments as of June 30 and March 31, 2013. In addition to the techniques and inputs noted in the table below, according to our valuation policy, the Adviser may also use other valuation techniques and methodologies when determining our fair value measurements. The below table is not intended to be all-inclusive, but rather provides information on the significant Level 3 inputs as they relate to our fair value measurements. The weighted average calculations in the table below are based on the principal balances for all debt-related calculations and on the cost basis for all equity-related calculations for the particular input.

 

     Quantitative Information about Level 3 Fair Value Measurements
     Fair Value
as of June
30, 2013
   Fair Value
as  March
31, 2013
    

Valuation

Technique/

Methodology

  

Unobservable
Input

   Range /
Weighted
Average as
June

30, 2013
  Range / Weighted
Average as March

31, 2013

Senior debt

   $118,790    $ 103,882       TEV    EBITDA multiples(B)    3.7x – 7.0x /5.2x   4.6x – 7.3x /5.6x
            EBITDA(B)    ($233) – $5,912/

$3,644

  ($997) –$6,640/$3,752
         SPSE(A)    EBITDA(B)    $335 - $3,249 /
$1,370
  $29 -$3,225 /$1,248
            Risk Ratings(C)    3.7–7.9/4.8   3.7 – 6.9/5.1

Senior subordinated debt

   93,969      86,811       TEV    EBITDA multiples(B)    4.3x – 9.7x /6.4x   4.5x – 9.7x / 6.5x
            EBITDA(B)    ($2,739) – $8,238/

$4,442

  ($2,866) – $8,695/$4,400
         SPSE(A)    EBITDA(B)    $5,231 - $6,543
/ $5,878
  $5,169 - $6,026 /
$5, 738
            Risk Ratings(C)    4.9 – 6.2/5.4   4.1 - 6.2 / 4.8

Preferred equity

   84,541      82,157       TEV    EBITDA multiples(B)    3.7x – 9.7x /5.6x   4.2x – 9.7x / 5.9x
            EBITDA(B)    ($2,739) -$8,238 /
$4,347
  ($2,866) - $8,695 /
$4,344

Common equity/equivalents

   11,027      13,632       TEV    EBITDA multiples(B)    3.6x – 7.5x /5.9x   3.7x – 7.8x /6.2x
            EBITDA(B)    ($2,739) -$6,655 /
$2,064
  ($2,866) -$6,026 /
$1,959
  

 

  

 

 

            

Total

   $308,327    $ 286,482      
  

 

  

 

 

            

 

17


(A) 

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

(B) 

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

(C) 

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

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

Changes in Level 3 Fair Value Measurements of Investments

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

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

 

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

Three months ended June 30, 2013:

          

Fair value as of March 31, 2013

   $ 103,882      $ 86,811      $ 82,157      $ 13,632      $ 286,482   

Total (losses) gains:

          

Net unrealized (depreciation) appreciation(B)

     (3,842     (943     (3,922     (2,699     (11,406

New investments, repayments and settlements(C):

          

Issuances / Originations

     20,690        8,501        6,306        94        35,591   

Settlements / Repayments

     (1,940     (400     —          —          (2,340
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Fair value as of June 30, 2013

   $ 118,790      $ 93,969      $ 84,541      $ 11,027      $ 308,327   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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

Three months ended June 30, 2012:

          

Fair value as of March 31, 2012

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

Total (losses) gains:

          

Net realized losses(A)(D)

     —          —          —          (46     (46

Net unrealized (depreciation) appreciation(B)

     (4,990     2,587        (4,956     1,642        (5,717

New investments, repayments and settlements(C):

          

Issuances / Originations

     950        9,315        2,479        21        12,765   

Settlements / Repayments

     (765     (2,165     —          —          (2,930

Sales(D)

     —          —                 46        46   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Fair value as of June 30, 2012

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

18


(A) 

Included in Net realized (loss) gain on our accompanying Condensed Consolidated Statements of Operations for the periods ended June 30, 2013 and 2012.

(B) 

Included in Net unrealized (depreciation) appreciation on our accompanying Condensed Consolidated Statements of Operations for the periods ended June 30, 2013 and 2012.

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

Investment Activity

During the three months ended June 30, 2013, the following significant transactions occurred:

 

   

In April 2013, we invested $17.7 million in a new Control investment, Jackrabbit, Inc. (“Jackrabbit”), through a combination of debt and equity. Jackrabbit, headquartered in Ripon, California, is a manufacturer of nut harvesting equipment.

 

   

In May 2013, we invested $8.8 million in a new Non-Control/Non-Affiliate investment, Funko, LLC (“Funko”), through a combination of debt and equity. Funko, headquartered in Lynnwood, Washington, is a designer, importer and marketer of pop-culture collectibles. This was our first co-investment with our affiliate fund, Gladstone Capital Corporation, pursuant to an exemptive order granted by the SEC in July 2012.

 

   

In June 2013, we invested $9.0 million in a new Control investment, Star Seed, Inc. (“Star Seed”), through a combination of debt and equity. Based in Osborne, Kansas, Star Seed provides its customers with a variety of specialty seeds and related products.

Investment Concentrations

As of June 30, 2013, our investment portfolio consisted of investments in 24 portfolio companies located in 15 states across 14 different industries with an aggregate fair value of $308.3 million, of which Venyu Solutions, Inc. (“Venyu”), Acme Cryogenics, Inc. (“Acme”) and SOG Specialty K&T, LLC (“SOG”), collectively, comprised approximately $96.2 million, or 31.2%, of our total investment portfolio at fair value. The following table outlines our investments by security type at June 30 and March 31, 2013:

 

     June 30, 2013     March 31, 2013  
     Cost     Fair Value     Cost     Fair Value  

Senior debt

   $ 154,495         43.0   $ 118,790         38.5   $ 135,745         41.6   $ 103,882         36.3

Senior subordinated debt

     111,648         31.0        93,969         30.5        103,547         31.7        86,811         30.3   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total debt

     266,143         74.0        212,759         69.0        239,292         73.3        190,693         66.6   

Preferred equity

     88,016         24.5        84,541         27.4        81,710         25.0        82,157         28.7   

Common equity/equivalents

     5,513         1.5        11,027         3.6        5,419         1.7        13,632         4.7   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total equity/equivalents

     93,529         26.0        95,568         31.0        87,129         26.7        95,789         33.4   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total investments

   $ 359,672         100.0   $ 308,327         100.0   $ 326,421         100.0   $ 286,482         100.0
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Investments at fair value consisted of the following industry classifications at June 30 and March 31, 2013:

 

     June 30, 2013     March 31, 2013  
     Fair Value      Percentage of
Total  Investments
    Fair Value      Percentage of
Total  Investments
 

Chemicals, Plastics, and Rubber

   $ 56,644         18.4   $ 59,170         20.7

Electronics

     42,374         13.7        43,970         15.3   

Machinery

     32,008         10.4        32,662         11.4   

Diversified/Conglomerate Manufacturing

     29,784         9.7        32,698         11.4   

Leisure, Amusement, Motion Pictures, Entertainment

     26,899         8.7        29,822         10.4   

Farming and Agriculture

     25,150         8.2        —           —     

Aerospace and Defense

     24,135         7.8        20,876         7.3   

Containers, Packaging, and Glass

     23,922         7.8        23,019         8.0   

Home and Office Furnishings, Housewares, and Durable Consumer Products

     21,418         6.9        23,512         8.2   

Personal and Non-Durable Consumer Products

     8,751         2.8        —           —     

Automobile

     7,486         2.4        7,467         2.6   

Cargo Transport

     6,437         2.1        6,897         2.4   

Buildings and Real Estate

     3,010         1.0        6,020         2.2   

Beverage, Food, and Tobacco

     309         0.1        369         0.1   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total Investments

   $ 308,327         100.0   $ 286,482         100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

 

19


The investments, at fair value, were included in the following geographic regions of the U.S. as of June 30 and March 31, 2013:

 

     June 30, 2013     March 31, 2013  
     Fair Value      Percentage of
Total  Investments
    Fair Value      Percentage of
Total  Investments
 

South

   $ 117,223         38.0   $ 125,518         43.8

West

     101,849         33.0        81,400         28.4   

Northeast

     55,810         18.1        58,319         20.4   

Midwest

     33,445         10.9        21,245         7.4   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total Investments

   $ 308,327         100.0   $ 286,482         100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

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

Investment Principal Repayments

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

 

          Amount  

For the remaining nine months ending March 31:

   2014    $ 9,133   

For the fiscal year ending March 31:

   2015      76,384   
   2016      42,164   
   2017      60,735   
   2018      51,982   
   Thereafter      26,000   
     

 

 

 
  

Total contractual repayments

   $ 266,398   
   Investments in equity securities      93,529   
   Adjustments to cost basis on debt securities      (255
     

 

 

 
  

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

   $ 359,672   
     

 

 

 

Receivables from Portfolio Companies

Receivables from portfolio companies represent non-recurring costs that we incurred on behalf of portfolio companies and are included in other assets on our accompanying Condensed Consolidated Statements of Assets and Liabilities. We maintain an allowance for uncollectible receivables from portfolio companies, which is determined based on historical experience and management’s expectations of future losses. We charge the accounts receivable to the established provision when collection efforts have been exhausted and the receivables are deemed uncollectible. As of June 30 and March 31, 2013, we had gross receivables from portfolio companies of $0.7 million and $1.2 million, respectively. The allowance for uncollectible receivables was $129 and $44 as of June 30 and March 31, 2013, respectively.

NOTE 4. RELATED PARTY TRANSACTIONS

Investment Advisory and Management Agreement

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

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

 

     Three Months Ended June 30,  
     2013     2012  

Average gross assets subject to base management fee(A)

   $ 309,800      $ 238,200   

Multiplied by prorated annual base management fee of 2%

     0.5     0.5
  

 

 

   

 

 

 

Base management fee(B)

     1,549        1,191   

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

     (511     (184
  

 

 

   

 

 

 

Net base management fee

   $ 1,038      $ 1,007   
  

 

 

   

 

 

 

Incentive fee(B)

   $ 165      $ —     
  

 

 

   

 

 

 

 

(A) 

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

(B) 

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

 

20


Base Management Fee

The base management fee is computed and payable quarterly and is assessed at an annual rate of 2.0%. It is computed on the basis of the value of our average gross assets at the end of the two most recently completed quarters, which are total assets, including investments made with proceeds of borrowings, less any uninvested cash or cash equivalents resulting from borrowings. 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. 50% of certain of these fees and 100% of others are credited against the base management fee that we would otherwise be required to pay to our Adviser.

Incentive Fee

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

 

   

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

 

   

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

 

   

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

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

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

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

 

21


Administration Agreement

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

Related Party Fees Due

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

 

     June 30, 2013      March 31, 2013  

Base management fee due to Adviser

   $ 262       $ 625   

Incentive fee due to Adviser

     165         1,454   

Other due to (from) Adviser

     20         (12
  

 

 

    

 

 

 

Total fees due to Adviser

   $ 447       $ 2,067   
  

 

 

    

 

 

 

Fee due to Administrator

   $ 243       $ 221   
  

 

 

    

 

 

 

Total related party fees due

   $ 690       $ 2,288   
  

 

 

    

 

 

 

NOTE 5. BORROWINGS

Line of Credit

On April 30, 2013, through our wholly-owned subsidiary, Business Investment, we entered into a fifth amended and restated credit agreement to increase the commitment amount of the revolving line of credit (the “Credit Facility”) from $60.0 million to $70.0 million and to extend the maturity date as described below. The Credit Facility was arranged by Key Equipment Finance Inc. (“KEF”) as administrative agent, lead arranger and a lender, with Branch Banking and Trust Company (“BB&T”) as a lender. The maturity date was extended to April 30, 2016 (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 April 30, 2017 (one year after the Maturity Date). In addition, there are two one-year extension options to be agreed upon by all parties, which may be exercised on or before April 30, 2014 and 2015, respectively. Subject to certain terms and conditions, the Credit Facility may be expanded up to a total of $200.0 million through the addition of other lenders to the facility. Advances under the Credit Facility generally bear interest at 30-day LIBOR, plus 3.75% per annum, with an unused fee of 0.50% on undrawn amounts. We incurred fees of approximately $0.3 million in connection with this amendment.

On June 12, 2013, we further increased the borrowing capacity under the Credit Agreement from $70.0 million to $105.0 million by entering into Joinder Agreements pursuant to the Credit Agreement, by and among Business Investment, the administrative agent, the servicer and each of Alostar Bank of Commerce and Everbank Commercial Finance, Inc.

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

 

     June 30, 2013      March 31, 2013  

Commitment amount

   $ 105,000       $ 60,000   

Borrowings outstanding at cost

     49,000         31,000   

Availability

     52,088         29,000   

 

     For the Three Months Ended
June 30,
 
     2013     2012  

Weighted average borrowings outstanding

   $ 32,654      $ 791   

Effective interest rate(A)

     4.6     41.9 %(B) 

Commitment (unused) fees incurred

   $ 52      $ 75   

 

(A) 

Excludes the impact of deferred financing fees.

(B) 

Due to limited borrowings outstanding, the commitment (unused) fees significantly increase the effective interest rate. The stated interest rate on advances bore interest at 30-day LIBOR plus 3.75% per annum.

 

22


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. KEF is also the trustee of the account and remits the collected funds to us once a month.

Generally, our Credit Facility contains covenants that require Business Investment to, among other things, maintain its status as a separate legal entity, prohibit certain significant corporate transactions (such as mergers, consolidations, liquidations or dissolutions) and restrict certain material changes to our credit and collection policies without the lenders’ consent. Our Credit Facility also limits payments on distributions to the aggregate net investment income for each of the twelve month periods ending March 31, 2014, 2015, 2016 and 2017. Business Investment is also subject to certain limitations on the type of loan investments it can apply toward availability credit in the borrowing base, including restrictions on geographic concentrations, sector concentrations, loan size, dividend payout, payment frequency and status, average life and lien property. Our Credit Facility further requires Business Investment to comply with other financial and operational covenants, which obligate Business Investment to, among other things, maintain certain financial ratios, including asset and interest coverage and a minimum number of obligors required in the borrowing base of the credit agreement. Additionally, we are subject to a performance guaranty that requires us to maintain (i) a minimum net worth (defined in our Credit Facility to include our mandatory redeemable term preferred stock) of $170.0 million plus 50% of all equity and subordinated debt raised after April 30, 2013, (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) its status as a BDC under the 1940 Act and as a RIC under the Code. As of June 30, 2013, and as defined in the performance guaranty of our Credit Facility, we had a minimum net worth of $270.5 million, an asset coverage of 283% 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 June 30, 2013, Business Investment had 19 obligors. As of June 30, 2013, we were in compliance with all covenants.

Short-Term Loan

Similar to previous quarter ends, to maintain our status as a RIC, we purchased $30.0 million of short-term U.S. Treasury Bills (“T-Bills”) through Jefferies & Company, Inc. (“Jefferies”) on June 27, 2013. 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 June 30, 2013. The T-Bills were purchased on margin using $4.0 million in cash and the proceeds from a $26.0 million short-term loan from Jefferies with an effective annual interest rate of approximately 1.56%. On July 5, 2013, when the T-Bills matured, we repaid the $26.0 million loan from Jefferies and we received back the $4.0 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 Home Solutions, Inc. (“Ginsey”). We evaluated whether the transaction should be accounted for as a sale or a financing-type transaction under the applicable guidance of ASC 860. Based on the terms of the participation agreement, we are required to treat the participation as a financing-type transaction. Specifically, the third-party has a senior claim to our remaining investment in the event of default by Ginsey which, in part, resulted in the loan participation bearing a rate of interest lower than the contractual rate established at origination. Therefore, our accompanying Condensed Consolidated Statements of Assists and Liabilities reflects the entire senior subordinated term debt investment in Ginsey and a corresponding $5.0 million secured borrowing liability. The secured borrowing has a stated interest rate of 7% and a maturity date of January 3, 2018.

Fair Value

We elected to apply ASC 825, “Financial Instruments,” specifically for our Credit Facility and short-term loan, which was consistent with the application of ASC 820 to our investments. Generally, we estimate the fair value of our Credit Facility using estimates of value provided by an independent third party and our own assumptions in the absence of observable market data, including estimated remaining life, counterparty credit risk, current market yield and interest rate spreads of similar securities as of the measurement date. During the three months ended June 30, 2013, due to the closing of a new three-year line of credit, increase in the commitment size from $60.0 million to $105.0 million and the addition of two new lenders, cost was deemed to approximate fair value. Additionally, due to the nine-day duration of the short-term loan, cost was deemed to approximate fair value. At each of June 30 and March 31, 2013, all of our borrowings were valued using Level 3 inputs. The following tables present the short-term loan and Credit Facility carried at fair value as of June 30 and March 31, 2013, 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 months ended June 30, 2013 and 2012:

 

23


     Level 3 – Borrowings  
     Total Recurring Fair Value Measurement
Reported in Condensed Consolidated
Statements of Assets and Liabilities
 
     June 30, 2013      March 31, 2013  

Short-Term Loan

   $ 26,009       $ 58,016   

Credit Facility

     49,000         31,854   
  

 

 

    

 

 

 

Total

   $ 75,009       $ 89,870   
  

 

 

    

 

 

 

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

 

     Short-Term
Loan
    Credit
Facility
    Total  

Three months ended June 30, 2013:

      

Fair value at March 31, 2013

   $ 58,016      $ 31,854      $ 89,870   

Borrowings

     26,009        28,500        54,509   

Repayments

     (58,016     (10,500     (68,516

Net unrealized depreciation(A)

     —          (854     (854
  

 

 

   

 

 

   

 

 

 

Fair value at June 30, 2013

   $ 26,009      $ 49,000      $ 75,009   
  

 

 

   

 

 

   

 

 

 

 

     Short-Term
Loan
    Credit
Facility
     Total  

Three months ended June, 30 2012:

       

Fair value at March 31, 2012

   $ 76,005      $ —         $ 76,005   

Borrowings

     76,010        31,000         107,010   

Repayments

     (76,005     —           (76,005

Net unrealized appreciation(A)

     —          492         492   
  

 

 

   

 

 

    

 

 

 

Fair value at June 30, 2012

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

 

 

   

 

 

    

 

 

 

 

(A) 

Included in net unrealized (depreciation) appreciation on our accompanying Condensed Consolidated Statement of Operations for periods ended June 30, 2013 and 2012.

The fair value of the collateral under our Credit Facility was approximately $303.1 million and $263.7 million at June 30 and March 31, 2013, respectively. The fair value of the collateral under the short-term loan was approximately $30.0 million and $65.0 million at June 30 and March 31, 2013, respectively.

NOTE 6. INTEREST RATE CAP AGREEMENTS

We have entered into an interest rate cap agreement with BB&T that effectively limits the interest rate on a portion of our borrowings under the line of credit pursuant to the terms of our Credit Facility. The agreement 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 agreement 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 agreement quarterly based on the current market valuation 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 cap using estimates of value provided by the counterparty and our own assumptions in the absence of observable market data, including estimated remaining life, counterparty credit risk, current market yield and interest rate spreads of similar securities as of the measurement date. At both June 30 and March 31, 2013, our interest rate cap agreement was valued using Level 3 inputs. The following table summarizes the key terms of the interest rate cap agreement:

 

                             June 30, 2013      March 31, 2013  

Interest

Rate Cap(A)

   Notional
Amount
     LIBOR
Cap
   

Effective

Date

  

Maturity

Date

   Cost      Fair
Value
     Cost      Fair
Value
 

December 2011

   $ 50,000         6.0   May 2012    October 2013    $ 29       $ —         $ 29       $ —     

 

(A) 

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

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

In July 2013, we entered into a forward interest rate cap agreement. See Note 13—Subsequent Events for further discussion.

 

24


NOTE 7. MANDATORILY REDEEMABLE PREFERRED STOCK

In March 2012, we completed a public offering of 1,600,000 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 $40.0 million and net proceeds, after deducting underwriting discounts and offering expenses borne by us, were $38.0 million. We incurred $2.0 million in total offering costs related to these transactions, which have been recorded as deferred financing costs on our accompanying Condensed Consolidated Statements of Assets and Liabilities and will be amortized over the redemption period ending February 28, 2017.

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

Our Board of Directors declared and paid the following monthly distributions to preferred stockholders for the three months ended June 30, 2013:

 

Fiscal

Year

  

Time Period

  

Declaration

Date

  

Record Date

  

Payment Date

   Distribution per  Term
Preferred Share
 

2014

   April 1 – 30    April 9, 2013    April 22, 2013    April 30, 2013    $ 0.1484375   
   May 1 – 31    April 9, 2013    May 20, 2013    May 31, 2013      0.1484375   
   June 1 – 30    April 9, 2013    June 19, 2013    June 28, 2013      0.1484375   
              

 

 

 
        

Three months ended June 30, 2013:

   $ 0.4453125   
              

 

 

 

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   
              

 

 

 
        

Three months ended June 30, 2012:

   $ 0.4453125   
              

 

 

 

In accordance with ASC 480, “Distinguishing Liabilities from Equity,” mandatorily redeemable financial instruments should be classified as liabilities on the balance sheet and, therefore, the related dividend payments are treated as dividend expense on our accompanying Condensed Consolidated Statements of Operations at the ex-dividend date. The fair value of the Term Preferred Stock based on the last reported closing price as of June 30 and March 31, 2013, was approximately $42.2 million and $42.7 million, respectively.

Aggregate Term Preferred Stock distributions declared and paid for the three months ended June 30, 2013, were approximately $0.7 million. The tax character of distributions paid by us to preferred stockholders is from ordinary income.

NOTE 8. COMMON STOCK

We filed a registration statement on Form N-2 (File No. 333-181879) with the SEC on June 4, 2012, and subsequently filed a Pre-effective Amendment No. 1 to the registration statement on July 17, 2012, which the SEC declared effective on July 26, 2012. On June 7, 2013, we filed Post-Effective Amendment No. 2 to the registration statement, which the SEC declared effective on July 26, 2013. The registration statement permits us to issue, through one or more transactions, up to an aggregate of $300.0 million in securities, consisting of common stock, preferred stock, subscription rights, debt securities and warrants to purchase common stock, including through a combined offering of two or more of such securities.

On October 5, 2012, we completed a public offering of 4.0 million shares of our common stock at a public offering price of $7.50 per share, which was below our then current net asset value (“NAV”) per share. Gross proceeds totaled $30.0 million and net proceeds, after deducting underwriting discounts and offering expenses borne by us, were $28.3 million, which was used to repay borrowings under our Credit Facility. In connection with the offering, the underwriters exercised their option to purchase an additional 395,825 shares at the public offering price to cover over-allotments, which resulted in gross proceeds of $3.0 million and net proceeds, after deducting underwriting discounts, of $2.8 million.

 

25


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

The following table sets forth the computation of basic and diluted net decrease in net assets resulting from operations per weighted average common share for the three months ended June 30, 2013 and 2012:

 

     Three Months Ended June 30,  
     2013     2012  

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

   $ (6,519   $ (3,017

Denominator for basic and diluted weighted average common shares

     26,475,958        22,080,133   
  

 

 

   

 

 

 

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

   $ (0.25   $ (0.13
  

 

 

   

 

 

 

NOTE 10. DISTRIBUTIONS TO COMMON STOCKHOLDERS

To qualify to be taxed as a RIC under Subtitle A, Chapter 1 of Subchapter M of the Code, we are required to distribute to our stockholders 90% of our “investment company taxable income,” which is generally our net ordinary income plus the excess of our net short-term capital gains over net long-term capital losses. 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 three months ended June 30, 2013 and 2012:

 

Fiscal Year

  

Declaration Date

  

Record Date

  

Payment Date

   Distribution
per Common  Share
 

2014

   April 9, 2013    April 22, 2013    April 30, 2013    $ 0.05   
   April 9, 2013    May 14, 2013    May 31, 2013      0.05   
   April 9, 2013    June 19, 2013    June 28, 2013      0.05   
           

 

 

 
     

Three months ended June 30, 2013:

   $ 0.15   
           

 

 

 

2013

   April 11, 2012    April 20, 2012    April 30, 2012    $ 0.05   
   April 11, 2012    May 18, 2012    May 31, 2012      0.05   
   April 11, 2012    June 20, 2012    June 29, 2012      0.05   
           

 

 

 
     

Three months ended June 30, 2012:

   $ 0.15   
           

 

 

 

Aggregate common distributions declared quarterly and paid for the three months ended June 30, 2013 and 2012 were approximately $4.0 million and $3.3 million, respectively, which were declared based on estimates of net investment income for the respective fiscal years. The tax characterization of the common distributions declared and paid for the fiscal year ended March 31, 2014, will be determined at fiscal year end and cannot be determined at this time. For the fiscal year ended March 31, 2013, 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 $3.1 million of the common distributions paid in fiscal year 2014 as having been paid in the prior year.

NOTE 11. COMMITMENTS AND CONTINGENCIES

As of June 30, 2013, 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 June 30, 2013, 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, 2012 and 2013 and expires in February 2014, unless it is renewed again by us, CCE and Agricredit. In connection with this guarantee and its subsequent renewals, we recorded aggregate premiums of $0.4 million from CCE.

 

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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 June 30 and March 31, 2013:

 

     June 30, 2013      March 31, 2013  

Unused line of credit commitments

   $ 2,784       $ 1,584   

Guarantees

     3,769         3,870   
  

 

 

    

 

 

 

Total

   $ 6,553       $ 5,454   
  

 

 

    

 

 

 

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 $43 as of June 30 and March 31, 2013.

NOTE 12. FINANCIAL HIGHLIGHTS

 

     Three Months Ended June 30,  
     2013     2012  

Per Common Share Data

    

NAV at beginning of period(A)

   $ 9.10      $ 9.38   

Net investment income(B)

     0.15        0.15   

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

     (0.40     (0.28
  

 

 

   

 

 

 

Total from investment operations(B)

     (0.25     (0.13

Cash distributions from net investment income(B)(C)

     (0.15     (0.15
  

 

 

   

 

 

 

NAV at end of period(A)

   $ 8.70      $ 9.10   
  

 

 

   

 

 

 

Per common share market value at beginning of period

   $ 7.31      $ 7.57   

Per common share market value at end of period

     7.35        7.39   

Total return(D)

     2.61     (0.38 )% 

Common stock outstanding at end of period

     26,475,958        22,080,133   

Statement of Assets and Liabilities Data:

    

Net assets at end of period

   $ 230,472      $ 200,887   

Average net assets(E)

     237,146        204,858   

Senior Securities Data(F):

    

Total borrowings at cost

   $ 80,009      $ 107,010   

Mandatorily redeemable preferred stock

     40,000        40,000   

Asset coverage ratio(G)

     283     230

Average coverage per unit(H)

   $ 2,829      $ 2,300   

Ratios/Supplemental Data:

    

Ratio of expenses to average net assets(I)(J)

     6.54     5.57

Ratio of net expenses to average net assets(I)(K)

     5.68        5.21   

Ratio of net investment income to average net assets(I)

     6.80        6.32   

 

(A) 

Based on actual common shares outstanding at the end of the corresponding period.

(B) 

Based on weighted average per basic common share data.

(C) 

Distributions are determined based on taxable income calculated in accordance with income tax regulations, which may differ from amounts determined under GAAP.

 

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(D) 

Total return equals the change in the market value of our common stock from the beginning of the period, taking into account dividends reinvested in accordance with the terms of our dividend reinvestment plan. Total return does not take into account distributions that may be characterized as a return of capital. For further information on the estimated character of our distributions to common stockholders, please refer to Note 10—Distributions to Common Stockholders.

(E) 

Calculated using the average balance of net assets at the end of each month of the reporting period.

(F) 

The 1940 Act currently permits BDCs to issue senior securities representing indebtedness and senior securities that are stock, to which we refer as “senior securities.”

(G) 

As a BDC, we are generally required to maintain an asset coverage ratio (as defined in Section 18(h) of the 1940 Act) of at least 200% on our senior securities representing indebtedness and our senior securities that are stock. Our mandatorily redeemable preferred stock is a senior security that is stock.

(H) 

Asset coverage per unit is the asset coverage ratio expressed in terms of dollar amounts per one thousand dollars of indebtedness.

(I) 

Amounts are annualized.

(J) 

Ratio of expenses to average net assets is computed using expenses before credits from the Adviser.

(K) 

Ratio of net expenses to average net assets is computed using total expenses net of any credits received from the Adviser.

NOTE 13. SUBSEQUENT EVENTS

Registration Statement

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. On June 7, 2013, we filed Post-Effective Amendment No. 2 to the registration statement, which the SEC declared effective on July 26, 2013. The registration statement will permit 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 such securities.

Short-Term Loan

On June 27, 2013, we purchased $30.0 million of T-Bills through Jefferies. The T-Bills were purchased on margin using $4.0 million in cash and the proceeds from a $26.0 million short-term loan from Jefferies with an effective annual interest rate of approximately 1.56%. On July 5, 2013, when the T-Bills matured, we repaid the $26.0 million loan from Jefferies and received the $4.0 million margin payment sent to Jefferies to complete the transaction.

Distributions

On July 9, 2013, our Board of Directors declared the following monthly cash distributions to common and preferred stockholders:

 

Record Date

   Payment Date    Distribution per
Common Share
     Distribution per  Term
Preferred Share
 

July 19, 2013

   July 31, 2013    $ 0.05       $ 0.1484375   

August 21, 2013

   August 30, 2013      0.05         0.1484375   

September 18, 2013

   September 30, 2013      0.05         0.1484375   
     

 

 

    

 

 

 
   Total for the Quarter:    $ 0.15       $ 0.4453125   
     

 

 

    

 

 

 

Interest Rate Cap Agreement

In July 2013, through Business Investment, we entered into a forward interest rate cap agreement with Keybank National Association, effective October 31, 2013 and expiring April 30, 2016, for a notional amount of $45.0 million that effectively limits the interest rate on a portion of our borrowings pursuant to the terms of our Credit Facility. We incurred a premium fee of $75 in conjunction with this agreement.

 

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

All statements contained herein, other than historical facts, may constitute “forward-looking statements.” These statements may relate to, among other things, our future operating results, our business prospects and the prospects of our portfolio companies, actual and potential conflicts of interest with Gladstone Management Corporation and its affiliates, the use of borrowed money to finance our investments, the adequacy of our financing sources and working capital, and our ability to co-invest, among other factors. In some cases, you can identify forward-looking statements by terminology such as “estimate,” “may,” “might,” “believe,” “will,” “provided,” “anticipate,” “future,” “could,” “growth,” “plan,” “intend,” “expect,” “should,” “would,” “if,” “seek,” “possible,” “potential,” “likely” or the negative of such terms or comparable terminology. These forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by such forward-looking statements. We caution readers not to place undue reliance on any such forward-looking statements. We have based forward-looking statements on information available to us on the date of this report, and we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, after the date of this Quarterly Report on Form 10-Q.

The following analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and the notes thereto contained elsewhere in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the fiscal year ended March 31, 2013, filed with the Securities and Exchange Commission (“SEC”) on May 14, 2013.

OVERVIEW

General

We are an externally-managed, closed-end, non-diversified management investment company that has elected to be regulated as a business development company under the 1940 Act. In addition, for U.S. federal income tax purposes, we have elected to be treated as a RIC under Subchapter M of the Code. As a business development company and a RIC, we are also subject to certain constraints, including limitations imposed by the 1940 Act and the Code.

We were incorporated under the General Corporation Law of the State of Delaware on February 18, 2005. We were established for the purpose of investing in debt and equity securities of established private businesses in the United States (“U.S.”). Debt investments primarily come in the form of three types of loans: senior term loans, senior subordinated loans and junior subordinated debt. Equity investments primarily take the form of preferred or common equity (or warrants or options to acquire the foregoing), often in connection with buyouts and other recapitalizations. To a much lesser extent, we also invest in senior and subordinated syndicated loans. Our investment objectives are (a) to achieve and grow current income by investing in debt securities of established businesses that we believe will provide stable earnings and cash flow to pay expenses, make principal and interest payments on our outstanding indebtedness and make distributions to stockholders that grow over time and (b) to provide our stockholders with long-term capital appreciation in the value of our assets by investing in equity securities of established businesses that we believe can grow over time to permit us to sell our equity investments for capital gains. We aim to maintain a portfolio consisting of approximately 80% debt investment and 20% equity investment, at cost.

We focus on investing in small and medium-sized private U.S. businesses that meet certain criteria, including some but not all of the following: the potential for growth in cash flow, adequate assets for loan collateral, experienced management teams with a significant ownership interest in the borrower, profitable operations based on the borrower’s cash flow, reasonable capitalization of the borrower (usually by leveraged buyout funds or venture capital funds) and the potential to realize appreciation and gain liquidity in our equity position, if any. We anticipate that liquidity in our equity position will be achieved through a merger or acquisition of the borrower, a public offering of the borrower’s stock or by exercising our right to require the borrower to repurchase our warrants, though there can be no assurance that we will always have these rights. We lend to borrowers that need funds to finance growth, restructure their balance sheets or effect a change of control. We invest by ourselves or jointly with other funds and/or management of the portfolio company, depending on the opportunity. If we are participating in an investment with one or more co-investors, our investment is likely to be smaller than if we were investing alone.

Our common stock and 7.125% Series A Cumulative Term Preferred Stock (our “Term Preferred Stock”) are traded on the NASDAQ Global Select Market (“NASDAQ”) under the symbols “GAIN” and “GAINP,” respectively.

We are externally managed by our investment advisor, Gladstone Management Corporation (the “Adviser”), a SEC registered investment adviser and an affiliate of ours, pursuant to an investment advisory and management agreement (the “Advisory Agreement”). The Adviser manages our investment activities. Our Board of Directors, which is composed of a majority of directors

 

29


independent from us, supervises such investment activities. We have also entered into an administration agreement (the “Administration Agreement”) with Gladstone Administration, LLC (the “Administrator”), an affiliate of ours and the Adviser, whereby we pay separately for administrative services.

Business Environment

The strength of the global economy, and the U.S. economy in particular, continues to be uncertain and volatile, and we remain cautious about a long-term economic recovery. The recession in general, and the disruptions in the capital markets in particular, have impacted our liquidity options and increased our cost of debt and equity capital. Many of our portfolio companies, as well as those that we evaluate for possible investments, are impacted by these economic conditions. If these conditions persist, it may affect their ability to repay our loans or engage in a liquidity event, such as a sale, recapitalization or initial public offering.

Capital Raising Efforts

Despite the challenges in these uncertain economic times, over the past year and-a-half, we have been able to extend and increase the size of our revolving line of credit (our “Credit Facility”) and complete public offerings of preferred and common stock. In October 2012, we extended the maturity date on our Credit Facility an additional year to 2015, and subsequently, in April and May 2013, we extended the maturity date another six months into 2016 and increased the commitment amount from $60 million to $105 million. In March 2012, we issued 1.6 million shares of our Term Preferred Stock for gross proceeds of $40.0 million. In October 2012, we issued 4.4 million shares of common stock for gross proceeds of $33.0 million.

Despite our public offering of common stock during the fiscal year, market conditions continue to affect the trading price of our common stock and thus our ability to finance new investments through the issuance of equity. On July 26, 2013, the closing market price of our common stock was $7.38, which represented a 15.2% discount to our June 30, 2013, net asset value (“NAV”) per share of $8.70. When our stock trades below NAV, our ability to issue equity is constrained by provisions of the Investment Company Act of 1940 (the “1940 Act”), which generally prohibits the issuance and sale of our common stock at an issuance price below the then current NAV per share without stockholder approval other than through sales to our then-existing stockholders pursuant to a rights offering.

At our annual meeting of stockholders held on August 9, 2012, our stockholders approved a proposal which authorizes us to sell shares of our common stock at a price below our then current NAV per share, subject to certain limitations, including that the number of shares issued and sold pursuant to such authority does not exceed 25% of our then outstanding common stock immediately prior to each such sale, provided that our Board of Directors makes certain determinations prior to any such sale. This proposal is in effect for one year from the date of stockholder approval. With our Board of Directors’ approval, we issued shares of our common stock in October and November 2012 at a price per share below the then current NAV per share. The resulting proceeds, in part, have and will allow us to grow the portfolio by making new investments, generate additional income through these new investments, provide us additional equity capital to help ensure continued compliance with regulatory tests and allow us to increase our debt capital while still complying with our applicable debt to equity ratios. At our next annual meeting of stockholders, scheduled to take place on August 8, 2013, we again have submitted to our stockholders a proposal to authorize us, with the approval of our Board of Directors, to issue and sell shares (during the next 12 months) at a price below its then current net asset value per share, subject to certain limitations as described in the Proxy Statement for the 2013 Annual Meeting of Stockholders, filed with the SEC on June 21, 2013.

New Investments

While conditions remain challenging, we are seeing an increase in the number of new investment opportunities consistent with our investing strategy of providing a combination of debt and equity in support of management and sponsor-led buyouts of small and medium-sized companies in the U.S. These opportunities and the aforementioned capital raising efforts have allowed us to invest approximately $219.1 million into 13 new proprietary debt and equity deals since October 2010. During the three months ended June 30, 2013, we invested a total of $35.5 million in three new deals.

The majority of these new investments, as well as the majority of our debt securities in our portfolio, has a success fee component, which enhances the yield on our debt investment. Unlike paid in kind (“PIK”) income, we do not recognize the fee into income until it is received in cash. As a result, as of June 30, 2013, we had an off-balance sheet success fee receivable of $15.0 million, or approximately $0.57 per common share. Due to their contingent nature, there are no guarantees that we will be able to collect all of these success fees or know the timing of such collections.

Regulatory Compliance

Due to the limited number of investments in our portfolio, our current asset composition has affected our ability to satisfy certain elements of the rules of the Internal Revenue Code of 1986, as amended (the “Code”), for maintenance of our status as a regulated investment company (“RIC”) under subchapter M of the Code. To maintain our status as a RIC, in addition to other requirements, as of the close of each quarter of our taxable year, we must meet the asset diversification test, which requires that at least 50% of the value of our assets consist of cash, cash items, U.S. government securities or certain other qualified securities (the “50% threshold”). During the three months ended June 30, 2013, we again fell below the 50% threshold.

 

30


Failure to meet the 50% threshold alone will not result in our loss of RIC status. In circumstances where the failure to meet the 50% threshold is the result of fluctuations in the value of our assets, including as a result of the sale of assets, we will still be deemed to have satisfied the 50% threshold and, therefore, maintain our RIC status, provided that we have not made any new investments, including additional investments in our existing portfolio companies (such as advances under outstanding lines of credit), since the time that we fell below the 50% threshold. As of June 30, 2013, we satisfied the 50% threshold primarily through the purchase of short-term qualified securities, which was funded through a short-term loan agreement. Subsequent to the June 30, 2013, measurement date, the short-term qualified securities matured and we repaid the short-term loan. See “—Recent Developments—Short-Term Loan” for more information regarding this transaction. As of the date of this filing, we are once again below the 50% threshold.

Thus, while we currently qualify as a RIC despite our recent inability to continuously meet the 50% threshold and potential inability to do so in the future, if we make any new or additional investments before regaining continuous compliance with the asset diversification test, our RIC status could be threatened. If we make a new or additional investment and fail to regain compliance with the 50% threshold on the next quarterly measurement date following such investment, we will not be in compliance with the RIC rules and will have thirty days to “cure” our failure to meet the 50% threshold to avoid the loss of our RIC status. Potential cures for failure of the asset diversification test include raising additional equity or debt capital, or changing the composition of our assets, which could include full or partial divestitures of investments, such that we would once again exceed the 50% threshold on a consistent basis.

Until the composition of our assets satisfies the required 50% threshold on a consistent basis, we will continue to seek to employ similar purchases of qualified securities using short-term loans that would allow us to satisfy the 50% threshold, thereby allowing us to make additional investments. There can be no assurance, however, that we will be able to enter into such a transaction on reasonable terms, if at all. We also continue to explore a number of other strategies, including changing the composition of our assets, which could include full or partial divestitures of investments, and raising additional equity or debt capital, such that we would once again exceed the 50% threshold on a consistent basis. Our ability to implement any of these strategies will be subject to market conditions and a number of risks and uncertainties that are, in part, beyond our control.

Our ability to seek external debt financing, to the extent that it is available under current market conditions, is further subject to the asset coverage limitations of the 1940 Act, which require us to have an asset coverage ratio (as defined in Section 18(h) of the 1940 Act), of at least 200% on our senior securities representing indebtedness and our senior securities that are stock, which we refer to collectively as “senior securities.” As of June 30, 2013, our asset coverage ratio was 283%. The ratio is impacted, in part, by our need to obtain a short-term loan at quarter end to satisfy the 50% threshold for our RIC status. Between the quarter end measurement dates, when we do not have a short-term loan outstanding, our leverage and asset coverage ratio improve. However, until the composition of our assets is above the required 50% threshold on a consistent basis, we will have to continue to obtain short-term loans on a quarterly basis. This strategy, while allowing us to satisfy the 50% threshold for our RIC status, limits our ability to use increased debt capital to make new investments, due to our asset coverage ratio limitations under the 1940 Act. Our common stock offering in October 2012, was undertaken, in part, to provide us additional equity capital to help ensure continued compliance with the 200% asset coverage ratio.

Investment Highlights

During the three months ended June 30, 2013, we disbursed $34.6 million in new debt and equity investments and extended $1.0 million of investments to existing portfolio companies through revolver draws or additions to term notes. From our initial public offering in June 2005 through June 30, 2013, we have made 201 investments in 101 companies for a total of approximately $834.6 million, before giving effect to principal repayments on investments and divestitures.

Investment Activity

During the three months ended June 30, 2013, the following significant transactions occurred:

 

   

In April 2013, we invested $17.7 million in a new Control investment, Jackrabbit, Inc. (“Jackrabbit”), through a combination of debt and equity. Jackrabbit, headquartered in Ripon, California, is a manufacturer of nut harvesting equipment.

 

   

In May 2013, we invested $8.8 million in a new Non-Control/Non-Affiliate investment, Funko, LLC (“Funko”), through a combination of debt and equity. Funko, headquartered in Lynnwood, Washington, is a designer, importer, and marketer of pop-culture collectibles. This was our first co-investment with our affiliate fund, Gladstone Capital Corporation, pursuant to an exemptive order granted by the SEC in July 2012.

 

   

In June 2013, we invested $9.0 million in a new Control investment, Star Seed, Inc. (“Star Seed”), through a combination of debt and equity. Based in Osborne, Kansas, Star Seed provides its customers with a variety of specialty seeds and related products.

 

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Recent Developments

Credit Facility Extension and Expansion

On April 30, 2013, through our wholly-owned subsidiary, Business Investment, we entered into a fifth amended and restated credit agreement to increase the commitment amount of the revolving line of credit (the “Credit Facility”) from $60.0 million to $70.0 million and to extend the maturity date as described below. The Credit Facility was arranged by Key Equipment Finance Inc. (“KEF”) as administrative agent, lead arranger and a lender, with Branch Banking and Trust Company (“BB&T”) as a lender. The maturity date was extended to April 30, 2016 (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 April 30, 2017 (one year after the Maturity Date). In addition, there are two one-year extension options to be agreed upon by all parties, which may be exercised on or before April 30, 2014 and 2015, respectively. Subject to certain terms and conditions, the Credit Facility may be expanded up to a total of $200.0 million through the addition of other lenders to the facility. Advances under the Credit Facility generally bear interest at 30-day LIBOR, plus 3.75% per annum, with an unused fee of 0.50% on undrawn amounts. We incurred fees of approximately $0.3 million in connection with this amendment.

On June 12, 2013, we further increased the borrowing capacity under the Credit Agreement from $70.0 million to $105.0 million by entering into Joinder Agreements pursuant to the Credit Agreement by and among Business Investment, the administrative agent, the servicer and each of Alostar Bank of Commerce and Everbank Commercial Finance, Inc.

Short-Term Loan

For each quarter end since December 31, 2009 (the “measurement dates”), we satisfied the 50% threshold to maintain our status as a RIC, in part, through the purchase of short-term qualified securities, which were funded primarily through a short-term loan agreement. Subsequent to each of the measurement dates, the short-term qualified securities matured, and we repaid the short-term loan, at which time we again fell below the 50% threshold.

For the June 30, 2013 measurement date, we purchased $30.0 million of short-term United States Treasury Bills (“T-Bills”) through Jefferies & Company, Inc. (“Jefferies”) on June 27, 2013. The T-Bills were purchased on margin using $4.0 million in cash and the proceeds from a $26.0 million short-term loan from Jefferies with an effective annual interest rate of approximately 1.56%. On July 5, 2013, when the T-Bills matured, we repaid the $26.0 million loan from Jefferies and received the $4.0 million margin payment sent to Jefferies to complete the transaction.

 

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RESULTS OF OPERATIONS

Comparison of the Three months ended June 30, 2013, to the Three months ended June 30, 2012

 

     For the Three Months Ended June 30,  
     2013     2012     $ Change     % Change  

INVESTMENT INCOME

        

Interest income

   $ 7,182      $ 5,511      $ 1,671        30.3

Other income

     216        394        (178     (45.2
  

 

 

   

 

 

   

 

 

   

 

 

 

Total investment income

     7,398        5,905        1,493        25.3   
  

 

 

   

 

 

   

 

 

   

 

 

 

EXPENSES

        

Base management fee

     1,549        1,191        358        30.1   

Incentive fee

     165        —          165        NM   

Administration fee

     243        183        60        32.8   

Interest and dividend expense

     1,190        805