UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
(Mark One)
| x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended March 31, 20142015
OR
| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 814-00704001-34007
GLADSTONE INVESTMENT CORPORATION
(Exact name of registrant as specified in its charter)
| Delaware | 83-0423116 | |
(State or other jurisdiction of
| (I.R.S. Employer
| |
1521 Westbranch Drive, Suite 100
| 22102 | |
| (Address of principal executive offices) | (Zip Code) | |
(703) 287-5800
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
(Title of Each Class) | (Name of Each Exchange on Which Registered) | |
| Common Stock, $0.001 par value per share | NASDAQ Global Select Market | |
| 7.125% Series A Cumulative Term Preferred Stock, $0.001 par value per share | NASDAQ Global Select Market | |
| 6.750% Series B Cumulative Term Preferred Stock, $0.001 par value per share | NASDAQ Global Select Market | |
| 6.500% Series C Cumulative Term Preferred Stock, $0.001 par value per share | NASDAQ Global Select Market |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES ¨ NO x
Indicate by check if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. YES ¨ NO x
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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨
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” inRule 12b-2 of the Exchange Act. (Check one):
| Large accelerated filer | ¨ | Accelerated filer | x | |||
| Non-accelerated filer | ¨ (Do not check if a smaller reporting company) | Smaller reporting company | ¨ | |||
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). YES ¨ NO x
The aggregate market value of the voting stock held by non-affiliates of the Registrant on September 30, 2013,2014, based on the closing price on that date of $7.05$7.11 on the NASDAQ Global Select Market, was $165,326,144.$183,806,933. For the purposes of calculating this amount only, all directors and executive officers of the Registrant have been treated as affiliates. There were 26,475,95830,270,958 shares of the Registrant’s Common Stock, $0.001 par value, outstanding as of May 13, 2014.19, 2015.
Documents Incorporated by Reference.Portions of the Registrant’s Proxy Statementdefinitive proxy statement relating to the Registrant’s 20142015 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission pursuant to Regulation 14A are incorporated by reference into Part III of this Annual Report on Form 10-K as indicated herein. Such proxy statement will be filed with the Securities and Exchange Commission no later than 120 days following the end of the Registrant’s fiscal year ended March 31, 2015.
GLADSTONE INVESTMENT CORPORATION
FORM 10-K FOR THE FISCAL YEAR ENDED
MARCH 31, 20142015
PART I | ITEM 1 | 2 | |||||||
| ITEM 1A | |||||||||
| ITEM 1B | |||||||||
| ITEM 2 | |||||||||
| ITEM 3 | |||||||||
| ITEM 4 | |||||||||
PART II | ITEM 5 | ||||||||
| ITEM 6 | |||||||||
| ITEM 7 | Management’s Discussion and Analysis of Financial Condition and Results of Operations | ||||||||
| ITEM 7A | |||||||||
| ITEM 8 | |||||||||
| ITEM 9 | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure | ||||||||
| ITEM 9A | |||||||||
| ITEM 9B | |||||||||
PART III | ITEM 10 | ||||||||
| ITEM 11 | |||||||||
| ITEM 12 | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | ||||||||
| ITEM 13 | Certain Relationships and Related Transactions, and Director Independence | ||||||||
| ITEM 14 | |||||||||
PART IV | ITEM 15 | ||||||||
FORWARD-LOOKING STATEMENTS
All statements contained herein, other than historical facts, may constitute “forward-looking statements.” These statements may relate to, among other things, our future performance or 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,” “provide,“provided,” “anticipate,” “future,” “could,” “growth,” “plan,” “project,” “intend,” “expect,” “may,” “should,” “continue,” “would,” “if,” “seek,” “possible,” “potential,” “likely” or the negative or variations of such terms or comparable terminology. These forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among others:but are not limited to: (1) furtherthe recurrence of adverse changesevents in the economy and the capital markets; (2) risks associated with negotiation and consummation of pending and future transactions; (3) the loss of one or more of our executive officers, in particular David Gladstone, Terry Lee Brubaker or David Dullum; 4) changes in our investment objectives and strategy; (5) availability, terms (including the possibility of interest rate volatility) and deployment of capital; (6) changes in our industry, interest rates, exchange rates,regulation or the general economy; (7) the degree and nature of our competition; (8) our ability to maintain our qualification as a regulated investment company and as a business development company; and (9) those factors described in the“Risk Factors” section of this Annual Report on Form 10-K. We caution readers not to place undue reliance on any such forward-looking statements. Actual results could differ materially from those anticipated in our forward-looking statements and future results could differ materially from historical performance. We have based forward-looking statements on information available to us on the date of this Annual Report on Form 10-K. Except as required by the federal securities laws, 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 Annual Report on Form 10-K. Although we undertake no obligation to revise or update any forward-looking statements, whether as a result of new information, future events or otherwise, you are advised to consult any additional disclosures that we may make directly to you or through reports that we have filed or in the future may file with the Securities and Exchange Commission, including subsequent annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K.
In this Annual Report on Form 10-K, or Annual Report, the “Company,” “we,” “us,” and “our” refer to Gladstone Investment Corporation and its wholly-owned subsidiaries unless the context otherwise indicates. Dollar amounts are in thousands unless otherwise indicated.
The information contained in this section should be read in conjunction with our accompanyingConsolidated Financial Statements and the notes thereto appearing elsewhere in this Annual Report on Form 10-K.
| ITEM 1. | BUSINESS |
Overview
Organization
We were incorporated under the General Corporation LawsLaw of the State of Delaware on February 18, 2005. On June 22, 2005, we completed anour initial public offering and commenced operations. We operate as an externally managed, closed-end, non-diversified management investment company and have elected to be treated as a business development company (“BDC”) under the Investment Company Act of 1940, as amended (the “1940 Act”). For federal income tax purposes, we have elected to be treated as a regulated investment company (“RIC”) under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”). In order to continue to qualify as a RIC for federal income tax purposes and obtain favorable RIC tax treatment, we must meet certain requirements, including certain minimum distribution requirements.
Our shares of common stock, 7.125% Series A Cumulative Term Preferred Stock (“Series A Term Preferred Stock”), 6.75% Series B Cumulative Term Preferred Stock (“Series B Term Preferred Stock”) and term preferred stock6.50% Series C Cumulative Term Preferred Stock (“Series C Term Preferred Stock”) are traded on the NASDAQ Global Select Market (“NASDAQ”) under the trading symbols “GAIN”“GAIN,” “GAINP,” “GAINO,” and “GAINP,“GAINN,” respectively.
Investment Objectives and Strategy
We were established for the purpose of investing in debt and equity securities of established private businesses operating in the United States (“U.S.”). Our investment objectives are to: (1) achieve and grow current income by investing in debt securities of established
businesses that we believe will provide stable earnings and cash flow to pay expenses, make principal and interest payments on our outstanding indebtedness and make distributions to stockholders that grow over time; and (2) provide our stockholders with long-term capital appreciation in the value of our assets by investing in equity securities, generally in combination with the aforementioned debt securities, of established businesses that we believe can grow over time to permit us to sell our equity investments for capital gains. To achieve our objectives, our investment strategy is to invest in several categories of debt and equity securities, with each investment generally ranging from $5 million to $30 million, although investment size may vary, depending upon our total assets or available capital at the time of investment. We seek to avoid investments in high-risk, early stage enterprises. We expect that our investment mixportfolio over time will consist of approximately 80%75% in debt securities and 20%25% in equity securities. However, assecurities, at cost. As of March 31, 2014,2015, our investment mix isportfolio was made up of 73% in debt securities and 27% in equity securities, at cost.
We invest by ourselves or jointly with other funds 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.
In July 2012, the Securities and Exchange Commission (“SEC”) granted us an exemptive order that expanded our ability to co-invest with certain of our affiliates under certain circumstances and any future business development company or closed-end management investment company that is advised (or sub-advised if it controls the fund) by our external investment adviser, or any combination of the foregoing, subject to the conditions in the SEC’s order. We believe this ability to co-invest will continue to enhance our ability to further our investment objectives and strategies.
In general, our investments in debt securities have a term of no more than seven years, accrue interest at variable rates (based on the one-month London Interbank Offered Rate (“LIBOR”)) and, to a lesser extent, at fixed rates. In addition, many of the debt securities we hold typically do not amortize prior to maturity. We seek debt instruments that pay interest monthly or, at a minimum, quarterly, haveand which may include a yield enhancement such as a success fee or deferred interest provision and are primarily interest only, with all principal and any accrued but unpaid interest due at maturity. Generally, success fees accrue at a set rate and are contractually due upon a change of control of the business. Some debt securities have deferred interest whereby some portion of the interest payment is added to the principal balance so that the interest is paid, together with the principal, at maturity. This form of deferred interest is often called “paid in kind”“paid-in-kind” (“PIK”). interest.
Typically, our investments in equity investments consistsecurities take the form of common stock, preferred stock, limited liability company interests, or warrants or options to purchase the foregoing. Often, these equity investments occur in connection with our original investment, buyouts and recapitalizations of a business, or refinancing existing debt.
As of March 31, 2015, our portfolio consisted of investments in 34 companies located in 16 states in 18 different industries with an aggregate fair value of $466.1 million. Since our initial public offering in 2005 and through March 31, 2015, we have invested in over 107113 different companies, while making over 106118 consecutive monthly distributions to common stockholders.
We expect that our targetinvestment portfolio will primarily include the following four categories of investments in private companies in the United States (“U.S.”):
| • | Senior Secured Debt Securities: We seek to invest a portion of our assets in senior secured debt securities also known as senior loans, senior term loans, lines of credit and senior notes. Using its assets as collateral, the borrower typically uses senior debt to cover a substantial portion of the funding needs of the business. The senior secured debt security usually takes the form of first priority liens on all, or |
| • | Senior Subordinated Secured Debt Securities:We seek to invest a portion of our assets in senior subordinated secured debt securities, also known as senior subordinated loans and senior subordinated notes. These senior subordinated |
| • | Junior Subordinated Debt Securities: We seek to invest a portion of our assets in junior subordinated debt securities, also known as subordinated loans, subordinated notes and mezzanine loans. These junior subordinated debts |
| • | Preferred and Common Equity/Equivalents: We seek to invest a portion of our assets in equity securities, which consist of preferred and common equity, or limited liability company interests, or warrants or options to acquire such securities, and are generally in combination with our debt investment in a business. Additionally, we may receive equity investments derived from restructurings on some of our existing debt investments. In many cases, we will own a significant portion of the equity which may include having voting control of the businesses in which we invest. |
Additionally, pursuant to the 1940 Act, we must maintain at least 70% of our total assets in qualifying assets, which generally include each of the investment types listed above. Therefore, the 1940 Act permits us to invest up to 30% of our assets in other non-qualifying assets. See “—Regulation as a BDC — Qualifying Assets” for a discussion of the types of qualifying assets in which we are permitted to invest pursuant to Section 55(a) of the 1940 Act.
Because the majority of the loans in our portfolio consist of term debt in private companies that typically cannot or will not expend the resources to have their debt securities rated by a credit rating agency, we expect that most, if not all, of the debt securities we acquire will be unrated. Investors should assume that these loans would be rated below what is today considered “investment grade” quality. Investments rated below investment grade are often referred to as high yield securities or junk bonds and may be considered highhigher risk, as compared to investment-grade debt instruments. In addition, many of our debt securities we hold typically do not amortize prior to maturity.
Investment Concentrations
Year over year, our investment concentration as a percentage of fair value and of cost has remained relatively unchanged. As of March 31, 2014,2015, our investment portfolio consisted of investments in 2934 portfolio companies located in 1416 states across 1418 different industries with an aggregate fair value of $314.4$466.1 million, of which our investments in Counsel Press, Inc. (“Counsel Press”), SOG Specialty K&T,Knives & Tools, LLC (“SOG”), Funko, LLC (“Funko”), Acme Cryogenics, Inc. (“Acme”), and Galaxy Tool Holdings Corp.Old World Christmas, Inc. (“Galaxy”Old World”), our threefive largest portfolio investments at fair value, collectively comprised $70.9$134.3 million, or 22.6%28.8%, of our total investment portfolio at fair value. The following table summarizes our investments by security type as of March 31, 20142015 and 2013:2014:
| March 31, 2014 | March 31, 2013 | March 31, 2015 | March 31, 2014 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Cost | Fair Value | Cost | Fair Value | Cost | Fair Value | Cost | Fair Value | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Senior debt | $ | 196,293 | 51,2 | % | $ | 169,870 | 54.0 | % | $ | 135,745 | 41.6 | % | $ | 103,882 | 36.3 | % | ||||||||||||||||||||||||||||||||||||||||||||||||
Senior subordinated debt | 82,348 | 21.5 | 70,827 | 22.5 | 103,547 | 31.7 | 86,811 | 30.3 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Senior secured debt | $ | 284,509 | 56.3 | % | $ | 263,141 | 56.5 | % | $ | 196,293 | 51.2 | % | $ | 169,870 | 54.0 | % | ||||||||||||||||||||||||||||||||||||||||||||||||
Senior subordinated secured debt | 85,937 | 17.0 | 70,378 | 15.1 | 82,348 | 21.5 | 70,827 | 22.5 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Total debt | 278,641 | 72.7 | 240,697 | 76.5 | 239,292 | 73.3 | 190,693 | 66.6 | 370,446 | 73.3 | 333,519 | 71.6 | 278,641 | 72.7 | 240,697 | 76.5 | ||||||||||||||||||||||||||||||||||||||||||||||||
Preferred equity | 98,099 | 25.6 | 62,901 | 20.0 | 81,710 | 25.0 | 82,157 | 28.7 | 127,762 | 25.3 | 111,090 | 23.8 | 98,099 | 25.6 | 62,901 | 20.0 | ||||||||||||||||||||||||||||||||||||||||||||||||
Common equity/equivalents | 6,797 | 1.7 | 10,795 | 3.5 | 5,419 | 1.7 | 13,632 | 4.7 | 7,050 | 1.4 | 21,444 | 4.6 | 6,797 | 1.7 | 10,795 | 3.5 | ||||||||||||||||||||||||||||||||||||||||||||||||
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Total equity/equivalents | 104,896 | 27.3 | 73,696 | 23.5 | 87,129 | 26.7 | 95,789 | 33.4 | 134,812 | 26.7 | 132,534 | 28.4 | 104,896 | 27.3 | 73,696 | 23.5 | ||||||||||||||||||||||||||||||||||||||||||||||||
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Total Investments | $ | 383,537 | 100.0 | % | $ | 314,393 | 100.0 | % | $ | 326,421 | 100.0 | % | $ | 286,482 | 100.0 | % | $ | 505,258 | 100.0 | % | $ | 466,053 | 100.0 | % | $ | 383,537 | 100.0 | % | $ | 314,393 | 100.0 | % | ||||||||||||||||||||||||||||||||
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InvestmentsOur investments at fair value consisted of the following industry classifications as of March 31, 20142015 and 2013:2014:
| March 31, 2014 | March 31, 2013 | March 31, 2015 | March 31, 2014 | |||||||||||||||||||||||||||||
| Fair Value | Percentage of Total Investments | Fair Value | Percentage of Total Investments | Fair Value | Percentage of Total Investments | Fair Value | Percentage of Total Investments | |||||||||||||||||||||||||
Home and Office Furnishings, Housewares, and Durable Consumer Products | $ | 70,533 | 15.1 | % | $ | 21,188 | 6.7 | % | ||||||||||||||||||||||||
Diversified/Conglomerate Manufacturing | $ | 54,845 | 17.4 | % | $ | 32,698 | 11.4 | % | 62,996 | 13.5 | 54,845 | 17.4 | ||||||||||||||||||||
Chemicals, Plastics, and Rubber | 52,753 | 16.8 | 59,170 | 20.7 | 49,312 | 10.6 | 52,753 | 16.8 | ||||||||||||||||||||||||
Leisure, Amusement, Motion Pictures, Entertainment | 39,867 | 12.7 | 29,822 | 10.4 | 44,931 | 9.6 | 39,867 | 12.7 | ||||||||||||||||||||||||
Diversified/Conglomerate Services | 31,995 | 6.9 | — | — | ||||||||||||||||||||||||||||
Machinery (Non-agriculture, Non-construction, Non-electronic | 25,917 | 8.2 | 32,662 | 11.4 | 30,397 | 6.5 | 25,917 | 8.2 | ||||||||||||||||||||||||
Personal and Non-Durable Consumer Products (Manufacturing Only) | 25,008 | 5.4 | 10,005 | 3.2 | ||||||||||||||||||||||||||||
Automobile | 25,735 | 8.2 | 7,467 | 2.6 | 24,530 | 5.3 | 25,735 | 8.2 | ||||||||||||||||||||||||
Home and Office Furnishings, Housewares, and Durable Consumer Products | 21,188 | 6.7 | 23,512 | 8.2 | ||||||||||||||||||||||||||||
Farming and Agriculture | 20,557 | 6.5 | — | — | 22,438 | 4.8 | 20,557 | 6.5 | ||||||||||||||||||||||||
Containers, Packaging, and Glass | 19,447 | 4.2 | 17,889 | 5.7 | ||||||||||||||||||||||||||||
Telecommunications | 19,241 | 4.1 | — | — | ||||||||||||||||||||||||||||
Aerospace and Defense | 18,512 | 5.9 | 20,876 | 7.3 | 18,770 | 4.0 | 18,512 | 5.9 | ||||||||||||||||||||||||
Containers, Packaging, and Glass | 17,889 | 5.7 | 23,019 | 8.0 | ||||||||||||||||||||||||||||
Beverage Food and Tobacco | 13,050 | 4.2 | 369 | 0.1 | ||||||||||||||||||||||||||||
Personal and Non-Durable Consumer Products (Manufacturing Only) | 10,005 | 3.2 | — | — | ||||||||||||||||||||||||||||
Cargo Transport | 13,972 | 3.0 | 6,500 | 2.1 | ||||||||||||||||||||||||||||
Beverage, Food and Tobacco | 12,982 | 2.8 | 13,050 | 4.2 | ||||||||||||||||||||||||||||
Textiles and Leather | 10,750 | 2.3 | — | — | ||||||||||||||||||||||||||||
Buildings and Real Estate | 7,575 | 2.4 | 6,020 | 2.2 | 1,860 | 0.4 | 7,575 | 2.4 | ||||||||||||||||||||||||
Cargo Transport | 6,500 | 2.1 | 6,897 | 2.4 | ||||||||||||||||||||||||||||
Electronics | — | — | 43,970 | 15.3 | ||||||||||||||||||||||||||||
Other < 2.0% | 6,891 | 1.5 | — | — | ||||||||||||||||||||||||||||
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Total Investments | $ | 314,393 | 100.0 | % | $ | 286,482 | 100.0 | % | $ | 466,053 | 100.0 | % | $ | 314,393 | 100.0 | % | ||||||||||||||||
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Investments
Our investments at fair value were included in the following U.S. geographic regions of the U.S. as of March 31, 20142015 and 2013:2014:
| March 31, 2014 | March 31, 2013 | March 31, 2015 | March 31, 2014 | |||||||||||||||||||||||||||||
| Fair Value | Percentage of Total Investments | Fair Value | Percentage of Total Investments | Fair Value | Percentage of Total Investments | Fair Value | Percentage of Total Investments | |||||||||||||||||||||||||
West | $ | 117,781 | 37.5 | % | $ | 81,400 | 28.4 | % | $ | 161,444 | 34.6 | % | $ | 117,781 | 37.5 | % | ||||||||||||||||
Northeast | 133,814 | 28.7 | 67,862 | 21.6 | ||||||||||||||||||||||||||||
South | 89,915 | 28.6 | 125,518 | 43.8 | 133,703 | 28.7 | 89,915 | 28.6 | ||||||||||||||||||||||||
Northeast | 67,862 | 21.6 | 58,319 | 20.4 | ||||||||||||||||||||||||||||
Midwest | 38,835 | 12.3 | 21,245 | 7.4 | 37,092 | 8.0 | 38,835 | 12.3 | ||||||||||||||||||||||||
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Total Investments | $ | 314,393 | 100.0 | % | $ | 286,482 | 100.0 | % | $ | 466,053 | 100.0 | % | $ | 314,393 | 100.0 | % | ||||||||||||||||
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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.
Our Investment Adviser and Administrator
Gladstone Management Corporation (the “Adviser”) is our affiliate, investment adviser, and a privately-held company led by a management team that has extensive experience in our lines of business. Another of our and the Adviser’s affiliates, a privately-held company, Gladstone Administration, LLC (the “Administrator”), employs, among others, our chief financial officer and treasurer, chief accounting officer, chief valuation officer, chief compliance officer, internal legalgeneral counsel and secretary (who also serves as the president of the Administrator) and their respective staffs. Excluding our chief financial officer and
treasurer, allAll but one of our executive officers serve as directors, or executive officers, officers, or both,a combination of the foregoing, of the following of our affiliates: Gladstone Commercial Corporation (“Gladstone Commercial”), a publicly-traded real estate investment trust; Gladstone Capital Corporation (“Gladstone Capital”), a publicly-traded BDC and RIC; Gladstone Land Corporation (“Gladstone Land”), a publicly-traded real estate company that invests in farmland and farm related property;investment trust; the Adviser; and the Administrator. Our chief financial officer and treasurer is also the chief financial officer and treasurer of Gladstone Capital. David Gladstone, our chairman and chief executive officer, also serves on the board of managers of our affiliate, Gladstone Securities, LLC (“Gladstone Securities”), a privately-held broker-dealer registered with the Financial Industry Regulatory Authority (“FINRA”) and insured by the Securities Investor Protection Corporation.
The Adviser and Administrator also provide investment advisory and administrative services, respectively, to our affiliates, including, but not limited to, Gladstone Commercial; Gladstone Capital; and Gladstone Land. In the future, the Adviser and Administrator may provide investment advisory and administrative services, respectively, to other funds and companies, both public and private.
We have been externally managed by the Adviser pursuant to an investment advisory and management agreement and ourthe Administrator has provided administration services to us under an administration agreement since June 22, 2005. The Adviser was organized as a corporation under the laws of the State of Delaware on July 2, 2002, and is a registered investment adviser under the Investment Advisers Act of 1940, as amended. The Administrator was organized as a limited liability company under the laws of the State of Delaware on March 18, 2005. The Adviser and Administrator are headquartered in McLean, Virginia, a suburb of Washington, D.C., and the The Advisor also has offices in several other states.
Investment Process
Overview of Investment and Approval Process
To originate investments, the Adviser’s investment professionals use an extensive referral network comprised primarily of private equity sponsors, venture capitalists, leveraged buyout funds, investment bankers, attorneys, accountants, commercial bankers and business brokers. The Adviser’s investment professionals review information received from these and other sources in search of potential financing opportunities. If a potential opportunity matches our investment objectives, the investment professionals will seek an initial screening of the opportunity with our president, David Dullum, to authorize the submission of an indication of interest (“IOI”) to the prospective portfolio company. If the prospective portfolio company passes this initial screening and the IOI is accepted by the prospective company, the investment professionals will seek approval to issue a letter of intent (“LOI”) from the Adviser’s investment committee, which is composed of DavidMr. Gladstone (our chairman and chief executive officer), Terry Lee Brubaker (our vice chairman and chief operating officer and assistant secretary)officer), and Mr. Dullum, to the prospective company. If this LOI is issued, then professionals from the Adviser and Gladstone Securities (the “Due Diligence Team”) will conduct a due diligence investigation and create a detailed profile summarizing the prospective portfolio company’s historical financial statements, industry, competitive position and management team and analyzing its conformity to our general investment criteria. The investment professionals then present this profile to the Adviser’s investment committee, which must approve each investment. Further, each investment is available for review by the members of our board of directors (our “Board of Directors”), a majority of whom are not “interested persons” as defined in Section 2(a)(19) of the 1940 Act.
Prospective Portfolio Company Characteristics
We have identified certain characteristics that we believe are important in identifying and investing in prospective portfolio companies. The criteria listed below provide general guidelines for our investment decisions, although not all of these criteria may be met by each portfolio company.
| • | Experienced Management. We typically require that the businesses in which we invest have experienced management teams or a hiring plan in place to install an experienced management team. We also require the businesses to have in place proper incentives to induce management to succeed and act in concert with our interests as investors, including having significant equity or other interests in the financial performance of their companies. |
| • | Value-and-Income Orientation and Positive Cash Flow. Our investment philosophy places a premium on fundamental analysis from an investor’s perspective and has a distinct value-and-income orientation. In seeking value, we focus on established companies in which we can invest at relatively low multiples of earnings before interest, taxes, depreciation and amortization (“EBITDA”), and that have positive operating cash flow at the time of investment. In seeking income, we typically invest in companies that generate relatively stable to growing sales, cash flows, and |
| • | Strong Competitive Position in an |
| • | Liquidation Value of |
Extensive Due Diligence
OurThe Due Diligence Team conducts what we believe are extensive due diligence investigations of our prospective portfolio companies and investment opportunities. The due diligence investigation may begin with a review of publicly available information followed by in depth business analysis, including, but not limited to, some or all of the following:
Upon completion of a due diligence investigation and a decision to proceed with an investment, the Adviser’s investment professionals who have primary responsibility for the investment present the investment opportunity to the Adviser’s investment committee. The investment committee then determines whether to pursue the potential investment. Additional due diligence of a potential investment may be conducted on our behalf by attorneys and independent accountants, as well as other outside advisers, prior to the closing of the investment, as appropriate.
We also rely on the long-term relationships that the Adviser’s investment professionals have with venture capitalists, leveraged buyout funds, investment bankers, commercial bankers, private equity sponsors, attorneys, accountants, and business brokers. In addition, the extensive direct experiences of our executive officers and managing directors in the operations of and providing debt and equity capital to small and medium-sized private businesses plays a significant role in our investment evaluation and assessment of risk.
Investment Structure
Once the Adviser has determined that an investment meets our standards and investment criteria, the Adviser works with the management of that company and other capital providers to structure the transaction in a way that we believe will provide us with the greatest opportunity to maximize our return on the investment, while providing appropriate incentives to management of the company. As discussed above, the capital classes through which we typically structure a deal include senior secured debt, senior subordinated secured debt, junior subordinated secured debt, and preferred and common equity or equivalents.equivalents, the majority of which is secured first and second lien debt investments. Through its risk management process, the Adviser seeks to limit the downside risk of our investments by:
We expect to hold most of our investments in senior debt and senior and junior subordinated debtinvestments until maturity or repayment, but may sell our investments (including our equity investments) earlier if a liquidity event takes place, such as the sale or recapitalization
of a portfolio company or, in the case of an equity investment in a company, its initial public offering. Occasionally, we may sell some or all of our investment interests in a portfolio company to a third party, such as an existing investor in the portfolio company, in a privately negotiated transaction.
Competitive Advantages
A large number of entities compete with us and make the types of investments that we seek to make in small and medium-sized privately-owned businesses. Such competitors include private equity funds, leveraged buyout funds, other BDCs, venture capital funds, investment banks and other equity and non-equity based investment funds, and other financing sources, including traditional financial services companies such as commercial banks. Many of our competitors are substantially larger than we are and have considerably greater funding sources thator are not availableable to us.access capital more cost effectively. In addition, certain of our competitors may have higher risk tolerances or different risk assessments, which could allow them to consider a wider variety of investments, and establish more relationships and build their market shares.a larger portfolio of investments. Furthermore, many of these competitors are not subject to the regulatory restrictions that the 1940 Act imposes on us as a BDC. However, we believe that we have the following competitive advantages over many other providers of financing to small and medium-sized businesses.
Management Expertise
DavidMr. Gladstone, our chairman and chief executive officer, is also the chairman and chief executive officer of the Adviser and its affiliated companies, other than Gladstone Securities, (the “Gladstone Companies”) and has been involved in all aspects of the Gladstone Companies’ investment activities, including serving as a member of the Adviser’s investment committee. Davidcommittees for each of the Company, Gladstone Capital, Gladstone Commercial, and Gladstone Land. Mr. Gladstone and Mr. Dullum, our president and a director, hashave extensive experience in private equity investing in middle market companies. Terry Leecompanies and with operating in the BDC marketplace in general. Mr. Brubaker, our vice chairman and chief operating officer, and assistant secretary, has substantial experience in acquisitions and operations of companies. Messrs. Gladstone and Brubaker also have principal management responsibility for the Adviser as its senior executive officers. These twothree individuals dedicate a significant portion of their time to managing our investment portfolio. Our senior management has extensive experience providing capital to small and medium-sized companies and has worked together at the Gladstone Companies for more than ten years. In addition, we have access to the resources and expertise of the Adviser’s investment professionals and support staff who possess a broad range of transactional, financial, managerial, and investment skills.
Increased Access to Investment Opportunities Developed Through Extensive Research Capability and Network of Contacts
The Adviser seeks to identify potential investments through active origination and due diligence and through its dialogue with numerous management teams, members of the financial community and potential corporate partners with whom the Adviser’s investment professionals have long-term relationships. We believe that the Adviser’s investment professionals have developed a broad network of contacts within the investment, commercial banking, private equity and investment management communities, and that
their reputation, experience, and focus on investing in investment managementsmall and medium-sized companies enables us to source and identify well-positioned prospective portfolio companies, which provide attractive investment opportunities. Additionally, the Adviser expects to generate information from its professionals’ network of accountants, consultants, lawyers and management teams of portfolio companies and other companies.companies to support the Adviser’s investment activities.
Disciplined, Value and Income-Oriented Investment Philosophy with a Focus on Preservation of Capital
In making its investment decisions, the Adviser focuses on the risk and reward profile of each prospective portfolio company, seeking to minimize the risk of capital loss without foregoing the potential for capital appreciation. We expect the Adviser to use the same value and income-oriented investment philosophy that its professionals use in the management of the other Gladstone Companies and to commit resources to manage downside exposure. The Adviser’s approach seeks to reduce our risk in investments by using some or all of the following approaches:
Longer Investment Horizon
Unlike private equity and venture capital funds that are typically organized as finite-life partnerships, we are not subject to standard periodic capital return requirements. The partnership agreements of most private equity and venture capital funds typically provide that these funds may only invest investors’ capital once and must return all capital and realized gains to investors within a finite time period, often seven to ten years. These provisions often force private equity and venture capital funds to seek returns on their investments by causing their portfolio companies to pursue mergers, public equity offerings, or other liquidity events more quickly than might otherwise be optimal or desirable, potentially resulting in a lower overall return to investors and/or an adverse impact on their portfolio companies. In contrast, we are a corporation of perpetual duration and are exchange-traded. We believe that our flexibility to make investments with a long-term view and without the capital return requirements of traditional private investment vehicles provides us with the opportunity to achieve greater long-term returns on invested capital.
Flexible Transaction Structuring
We believe our management team’s broad expertise and its ability to draw upon many years of combined experience enables the Adviser to identify, assess, and structure investments successfully across all levels of a company’s capital structure and manage potential risk and return at all stages of the economic cycle. We are not subject to many of the regulatory limitations that govern traditional lending institutions, such as banks. As a result, we are flexible in selecting and structuring investments, adjusting investment criteria and transaction structures and, in some cases, the types of securities in which we invest.invest, thereby affording us a competitive advantage of providing both, equity and debt financing, which may limit uncertainty related to the close of the transaction. We believe that this approach enables the Adviser to identifydevelop a financing structure which best fits the investment and growth profile of the underlying business and yields attractive investment opportunities that will continue to generate current income and capital gain potential throughout the economic cycle, including during turbulent periods in the capital markets.
Leverage
For the purpose of making investments and taking advantage of favorable interest rates, we may issue senior securities up to the maximum amount permitted by the 1940 Act. The 1940 Act currently permits us to issue senior securities representing indebtedness and senior securities that are stock to which we refer collectively as(collectively our “Senior Securities,”Securities”) in amounts such that we maintain an asset coverage ratio, as defined in Section 18(h) of the 1940 Act, of at least 200% on each suchour Senior SecuritySecurities immediately after each issuance of such Senior Security.Securities. We may also incur such indebtedness to repurchase our common stock. AsWe may also be exposed to the risks of leverage as a result of incurring indebtedness, generally such as through our revolving line of credit or issuing senior securitiesSenior Securities representing indebtedness, such as our 7.125% Series A, CumulativeSeries B, and Series C Term Preferred Stock (our “Term Preferred Stock”), we are exposed to the risks of leverage.Stock. Although borrowing money for investments increases the potential for gain, it also increases the risk of a loss. A decrease in the value of our investments will have a greater
impact on the value of our common stock to the extent that we have borrowed money to make investments. There is a possibility that the costs of borrowing could exceed the income we receive on the investments we make with such borrowed funds. Our Board of Directors is authorized to provide for the issuance of Senior Securities with such preferences, powers, rights and privileges as it deems appropriate, subject to the requirements of the 1940 Act. See “—Regulation as a BDC—Asset Coverage” for a discussion of our leveraging constraints and “Risk“Risk Factors—Risks Related to Our External Financing”Financing” for further discussion of certain leveraging risks.
Ongoing Management of Investments and Portfolio Company Relationships
The Adviser’s investment professionals actively oversee each investment by continuously evaluating the portfolio company’s performance and typically working collaboratively with the portfolio company’s management to identify and incorporate best resources and practices that help us achieve our projected investment performance.
Monitoring
The Adviser’s investment professionals monitor the financial performance, trends, and changing risks of each portfolio company on an ongoing basis to determine if each company is performing within expectations and to guide the portfolio company’s management in taking the appropriate courses of action. The Adviser employs various methods of evaluating and monitoring the performance of our investments in portfolio companies, which can include the following:
Relationship Management
The Adviser’s investment professionals interact with various parties involved with a portfolio company, or investment, by actively engaging with internal and external constituents, including:
Managerial Assistance and Services
As a BDC, we make available significant managerial assistance to our portfolio companies and provide other services to such portfolio companies. Neither we, nor the Adviser, currently receive fees in connection with the managerial assistance we make available. At times, the Adviser provides other services to certain of our portfolio companies and it receives fees for these other services. 50%Such services may include, but are not limited to: (i) assistance obtaining, sourcing or structuring credit facilities, long term loans or additional equity from unaffiliated third parties; (ii) negotiating important contractual financial relationships; (iii) consulting services regarding restructuring of certainthe portfolio company and financial modeling as it relates to raising additional debt and equity capital from unaffiliated third parties; and (iv) primary role in interviewing, vetting and negotiating employment contracts with candidates in connection with adding and retaining key portfolio company management team members. At the end of each quarter, we credit 100% of these fees and 100% of others historically have been credited against the base management fee that we would otherwise be required to pay to ourthe Adviser. Effective October 1, 2013, 100% of all these fees are credited against the base management fee that we would otherwise be required to pay to our Adviser; however,However, pursuant to the terms of the Advisory Agreement,agreement with the Adviser, a small percentage of certain of such fees, primarily for the valuation of portfolio companies, is retained by the Adviser in the form of reimbursement, at cost, for certain tasks completed by personnel of the Adviser.
In February 2011, Gladstone Securities started providing other services (such as investment banking and due diligence services) to certain of our portfolio companies. Any such fees paid by portfolio companies to Gladstone Securities upon origination do not impact the overall fees we pay to the Adviser or the overall fees credited against the base management fee.
Valuation Process
The following is a general description of the Company’s investment valuation stepspolicy (the “Policy”) (which has been approved by our Board of Directors) that the professionals fromof the Adviser and Administrator, (thewith oversight and direction from the chief valuation officer, an employee of the Administrator that reports directly to the Company’s Board of Directors, (collectively, the “Valuation Team”) takeuse each quarter to determine the fair value of our investment portfolio. In accordance with the 1940 Act, our Board of Directors has the ultimate responsibility for reviewing and approving, in good faith, the fair value of our investments based on the Policy. The Valuation TeamAdviser values our investments in accordance with the requirements of the 1940 Act. We value securitiesAct and accounting principles generally accepted in the U.S. (“GAAP”). There is no single standard for which market quotations are readily available at their market value. We value all other securities and assets atdetermining fair value (especially for privately-held businesses), as determined in good faith byfair value depends upon the specific facts and circumstances of each individual investment. Each quarter, our Board of Directors. In determiningDirectors reviews the value of our investments,Policy to determine if changes thereto are advisable and assesses whether the Valuation Team has established an investment valuation policy (the “Policy”). The Policy has been approved by our Board of Directors and each quarter the Board of Directors reviews whether the Valuation Team have applied the Policy consistently and votes whether or notconsistently. With respect to accept the recommended valuation of our investment portfolio. Due toportfolio, the uncertainty inherent in the valuation process, such estimates of fair value may differ significantly from the values that would have been obtained had a ready market for the securities existed. Investments for which market quotations are readily available are recorded in our financial statements at such market quotations. With respect to any investments for which market quotations are not readily available, we performValuation Team performs the following valuation processsteps each quarter:
Fair value measurements of our investments may involve subjective judgment and estimates. Due to the uncertainty inherent in valuing these securities, the Adviser’s determinations of fair value may fluctuate from period to period and may differ materially from the values that could be obtained if a ready market for determiningthese securities existed. Our NAV could be materially affected if the aggregateAdviser’s determinations regarding the fair value of our portfolioinvestments are materially different from the values that we ultimately realize upon our disposal of investments.
such securities. Our valuation policies, procedures and processes are more fully described under“Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies — Investment Valuation.”
Investment Advisory and Management Agreement
We entered into an investment advisory and management agreement with the Adviser (the “Advisory Agreement”). In accordance with the Advisory Agreement, we pay the Adviser fees as compensation for its services, consisting of a base management fee and an incentive fee. On July 9, 2013,15, 2014, our Board of Directors approved the annual renewal of the Advisory Agreement with the Adviser through August 31, 2014. Mr.2015. Our Board of Directors considered the following factors as the basis for its decision to renew the Advisory Agreement: (1) the nature, extent and quality of services provided by the Adviser to our stockholders; (2) the investment performance of the Company and the Adviser, (3) the costs of the services to be provided and profits to be realized by the Adviser and its affiliates from the relationship with the Company, (4) the extent to which economies of scale will be realized as the Company and the Company’s affiliates that are managed by the same Adviser (Gladstone Commercial, Gladstone our chairmanCapital and chief executive officer, controlsGladstone Land) grow and whether the Adviser.fee level under the Advisory Agreement reflects the economies of scale for the Company’s investors, (5) the fee structure of the advisory and administrative agreements of comparable funds, and (6) indirect profits to the Adviser created through the Company and (7) in light of the foregoing considerations, the overall fairness of the advisory fee paid under the Advisory Agreement.
Base Management Fee
The base management fee is computed and generally payable quarterly to the Adviser and is assessed at an annual rate of 2%. It is2.0%, computed on the basis of the value of our average gross assets at the end of the two most recently completed quarters (inclusive of the current quarter), 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 makeborrowings, and adjusted appropriately for any share issuances or repurchases during the period. Additionally, pursuant to the requirements of the 1940 Act, the Adviser makes available significant managerial assistance to our portfolio companies andcompanies. The Adviser may also 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 under other agreements and receivesmay receive fees for theseservices other services. 50% of certainthan managerial assistance, as discussed above. We generally credit 100% of these fees and 100% of others historically have been credited against the base management fee that we would otherwise be required to pay to our Adviser. Effective October 1, 2013, 100% of all these fees are credited against the base management fee that we would otherwise be required to pay to our Adviser; however, pursuant to the terms of the Advisory Agreement, a small percentage of certain of such fees, primarily for the valuation of portfolio companies, is retained by the Adviser in the form of reimbursement, at cost, for certain tasks completed by personnel of the Adviser.
Loan Servicing Fee
The Adviser also services the loans held by our wholly-owned subsidiary, Gladstone Business Investment, LLC (“Business Investment”), in return for which the Adviser receives a 2.0% annual fee based on the monthly aggregate outstanding balance of loans pledged under our revolving line of credit. The entire loan servicing fee paid monthly to the Adviser by Business Investment is voluntarily and irrevocably credited against the base management fee otherwise payable to the Adviser since Business Investment is a consolidated subsidiary of the Company, and overall, the base management fee, inclusive of the loan servicing fee, cannot exceed 2.0% of total assets (as reduced by cash and cash equivalents pledged to creditors) during any given calendar year pursuant to the Advisory Agreement.
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 anThe income-based incentive fee with respect to our pre-incentive fee net investment income in each calendar quarteris generally payable quarterly to the Adviser and is computed as follows:
Quarterly Incentive Fee Based on Net Investment Income
Pre-incentive fee net investment income
(expressed as a percentage of the value of net assets)
Percentage of pre-incentive fee net investment income
allocated to income-related portion of incentive fee
The second part of the incentive fee is a capital gains-based incentive fee that will beis 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%20.0% of our realized capital gains, less any realized capital losses and unrealized depreciation, calculated as of the end of the fiscalpreceding calendar year. In determining theThe capital gains-based incentive fee payable to the Adviser we will calculate theis calculated based on (i) cumulative aggregate realized capital gains andsince our inception, less (ii) cumulative aggregate realized capital losses since our inception, andif any, less (iii) the entire portfolio’s aggregate net unrealized capital depreciation, if any, as of the date of the calculation. If this number is positive at the applicable calculation as applicable, withdate, then the capital gains-based incentive fee for such year equals 20.0% of such amount, less the aggregate amount of any capital gains-based incentive fees paid in respect to each of the investmentsour portfolio in our portfolio.all prior years. For this purpose,calculation purposes, cumulative aggregate realized capital gains, if any, equals the sum of the differencesexcess 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 whichdeficit between the net sales price
of each investment, when sold, is less thanand the original cost of such investment since our inception. Aggregate netThe entire portfolio’s aggregate unrealized capital depreciation, if any, equals the sum of the difference, if negative,deficit between the valuationfair value of each investment security 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 anyinvestment security. We have not incurred 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 ourfrom inception through March 31, 2014,2015, as cumulative net unrealized capital depreciation has exceeded cumulative realized capital gains net of cumulative realized capital losses.
Additionally, in accordance with accounting principles generally accepted in the U.S. (“GAAP”),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 reporting period, then GAAP requires us to record a capital gains-based incentive fee equal to 20%20.0% 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.reporting period. 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 any such unrealized capital appreciation will be realized in the future. NoThere has been no GAAP accrual recorded for a capital gains-based incentive fee has been recorded fromsince our inception through March 31, 2014.2015.
Our Board of Directors accepted an unconditional and irrevocable voluntary credit from the Adviser to reduce the income-based incentive fee to the extent net investment income did not cover 100% of the distributions to common stockholders for the year ended March 31, 2013, which credit totaled $0.2 million. For the years ended March 31, 2015 and 2014, there were no such incentive fee credits from the Adviser.
Administration Agreement
We have entered into an administration agreement with the Administrator (the “Administration Agreement”) with the Administrator,, whereby we pay separately for administrative services. The Administration Agreement provides for payments equal to our allocable portion of the Administrator’s overhead expenses inincurred while performing its obligations under the Administration Agreement, including, but not limitedservices to us, which are primarily rent and the salaries and benefits expenses of the Administrator’s employees, including our chief financial officer and treasurer, chief accounting officer, chief valuation officer, chief compliance officer internaland general counsel and secretary (who also serves as the Administrator’s president) and their respective staffs. Ourstaff. Prior to July 1, 2014, our allocable portion of administrativethe expenses iswere generally derived by multiplying that portion of the Administrator’s totalexpenses allocable expensesto all funds managed by the Adviser by the percentage of our total assets at the beginning of theeach quarter in comparison to the total assets at the beginning of theeach quarter of all funds managed by the Adviser.
Effective July 1, 2014, our allocable portion of the Administrator’s expenses are generally derived by multiplying the Administrator’s total expenses by the approximate percentage of time during the current quarter the Administrator’s employees performed services for us in relation to their time spent performing services for all companies serviced by the Administrator under similar agreements.Administrator. These administrative fees are accrued at the end of the quarter when the services are performed and generally paid the following quarter. On July 9, 2013,15, 2014, our Board of Directors approved the annual renewal of the Administration Agreement through August 31, 2014.2015.
Material U.S. Federal Income Tax Considerations
RIC Status
To maintain the qualificationqualify for treatment as a RIC under Subchapter M of the Code, we must distribute to our stockholders, for each taxable year, at least 90% of our “investment company taxable income,” which is generally our ordinary income plus the excess of our net short-term capital gains over net long-term capital losses. We refer to this as the “annual distribution requirement.” We must also meet several additional requirements, including:
Due to the limited number of investments in our portfolio, our asset composition at times has affected our ability to satisfy certain elements of the rules of the Code, for maintenance of our status as a RIC thereunder. 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 fiscal year ended March 31, 2014, we were at times below the 50% threshold.
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 March 31, 2014, our asset composition satisfied the 50% threshold. Additionally, our asset composition satisfied the 50% threshold as of September 30 and December 31, 2013 without, but as a precaution to ensure compliance, we also purchased short-term qualified securities, which were funded through short-term loan agreements. Subsequent to each of those measurement dates, the short-term qualified securities matured and we repaid the short-term loans. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Recent Developments—Short-Term Loan” for more information regarding these transactions.
Until the composition of our assets satisfies the required 50% threshold by a significant margin, we may continue to employ similar purchases of qualified securities using short-term loans that would ensure that we satisfy the 50% threshold. There can be no assurance, however, that we will be able to enter into such a transaction on reasonable terms, if at all.
Failure to Qualify as a RIC.RIC
If we are unable to qualify for treatment as a RIC, we willwould be subject to tax on all of our taxable income at regular corporate rates. We would not be able to deduct distributions to stockholders, nor would we be required to make such distributions. Distributions would be taxable to our stockholders as dividend income to the extent of our current and accumulated earnings and profits. Subject to certain limitations under the Code, corporate distributees would be eligible for the dividends received deduction. Distributions in excess of our current and accumulated earnings and profits would be treated first as a return of capital to the extent of the stockholder’s adjusted tax basis, and then as a gain realized from the sale or exchange of property. If we fail to meet the RIC requirements for more than two consecutive years and then seek to requalify as a RIC, we generally would be requiredsubject to recognize a gaincorporate-level federal income tax on of any unrealized appreciation with respect to our assets to the extent that any such unrealized appreciation is recognized during a specified period up to 10-years. Absent such special election, any gain we recognized would be deemed distributed to our stockholders as a taxable distribution.ten years.
Qualification as a RIC.RIC
If we qualify as a RIC and distribute to stockholders each year in a timely manner at least 90% of our investment company taxable income, we will not be subject to federal income tax on the portion of our taxable income and gains we distribute to stockholders. We would, however, be subject to a 4% nondeductible federal excise tax if we do not distribute, actually or on a deemed basis, an amount at least equal to the sum of (1) 98% of our ordinary income for the calendar year, (2) 98.2% of our capital gains in excess of capital losses for the one-year period ending on October 31 of the calendar year and (3) any ordinary income and capital gains in excess of capital losses for preceding years that were not distributed during such years. For the years ended December 31, 2014, 2013 and 2012, we incurred $0.1 million, $0.3 million and $31, respectively, in excise taxes. As of March 31, 2015, our capital loss carryforward totaled $0.3 million.
The 4% federal excise tax would applyapplies only to the amount by which the required distributions exceed the amount of income we distribute, actually or on a deemed basis, to stockholders. We will be subject to regular corporate income tax, currently at rates up to 35%, on any undistributed income that is not distributed or deemed to be distributed, including both ordinary income and capital gains. We intend tomay retain some or all of our capital gains, but we generally intend to treat the retained amount as a deemed distribution. In that case, among other consequences, we will pay tax on the retained amount, each stockholder will be required to include its share of the deemed distribution in income as if it had been actually distributed to the stockholder and the stockholder will be entitled to claim a credit or refund equal to its allocable share of the tax we pay on the retained capital gain. The amount of the deemed distribution, net of such tax, will be added to the stockholder’s cost basis for its common stock. Since we expect to pay tax on any retained capital gains at our regular corporate capital gain tax rate, and since that rate is in excess of the maximum rate currently payable by individuals on long-term capital gains, the amount of tax that individual stockholders will be treated as having paid will exceed the tax they owe on the capital gain dividend and such excess may be claimed as a credit or refund against the stockholder’s other tax obligations. A stockholder that is not subject to U.S. federal income tax or tax on long-term capital gains would be required to file a U.S. federal income tax return on the appropriate form in order to claim a refund for the taxes we paid. In order to utilize the deemed distribution approach, we must provide written notice to the stockholders after the close of the relevant tax year. We will also be subject to alternative minimum tax, but any tax preference items would be apportioned between us and our stockholders in the same proportion that distributions, other than capital gain dividends, paid to each stockholder bear to our taxable income determined without regard to the dividends paid deduction. As of March 31, 2015, we have never distributed investment company taxable income as a deemed distribution.
Taxation of Our U.S. Stockholders
Distributions
Distributions.For any period during which we qualify as a RIC for federal income tax purposes, distributions to our stockholders attributable to our investment company taxable income generally will be taxable as ordinary income to stockholders to the extent of our current or accumulated earnings and profits. We first allocate our earnings and profits to distributions to our preferred stockholders and then to distributions to our common stockholders based on priority in our capital structure. Any distributions in excess of our earnings and profits will first be treated as a return of capital to the extent of the stockholder’s adjusted basis in his or her shares of common stock and thereafter as gain from the sale of shares of our common stock. Distributions of our long-term capital gains, reported by us as such, will be taxable to stockholders as long-term capital gains regardless of the stockholder’s holding period for its common stock and whether the distributions are paid in cash or invested in additional common stock. Corporate stockholders are generally eligible for the 70% dividends received deduction with respect to dividends received from us, other than capital gains dividends, but only to the extent such amount reported by us does not exceed theis attributable to dividends received by us from taxable domestic corporations.
Any dividenddistribution declared by us in October, November or December of any calendar year, payable to stockholders of record on a specified date in such a month and actually paid during January of the following year, will be treated as if it were paid by us and received by the
stockholders on December 31 of the previous year. In addition, we may elect (in accordance with Section 855(a) of the Code) to relate a dividenddistribution back to the prior taxable year if we (1) declare such dividenddistribution prior to the later of the due date for filing our return for that taxable year or the 15th day of the ninth month following the close of the taxable year, (2) make the election in that return, and (3) distribute the amount in the 12-month period following the close of the taxable year but not later than the first regular dividenddistribution payment of the same type following the declaration. Any such election will not alter the general rule that a stockholder will be treated as receiving a dividenddistribution in the taxable year in which the distribution is made, subject to the October, November, December rule described above. As of March 31, 2015, our Section 855(a) distributions were $4.0 million.
If a common stockholder participates in our “opt in” dividend reinvestment plan, any distributions reinvested under the plan will be taxable to the common stockholder to the same extent, and with the same character, as if the common stockholder had received the distribution in cash. The common stockholder will have an adjusted basis in the additional common shares purchased through the plan equal to the amount of the reinvested distribution. The additional common shares will have a new holding period commencing on the day following the day on which the shares are credited to the common stockholder’s account. The plan agent purchases shares in the open market in connection with the obligations under the plan. We do not have a dividend reinvestment plan for our preferred stockholders.
Sale of Our Shares.Shares
A U.S. stockholder generally will recognize taxable gain or loss if the U.S. stockholder sells or otherwise disposes of his, her or its shares of our common or preferred stock. Any gain arising from such sale or disposition generally will be treated as long-term capital gain or loss if the U.S. stockholder has held his, her or its shares for more than one year. Otherwise, it will be classified as short-term capital gain or loss. However, any capital loss arising from the sale or disposition of shares of our common stock held for six months or less will be treated as long-term capital loss to the extent of the amount of capital gain dividends received, or undistributed capital gain deemed received, with respect to such shares. Under the tax laws in effect as of the date of this filing, individual U.S. stockholders are subject to a maximum federal income tax rate of 20% on their net capital gain (i.e. the excess of realized net long-term capital gain over realized net short-term capital loss for a taxable year) including any long-term capital gain derived from an investment in our shares. Such rate is lower than the maximum rate on ordinary income currently payable by individuals. Corporate U.S. stockholders currently are subject to federal income tax on net capital gain at the same rates applied to their ordinary income (currently up to a maximum of 35%). Capital losses are subject to limitations on use for both corporate and non-corporate stockholders. Certain U.S. stockholders who are individuals, estates or trusts generally are subject to a 3.8% Medicare tax on, among other things, dividends on, and capital gain from the sale or other disposition of, shares of our common stock.
Backup Withholding.Withholding
We may be required to withhold federal income tax, or backup withholding, currently at a rate of 28%, from all taxable distributions to any non-corporate U.S. stockholder (1) who fails to furnish us with a correct taxpayer identification number or a certificate that such stockholder is exempt from backup withholding, or (2) with respect to whom the Internal Revenue Service (“IRS”) notifies us that such stockholder has failed to properly report certain interest and dividend income to the IRS and to respond to notices to that effect. An individual’s taxpayer identification number is generally his or her social security number. Any amount withheld under backup withholding is allowed as a credit against the U.S. stockholder’s federal income tax liability, provided that proper information is provided to the IRS.
The Foreign Account Tax Compliance Act (“FATCA”) imposes a federal withholding tax on certain types of payments made to “foreign financial institutions” and certain other non-U.S. entities unless certain due diligence, reporting, withholding, and certification obligation requirements are satisfied. Under delayed effective dates provided for in the Treasury Regulations and other IRS guidance, such required withholding will not begin until July 1, 2014 with respect to dividends on our stock, and January 1, 2017 with respect to gross proceeds from a sale or other disposition of our stock.
Regulation as a BDC
We are a closed-end, non-diversified management investment company that has elected to be regulated as a BDC under Section 54 of the 1940 Act. As such, we are subject to regulation under the 1940 Act. The 1940 Act contains prohibitions and restrictions relating to transactions between BDCs and their affiliates, principal underwriters and affiliates of those affiliates or underwriters and requires that a majority of the directors be persons other than “interested persons,” as defined in the 1940 Act. In addition, the 1940 Act provides that we may not change the nature of our business so as to cease to be, or to withdraw our election as, a BDC unless approved by a majority of our outstanding “voting securities,” as defined in the 1940 Act.
We intend to conduct our business so as to retain our status as a BDC. A BDC may use capital provided by public stockholders and from other sources to invest in long-term private investments in businesses. A BDC provides stockholders the ability to retain the liquidity of a publicly-traded stock while sharing in the possible benefits, if any, of investing in primarily privately owned companies.
In general, a BDC must have been organized and have its principal place of business in the U.S. and must be operated for the purpose of making investments in qualifying assets, as described in Sections 55(a)(1) – (through (a)(3) of the 1940 Act.
Qualifying Assets
Under the 1940 Act, a BDC may not acquire any asset other than assets of the type listed in Section 55(a) of the 1940 Act, which are referred to as qualifying assets, unless, at the time the acquisition is made, qualifying assets, other than certain interests in furniture, equipment, real estate, or leasehold improvements (“operating assets”Operating Assets”) represent at least 70% of our total assets, exclusive of operating assets.Operating Assets. The types of qualifying assets in which we may invest under the 1940 Act include, but are not limited to, the following:
| (1) | Securities purchased in transactions not involving any public offering from the issuer of such securities, which issuer is an eligible portfolio company. An eligible portfolio company is generally defined in the 1940 Act as any issuer which: |
| (a) | is organized under the laws of, and has its principal place of business in, any State or States in the |
| (b) | is not an investment company (other than a small business investment company wholly owned by the BDC or otherwise excluded from the definition of investment company); and |
| (c) | satisfies one of the following: |
| (i) | it does not have any class of securities with respect to which a broker or dealer may extend margin credit; |
| (ii) | it is controlled by the BDC and for which an affiliate of the BDC serves as a director; |
| (iii) | it has total assets of not more than $4 million and capital and surplus of not less than $2 million; |
| (iv) | it does not have any class of securities listed on a national securities exchange; or |
| (v) | it has a class of securities listed on a national securities exchange, with an aggregate market value of outstanding voting and non-voting equity of less than $250 million. |
| (2) | Securities received in exchange for or distributed on or with respect to securities described in (1) above, or pursuant to the exercise of options, warrants or rights relating to such securities. |
| (3) | Cash, cash items, government securities or high quality debt securities maturing in one year or less from the time of investment. |
As of March 31, 2015, 98.8% of our assets were qualifying assets.
Asset Coverage
Pursuant to Section 61(a)(2) of the 1940 Act, we are permitted, under specified conditions, to issue multiple classes of Senior Securities representing indebtedness. However, pursuant to Section 18(c) of the 1940 Act, we are permitted to issue only one class of Senior Securities that is stock. In either case, we may only issue such Senior Securities if such class of Senior Securities, after such issuance, has an asset coverage, as defined in Section 18(h) of the 1940 Act, of at least 200%.
In addition, our ability to pay dividends or distributions (other than dividends payable in our stock) to holders of any class of our capital stock would be restricted if our Senior Securities representing indebtedness fail to have an asset coverage of at least 200% (measured at the time of declaration of such distribution and accounting for such distribution). The 1940 Act does not apply this limitation to privately arranged debt that is not intended to be publicly distributed, unless this limitation is specifically negotiated by the lender. In addition, our ability to pay dividends or distributions (other than dividends payable in our common stock) to our common stockholders would be restricted if our Senior Securities that are stock fail to have an asset coverage of at least 200% (measured at the time of declaration of such distribution and accounting for such distribution). If the value of our assets declines, we might be unable to satisfy these asset coverage requirements. To satisfy the 200% asset coverage requirement in the event that we are seeking to pay a distribution, we might either have to (i) liquidate a portion of our loan portfolio to repay a portion of our indebtedness or (ii) issue common stock. This may occur at a time when a sale of a portfolio asset may be disadvantageous, or when we have limited access to capital markets on agreeable terms. In addition, any amounts that we use to service our indebtedness or for offering expenses will not be available for distributions to our stockholders. If we are unable to regain asset coverage through these methods, we may be forced to suspend the payment of such dividends.dividends or distributions. As of March 31, 2015, our asset coverage ratio was 230%
Significant Managerial Assistance
A BDC generally must make available significant managerial assistance to issuers of certain of its portfolio securities that the BDC counts as a qualifying asset for the 70% test described above. Making available significant managerial assistance means, among other things, any arrangement whereby the BDC, through its directors, officers or employees, offers to provide, and, if accepted, does so provide, significant guidance and counsel concerning the management, operations or business objectives and policies of a portfolio
company. Significant managerial assistance also includes the exercise of a controlling influence over the management and policies of the portfolio company. However, with respect to certain, but not all such securities, where the BDC purchases such securities in conjunction with one or more other persons acting together, one of the other persons in the group may make available such managerial assistance, or the BDC may exercise such control jointly.
Investment Policies
We seek to achieve a high level of current income and capital gains through investments in debt securities and preferred and common stock that we acquire in connection with buyout and other recapitalizations. The following investment policies, along with these investment objectives, may not be changed without the approval of our Board of Directors:
With the exception of our policy to conduct our business as a BDC, these policies are not fundamental and may be changed without stockholder approval.
Code of Ethics
We and all of the Gladstone family of companies, have adopted a code of ethics and business conduct applicable to all of the officers, directors and employees of such companies that complies with the guidelines set forth in Item 406 of Regulation S-K of the Securities Act of 1933 (the “Securities Act”) and Rule 17j-1 of the 1940 Act. As required by the 1940 Act, this code establishes procedures for personal investments, restricts certain transactions by such personnel and requires the reporting of certain transactions and holdings by such personnel. This code of ethics and business conduct is publicly available on our website under “Corporate Governance” at www.GladstoneInvestment.com. We intend to provide any required disclosure of any amendments to or waivers of the provisions of this code by posting information regarding any such amendment or waiver to our website within four days of its effectivenessor in a Current Report on Form 8-K.
Compliance Policies and Procedures
We and the Adviser have adopted and implemented written policies and procedures reasonably designed to prevent violation of the federal securities laws, and our Board of Directors is required to review these compliance policies and procedures annually to assess their adequacy and the effectiveness of their implementation. We have designated a chief compliance officer, John Dellafiora, Jr., who also serves as chief compliance officer for all of the Gladstone family of companies.
Staffing
We do not currently have any employees and do not expect to have any employees in the foreseeable future. Currently, services necessary for our business are provided by individuals who are employees of the Adviser and the Administrator pursuant to the terms of the Advisory Agreement and the Administration Agreement, respectively. No employee of the Adviser or the Administrator will dedicate all of his or her time to us. However, we expect that 25 to 30 full time employees of the Adviser and the Administrator will spend substantial time on our matters during the remainder of calendar year 2014.2015 and all of calendar year 2016. To the extent we acquire more investments, we anticipate that the number of employees of the Adviser and the Administrator who devote time to our matters will increase.
As of May 12, 2014,5, 2015, the Adviser and Administrator collectively had 6163 full-time employees. A breakdown of these employees is summarized by functional area in the table below:
Number of Individuals | Functional Area | |
| Executive management | ||
| Accounting, administration, compliance, human resources, legal and treasury | ||
| Investment management, portfolio management and due diligence |
Available Information:Information
Copies of our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments, if any, to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) are available free of charge through our website atwww.GladstoneInvestment.com as soon as reasonably practicable after such materials are electronically filed with or furnished to the Securities and Exchange Commission (the “SEC”).SEC. A request for any of these reports may also be submitted to us by sending a written request addressed to Investor Relations, Gladstone Investment Corporation, 1521 Westbranch Drive, Suite 100, McLean, VA 22102, or by calling our toll-free investor relations line at 1-866-366-5745. The public may read and copy materials that we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. The SEC also maintains a website that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC at www.sec.gov.
You should carefully consider these risk factors, together with all of the other information included in this Annual Report on Form 10-K and the other reports and documents filed by us with the SEC. The risks set out below are not the only risks we face. Additional risks and uncertainties not presently known to us, or not presently deemed material by us, may also impair our operations and performance. If any of the following events occur, our business, financial condition, results of operations and cash flows could be materially and adversely affected. In such case, our net asset value and the trading price of our securities could decline, and you may lose all or part of your investment. The risk factors described below are the principal risk factors associated with an investment in our securities as well as those factors generally associated with an investment company with investment objectives, investment policies, capital structure or trading markets similar to ours.
Risks Related to the Economy and Recent Legislation
The failure of U.S. lawmakers to reach an agreement on the national debt ceiling could have a material adverse effect on our business, financial condition and results of operations.
In February 2014, the U.S. Congress passed legislation to increase the debt ceiling through March 2015. Congress will need to pass additional legislation prior to March 2015 to further increase the debt ceiling in order for the government to continue to make payments to its creditors. In the event U.S. lawmakers fail to reach a viable agreement on the national debt ceiling, the U.S. could default on its obligations, which could negatively impact the trading market for U.S. government securities. This may, in turn, negatively affect our ability to obtain financing for our investments. As a result, it may materially adversely affect our business, financial condition and results of operations.
While the U.S. has begun to see improving financial indicators since the 2008 recession, recent events have created more uncertainty in the U.S. economy and capital markets. Therefore, we remain cautious about a long-term economic recovery.
Over the last several years, the U.S. capital markets have experienced significant price volatility and liquidity disruptions, which have caused market prices of many stocks and debt securities to fluctuate substantially and the spreads on prospective debt financings to widen considerably. 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. As a result, we do not know if adverse conditions will again intensify, and we are unable to gauge the full extent to which disruptions will continue to affect us. The longer these uncertain conditions persist, the greater the probability that these factors could continue to increase our costs of, and significantly limit our access to, debt and equity capital and, thus, have an adverse effect on our operations and financial results. Many of our portfolio companies and the companies we may invest in prospectively are also susceptible to these unstable economic conditions, which may affect the ability of one or more of our portfolio companies to repay our loans or engage in a liquidity event, such as a sale, recapitalization or initial public offering. These unstable economic conditions could also disproportionately impact some of the industries in which we invest, causing us to be more vulnerable to losses in our portfolio, which could cause the number of non-performing assets to increase and the fair value of our portfolio to decrease. The unstable economic conditions may also decrease the value of collateral securing some of our loans as well as the value of our equity investments, which would decrease our ability to borrow under our Credit Facility or raise equity capital, thereby further reducing our ability to make new investments.
Even with the short term increase to the debt ceiling, there is still a great deal of volatility in the marketplace. The unstable economic conditions have affected the availability of credit generally. Though we increased our distributions by 20% during the 2014 fiscal year and maintained that level of distributions, we cannot guarantee that this increase will remain in place due to limitations placed by our Credit Facility on distributions to stockholders and the impact of market conditions. We do not know when market conditions will stabilize, if adverse conditions will intensify or the full extent to which the disruptions will continue to affect us. Also, it is possible that persistent instability of the financial markets could have other unforeseen material effects on our business.
A further downgrade of the United States credit rating and the ongoing economic crisis in Europe could negatively impact our liquidity, financial condition and earnings.
Recent U.S. debt ceiling and budget deficit concerns, together with signs of deteriorating sovereign debt conditions in Europe, have increased the possibility of additional credit-rating downgrades and economic slowdowns. In August 2011, Standard & Poor’s downgraded its long-term sovereign credit rating on the U.S. to AA+ for the first time due to the U.S. Congress’ inability to reach an effective agreement on the national debt ceiling and a budget in a timely manner. The current U.S. debt ceiling and budget deficit concerns have increased the possibility of the credit-rating agencies further downgrading the U.S. credit rating. On October 15, 2013,
Fitch Ratings Service placed the U.S. credit rating on negative watch, warning that a failure by the U.S. Government to honor interest or principal payments on U.S. treasury securities would impact its decision on whether to downgrade the U.S. credit rating. Fitch also stated that the manner and duration of an agreement to raise the debt ceiling and resolve the then existing budget impasse, as well as the perceived risk of such events occurring in the future, would weigh on its ratings. On March 21, 2014, Fitch affirmed its AAA long-term and F1+ short-term sovereign credit rating on the U.S. government with a stable outlook. This resolved the rating watch negative that was placed on the ratings on October 15, 2013.
The impact of any further downgrades to the U.S. government’s sovereign credit rating, or its perceived creditworthiness, and deteriorating sovereign debt conditions in Europe, is inherently unpredictable and could adversely affect the U.S. and global financial markets and economic conditions. There can be no assurance that governmental or other measures to aid economic recovery will be effective. These developments and the government’s credit concerns in general could cause interest rates and borrowing costs to rise, which may negatively impact our ability to access the debt markets on favorable terms. In addition, the decreased credit rating could create broader financial turmoil and uncertainty, which may weigh heavily on our stock price. Continued adverse economic conditions could have a material adverse effect on our business, financial condition and results of operations.
We may experience fluctuations in our quarterly and annual results based on the impact of inflation in the United States.
The majority of our portfolio companies are in industries that are directly impacted by inflation, such as consumer goods and services and manufacturing. Our portfolio companies may not be able to pass on to customers increases in their costs of operations, which could greatly affect their operating results, impacting their ability to repay our loans. In addition, any projected future decreases in our portfolio companies’ operating results due to inflation could adversely impact the fair value of those investments. Any decreases in the fair value of our investments could result in future unrealized losses and therefore reduce our net assets resulting from operations.
Healthcare reform legislation may affect our results of operations and financial condition.
On March 23, 2010, the President of the United States signed into law the Patient Protection and Affordable Care Act of 2010 and on March 30, 2010, the President signed into law the Health Care and Education Reconciliation Act, which in part modified the Patient Protection and Affordable Care Act (together, the “Acts”). Together, the two Acts serve as the primary vehicle for comprehensive health care reform in the U.S. The Acts are intended to reduce the number of individuals in the U.S. without health insurance and effect significant other changes to the ways in which health care is organized, delivered and reimbursed. The complexities and ramifications of the new legislation are significant, and have begun being implemented through a phased approach concluding in 2018. At this time, the effects of health care reform and its impact on our portfolio companies’ business, results of operations and financial condition and the resulting impact on our operations are not yet known. Accordingly, the Acts could adversely affect the cost of providing healthcare coverage generally and could adversely affect the financial and operational performance of the portfolio companies in which we invest and therefore negatively impact our financial and operational performance.
Risks Related to Our External Management
We are dependent upon our key management personnel and the key management personnel of the Adviser, particularly David Gladstone, Terry Lee Brubaker and David Dullum, and on the continued operations of the Adviser, for our future success.
We have no employees. Our chief executive officer, president, chief operating officer, chief financial officer and treasurer, and the employees of the Adviser, do not spend all of their time managing our activities and our investment portfolio. We are particularly dependent upon David Gladstone, Terry Lee Brubaker and David Dullum in this regard. Our executive officers and the employees of the Adviser allocate some, and in some cases a material portion, of their time to businesses and activities that are not related to our business. We have no separate facilities and are completely reliant on the Adviser, which has significant discretion as to the implementation and execution of our business strategies and risk management practices. We are subject to the risk of discontinuation of the Adviser’s operations or termination of the Advisory Agreement and the risk that, upon such event, no suitable replacement will be found. We believe that our success depends to a significant extent upon the Adviser and that discontinuation of its operations could have a material adverse effect on our ability to achieve our investment objectives.
Our success depends on the Adviser’s ability to attract and retain qualified personnel in a competitive environment.
The Adviser experiences competition in attracting and retaining qualified personnel, particularly investment professionals and senior executives, and we may be unable to maintain or grow our business if we cannot attract and retain such personnel. The Adviser’s ability to attract and retain personnel with the requisite credentials, experience and skills depends on several factors including, but not limited to, its ability to offer competitive wages, benefits and professional growth opportunities. The Adviser competes with investment funds (such as private equity funds and mezzanine funds) and traditional financial services companies for qualified personnel, many of which have greater resources than us. Searches for qualified personnel may divert management’s time from the operation of our business. Strain on the existing personnel resources of the Adviser, in the event that it is unable to attract experienced investment professionals and senior executives, could have a material adverse effect on our business.
The Adviser can resign on 60 days’ notice, and we may not be able to find a suitable replacement within that time, resulting in a disruption in our operations that could adversely affect our financial condition, business and results of operations.
The Adviser has the right to resign under the Advisory Agreement at any time upon not less than 60 days’ written notice, whether we have found a replacement or not. If the Adviser resigns, we may not be able to find a new investment adviser or hire internal management with similar expertise and ability to provide the same or equivalent services on acceptable terms within 60 days, or at all. If we are unable to do so quickly, our operations are likely to experience a disruption, our financial condition, business and results of operations as well as our ability to pay distributions are likely to be adversely affected and the market price of our shares may decline. In addition, the coordination of our internal management and investment activities is likely to suffer if we are unable to identify and reach an agreement with a single institution or group of executives having the expertise possessed by the Adviser and its affiliates. Even if we are able to retain comparable management, whether internal or external, the integration of such management and their lack of familiarity with our investment objective may result in additional costs and time delays that may adversely affect our business, financial condition, results of operations and cash flows.
Our incentive fee may induce the Adviser to make certain investments, including speculative investments.
The management compensation structure that has been implemented under the Advisory Agreement may cause the Adviser to invest in high-risk investments or take other risks. In addition to its management fee, the Adviser is entitled under the Advisory Agreement to receive incentive compensation based in part upon our achievement of specified levels of income. In evaluating investments and other management strategies, the opportunity to earn incentive compensation based on net income may lead the Adviser to place undue emphasis on the maximization of net income at the expense of other criteria, such as preservation of capital, maintaining sufficient liquidity, or management of credit risk or market risk, in order to achieve higher incentive compensation. Investments with higher yield potential are generally riskier or more speculative. This could result in increased risk to the value of our investment portfolio.
We may be obligated to pay the Adviser incentive compensation even if we incur a loss.
The Advisory Agreement entitles the Adviser to incentive compensation for each fiscal quarter in an amount equal to a percentage of the excess of our investment income for that quarter (before deducting incentive compensation, net operating losses and certain other items) above a threshold return for that quarter. When calculating our incentive compensation, our pre-incentive fee net investment income excludes realized and unrealized capital losses that we may incur in the fiscal quarter, even if such capital losses result in a net loss on our statement of operations for that quarter. Thus, we may be required to pay the Adviser incentive compensation for a fiscal quarter even if there is a decline in the value of our portfolio or we incur a net loss for that quarter. For additional information on incentive compensation under the Advisory Agreement with the Adviser, see “Business — Ongoing Management of Investments and Portfolio Company Relationships — Investment Advisory and Management Agreement.”
We may be required to pay the Adviser incentive compensation on income accrued, but not yet received in cash.
That part of the incentive fee payable by us that relates to our net investment income is computed and paid on income that may include interest that has been accrued but not yet received in cash, such as debt instruments with PIK interest. If a portfolio company defaults on a loan, it is possible that such accrued interest previously used in the calculation of the incentive fee will become uncollectible. Consequently, we may make incentive fee payments on income accruals that we may not collect in the future and with respect to which we do not have a clawback right against the Adviser.
The Adviser’s failure to identify and invest in securities that meet our investment criteria or perform its responsibilities under the Advisory Agreement would likely adversely affect our ability for future growth.
Our ability to achieve our investment objectives will depend on our ability to grow, which in turn will depend on the Adviser’s ability to identify and invest in securities that meet our investment criteria. Accomplishing this result on a cost-effective basis will be largely a function of the Adviser’s structuring of the investment process, its ability to provide competent and efficient services to us, and our access to financing on acceptable terms. The senior management team of the Adviser has substantial responsibilities under the Advisory Agreement. In order to grow, the Adviser will need to hire, train, supervise, and manage new employees successfully. Any failure to manage our future growth effectively would likely have a material adverse effect on our business, financial condition, and results of operations.
There are significant potential conflicts of interest which could impact our investment returns.
Our executive officers and directors, and the officers and directors of the Adviser, serve or may serve as officers, directors, or principals of entities that operate in the same or a related line of business as we do or of investment funds managed by our affiliates. Accordingly, they may have obligations to investors in those entities, the fulfillment of which might not be in the best interests of us or our stockholders. For example, Mr. Gladstone, our chairman and chief executive officer, is the chairman of the board and chief executive officer of the Adviser, Gladstone Investment, Gladstone Commercial and Gladstone Land. In addition, Mr. Brubaker, our vice chairman and chief operating officer, is the vice chairman and chief operating officer of the Adviser, Gladstone Capital, Gladstone Commercial and Gladstone Land. Mr. Dullum, our president and a director, is a director of Gladstone Capital and Gladstone Commercial, as well as an executive managing director of the Adviser. Moreover, the Adviser may establish or sponsor other investment vehicles which from time to time may have potentially overlapping investment objectives with ours and accordingly may invest in, whether principally or secondarily, asset classes we target. While the Adviser generally has broad authority to make investments on behalf of the investment vehicles that it advises, the Adviser has adopted investment allocation procedures to address these potential conflicts and intends to direct investment opportunities to the Gladstone affiliate with the investment strategy that most closely fits the investment opportunity. Nevertheless, the management of the Adviser may face conflicts in the allocation of investment opportunities to other entities managed by the Adviser. As a result, it is possible that we may not be given the opportunity to participate in certain investments made by other funds managed by the Adviser. Our Board of Directors approved a revision of our investment objectives and strategies that became effective on January 1, 2013, which may enhance the potential for conflicts in the allocation of investment opportunities to us and other entities managed by the Adviser.
In certain circumstances, we may make investments in a portfolio company in which one of our affiliates has or will have an investment, subject to satisfaction of any regulatory restrictions and, where required, the prior approval of our Board of Directors. As of March 31, 2014, our Board of Directors has approved the following types of co-investment transactions:
Certain of our officers, who are also officers of the Adviser, may from time to time serve as directors of certain of our portfolio companies. If an officer serves in such capacity with one of our portfolio companies, such officer will owe fiduciary duties to stockholders of the portfolio company, which duties may from time to time conflict with the interests of our stockholders.
In the course of our investing activities, we will pay management and incentive fees to the Adviser and will reimburse the Administrator for certain expenses it incurs. As a result, investors in our common stock will invest on a “gross” basis and receive distributions on a “net” basis after expenses, resulting in, among other things, a lower rate of return than one might achieve through our investors themselves making direct investments. As a result of this arrangement, there may be times when the management team of the Adviser has interests that differ from those of our stockholders, giving rise to a conflict. In addition, as a BDC, we make available significant managerial assistance to our portfolio companies and provide other services to such portfolio companies. Although, neither we nor the Adviser currently receives fees in connection with managerial assistance, the Adviser and Gladstone Securities have, at various times, provided other services to certain of our portfolio companies and received fees for these other services.
Our business model is dependent upon developing and sustaining strong referral relationships with investment bankers, business brokers and other intermediaries and any change in our referral relationships may impact our business plan.
We are dependent upon informal relationships with investment bankers, business brokers and traditional lending institutions to provide us with deal flow. If we fail to maintain our relationship with such funds or institutions, or if we fail to establish strong referral relationships with other funds, we will not be able to grow our portfolio of investments and fully execute our business plan.
Our base management fee may induce our Adviser to incur leverage.
The fact that our base management fee is payable based upon our gross assets, which would include any investments made with proceeds of borrowings, may encourage our Adviser to use leverage to make additional investments. Under certain circumstances, the use of increased leverage may increase the likelihood of default, which would disfavor holders of our securities. Given the subjective nature of the investment decisions made by our Adviser on our behalf, we will not be able to monitor this potential conflict of interest.
Risks Related to Our External Financing
In addition to regulatory limitations on our ability to raise capital, our credit facility contains various covenants which, if not complied with, could accelerate our repayment obligations under the facility, thereby materially and adversely affecting our liquidity, financial condition, results of operations and ability to pay distributions.
We will have a continuing need for capital to finance our investments. As of March 31, 2014, we had $61.2 million in borrowings outstanding under our fifth amended and restated credit agreement, which provides for maximum borrowings of $105 million, with a revolving period end date of April 30, 2016 (the “Credit Facility”). Our Credit Facility permits us to fund additional loans and investments as long as we are within the conditions set forth in the credit agreement. Our Credit Facility contains covenants that require our wholly-owned subsidiary Gladstone Business Investment, LLC (“Business Investment”) to maintain its status as a separate legal entity, prohibit certain significant corporate transactions (such as mergers, consolidations, liquidations or dissolutions) and restrict material changes to our credit and collection policies without lenders’ consent. The facility also limits payments as distributions to the aggregate net investment income for each of the twelve month periods ending March 31, 2015, 2016 and 2017. We are also subject to certain limitations on the type of loan investments we can make, including restrictions on geographic concentrations, sector concentrations, loan size, dividend payout, payment frequency and status, average life and lien property. The Credit Facility also requires us to comply with other financial and operational covenants, which obligate us to, among other things, maintain certain financial ratios, including asset and interest coverage, a minimum net worth 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 of $170 million plus 50% of all equity and subordinated debt raised after April 30, 2013 which equates to $170 million as of March 31, 2014, (ii) “asset coverage” with respect to “senior securities representing indebtedness” of at least 200%, in accordance with Section 18 of the 1940 Act and (iii) our status as a BDC under the 1940 Act and as a RIC under the Code. As of March 31, 2014, we were in compliance with the covenants under the fifth amended and restated credit agreement, and as of May 12, 2014, we were in compliance with the covenants under the Credit Facility; however, our continued compliance depends on many factors, some of which are beyond our control.
Given the continued uncertainty in the capital markets, the cumulative unrealized depreciation in our portfolio may increase in future periods and threaten our ability to comply with the minimum net worth covenant and other covenants under our Credit Facility.
Any inability to renew, extend or replace our Credit Facility on terms favorable to us, or at all, could adversely impact our liquidity and ability to fund new investments or maintain distributions to our stockholders.
The revolving period end date of our Credit Facility is April 30, 2016 (the “Revolving Period End Date”) and, if not renewed or extended by the Revolving Period End Date, all principal and interest will be due and payable one year later on or before April 30, 2017. Subject to certain terms and conditions, the Credit Facility may be expanded to a total of $200 million through the addition of other lenders to the facility. However, if additional lenders are unwilling to join the facility on its terms, we will be unable to expand the facility and thus will continue to have limited availability to finance new investments under our Credit Facility. There can be no guarantee that we will be able to renew, extend or replace the Credit Facility upon its revolving period end in 2016 on terms that are favorable to us, if at all. Our ability to expand the Credit Facility, and to obtain replacement financing at or before the time of its maturity, will be constrained by then-current economic conditions affecting the credit markets. In the event that we are not able to expand the Credit Facility, or to renew, extend or refinance the Credit Facility by the end of its revolving period, this could have a material adverse effect on our liquidity and ability to fund new investments, our ability to make distributions to our stockholders and our ability to qualify as a RIC under the Code.
If we are unable to secure replacement financing, we may be forced to sell certain assets on disadvantageous terms, which may result in realized losses, and such realized losses could materially exceed the amount of any unrealized depreciation on these assets as of our
most recent balance sheet date, which would have a material adverse effect on our results of operations. In addition to selling assets, or as an alternative, we may issue equity in order to repay amounts outstanding under the Credit Facility. Based on the recent trading prices of our stock, such an equity offering may have a substantial dilutive impact on our existing stockholders’ interest in our earnings, assets and voting interest in us. If we are able to renew, extend or refinance our Credit Facility prior to maturity, any renewal, extension or refinancing of the Credit Facility will potentially result in significantly higher interest rates and related charges and may impose significant restrictions on the use of borrowed funds to fund investments or maintain distributions to stockholders.
Our business plan is dependent upon external financing, which is constrained by the limitations of the 1940 Act.
The last equity offerings we completed were for our Term Preferred Stock in March 2012 and our common offering in October 2012, and there can be no assurance that we will be able to raise capital through issuing equity in the near future. Our business requires a substantial amount of cash to operate and grow. We may acquire such additional capital from the following sources:
We financed certain of our investments with borrowed money and capital from the issuance of Senior Securities, which will magnify the potential for gain or loss on amounts invested and may increase the risk of investing in us.
The following table illustrates the effect of leverage on returns from an investment in our common stock assuming various annual returns on our portfolio, net of expenses. The calculations in the table below are hypothetical, and actual returns may be higher or lower than those appearing in the table below.
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| (10 | )% | (5 | )% | 0 | % | 5 | % | 10 | % | |||||||||||
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Corresponding return to common stockholder(1) | (17.2 | )% | (9.7 | )% | (2.2 | )% | 5.3 | % | 12.7 | % | ||||||||||
Based on an aggregate outstanding indebtedness of $66.2 million at cost as of March 31, 2014, the effective annual interest rate of 4.5% as of that date, and aggregate liquidation preference of our Term Preferred Stock of $40 million, our investment portfolio at fair value would have had to produce an annual return of at least 1.8% to cover annual interest payments on the outstanding debt and dividends on our Term Preferred Stock.
A change in interest rates may adversely affect our profitability and our hedging strategy may expose us to additional risks.
We anticipate using a combination of equity and long-term and short-term borrowings to finance our investment activities. As a result, a portion of our income will depend upon the difference between the rate at which we borrow funds and the rate at which we loan these funds. Higher interest rates on our borrowings will decrease the overall return on our portfolio. As of March 31, 2014, based on the total principal balance of debt outstanding, our portfolio consisted of 82.5% of loans at variable rates with floors and 17.5% at fixed rates.
We currently hold one interest rate cap agreement. While hedging activities may insulate us against adverse fluctuations in interest rates, they may also limit our ability to participate in the benefits of lower interest rates with respect to the hedged portfolio. Adverse developments resulting from changes in interest rates or any future hedging transactions could have a material adverse effect on our business, financial condition and results of operations. Our ability to receive payments pursuant to an interest rate cap agreement is linked to the ability of the counter-party to that agreement to make the required payments. To the extent that the counter-party to the agreement is unable to pay pursuant to the terms of the agreement, we may lose the hedging protection of the interest rate cap agreement.
Risks Related to Our Investments
We operate in a highly competitive market for investment opportunities.
There has been increased competitive pressure in the BDC and investment company marketplace for senior and senior subordinated secured debt, resulting in lower yields for increasingly riskier investments. A large number of entities compete with us and make the types of investments that we seek to make in small and mid-sizedmedium-sized companies. We compete with public and private buyout funds, commercial and investment banks, commercial financing companies, and, to the extent that they provide an alternative form of financing, hedge funds. Many of our competitors are substantially larger and have considerably greater financial, technical and marketing resources than we do. For example, some competitors may have a lower cost of funds and access to funding sources that are not available to us. In addition, some of our competitors may have higher risk tolerances or different risk assessments, which would allow them to consider a wider variety of investments and establish more relationships than us. Furthermore, many of our competitors are not subject to the regulatory restrictions that the 1940 Act imposes on us as a BDC. The competitive pressures we face could have a material adverse effect on our business, financial condition and results of operations. Also, as a result of this competition, we may not be able to take advantage of attractive investment opportunities from time to time and we can offer no assurance that we will be able to identify and make investments that are consistent with our investment objective. We do not seek to compete based on the interest rates we offer, and we believe that some of our competitors may make loans with interest rates that will be comparable to or lower than the rates we offer. We may lose investment opportunities if we do not match our competitors’ pricing, terms, and structure. However, if we match our competitors’ pricing, terms, and structure, we may experience decreased net interest income and increased risk of credit loss.
Our investments in small and medium-sized portfolio companies are extremely risky and could cause you to lose all or a part of your investment.
Investments in small and medium-sized portfolio companies are subject to a number of significant risks including the following:
| • | Small and medium-sized businesses may have limited financial resources and may not be able to repay the loans we make to them. Our strategy includes providing financing to portfolio companies that typically do not have readily available access to financing. While we believe that this provides an attractive opportunity for us to generate profits, this may make it difficult for the portfolio companies to repay their loans to us upon maturity. A borrower’s ability to repay its loan may be adversely affected by numerous factors, including the failure to meet its business plan, a downturn in its industry or negative economic conditions. |
| • | Small and medium-sized businesses typically have narrower product lines and smaller market shares than large businesses. Because our target portfolio companies are smaller businesses, they will tend to be more vulnerable to |
competitors’ actions and market conditions, as well as general economic downturns. In addition, our portfolio companies may face intense competition, including competition from companies with greater financial resources, more extensive development, manufacturing, marketing and other capabilities and a larger number of qualified managerial and technical personnel. |
| • | There is generally little or no publicly available information about these businesses. Because we seek to invest in privately owned businesses, there is generally little or no publicly available operating and financial information about our potential portfolio companies. As a result, we rely on our officers, the Adviser and its employees, Gladstone Securities and consultants to perform due diligence investigations of these portfolio companies, their operations, and their prospects. We may not learn all of the material information we need to know regarding these businesses through our investigations. |
| • | Small and medium-sized businesses generally have less predictable operating results. We expect that our portfolio companies may have significant variations in their operating results, may from time to time be |
| • | Small and medium-sized businesses are more likely to be dependent on one or two persons. Typically, the success of a small or medium-sized business also depends on the management talents and efforts of one or two persons or a small group of persons. The death, disability or resignation of one or more of these persons could have a material adverse impact on our borrower and, in turn, on us. |
| • | Small and medium-sized businesses may have limited operating histories. While we intend to target stable companies with proven track records, we may make loans to new companies that meet our other investment criteria. Portfolio companies with limited operating histories will be exposed to all of the operating risks that new businesses face and may be particularly susceptible to, among other risks, market downturns, competitive pressures and the departure of key executive officers. |
| • | Debt securities of small and medium-sized private companies typically are not rated by a credit rating agency. Typically a small or medium-sized private business cannot or will not expend the resources to have their debt securities rated by a credit rating agency. We expect that most, if not all, of the debt securities we acquire will be unrated. Investors should assume that these loans would be at rates below what is today considered “investment grade” quality. Investments rated below investment grade are often referred to as high yield securities or junk bonds and may be considered high risk as compared to investment-grade debt instruments. |
Because the loans we make and equity securities we receive when we make loans are not publicly traded, there is uncertainty regarding the value of our privately held securities that could adversely affect our determination of our NAV.net asset value (“NAV”).
Our portfolio investments are, and we expect will continue to be, in the form of securities that are not publicly traded. The fair value of securities and other investments that are not publicly traded may not be readily determinable. Our Board of Directors has established an investment valuation policy that the Adviserultimate responsibility for reviewing and Administrator apply to determine the fair value of these securities quarterly. These procedures for the determination of value of many of our debt securities rely on the opinions of value submitted to us by SPSE or the use of internally developed discounted cash flow (“DCF”) methodologies or indicative bid prices (“IBP”) offered by the respective originating syndication agent’s trading desk, or secondary desk, specifically for our syndicated loans, or internal methodologies based on the total enterprise value (“TEV”) of the issuer used for certain of our equity investments. SPSE will only evaluate the debt portion of our investments for which we specifically request evaluation, and SPSE may decline to make requested evaluations for any reasonapproving, in its sole discretion. However, to date, SPSE has accepted each of our requests for evaluation.
Our use of these fair value methods is inherently subjective and is based on estimates and assumptions of each security. In the event that we are required to sell a security, we may ultimately sell for an amount materially less than the estimated fair value calculated by SPSE, or utilizing the TEV, IBP or the DCF methodology.
Our procedures also include provisions whereby the Adviser will establish the fair value of any equity securities we may hold where SPSE or third-party agent banks are unable to provide evaluations. The types of factors that may be considered in determininggood faith, the fair value of our debtinvestments, based on the Policy. Our Board of Directors reviews valuation recommendations that are provided by the Valuation Team. In valuing our investment portfolio, several techniques are used, including, a total enterprise value approach, a yield analysis, market quotes, and equity securities include some orindependent third party assessments. Currently, Standard & Poor’s Securities Evaluation, Inc. provides estimates of fair value on generally all of the following:
Fair value measurements of our investments may involve subjective judgments and estimates and due to publicly-traded companies; and
Because
on these investments to be different than the valuations currently assigned. Further, such valuations, particularly valuations of private securitiesinvestments are generally subject to legal and private companies,other restrictions on resale or otherwise are not susceptibleless liquid than publicly traded securities. If we were required to precise determination, may fluctuate over short periods of time, and mayliquidate a portfolio investment in a forced or liquidation sale, we could realize significantly less than the value at which it is recorded.
Our NAV would be based on estimates, our determinations ofadversely affected if the fair value may differ from the values that might have actually resulted had a readily available market for these securities been available.
A portion of our assets are, and will continue to be, comprised of equity securitiesinvestments that are valued based on internal assessment using our own valuation methods approved by our Board of Directors without the input of SPSE or any other third-party evaluator. We believe that our equity valuation methods reflect those regularly used as standards by other professionals in our industry who value equity securities. However, determination of fair value for securities that are not publicly traded, whether or not we use the recommendations of an independent third-party evaluator, necessarily involves the exercise of subjective judgment. Our NAV could be adversely affected if our determinations regarding the fair value of our investments were materially higher than the values that we ultimately realize upon the disposal of such securities.
The lack of liquidity of our privately held investments may adversely affect our business.
We will generally make investments in private companies whose securities are not traded in any public market. Substantially all of the investments we presently hold and the investments we expect to acquire in the future are, and will be, subject to legal and other restrictions on resale and will otherwise be less liquid than publicly-traded securities. The illiquidity of our investments may make it difficult for us to quickly obtain cash equal to the value at which we record our investments if the need arises. This could cause us to miss important investment opportunities. In addition, if we are required to liquidate all or a portion of our portfolio quickly, we may record substantial realized losses upon liquidation. We may also face other restrictions on our ability to liquidate an investment in a portfolio company to the extent that we, the Adviser, or our respective officers, employees or affiliates have material non-public information regarding such portfolio company.
Due to the uncertainty inherent in valuing these securities, ourthe Adviser’s determinations of fair value may differ materially from the values that could be obtained if a ready market for these securities existed. Our NAV could be materially affected if ourthe Adviser’s determinations regarding the fair value of our investments are materially different from the values that we ultimately realize upon our disposal of such securities.
Our financial results could be negatively affected if a significant portfolio investment fails to perform as expected.
Our total investment in companies may be significant individually or in the aggregate. As a result, if a significant investment in one or more companies fails to perform as expected, our financial results could be more negatively affected and the magnitude of the loss could be more significant than if we had made smaller investments in more companies. Our five largest investments represented 32.8%28.8% of the fair value of our total portfolio as of March 31, 2014,2015, compared to 50.2%32.8% as of March 31, 2013.2014. Any disposition of a significant investment in one or more companies may negatively impact our net investment income and limit our ability to pay distributions.
When we are a debt or minority equity investor in aWe generally will not control our portfolio company, which we expect will generally be the case, we may not be in a position to control the entity, and its management may make decisions that could decrease the value of our investment.companies.
We anticipate thatdo not, and do not expect to, control most of our investments will continue to be eitherportfolio companies, even though we may have board representation or board observation rights, and our debt or minority equity investments in our portfolio companies. Therefore,agreements may contain certain restrictive covenants. As a result, we are and will remain subject to the risk that a portfolio company in which we invest may make business decisions with which we disagree and the shareholders and management of such company, as representatives of the holders of their common stock, may take risks or otherwise act in ways that do not serve our best interests.interests as debt investors. Due to the lack of liquidity for our investments in non-traded companies, we may not be able to dispose of our interests in our portfolio companies as readily as we would like or at an appropriate valuation. As a result, a portfolio company may make decisions that could decrease the value of our portfolio holdings. In addition, we will generally not be in a position to control any portfolio company by investing in its debt securities.
We typically invest in transactions involving acquisitions, buyouts and recapitalizations of companies, which will subject us to the risks associated with change in control transactions.
Our strategy, in part, includes making debt and equity investments in companies in connection with acquisitions, buyouts and recapitalizations, which subjects us to the risks associated with change in control transactions. Change in control transactions often present a number of uncertainties. Companies undergoing change in control transactions often face challenges retaining key employees and maintaining relationships with customers and suppliers. While we hope to avoid many of these difficulties by participating in transactions where the management team is retained and by conducting thorough due diligence in advance of our decision to invest, if our portfolio companies experience one or more of these problems, we may not realize the value that we expect in connection with our investments, which would likely harm our operating results and financial condition.
Our portfolio companies may incur debt that ranks equally with, or senior to, our investments in such companies.
We primarily invest in secured first and second lien debt securities issued by our portfolio companies. In some cases portfolio companies will be permitted to have other debt that ranks equally with, or senior to, the debt securities in which we invest. By their terms, such debt instrumentssecurities may provide that the holders thereof are entitled to receive payment of interest and principal on or before the dates on which we are entitled to receive payments in respect of the debt securities in which we invest. Also, in the event of insolvency, liquidation, dissolution, reorganization, or bankruptcy of a portfolio company, holders of debt instruments ranking senior to our investment in that portfolio company would typically be entitled to receive payment in full before we receive any distribution in respect of our investment. After repaying such senior creditors, such portfolio company may not have any remaining assets to use for
repaying its obligation to us. In the case of debt ranking equally with debt securities in which we invest, we would have to share on an equal basis any distributions with other creditors holding such debt in the event of an insolvency, liquidation, dissolution, reorganization, or bankruptcy of a portfolio company.
Prepayments of our investments by our portfolio companies could adversely impact our results of operations and reduce our return on equity.
In addition to risks associated with delays in investing our capital, we are also subject to the risk that investments we make in our portfolio companies may be repaid prior to maturity. During the fiscal year 2014,2015, we experienced prepayments of debt investments from Venyu Solutions,Cambridge Sound Management, Inc. (“Venyu”CSM”), Channel Technologies Group, LLCFrontier Packaging, Inc. (“CTG”Frontier”), Funko, Old World, and Cavert II Holding Corp.Star Seed, Inc. (“Cavert”Star Seed”). We will first use any proceeds from prepayments to repay any borrowings outstanding on our Credit Facility.credit facility. In the event that funds remain after repayment of our outstanding borrowings, then we will generally reinvest these proceeds in government securities, pending their future investment in new debt and/or equity securities. These government securities will typically have substantially lower yields than the debt securities being prepaid and we could experience significant delays in reinvesting these amounts. As a result, our results of operations could be materially adversely affected if one or more of our portfolio companies elect to prepay amounts owed to us. Additionally, prepayments could negatively impact our return on equity, which could result in a decline in the market price of our common stock.
Higher taxation of our portfolio companies may impact our quarterly and annual operating results.
The recession’s adverse effect on federal, state and municipality revenues may induce these government entities to raise various taxes to make up for lost revenues. Additional taxation may have an adverse affecteffect on our portfolio companies’ earnings and reduce their ability to repay our loans to them, thus affecting our quarterly and annual operating results.
Our portfolio is concentrated in a limited number of companies and industries, which subjects us to an increased risk of significant loss if any one of these companies does not repay us or if the industries experience downturns.
As of March 31, 2014,2015, we had investments in 2934 portfolio companies, of which there were threefive investments, Counsel Press, SOG, Funko, Acme, and GalaxyOld World that comprised $70.9$134.3 million, or 22.6%28.8%, of our total investment portfolio, at fair value. A consequence of a limited number of investments is that the aggregate returns we realize may be substantially adversely affected by the unfavorable performance of a small number of such loans or a substantial write-down of any one investment. Beyond our regulatory and income tax diversification requirements, as well as our credit facility requirements, we do not have fixed guidelines for industry concentration and our investments could potentially be concentrated in
relatively few industries. In addition, while we do not intend to invest 25% or more of our total assets in a particular industry or group of industries at the time of investment, it is possible that as the values of our portfolio companies change, one industry or a group of industries may comprise in excess of 25% of the value of our total assets. As of March 31, 2014, our largest industry concentration was in Diversified/Conglomerate Manufacturing representing 17.4% of our total investments, at fair value. As a result, aA downturn in ana particular industry in which we have invested a significant portion of our total assets could have a materially adverse effect on us. As of March 31, 2015, our largest industry concentration was in Home and Office Furnishings, Housewares, and Durable Consumer Products, representing 15.1% of our total investments, at fair value.
Our investments are typically long term and will require several years to realize liquidation events.
Since we generally make five to seven year term loans and hold our loans and related warrants or other equity positions until the loans mature, you should not expect realization events, if any, to occur over the near term. In addition, we expect that any warrants or other equity positions that we receive when we make loans may require several years to appreciate in value and we cannot give any assurance that such appreciation will occur.
The disposition of our investments may result in contingent liabilities.
Currently, all of our investments involve private securities. In connection with the disposition of an investment in private securities, we may be required to make representations about the business and financial affairs of the underlying portfolio company typical of those made in connection with the sale of a business. We may also be required to indemnify the purchasers of such investment to the extent that any such representations turn out to be inaccurate or with respect to certain potential liabilities. These arrangements may result in contingent liabilities that ultimately yield funding obligations that must be satisfied through our return of certain distributions previously made to us.
There may be circumstances where our debt investments could be subordinated to claims of other creditors or we could be subject to lender liability claims.
Even though we have structured somemost of our investments as seniorsecured first and second lien loans, if one of our portfolio companies were to go bankrupt, depending on the facts and circumstances, including the extent to which we actually provided managerial assistance to that portfolio company, a bankruptcy court might re-characterize our debt investments and subordinate all, or a portion, of our claims to that of other creditors. Holders of debt instruments ranking senior to our investments typically would be entitled to receive payment in full
before we receive any distributions. After repaying such senior creditors, such portfolio company may not have any remaining assets to use to repay its obligation to us. We may also be subject to lender liability claims for actions taken by us with respect to a borrower’s business or in instances in which we exercised control over the borrower. It is possible that we could become subject to a lender’s liability claim, including as a result of actions taken in rendering significant managerial assistance.
Portfolio companycompany-related litigation could result in additional costs, including defense costs or damages, and the diversion of management time and resources.
In the course of investing in and often providing significant managerial assistance to certain of our portfolio companies, certain persons employed by ourthe Adviser sometimes serve as directors on the boards of such companies. To the extent that litigation arises out of our investments in these companies, even if meritless, we or such employees may be named as defendants in such litigation, which could result in additional costs, including defense costs, and the diversion of management time and resources. We may be unable to accurately estimate our exposure to litigation risk if we record balance sheet reserves for probable loss contingencies. As a result, any reserves we establish to cover any settlements or judgments may not be sufficient to cover our actual financial exposure, which may have a material impact on our results of operations, financial condition, or financial condition.cash flows.
In view of the inherent difficulty of predicting the outcome of legal actions and regulatory matters, we cannot provide assurance as to the outcome of any threatened or pending matter or, if resolved adversely, the costs associated with any such matter, particularly where the claimant seeks very large or indeterminate damages or where the matter presents novel legal theories, involves a large number of parties or is at a preliminary stage. The resolution of any such matters may be time consuming, expensive, and may distract management from the conduct of our business. The resolution of certain threatened or pending legal actions or regulatory matters, if unfavorable, whether in settlement or a judgment, could have a material adverse effect on our financial condition, results of operations, or cash flows for the quarter in which such actions or matters are resolved or a reserve is established.
For example, a former portfolio company, Noble Logistics, Inc. (“Noble”) is a defendant in employment law wage and hour and independent contractor misclassification claims in a purported class action seeking monetary damages, Maximo v. Aspen Contracting California LLC d/b/a/ Noble Logistics, et al., or Maximo. Noble is a debtor in a bankruptcy case under Chapter 11 of the federal bankruptcy code, pending in federal bankruptcy court in Delaware. The claims against Noble asserted in the Maximo case have been stayed by the filing of Noble’s bankruptcy case. A lawsuit brought by plaintiffs Clarence and Sheila Walder against a customer of Noble is also pending in California based on similar facts relating to Noble and claims under California law. The Maximo and Walder plaintiffs have attempted to bring claims against the Company and other former investors in Noble based primarily on allegations that the Company and other investors controlled Noble and were responsible for the misclassification of Noble’s workforce. To date, claims against the Company have been struck by a court or voluntarily dismissed by the plaintiffs in connection with the automatic stay arising in connection with the Noble bankruptcy. While neither the Company nor any of its portfolio companies (other than Noble) are currently defendants in these cases, they may in the future be subject to claims by these plaintiffs or other persons alleging similar claims, or may expend funds on behalf of Noble to defend claims.
While the Company believes it would have valid defenses to potential claims, based on the current claims and facts alleged, and intends to defend any claims vigorously, it may nevertheless expend significant amounts of money in defense costs and expenses. Further, if the Company enters into settlements or suffers an adverse outcome in any litigation, the Company could be required to pay significant amounts. In addition, if any of the Company’s portfolio companies become subject to direct or indirect claims or other obligations, such as defense costs or damages in litigation or settlement, the Company’s investment in such companies could diminish in value and the Company could suffer indirect losses. Further, these matters could cause the Company to expend significant management time and effort in connection with assessment and defense of any claims. No range of potential expenses, costs or damages in connection with these matters can be estimated at this time.
We may not realize gains from our equity investments and other yield enhancements.
When we make a subordinated loan, we may receive warrants to purchase stock issued by the borrower or other yield enhancements, such as success fees. Our goal is to ultimately dispose of these equity interests and realize gains upon our disposition of such interests. We expect that, over time, the gains we realize on these warrants and other yield enhancements will offset any losses we may experience on loan defaults. However, any warrants we receive may not appreciate in value and, in fact, may decline in value and any other yield enhancements, such as success fees, may not be realized. Accordingly, we may not be able to realize gains from our equity interests or other yield enhancements and any gains we do recognize may not be sufficient to offset losses we experience on our loan portfolio.
During the fiscal year ended March 31, 2015, we recorded a net realized loss of $0.1 million related to reversal of escrows from previous investment exits. During the fiscal year ended March 31, 2014, we recorded a net realized gain of $8.2 million related to theprimarily consisting of a $24.8 million gain on the sale of Venyu sale,Solutions, Inc. (“Venyu”), partially offset by the realized losses of $11.4 million and $1.8 million related to the equity sales of Auto Safety House,
LLC (“ASH”) and Packerland Whey Products, Inc. (“Packerland”), respectively, and a realized lossesloss of $3.4 million related to the restructuring of Noble Logistics, Inc. (“Noble”).Noble. During the fiscal year ended March 31, 2013, we
recorded a realized gain of $0.8 million relating to post-closing adjustments on our previous investment exit of A. Stucki and during the fiscal year ended March 31, 2012, we recapitalized our investment in Cavert, receiving $8.5 million in proceeds and realizing a gain of $5.5 million.Holding Corp. (“A. Stucki”). There can be no guarantees that such realized gains can be achieved in future periods and the impact of such sales on our results of operations for the fiscal years 2014, 2013 and 2012in prior periods should not be relied upon as being indicative of performance in future periods. For the years ended March 31, 2015, 2014 and 2013, success fees totaled $1.4 million, $4.2 million and $0.8 million, respectively.
Any cumulative unrealized depreciation we experience on our investment portfolio may be an indication of future realized losses, which could reduce our income available for distribution.
As a BDC we are required to carry our investments at market value or, if no market value is ascertainable, at fair value as determined in good faith by or under the direction of our Board of Directors. We will record decreases in the market values or fair values of our investments as unrealized depreciation. Since our inception, we have, at times, incurred a cumulative net unrealized depreciation of our portfolio. Any unrealized depreciation in our investment portfolio could result in realized losses in the future and ultimately in reductions of our income available for distribution to stockholders in future periods.
The recent volatility of oil and natural gas prices could impair certain of our portfolio companies’ operations and ability to satisfy obligations to their respective lenders and investors, including us, which could negatively impact our financial condition.
Many of our portfolio companies’ businesses are heavily dependent upon the prices of, and demand for, oil and natural gas, which have recently declined significantly and such volatility could continue or increase in the future. A substantial or extended decline in oil and natural gas demand or prices may adversely affect the business, financial condition, cash flow, liquidity or results of operations of these portfolio companies and might impair their ability to meet capital expenditure obligations and financial commitments. A prolonged or continued decline in oil prices could therefore have a material adverse effect on our business, financial condition and results of operations.
Risks Related to Our External Financing
In addition to regulatory limitations on our ability to raise capital, our revolving line of credit contains various covenants which, if not complied with, could accelerate our repayment obligations under the facility, thereby materially and adversely affecting our liquidity, financial condition, results of operations and ability to pay distributions.
We will have a continuing need for capital to finance our investments. As of March 31, 2015, we had $118.8 million in borrowings outstanding under our fifth amended and restated credit agreement, which provides for maximum borrowings of $185.0 million (our “Credit Facility”), with a revolving period end date of June 26, 2017 (the “Revolving Period End Date”). Our Credit Facility permits us to fund additional loans and investments as long as we are within the conditions and covenants set forth in the credit agreement. Our Credit Facility contains covenants that require our wholly-owned subsidiary, Business Investment, to maintain its status as a separate legal entity, prohibit certain significant corporate transactions (such as mergers, consolidations, liquidations or dissolutions) and restrict material changes to our credit and collection policies without lenders’ consent. Our Credit Facility also generally seeks to restrict distributions on our common stock to the sum of certain amounts, including, but not limited to, our net investment income, plus net capital gains, plus amounts elected by the Company to be considered as having been paid during the prior fiscal year in accordance with Section 855(a) of the Code. We are also subject to certain limitations on the type of loan investments we can make, including restrictions on geographic concentrations, sector concentrations, loan size, payment frequency and status, average life and lien property. Our Credit Facility also requires us to comply with other financial and operational covenants, which obligate us 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 of $170 million plus 50% of all equity and subordinated debt raised minus any equity or subordinated debt redeemed or retired after June 26, 2014, which equates to $202.9 million as of March 31, 2015, (ii) “asset coverage” with respect to “senior securities representing indebtedness” of at least 200%, in accordance with Section 18, as modified by Section 61, of the 1940 Act and (iii) our status as a BDC under the 1940 Act and as a RIC under the Code. As of March 31, 2015 and as of the date of this filing, we were in compliance with the covenants under our Credit Facility; however, our continued compliance depends on many factors, some of which are beyond our control.
Given the continued uncertainty in the capital markets, the cumulative net unrealized depreciation in our portfolio may increase in future periods and threaten our ability to comply with the minimum net worth covenant and other covenants under our Credit Facility. Our failure to satisfy these covenants could result in foreclosure by our lenders, which would accelerate our repayment obligations under the facility and thereby have a material adverse effect on our business, liquidity, financial condition, results of operations and ability to pay distributions to our stockholders.
Any inability to renew, extend or replace our Credit Facility on terms favorable to us, or at all, could adversely impact our liquidity and ability to fund new investments or maintain distributions to our stockholders.
If our Credit Facility is not renewed or extended by the Revolving Period End Date, all principal and interest will be due and payable on or before June 26, 2017. Subject to certain terms and conditions, our Credit Facility may be expanded to a total of $250 million through the addition of other lenders to the facility. However, if additional lenders are unwilling to join the facility on its terms, we will be unable to expand the facility and thus will continue to have limited availability to finance new investments under our Credit Facility. There can be no guarantee that we will be able to renew, extend or replace our Credit Facility upon its Revolving Period End Date on terms that are favorable to us, if at all. Our ability to expand our Credit Facility, and to obtain replacement financing at or before the time of its Revolving Period End Date, will be constrained by then-current economic conditions affecting the credit markets. In the event that we are not able to expand our Credit Facility, or to renew, extend or refinance our Credit Facility by the Revolving Period End Date, this could have a material adverse effect on our liquidity and ability to fund new investments, our ability to make distributions to our stockholders and our ability to qualify as a RIC under the Code.
If we are unable to secure replacement financing, we may be forced to sell certain assets on disadvantageous terms, which may result in realized losses, and such realized losses could materially exceed the amount of any unrealized depreciation on these assets as of our most recent balance sheet date, which would have a material adverse effect on our results of operations. Such circumstances would also increase the likelihood that we would be required to redeem some or all of our outstanding mandatorily redeemable preferred stock, which could potentially require us to sell more assets. In addition to selling assets, or as an alternative, we may issue common equity in order to repay amounts outstanding under our Credit Facility. Based on the recent trading prices of our common stock, such an equity offering may have a substantial dilutive impact on our existing stockholders’ interest in our earnings, assets and voting interest in us. If we are able to renew, extend or refinance our Credit Facility prior to maturity, renewal, extension or refinancing, it could potentially result in significantly higher interest rates and related charges and may impose significant restrictions on the use of borrowed funds to fund investments or maintain distributions to common and preferred stockholders.
Because we expect to distribute substantially all of our net investment income, at least 90%, on an annual basis, our business plan is dependent upon external financing, which is constrained by the limitations of the 1940 Act.
We completed recent equity offerings of our Series C and Series B Term Preferred Stock in May 2015 and November 2014, respectively; our Series A Term Preferred Stock in March 2012; and our common offerings in March 2015 and in October 2012, and there can be no assurance that we will be able to raise capital through issuing equity in the near future. Our business requires a substantial amount of cash to operate and grow. We may acquire such additional capital from the following sources:
| • | Senior Securities.We may issue senior securities representing indebtedness (including borrowings under our Credit Facility) and senior securities that are stock, such as our Series A, B, and C Term Preferred Stock, up to the maximum amount permitted by the 1940 Act. The 1940 Act currently permits us, as a BDC, to issue senior securities representing indebtedness and senior securities which are stock (such as our mandatorily redeemable preferred stock) (collectively, our “Senior Securities”), in amounts such that our asset coverage, as defined in Section 18(h) of the 1940 Act, is at least 200% immediately after each issuance of such Senior Security. As a result of incurring indebtedness (in whatever form), we will be exposed to the risks associated with leverage. Although borrowing money for investments increases the potential for gain, it also increases the risk of a loss. A decrease in the value of our investments will have a greater impact on the value of our common stock to the extent that we have borrowed money to make investments. There is a possibility that the costs of borrowing could exceed the income we receive on the investments we make with such borrowed funds. In addition, our ability to pay distributions, issue Senior Securities or repurchase shares of our common stock would be restricted if the asset coverage on each of our Senior Securities is not at least 200%. If the aggregate value of our assets declines, we might be unable to satisfy that 200% requirement. To satisfy the 200% asset coverage requirement in the event that we are seeking to pay a distribution, we might either have to (i) liquidate a portion of our loan portfolio to repay a portion of our indebtedness or (ii) issue common stock. This may occur at a time when a sale of a portfolio asset may be disadvantageous, or when we have limited access to capital markets on agreeable terms. In addition, any amounts that we use to service our indebtedness or for offering expenses will not be available for distributions to stockholders. Furthermore, if we have to issue common stock below NAV per common share, any non-participating stockholders will be subject to dilution, as described below. Pursuant to Section 61(a)(2) of the 1940 Act, we are permitted, under specified conditions, to issue multiple classes of senior securities representing indebtedness. However, pursuant to Section 18(c) of the 1940 Act, we are permitted to issue only one class of Senior Securities that is stock. |
| • | Common and Convertible Preferred Stock.Because we are constrained in our ability to issue debt or Senior Securities for the reasons given above, we are dependent on the issuance of equity as a financing source. If we raise additional funds by issuing more common stock, the percentage ownership of our common stockholders at the time of the issuance would decrease and our existing common stockholder may experience dilution. In addition, under the 1940 Act, we will generally not be able to issue additional shares of our common stock at a price below NAV per common share to purchasers, other than to our existing common stockholders through a rights offering, without first obtaining the approval of our stockholders and our independent directors. If we were to sell shares of our common stock below our then current NAV per common share, as we did in March 2015 and October 2012, such sales would result in an immediate dilution to the NAV per common share. |
This dilution would occur as a result of the sale of common shares at a price below the then current NAV per share of our common stock and a proportionately greater decrease in a common stockholder’s interest in our earnings and assets and voting percentage than the increase in our assets resulting from such issuance. For example, if we issue and sell an additional 10% of our common stock at a 5% discount from NAV, a common stockholder who does not participate in that offering for its proportionate interest will suffer NAV dilution of up to 0.5% or $5 per $1,000 of NAV. This imposes constraints on our ability to raise capital when our common stock is trading below NAV per common share, as it generally has for the last several years. As noted above, the 1940 Act prohibits the issuance of multiple classes of senior securities that are stock. As a result, we would be prohibited from issuing convertible preferred stock to the extent that such a security was deemed to be a separate class of stock from our outstanding mandatorily redeemable preferred stock. |
We financed certain of our investments with borrowed money and capital from the issuance of Senior Securities, which will magnify the potential for gain or loss on amounts invested and may increase the risk of investing in us.
The following table illustrates the effect of leverage on returns from an investment in our common stock assuming various annual returns on our portfolio, net of expenses. The calculations in the table below are hypothetical, and actual returns may be higher or lower than those appearing in the table below.
| Assumed Return on Our Portfolio (Net of Expenses) | ||||||||||||||||||||
| (10 | )% | (5 | )% | 0 | % | 5 | % | 10 | % | |||||||||||
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Corresponding return to common stockholder(1) | (21.6 | )% | (12.8 | )% | (3.9 | )% | 4.9 | % | 13.8 | % | ||||||||||
| (1) | The hypothetical return to common stockholders is calculated by multiplying our total assets as of March 31, 2015, by the assumed rates of return and subtracting all interest on our debt and dividends on our mandatorily redeemable preferred stock expected to be paid or declared during the twelve months following March 31, 2015; and then dividing the resulting difference by our total net assets attributable to Common Stock as of March 31, 2015. Based on $483.5 million in total assets, $118.8 million in debt outstanding at cost, $5.1 million in a secured borrowing, $40.0 million in aggregate liquidation preference of Series A Term Preferred Stock, $41.4 million in aggregate liquidation preference of Series B Term Preferred Stock and $273.4 million in net assets as of March 31, 2015. |
Based on an aggregate outstanding indebtedness of $123.9 million at cost as of March 31, 2015, the effective annual interest rate of 4.0% as of that date, and aggregate liquidation preference of our mandatorily redeemable preferred stock of $81.4 million, our investment portfolio at fair value would have had to produce an annual return of at least 2.3% to cover annual interest payments on the outstanding debt and dividends on our mandatorily redeemable preferred stock.
A change in interest rates may adversely affect our profitability and our hedging strategy may expose us to additional risks.
We anticipate using a combination of equity and long-term and short-term borrowings to finance our investment activities. As a result, a portion of our income will depend upon the spread between the rate at which we borrow funds and the rate at which we loan these funds. An increase or decrease in interest rates could reduce the spread between the rate at which we invest and the rate at which we borrow, and thus, adversely affect our profitability, if we have not appropriately hedged against such event. Alternatively, our interest rate hedging activities may limit our ability to participate in the benefits of lower interest rates with respect to the hedged portfolio.
Ultimately, we expect approximately 90.0% of the loans in our portfolio to be at variable rates determined on the basis of the LIBOR and approximately 10.0% to be at fixed rates. As of March 31, 2015, based on the total principal balance of debt investments outstanding, our portfolio consisted of 79.9% of loans at variable rates with floors and 20.1% at fixed rates.
We currently hold one interest rate cap agreement for a notional amount of $45.0 million. While hedging activities may insulate us against adverse fluctuations in interest rates, they may also limit our ability to participate in the benefits of lower interest rates with respect to the hedged portfolio. Adverse developments resulting from changes in interest rates or any future hedging transactions could have a material adverse effect on our business, financial condition and results of operations. Our ability to receive payments pursuant to an interest rate cap agreement is linked to the ability of the counter-party to that agreement to make the required payments. To the extent that the counter-party to the agreement is unable to pay pursuant to the terms of the agreement, we may lose the hedging protection of the interest rate cap agreement.
Also, the fair value of certain of our debt investments is based in part on the current market yields or interest rates of similar securities. A change in interest rates could have a significant impact on our determination of the fair value of these debt investments. In addition, a change in interest rates could also have an impact on the fair value of our interest rate cap agreements that could result in the recording of unrealized appreciation or depreciation in future periods. Therefore, adverse developments resulting from changes in interest rates could have a material adverse effect on our business, financial condition and results of operations. For additional information on interest rate fluctuations, seeManagement’s Discussion and Analysis of Financial Condition and Results of Operations—Quantitative and Qualitative Disclosures About Market Riskand Financial Statements and Supplementary Datafor additional information on interest rate cap agreements.
Risks Related to Our Regulation and Structure
If we are unable to meet the 50% threshold of the asset diversification test applicable to RICs under the Code as measured at each quarter end, we would lose our RIC status unless we are able to cure such failure within 30 days of the quarter end.
In order to maintain RIC status under the Code, 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, the securities of other RICs and other securities to the extent such other securities of any one issuer do not represent more than 5% of our total assets or more than 10% of the voting securities of such issuer. As a result of changes in the makeup of our assets during 2009, we have not continuously exceeded the 50% threshold. At each quarterly measurement date from June 30, 2009 to December 31, 2013, we satisfied the 50% threshold through the purchase of short-term qualified securities, which was funded primarily through a short-term loan agreement. The March 31, 2014 quarter end is the first quarter since June 30, 2009 in which we satisfied the 50% threshold without purchasing short-term qualified securities. Until the composition of our assets is continuously above the required 50% threshold, we may have to deploy similar purchases of qualified securities using short-term loans that would allow us to satisfy the asset diversification test, thereby allowing us to make new or 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. In circumstances where the failure to meet the 50% threshold as of a subsequent quarterly measurement date is the result of fluctuations in the value of assets, we are still deemed under the rules to have satisfied the asset diversification test and, therefore, maintain our RIC status, as long as we have not made any new investments, including additional investments in our portfolio companies (such as advances under outstanding lines of credit), since the time that we fell below the 50% threshold. Because, in most circumstances, we are contractually required to advance funds on outstanding lines of credit upon the request of our portfolio companies, we may have a limited ability to avoid adding to existing investments in a manner that would cause us to fail the asset diversification test at a subsequent quarterly measurement date.
If we are not in compliance with the 50% threshold at a quarterly measurement date, we would have thirty days to “cure” our failure to meet the 50% threshold at such quarterly measurement date to avoid our loss of RIC status. Potential cures for failure of the asset diversification test include raising additional equity or debt capital as we have done in the past, or changing the composition of our assets, which could include full or partial divestitures of investments, such that we would once again meet or exceed the 50% threshold at such quarterly measurement date. Our ability to implement any of these cures would be subject to market conditions and a number of risks and uncertainties that would be, in part, beyond our control. Accordingly, we cannot guarantee you that we would be successful in curing any failure of the asset diversification test, which would subject us to corporate level tax. For additional information about the consequences of failing to satisfy the RIC qualification requirements, see “—We will be subject to corporate-level tax if we are unable to satisfy Code requirements for RIC qualification.”
We will be subject to corporate-level tax if we are unable to satisfy Code requirements for RIC qualification.
To maintain our qualification as a RIC, we must meet income source, annual distribution and asset diversification and annual distribution requirements. The annual distribution requirement is satisfied if we distribute at least 90% of our ordinaryinvestment company taxable income and short-term capital gains to our stockholders on an annual basis. Because we use leverage, we are subject to certain asset coverage ratio requirements under the 1940 Act and could, under certain circumstances, be restricted from making distributions necessary to qualify as a RIC. Warrants we receive with respect to debt investments will create “original issue discount,”discount” (“OID”), which we must recognize as ordinary income increasingover the term of the debt investment. Similarly, PIK interest which is accrued generally over the term of the debt investment but not paid in cash. Both OID and PIK interest will increase the amounts we are required to distribute to maintain RIC status. Because such warrantsOIDs and PIK interest will not produce distributable cash for us at the same time as we are required to make distributions, in respect of the related original issue discount, we will need to use cash from other sources to satisfy such distribution requirements. TheAdditionally, we must meet asset diversification and income source requirements must be met at the end of each calendar quarter. If we fail to meet these tests, we may need to quickly dispose of certain investments to prevent the loss of RIC status. Since
most of our investments will be illiquid, such dispositions, if even possible, may not be made at prices advantageous to us and, in fact, may result in substantial losses. If we fail to qualify as a RIC as of a calendar quarter or annually for any reason and become fully subject to corporate income tax, the resulting corporate taxes could substantially reduce our net assets, the amount of income available for distribution, and the actual amount distributed. Such a failure would have a material adverse effect on us and our shares.common stock. For additional information regarding asset coverage ratio and RIC requirements, see “Business—“Business—Material U.S. Federal Income Tax Considerations—RIC Status.Status.”
From time to time, some of our debt investments may include success fees that would generate payments to us if the business is ultimately sold. Because the satisfaction of these success fees, and the ultimate payment of these fees, is uncertain and highly contingent, we do notgenerally only recognize them as income until we have received payment. We sought and received approval for a change in accounting method from the IRS related to our tax treatment for success fees. As a result, we, in effect, will continue to account for the recognition of income from the success fees upon receipt, or when the amounts become fixed.payment is received. Success fee amounts are characterized as ordinary income for tax purposes and, as a result, we are required to distribute such amounts to our stockholders in order to maintain RIC status.
If we do not invest a sufficient portion of our assets in “qualifying assets,” we could fail to qualify as a BDC under the 1940 Act or be precluded from investing according to our current business strategy.
As a BDC, we may not acquire any assets other than “qualifying assets” unless, at the time of and after giving effect to such acquisition, at least 70% of our total assets are qualifying assets, as defined in Section 55(a) of the 1940 Act.
We believe that most of the investments that we may acquire in the future will constitute qualifying assets. However, we may be precluded from investing in what we believe to be attractive investments if such investments are not qualifying assets for purposes of the 1940 Act. If we do not invest a sufficient portion of our assets in qualifying assets, we could violate the 1940 Act provisions applicable to BDCs. As a result of such violation, specific rules under the 1940 Act could prevent us, for example, from making follow-on investments in existing portfolio companies (which could result in the dilution of our position) or could require us to dispose of investments at inappropriate times in order to come into compliance with the 1940 Act. If we need to dispose of such investments quickly, it could be difficult to dispose of such investments on favorable terms. We may not be able to find a buyer for such investments and, even if we do find a buyer, we may have to sell the investments at a substantial loss. Any such outcomes would have a material adverse effect on our business, financial condition, results of operations and cash flows.
If we do not maintain our status as a BDC, we would be subject to regulation as a registered closed-end investment company under the 1940 Act. As a registered closed-end investment company, we would be subject to substantially more regulatory restrictions under the 1940 Act, which would significantly decrease our operating flexibility. For additional information regarding qualifying assets, see “Business—Regulation as a BDC — Qualifying Assets.”
Changes in laws or regulations governing our operations, or changes in the interpretation thereof, and any failure by us to comply with laws or regulations governing our operations may adversely affect our business.
We, and our portfolio companies, are subject to regulation by laws at the local, state and federal levels. These laws and regulations, as well as their interpretation, may be changed from time to time. Accordingly, any change in these laws or regulations, or their interpretation, or any failure by us or our portfolio companies to comply with these laws or regulations may adversely affect our business. For additional information regarding the regulations to which we are subject, see “Business—“Business—Material U.S. Federal Income Tax Considerations—RIC Status”and “Business—Regulation as a BDC.”
Provisions of the Delaware General Corporation Law and of our certificate of incorporation and bylaws could restrict a change in control and have an adverse impact on the price of our common stock.
We are subject to provisions of the Delaware General Corporation Law that, in general, prohibit any business combination with a beneficial owner of 15% or more of our common stock for three years unless the holder’s acquisition of our stock was either approved in advance by our Board of Directors or ratified by theour Board of Directors and stockholders owning two-thirds of our outstanding stock not owned by the acquiring holder. Although we believe these provisions collectively provide for an opportunity to receive higher bids by requiring potential acquirers to negotiate with our Board of Directors, they would apply even if the offer may be considered beneficial by some stockholders.
We have also adopted other measures that may make it difficult for a third party to obtain control of us, including provisions of our certificate of incorporation classifying our Board of Directors in three classes serving staggered three-year terms, and provisions of our certificate of incorporation authorizing our Board of Directors to induce the issuance of additional shares of our stock. These provisions, as well as other provisions of our certificate of incorporation and bylaws, may delay, defer, or prevent a transaction or a change in control that might otherwise be in the best interests of our stockholders.
Risks Related to Our External Management
We are dependent upon our key management personnel and the key management personnel of the Adviser, particularly David Gladstone, Terry Lee Brubaker and David Dullum, and on the continued operations of the Adviser, for our future success.
We have no employees. Our chief executive officer, chief operating officer, chief financial officer and treasurer, chief valuation officer, chief accounting officer, and the employees of the Adviser, do not spend all of their time managing our activities and our investment portfolio. We are particularly dependent upon David Gladstone, Terry Lee Brubaker and David Dullum for their experience, skills, and networks. Our executive officers and the employees of the Adviser allocate some, and in some cases a material portion, of their time to businesses and activities that are not related to our business. We have no separate facilities and are completely reliant on the Adviser, which has significant discretion as to the implementation and execution of our business strategies and risk management practices. We are subject to the risk of discontinuation of the Adviser’s operations or termination of the Advisory Agreement and the risk that, upon such event, no suitable replacement will be found. We believe that our success depends to a significant extent upon the Adviser and that discontinuation of its operations or the loss of its key management personnel could have a material adverse effect on our ability to achieve our investment objectives.
Our success depends on the Adviser’s ability to attract and retain qualified personnel in a competitive environment.
The Adviser experiences competition in attracting and retaining qualified personnel, particularly investment professionals and senior executives, and we may be unable to maintain or grow our business if we cannot attract and retain such personnel. The Adviser’s ability to attract and retain personnel with the requisite credentials, experience and skills depends on several factors including, but not limited to, its ability to offer competitive wages, benefits and professional growth opportunities. The Adviser competes with investment funds (such as private equity funds and mezzanine funds) and traditional financial services companies for qualified personnel, many of which have greater resources than us. Searches for qualified personnel may divert management’s time from the operation of our business. Strain on the existing personnel resources of the Adviser, in the event that it is unable to attract experienced investment professionals and senior executives, could have a material adverse effect on our business.
We are dependent upon the contacts and relationships of the Adviser to provide us with potential investment opportunities.
We depend upon the Adviser to maintain its relationships with private equity sponsors, placement agents, investment banks, management groups and other financial institutions, and we expect to rely to a significant extent upon these relationships to provide us with potential investment opportunities. If the Adviser or members of our investment team fail to maintain such relationships, or to develop new relationships with other sources of investment opportunities, we will not be able to grow our investment portfolio. In addition, individuals with whom the Adviser has relationships are not obligated to provide us with investment opportunities, and we can offer no assurance that these relationships will generate investment opportunities for us in the future. Failure of the Adviser to maintain such relationships or enter into new relationships that would generate additional investment opportunities, could have a material adverse effect on our business.
The Adviser can resign on 60 days’ notice, and we may not be able to find a suitable replacement within that time, resulting in a disruption in our operations that could adversely affect our financial condition, business and results of operations.
The Adviser has the right to resign under the Advisory Agreement at any time upon not less than 60 days’ written notice, whether we have found a replacement or not. If the Adviser resigns, we may not be able to find a new investment adviser or hire internal management with similar expertise and ability to provide the same or equivalent services on acceptable terms within 60 days, or at all. If we are unable to do so quickly, our operations are likely to experience a disruption, our financial condition, business and results of operations as well as our ability to pay distributions are likely to be adversely affected and the market price of our common stock may decline. In addition, the coordination of our internal management and investment activities is likely to suffer if we are unable to identify and reach an agreement with a single institution or group of executives having the expertise possessed by the Adviser and its affiliates. Even if we are able to retain comparable management, whether internal or external, the integration of such management and their lack of familiarity with our investment objective may result in additional costs and time delays that may adversely affect our business, financial condition, results of operations and cash flows.
Our incentive fee may induce the Adviser to make certain investments, including speculative investments.
The management compensation structure that has been implemented under the Advisory Agreement may cause the Adviser to invest in high-risk investments or take other investment risks. In addition to its management fee, the Adviser is entitled under the Advisory Agreement to receive incentive compensation based in part upon our achievement of specified levels of income. In evaluating investments and other management strategies, the opportunity to earn incentive compensation based on net investment income may lead the Adviser to place undue emphasis on the maximization of net investment income at the expense of other criteria, such as preservation of capital, maintaining sufficient liquidity, or management of credit risk or market risk, in order to achieve higher incentive compensation. Investments with higher yield potential are generally riskier or more speculative. This could result in increased risk to the value of our investment portfolio.
We may be obligated to pay the Adviser incentive compensation even if we incur a loss.
The Advisory Agreement entitles the Adviser to incentive compensation for each fiscal quarter in an amount equal to a percentage of the excess of our net investment income for that quarter (before deducting incentive fee, net operating losses and certain other items) above a threshold return of 1.75% for that quarter. When calculating our incentive fee, our pre-incentive fee net investment income excludes realized and unrealized losses or depreciation that we may incur in the fiscal quarter, even if such losses or depreciation result in a net loss on our statement of operations for that quarter. Thus, we may be required to pay the Adviser incentive compensation for a fiscal quarter even if there is a decline in the value of our portfolio or we incur a net realized or unrealized loss for that quarter. For additional information on incentive compensation under the Advisory Agreement with the Adviser, see “Business — Investment Advisory and Management Agreement.”
We may be required to pay the Adviser incentive compensation on income accrued, but not yet received in cash.
That part of the incentive fee payable by us that relates to our net investment income is computed and paid on income that may include interest that has been accrued but not yet received in cash, such as debt instruments with PIK interest. If a portfolio company defaults on a loan, it is possible that such accrued interest previously used in the calculation of the incentive fee will become uncollectible. Consequently, we may make incentive fee payments on income accruals that we may not collect in the future and with respect to which we do not have a clawback right against the Adviser. During the years ended March 31, 2015, 2014 and 2013, PIK income and any other non-cash income represents less than 1% of total income for the year.
The Adviser’s failure to identify and invest in securities that meet our investment criteria or perform its responsibilities under the Advisory Agreement would likely adversely affect our ability for future growth.
Our ability to achieve our investment objectives will depend on our ability to grow, which in turn will depend on the Adviser’s ability to identify and invest in securities that meet our investment criteria. Accomplishing this result on a cost-effective basis will be largely a function of the Adviser’s structuring of the investment process, its ability to provide competent and efficient services to us, and our access to financing on acceptable terms. The senior management team of the Adviser has substantial responsibilities under the Advisory Agreement. In order to grow, the Adviser will need to hire, train, supervise, and manage new employees successfully. Any failure to manage our future growth effectively would likely have a material adverse effect on our business, financial condition, and results of operations and cash flows.
There are significant potential conflicts of interest, including with the Adviser, which could impact our investment returns.
Our executive officers and directors, and the officers and directors of the Adviser, serve or may serve as officers, directors, or principals of entities that operate in the same or a related line of business as we do or of investment funds managed by our affiliates. Accordingly, they may have obligations to investors in those entities, the fulfillment of which might not be in the best interests of us or our stockholders. For example, Mr. Gladstone, our chairman and chief executive officer, is the chairman of the board and chief executive officer of the Adviser and Administrator, Gladstone Investment, Gladstone Commercial and Gladstone Land. In addition,
Mr. Brubaker, our vice chairman and chief operating officer, is the vice chairman and chief operating officer of the Adviser and Administrator, Gladstone Capital, Gladstone Commercial and Gladstone Land. Mr. Dullum, our president and a director, is an executive managing director of the Adviser. Moreover, the Adviser may establish or sponsor other investment vehicles which from time to time may have potentially overlapping investment objectives with ours and accordingly may invest in, whether principally or secondarily, asset classes we target. While the Adviser generally has broad authority to make investments on behalf of the investment vehicles that it advises, the Adviser has adopted investment allocation procedures to address these potential conflicts and intends to direct investment opportunities to the Gladstone affiliate with the investment strategy that most closely fits the investment opportunity. Nevertheless, the management of the Adviser may face conflicts in the allocation of investment opportunities to other entities managed by the Adviser. As a result, it is possible that we may not be given the opportunity to participate in certain investments made by other funds managed by the Adviser. Our Board of Directors approved a revision of our investment objectives and strategies that became effective on January 1, 2013, which may enhance the potential for conflicts in the allocation of investment opportunities to us and other entities managed by the Adviser.
In certain circumstances, we may make investments in a portfolio company in which one of our affiliates has or will have an investment, subject to satisfaction of any regulatory restrictions and, where required, the prior approval of our Board of Directors. As of March 31, 2015, our Board of Directors has approved the following types of co-investment transactions not under the July 2012 co-invest exemption order we received from the SEC:
Certain of our officers, who are also officers of the Adviser, may from time to time serve as directors of certain of our portfolio companies. If an officer serves in such capacity with one of our portfolio companies, such officer will owe fiduciary duties to stockholders of the portfolio company, which duties may from time to time conflict with the interests of our stockholders.
In the course of our investing activities, we will pay management and incentive fees to the Adviser and will reimburse the Administrator for certain expenses it incurs. As a result, investors in our common stock will invest on a “gross” basis and receive distributions on a “net” basis after expenses, resulting in, among other things, a lower rate of return than one might achieve through our investors themselves making direct investments. As a result of this arrangement, there may be times when the management team of the Adviser has interests that differ from those of our stockholders, giving rise to a conflict. In addition, as a BDC, we make available significant managerial assistance to our portfolio companies and provide other services to such portfolio companies. While neither we nor the Adviser currently receives fees in connection with managerial assistance, the Adviser and Gladstone Securities have, at various times, provided other services to certain of our portfolio companies and received fees for these other services.
Our business model is dependent upon developing and sustaining strong referral relationships with investment bankers, business brokers and other intermediaries and any change in our referral relationships may impact our business plan.
We are dependent upon informal relationships with investment bankers, business brokers and traditional lending institutions to provide us with deal flow. If we fail to maintain our relationship with such funds or institutions, or if we fail to establish strong referral relationships with other funds, we will not be able to grow our portfolio of investments and fully execute our business plan.
The Adviser is not obligated to provide credits of the base management fee or incentive fees, which could negatively impact our earnings and our ability to maintain our current level of distributions to our stockholders.
The Advisory Agreement provides for a base management fee, based on our gross assets, and an incentive fee, that is based on our income and capital gains. Our Board of Directors has accepted in the past and may accept in the future voluntary, unconditional and irrevocable credits to reduce the annual 2.0% base management fee or the incentive fee, on a quarterly or annual basis. Any fees credited may not be recouped by the Adviser in the future. However, the Adviser is not required to issue these or other credits of fees under the Advisory Agreement. If the Adviser does not issue these credits in the future, it could negatively impact our earnings and may compromise our ability to maintain our current level of distributions to our stockholders, which could have a material adverse impact on our common stock price.
Our base management fee may induce the Adviser to incur leverage.
The fact that our base management fee is payable based upon our gross assets, which would include any investments made with proceeds of borrowings, may encourage the Adviser to use leverage to make additional investments. Under certain circumstances, the use of increased leverage may increase the likelihood of default, which would disfavor holders of our securities. Given the subjective nature of the investment decisions made by the Adviser on our behalf, we will not be able to monitor this potential conflict of interest.
Risks Related to an Investment in Our Securities
We may experience fluctuations in our quarterly and annual operating results.
We may experience fluctuations in our quarterly and annual operating results due to a number of factors, including, among others, variations in our investment income, the interest rates payable on the debt securities we acquire, the default rates on such securities, the level of our expenses, variations in and the timing of the recognition of realized and unrealized gains or losses, placing and removing investments on non-accrual status, the degree to which we encounter competition in our markets, the ability to sell investments at attractive terms, the ability to fund and close suitable investments, the level of our expenses, the degree to which we encounter competition in our markets, and general economic conditions, including the impacts of inflation. The majority of our portfolio companies are in industries that are directly impacted by inflation, such as manufacturing and consumer goods and services. Our portfolio companies may not be able to pass on to customers increases in their costs of production which could greatly affect their operating results, impacting their ability to repay our loans. In addition, any projected future decreases in our portfolio companies’ operating results due to inflation could adversely impact the fair value of those investments. Any decreases in the fair value of our investments could result in future realized and unrealized losses and therefore reduce our net assets resulting from operations. As a result of these factors, results for any period should not be relied upon as being indicative of performance in future periods.
There is a risk that you may not receive distributions or that distributions may not grow over time.
Our current intention is to distribute at least 90% of our ordinaryinvestment company taxable income and short-term capital gains to our common stockholders on a quarterly basis by paying monthly common distributions. We expect to retain some or all net realized long-term capital gains by first offsetting them with realized capital losses, and, secondly, through a “deemed distribution” to supplement our equity capital and support the growth of our portfolio, although our Board of Directors may determine in certain cases to distribute these gains to our common stockholders. In addition, our Credit Facility restricts the amount of distributions we are permitted to make.make annually. We cannot assure you that we will achieve investment results or maintain a tax status that will allow or require any specified level of cash distributions.
Investing in our securities may involve an above average degree of risk.
The investments we make in accordance with our investment objective may result in a higher amount of risk than alternative investment options and a higher risk of volatility or loss of principal. Our investments in portfolio companies may be highly speculative, and therefore, an investment in our sharescommon stock may not be suitable for someone with lower risk tolerance.
Distributions to our common stockholders have included and may in the future include a return of capital.
Our Board of Directors declares monthly common distributions each quarter based on the respective quarter’s estimates of investment company taxable income for each fiscal year, which may differ, and in the past have differed, from actual results. Because our common distributions are based on estimates of investment company taxable income that may differ from actual results, future common distributions payable to our common stockholders may also include a return of capital. Moreover, to the extent that we distribute amounts that exceed our accumulated earnings and profits, these distributions constitute a return of capital. A return of capital represents a return of a common stockholder’s original investment in common shares of our stock and should not be confused with a distribution from earnings and profits. Although return of capital distributions may not be taxable, such distributions may increase an investor’s tax liability for capital gains upon the sale of our sharescommon stock by reducing the investor’s tax basis for such shares.common stock. Such returns of capital reduce our asset base and also adversely impact our ability to raise debt capital as a result of the leverage restrictions under the 1940 Act, which could have a material adverse impact on our ability to make new investments.
The market price of our shares may fluctuate significantly.
The trading price of our common stock and our preferred stock may fluctuate substantially. The extremeDue to the volatility and disruptiondisruptions that have affected the capital and credit markets over the past few years, we haveour stock has experienced greater than usual stock price volatility.
The market price and marketability of our shares may from time to time be significantly affected by numerous factors, including many over which we have no control and that may not be directly related to us. These factors include, but are not limited to, the following:
Fluctuations in the trading prices of our shares may adversely affect the liquidity of the trading market for our shares and, if we seek to raise capital through future equity financings, our ability to raise such equity capital.
The issuance of subscription rights to our existing stockholders may dilute the ownership and voting powers of existing stockholders in our common stock, dilute the NAV of theirCommon shares and have a material adverse effect on the trading price of our common stock.
In April 2008, we completed an offering of transferable rights to subscribe for additional shares of our common stock, or subscription rights. We raised equity in this manner primarily due to the capital raising constraints applicable to us under the 1940 Act when our common stock is trading below its NAV per share, as it was at the time of the rights offering. In the event that we again issue subscription rights to our existing stockholders, there is a significant possibility that the rights offering will dilute the ownership
interest and voting power of stockholders who do not fully exercise their subscription rights. Stockholders who do not fully exercise their subscription rights should expect that they will, upon completion of the rights offering, own a smaller proportional interest in the Company than would otherwise be the case if they fully exercised their subscription rights. In addition, because the subscription price of the rights offering is likely to be less than our most recently determined NAV per share, our common stockholders are likely to experience an immediate dilution of the per share NAV of their shares as a result of the offer. As a result of these factors, any future rights offerings of our common stock, or our announcement of our intention to conduct a rights offering, could have a material adverse impact on the trading price of our common stock.
Shares of closed-end investment companies frequently trade at a discount from NAV.
Shares of closed-end investment companies frequently trade at a discount from NAV.NAV per common share. Since our inception, our common stock has at times traded above NAV, and at times traded below NAV. During the past year, our common stock has consistently,often, and at times significantly, traded below NAV. Subsequent to March 31, 2014,2015, our common stock has traded at discounts of up to 7.9%19.9% of our NAV per share, which was $8.34$9.18 as of March 31, 2014.2015. This characteristic of shares of closed-end investment companies is separate and distinct from the risk that our NAV per share will decline. As with any stock, the price of our common shares will fluctuate with market conditions and other factors. If common shares are sold, the price received may be more or less than the original investment. Whether investors will realize gains or losses upon the sale of our shares will not depend directly upon our NAV, but will depend upon the market price of the shares at the time of sale. Since the market price of our common shares will be affected by such factors as the relative demand for and supply of the shares in the market, general market and economic conditions and other factors
beyond our control, we cannot predict whether the common shares will trade at, below or above our NAV. Under the 1940 Act, we are generally not able to issue additional shares of our common stock at a price below NAV per share to purchasers other than our existing common stockholders through a rights offering without first obtaining the approval of our common stockholders and our independent directors. Additionally, at times when our common stock is trading below its NAV per share, our dividend yield may exceed the weighted average returns that we would expect to realize on new investments that would be made with the proceeds from the sale of such stock, making it unlikely that we would determine to issue additional common shares in such circumstances. Thus, for as long as our common stock tradesmay trade below NAV we will be subject to significant constraints on our ability to raise capital through the issuance of common stock. Additionally, an extended period of time in which we are unable to raise capital may restrict our ability to grow and adversely impact our ability to increase or maintain our distributions.
StockholdersCommon stockholders may incur dilution if we sell shares of our common stock in one or more offerings at prices below the then current NAV per share of our common stock.share.
At our most recent annual meeting of stockholders on August 7, 2014, our stockholders approved a proposal designed to allow us to access the capital markets in a way that absent stockholder approval, we are generally unable to due to restrictions applicable to BDCs under the 1940 Act. Specifically, our stockholders approved a proposal that authorizes us to sell shares of our common stock below the then current NAV per share of our common stock in one or more offerings for a period of one year from the date of such approval, subject to certain conditions (including, but not limited to, that the number of common shares issued and sold pursuant to such authority does not exceed 25% of our then outstanding common stock immediately prior to each such sale).
We exercised this right with Board of Director approval in March 2015, when we completed a public offering of 3.3 million shares of our common stock at a public offering price of $7.40 per share, which was below our then current NAV of $8.55 per share. Gross proceeds totaled approximately $24.4 million and net proceeds, after deducting underwriting discounts and offering expenses borne by us, were approximately $23.0 million. The net dilutive effect of the issuance of common stock, net of expenses, below NAV was $0.22 per share of common stock.
We previously exercised this right with our Board of Director’s approval in October 2012, when we completed a public offering of 4.4 million shares of our common stock at a public offering price of $7.50 per share, which was below our then current NAV of $8.65 per share. Gross proceeds totaled $33approximately $33.0 million and net proceeds, after deducting underwriting discounts and offering expenses borne by us, were $31approximately $31.0 million. The net dilutive effect of the issuance of common stock, net of expenses, below NAV was $0.31 per share of common stock.
At the upcoming annual stockholders meeting scheduled for August 7, 2014,6, 2015, we expect that our stockholders will again be asked to vote in favor of renewing this proposal for another year. During the past year, our common stock has traded consistently, and at times significantly, below NAV. Any decision to sell shares of our common stock below the then current NAV per share of our common stock would be subject to the determination by our Board of Directors that such issuance is in our and our stockholders’ best interests.
If we were to sell shares of our common stock below NAV per share, such sales would result in an immediate dilution to the NAV per share. This dilution would occur as a result of the sale of shares at a price below the then current NAV per share of our common stock and a proportionately greater decrease in a common stockholder’s interest in our earnings and assets and voting interest in us than the increase in our assets resulting from such issuance. The greater the difference between the sale price and the NAV per share at the time of the offering, the more significant the dilutive impact would be. Because the number of shares of common stock that could be so issued and the timing of any issuance is not currently known, the actual dilutive effect, if any, cannot be currently predicted. However, if, for example, we sold an additional 10% of our common stock at a 5% discount from NAV, aan existing common stockholder who did not participate in that offering for its proportionate interest would suffer NAV dilution of up to 0.5% or $5 per $1,000 of NAV.
If we fail to pay dividends on our Term Preferred Stockmandatorily redeemable preferred stock for two years, the holders of our Term Preferred Stockpreferred stock will be entitled to elect a majority of our directors.
The terms of our Term Preferred Stockthree series of mandatorily redeemable preferred stock provide for annual dividends in the amount of $1.7813$1.78125, $1.68750, and $1.62500 per outstanding share of our Series A Term Preferred Stock.Stock, Series B Term Preferred Stock and Series C Term Preferred Stock, respectively. In accordance with the terms of each of our Term Preferred Stock,three series of mandatorily redeemable term preferred stock, if dividends thereon are unpaid in an amount equal to at least two years of dividends, the holders of Term Preferred Stocksuch series of stock will be entitled to elect a majority of our Board of Directors.
Other Risks
Market volatility and the condition of the debt and equity capital markets could negatively impact our financial condition and stock price.
Beginning in the third quarter of 2007, global credit and other financial markets began to suffer substantial stress, volatility, illiquidity and disruption. These forces reached extraordinary levels in late 2008, resulting in the bankruptcy of, the acquisition of, or government intervention in the affairs of several major domestic and international financial institutions. In particular, the financial services sector was negatively impacted by significant write-offs as the value of the assets held by financial firms declined, impairing their capital positions and abilities to lend and invest. We believe that such value declines were exacerbated by widespread forced liquidations as leveraged holders of financial assets, faced with declining prices, were compelled to sell to meet margin requirements and maintain compliance with applicable capital standards. Such forced liquidations also impaired or eliminated many investors and investment vehicles, leading to a decline in the supply of capital for investment and depressed pricing levels for many assets. These events significantly diminished overall confidence in the debt and equity markets, engendered unprecedented declines in the values of certain assets, and caused extreme economic uncertainty. If market conditions similar to these were to recur, our assets could experience a similar decline in value, among other negative impacts we could suffer.
Since March 2009, the global credit and other financial market conditions have improved as stability has increased throughout the international financial system and, specifically, in the U.S. economy in which we operate, and many public market indices have experienced positive total returns. However, the macroeconomic environment and recovery from the downturn has been challenging and inconsistent. Instability in the credit markets, the impact of periodic uncertainty regarding the U.S. federal budget, tapering of bond purchases by the U.S. Federal Reserve and debt ceiling, the instability in the geopolitical environment in many parts of the world, sovereign debt conditions in Europe and other disruptions may continue to put pressure on economic conditions in the U.S. and abroad, all of which can have an adverse effect on our business.
Economic recessions or downturns could impair our portfolio companies and harm our operating results.
Many of our portfolio companies may be susceptible to economic downturns or recessions and may be unable to repay our loans during these periods. Therefore, during these periods our non-performing assets may increase and the value of these assets may decrease. Adverse economic conditions may also decrease the value of collateral securing some of our loans and the value of our equity investments. Economic slowdowns or recessions could lead to financial losses in our portfolio and a decrease in investment income, net investment income and assets. Unfavorable economic conditions also could increase our funding costs, limit our access to the capital markets or result in a decision by lenders not to extend credit to us. These events could prevent us from increasing investments and harm our operating results. We experienced to some extent such effects as a result of the economic downturn that occurred from 2008 through 2009 and may experience such effects again in any future downturn or recession.
We could face losses and potential liability if intrusion, viruses or similar disruptions to our technology jeopardize our confidential information, whether through breach of our network security or otherwise.
Maintaining our network security is of critical importance because our systems store highly confidential financial models and portfolio company information. Although we have implemented, and will continue to implement and upgrade, security measures, our technology platform is and will continue to be vulnerable to intrusion, computer viruses or similar disruptive problems caused by transmission from unauthorized users. The misappropriation of proprietary information could expose us to a risk of loss or litigation.
Terrorist attacks, acts of war, or national disasters may affect any market for our common stock, impact the businesses in which we invest, and harm our business, operating results, and financial conditions.
Terrorist acts, acts of war, or national disasters have created, and continue to create, economic and political uncertainties and have contributed to global economic instability. Future terrorist activities, military or security operations, or national disasters could further weaken the domestic/global economies and create additional uncertainties, which may negatively impact the businesses in which we invest directly or indirectly and, in turn, could have a material adverse impact on our business, operating results, and financial condition. Losses from terrorist attacks and national disasters are generally uninsurable.
Pending legislation may allow us to incur additional leverage.
As a BDC, we are generally not permitted to incur indebtedness (which includes senior securities representing indebtedness and senior securities that are stock) unless immediately after such borrowing we have asset coverage (as defined in Section 18(h) of the 1940 Act) of at least 200% (i.e. the amount of borrowings may not exceed 50% of the value of our assets). Various pieces of legislation that have been introduced during the current session of the U.S. House of Representatives, if passed, would modify this section of the 1940 Act and increase the amount of such indebtedness that BDCs may incur by modifying the percentage from 200% to 150% and making the asset coverage requirement inapplicable for senior securities that are stock, such as preferred term Our Term Preferred Stock is a senior security that is stock and so for this 200% asset coverage threshold is included as total indebtedness. However, if this proposed legislation is passed, the 1940 Act may not limit our ability to issue preferred stock in the future. As a result, we may be able to incur additional indebtedness in the future and therefore your risk of an investment in us may increase.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
We do not own any real estate or other physical properties material to our operations. The Adviser is the current leaseholder of all properties in which we operate. We occupy these premises pursuant to our Advisory and Administration Agreements with the Adviser and Administrator, respectively. The Adviser and Administrator are both headquartered in McLean, Virginia, a suburb of Washington, D.C., and the Adviser also has offices in several other states.
From time to time, we may become involved in various investigations, claims and legal proceedings that arise in the ordinary course of our business. Furthermore, third parties may try to seek to impose liability on us in connection with the activities of our portfolio companies. See“Risk Factors—Portfolio company-related litigation could result in costs, including defense costs or damages, and the diversion of management time and resources.”While we do not expect that the resolution of these matters if they arise would materially affect our business, financial condition, or results of operations or cash flows, resolution will be subject to various uncertainties and could result in the expenditure of significant financial and managerial resources.
On April 25, 2014, plaintiffs Clarence and Sheila Walder (“Walder”) filed a complaint in the Superior Court of California, County of Los Angeles, alleging various violations of the United States Fair Labor Standards Act and the California Labor Code, against the Company, and one of its wholly-owed subsidiaries, Business Investment, among other persons, and seeking monetary damages. The gravamen of the lawsuit, brought as a class action and seeking certification of plaintiffs as class representatives, is that the defendants
conspired to intentionally misclassify plaintiffs and similarly situated individuals as independent contractors (rather than as employees), thereby failing to pay plaintiffs and others similarly situated all wages (including overtime wages) to which they were statutorily entitled, failing to allow meal and rest breaks, and asserting other related claims. The complaint relates to services rendered by plaintiffs for Aspen Contracting California, LLC d/b/a/ Noble Logistics. Inc. (“Aspen”), an entity that is currently a chapter 11 debtor, having filed a bankruptcy case in Delaware on February 28, 2014. Aspen is a portfolio company of the Company and Business Investment. The Walder complaint has not yet been served on the Company or Business Investment. The Company and Business Investment intend to vigorously defend themselves in this litigation and any potential range of damages can not be estimated at this time.
ITEM 4. MINE SAFETY DISCLOSURES
Not Applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock is traded on NASDAQ Global Select Market (“NASDAQ”) under the symbol “GAIN.” The following table reflects, by quarter, the high and low intraday sales prices per share of our common stock on the NASDAQ, the intraday sales prices as a percentage of NAV and quarterly distributions declared per common share for each fiscal quarter during the last two fiscal years. Amounts presented for each fiscal quarter of 20142015 and 20132014 represent the cumulative amount of the distributions declared per common share for the months composing such quarter.
| Quarter Ended | Sales Prices | Discount / (Premium) of High to NAV(B) | Discount of Low to NAV(B) | Declared Common Stock Distributions | ||||||||||||||||||||||||||||||||||||||||||||||||||
| NAV(A) | High | Low | ||||||||||||||||||||||||||||||||||||||||||||||||||||
FY 2015 | 6/30/2014 | $ | 8.57 | $ | 8.39 | $ | 7.23 | 2.1 | % | 15.6 | % | $ | 0.18 | |||||||||||||||||||||||||||||||||||||||||
| Discount / (Premium) of High to NAV(B) | 9/30/2014 | 8.49 | 7.77 | 7.08 | 8.5 | 16.6 | 0.18 | |||||||||||||||||||||||||||||||||||||||||||||||
| Quarter Ended | Sales Prices | Discount of Low to NAV(B) | Declared Distributions | 12/31/2014 | 8.55 | 7.50 | 6.72 | 12.3 | 21.4 | 0.23 | ||||||||||||||||||||||||||||||||||||||||||||
| NAV(A) | High | Low | 3/31/2015 | 9.18 | 8.04 | 6.98 | 12.4 | 24.0 | 0.18 | |||||||||||||||||||||||||||||||||||||||||||||
FY 2014 | 6/30/2013 | $ | 8.70 | $ | 7.52 | $ | 7.02 | 14 | % | 19 | % | $ | 0.150 | 6/30/2013 | $ | 8.70 | $ | 7.52 | $ | 7.02 | 13.6 | % | 19.3 | % | $ | 0.15 | ||||||||||||||||||||||||||||
| 9/30/2013 | 9.12 | 7.57 | 6.80 | 17 | 25 | 0.150 | 9/30/2013 | 9.12 | 7.57 | 6.80 | 17.0 | 25.4 | 0.15 | |||||||||||||||||||||||||||||||||||||||||
| 12/31/2013 | 8.49 | 8.06 | 6.80 | 5 | 20 | 0.230 | 12/31/2013 | 8.49 | 8.06 | 6.80 | 5.1 | 19.9 | 0.23 | |||||||||||||||||||||||||||||||||||||||||
| 3/31/2014 | 8.34 | 8.50 | 7.35 | (2 | ) | 12 | 0.180 | 3/31/2014 | 8.34 | 8.50 | 7.35 | (1.9 | ) | 11.9 | 0.18 | |||||||||||||||||||||||||||||||||||||||
FY 2013 | 6/30/2012 | $ | 9.10 | $ | 7.81 | $ | 6.90 | 14 | % | 24 | % | $ | 0.150 | |||||||||||||||||||||||||||||||||||||||||
| 9/30/2012 | 8.93 | 8.07 | 7.20 | 10 | 19 | 0.150 | ||||||||||||||||||||||||||||||||||||||||||||||||
| 12/31/2012 | 8.65 | 8.02 | 6.59 | 7 | 24 | 0.150 | ||||||||||||||||||||||||||||||||||||||||||||||||
| 3/31/2013 | 9.10 | 7.72 | 6.95 | 15 | 24 | 0.150 | ||||||||||||||||||||||||||||||||||||||||||||||||
| (A) | NAV per share is determined as of the last day in the relevant quarter and therefore may not reflect the NAV per share on the date of the high and low intraday sales prices. The NAVs shown are based on outstanding shares at the end of each period. |
| (B) | The discounts (premiums) set forth in these columns represent the high or low, as applicable, sale prices per share for the relevant quarter minus the NAV per share as of the end of such quarter, and therefore may not reflect the premium or discount to NAV per share on the date of the high and low intraday sales prices. |
As of May 12, 2013,19, 2015, there were 2422 record owners of our common stock. This number does not include stockholders for whom shares are held in “street name.”
Distributions
We currently intend to continue to distribute in the form of cash distributions a minimum of 90% of our ordinaryinvestment company taxable income, and short-term capital gains, if any, on a quarterly basis to our stockholders in the form of monthly distributions. We intend to retain some or all of our long-term capital gains, if any, but to designate the retained amount as a deemed distribution, after giving effect to any prior year realized losses that are carried forward, to supplement our equity capital and support the growth of our portfolio. However, in certain cases our Board of Directors may choose to distribute our net realized long-term capital gains by paying a one-time, special common distribution.
Additionally, ourOur Credit Facility contains a covenant that limits paymentsalso generally seeks to restrict distributions on our common stock to the sum of distributionscertain amounts, including, but not limited to, our aggregate net investment income, for eachplus net capital gains, plus amounts elected by the Company to be considered as having been paid during the prior fiscal year in accordance with Section 855(a) of the twelve month periods ending March 31, 2015, 2016 and 2017.Code.
Recent Sales of Unregistered Securities and Purchases of Equity Securities
We did not sell any unregistered securities orshares of stock, nor repurchase any of our securitiesshares of stock during the fiscal year ended March 31, 2014.2015.
ITEM 6. SELECTED FINANCIAL DATA
The following consolidated selected financial data as of and for the fiscal years ended March 31, 2015, 2014, 2013, 2012, 2011, and 2010,2011, are derived from our audited consolidated financial statements.accompanyingConsolidated Financial Statements. The other data included atin the bottom of thesecond table below is unaudited. The data should be read in conjunction with our consolidated financial statementsaudited accompanyingConsolidated Financial Statements and notes thereto and “Management’s“Management’s Discussion and Analysis of Financial Condition and Results of Operations”Operations” included elsewhere in this report.
GLADSTONE INVESTMENT CORPORATION
CONSOLIDATED SELECTED FINANCIAL AND OTHER DATA
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AND PER UNIT DATA)
| Year Ended March 31, | ||||||||||||||||||||
| 2014 | 2013 | 2012 | 2011 | 2010 | ||||||||||||||||
Statement of operations data: | ||||||||||||||||||||
Total investment income | $ | 36,264 | $ | 30,538 | $ | 21,242 | $ | 26,064 | $ | 20,785 | ||||||||||
Total expenses net of credits from Adviser | 16,957 | 14,050 | 7,499 | 9,893 | 10,187 | |||||||||||||||
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Net investment income | 19,307 | 16,488 | 13,743 | 16,171 | 10,598 | |||||||||||||||
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Net (loss) gain on investments | (20,636 | ) | 791 | 8,223 | 268 | (21,669 | ) | |||||||||||||
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Net (decrease) increase in net assets resulting from operations | $ | (1,329 | ) | $ | 17,279 | $ | 21,966 | $ | 16,439 | $ | (11,071 | ) | ||||||||
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Per share data(A): | ||||||||||||||||||||
Net (decrease) increase in net assets resulting from operations per common share—basic and diluted | $ | (0.05 | ) | $ | 0.71 | $ | 0.99 | $ | 0.74 | $ | (0.50 | ) | ||||||||
Net investment income before net (loss) gain on investments per common share—basic and diluted | 0.73 | 0.68 | 0.62 | 0.73 | 0.48 | |||||||||||||||
Cash distributions declared per common share | 0.71 | 0.60 | 0.61 | 0.48 | 0.48 | |||||||||||||||
Statement of assets and liabilities data: | ||||||||||||||||||||
Total assets | $ | 330,694 | $ | 379,803 | $ | 325,297 | $ | 241,109 | $ | 297,161 | ||||||||||
Net assets | 220,837 | 240,963 | 207,216 | 198,829 | 192,978 | |||||||||||||||
Net asset value per common share | 8.34 | 9.10 | 9.38 | 9.00 | 8.74 | |||||||||||||||
Common shares outstanding | 26,475,958 | 26,475,958 | 22,080,133 | 22,080,133 | 22,080,133 | |||||||||||||||
Weighted common shares outstanding—basic and diluted | 26,475,958 | 24,189,148 | 22,080,133 | 22,080,133 | 22,080,133 | |||||||||||||||
Senior securities data(B): | ||||||||||||||||||||
Borrowings under Credit Facility at cost | $ | 61,250 | $ | 31,000 | $ | — | $ | — | $ | 27,800 | ||||||||||
Short term loan | — | 58,016 | 76,005 | 40,000 | 75,000 | |||||||||||||||
Mandatorily redeemable preferred stock | 40,000 | 40,000 | 40,000 | — | — | |||||||||||||||
Asset coverage ratio(C) | 298 | % | 272 | % | 268 | % | 534 | % | 281 | % | ||||||||||
Asset coverage per unit(D) | $ | 2,978 | $ | 2,725 | $ | 2,676 | $ | 5,344 | $ | 2,814 | ||||||||||
Other unaudited data: | ||||||||||||||||||||
Number of portfolio companies | 29 | 21 | 17 | 17 | 16 | |||||||||||||||
Average size of portfolio company investment at cost | $ | 13,225 | $ | 15,544 | $ | 15,670 | $ | 11,600 | $ | 14,223 | ||||||||||
Principal amount of new investments | 132,291 | 87,607 | 91,298 | 43,634 | 4,788 | |||||||||||||||
Proceeds from loan repayments and investments sold | 83,415 | 28,424 | 27,185 | 97,491 | 90,240 | |||||||||||||||
Weighted average yield on investments(E) | 12.61 | % | 12.51 | % | 12.32 | % | 11.36 | % | 11.02 | % | ||||||||||
Total return(F) | 23.51 | 4.73 | 5.58 | 38.56 | 79.80 | |||||||||||||||
| Year Ended March 31, | ||||||||||||||||||||
| 2015 | 2014 | 2013 | 2012 | 2011 | ||||||||||||||||
Statement of Operations Data: | ||||||||||||||||||||
Total investment income | $ | 41,643 | $ | 36,264 | $ | 30,538 | $ | 21,242 | $ | 26,064 | ||||||||||
Total expenses net of credits from Adviser | 21,746 | 16,957 | 14,050 | 7,499 | 9,893 | |||||||||||||||
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Net investment income | 19,897 | 19,307 | 16,488 | 13,743 | 16,171 | |||||||||||||||
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Net gain (loss) on investments | 30,317 | (20,636 | ) | 791 | 8,223 | 268 | ||||||||||||||
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Net increase (decrease) in net assets resulting from operations | $ | 50,214 | $ | (1,329 | ) | $ | 17,279 | $ | 21,966 | $ | 16,439 | |||||||||
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Per Common Share Data: | ||||||||||||||||||||
Net increase (decrease) in net assets resulting from operations per common share—basic and diluted(A) | $ | 1.88 | $ | (0.05 | ) | $ | 0.71 | $ | 0.99 | $ | 0.74 | |||||||||
Net investment income before net gain (loss) on investments per common share—basic and diluted(A) | 0.75 | 0.73 | 0.68 | 0.62 | 0.73 | |||||||||||||||
Cash distributions declared per common share | 0.77 | 0.71 | 0.60 | 0.61 | 0.48 | |||||||||||||||
Statement of Assets and Liabilities Data: | ||||||||||||||||||||
Total assets | $ | 483,521 | $ | 330,694 | $ | 379,803 | $ | 325,297 | $ | 241,109 | ||||||||||
Net assets | 273,429 | 220,837 | 240,963 | 198,829 | 198,829 | |||||||||||||||
Net asset value per common share | 9.18 | 8.34 | 9.10 | 9.00 | 9.00 | |||||||||||||||
Common shares outstanding | 29,775,958 | 26,475,958 | 26,475,958 | 22,080,133 | 22,080,133 | |||||||||||||||
Weighted common shares outstanding—basic and diluted | 26,665,821 | 26,475,958 | 24,189,148 | 22,080,133 | 22,080,133 | |||||||||||||||
Senior Securities Data(B): | ||||||||||||||||||||
Total borrowings, at cost(C) | $ | 123,896 | $ | 66,250 | $ | 94,016 | $ | 76,005 | $ | 40,000 | ||||||||||
Mandatorily redeemable preferred stock | 81,400 | 40,000 | 40,000 | 40,000 | — | |||||||||||||||
Asset coverage ratio(B) | 230 | % | 298 | % | 272 | % | 268 | % | 534 | % | ||||||||||
Asset coverage per unit(D) | $ | 2,301 | $ | 2,978 | $ | 2,725 | $ | 2,676 | $ | 5,344 | ||||||||||
| (A) | Per share data |
| (B) |
| 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 |
| (C) | Includes borrowings under our Credit Facility, other secured borrowings, and short-term loans, as applicable. |
| (D) | Asset coverage per unit is the asset coverage ratio expressed in terms of dollar amounts per one thousand dollars of indebtedness. |
| Year Ended March 31, | ||||||||||||||||||||
| 2015 | 2014 | 2013 | 2012 | 2011 | ||||||||||||||||
Other Unaudited Data: | ||||||||||||||||||||
Number of portfolio companies | 34 | 29 | 21 | 17 | 17 | |||||||||||||||
Average size of portfolio company investment at cost | $ | 14,861 | $ | 13,225 | $ | 15,544 | $ | 15,670 | $ | 11,600 | ||||||||||
Principal amount of new investments | 108,197 | 132,291 | 87,607 | 91,298 | 43,634 | |||||||||||||||
Proceeds from loan repayments and investments sold | 11,259 | 83,415 | 28,424 | 27,185 | 97,491 | |||||||||||||||
Weighted average yield on investments(A) | 12.60 | % | 12.61 | % | 12.51 | % | 12.32 | % | 11.36 | % | ||||||||||
Total return(B) | 11.96 | 24.26 | 4.73 | 5.58 | 38.56 | |||||||||||||||
| Weighted average yield on investments equals interest income earned on investments divided by the weighted average interest-bearing |
| Total return equals the |
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following analysis of our financial condition and results of operations should be read in conjunction with our accompanyingConsolidated Financial Statements and the notes thereto contained elsewhere in this Annual Report on Form 10-K. Historical financial condition and results of operations and percentage relationships among any amounts in the financial statements are not necessarily indicative of financial condition, or results of operations or percentage relationships for any future periods. Statements we make in the following discussion that express a belief, expectation or intention, as well as those that are not historical fact, are forward-looking statements that are subject to risks, uncertainties and assumptions. Our actual results could differ materially from those we express in the following discussion as a result of a variety of factors, including the risks and uncertainties we have referred to under the headings “Forward Looking Statements” and “Risk Factors” in Part I of this report. Except per share amounts, dollar amounts in the tables included herein are in thousands unless otherwise indicated.
OVERVIEW
General
We arewere incorporated under the General Corporation Laws of the State of Delaware on February 18, 2005. We operate as an externally-managed,externally managed, closed-end, non-diversified management investment company that hasand have elected to be regulatedtreated as a business development company (“BDC”) under the Investment Company Act of 1940, as amended (the “1940 Act”). In addition, for United States (“U.S.”)For federal income tax purposes, we have elected to be treated as a regulated investment company (“RIC”) under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”). As a BDC andIn order to continue to qualify as a RIC for federal income tax purposes and obtain favorable RIC tax treatment, we are also subject tomust meet certain constraints,requirements, including limitations imposed by the 1940 Act and the Code.certain minimum distribution requirements.
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 operating 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) toto: (1) achieve and grow current income by investing in debt securities of established businesses that we believe will provide stable earnings and cash flow to pay expenses, make principal and interest payments on our outstanding indebtedness and make distributions to stockholders that grow over timetime; and (b) to(2) provide our stockholders with long-term capital appreciation in the value of our assets by investing in equity securities of established businesses that we believe can grow over time to permit us to sell our equity investments for capital gains. To achieve our objectives, our investment strategy is to invest in several categories of debt and equity securities, with each investment generally ranging from $5 million to $30 million, although investment size may vary, depending upon our total assets or available capital at the time of investment. We seek to avoid investments in high-risk, early stage enterprises. We expect that our investment mixportfolio over time will consist of approximately 80%75% in debt securities and 20%25% in equity securities.securities, at cost. As of March 31, 2014,2015, our investment mixportfolio was made up of 73% in debt securities and 27% in equity securities, at cost.
We focus on investing in small and medium-sized private businesses in the United States (“U.S. businesses”) that meet certain criteria, including, some but not all oflimited to, the following: the potential for growth insustainability of the business’ free cash flow and its ability to grow it over time, 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 fundsincluding an ample equity contribution or venture capital funds)cushion based on prevailing enterprise valuation multiples, 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 for growth capital or to finance growth, restructureacquisitions or recapitalize or refinance their balance sheets or effect a change of control.existing debt facilities. We seek to avoid investing in high-risk, early-stage enterprises. 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.
OurIn July 2012, the Securities and Exchange Commission (“SEC”) granted us an exemptive order that expanded our ability to co-invest with certain of our affiliates under certain circumstances and any future business development company or closed-end management investment company that is advised (or sub-advised if it controls the fund) by our external investment adviser, or any combination of the foregoing, subject to the conditions in the SEC’s order. We believe this ability to co-invest has enhanced and will continue to enhance our ability to further our investment objectives and strategies.
In general, our investments in debt securities have a term of no more than seven years, accrue interest at variable rates (based on the one-month London Interbank Offered Rate (“LIBOR”)) and, to a lesser extent, at fixed rates. We seek debt instruments that pay interest monthly or, at a minimum, quarterly, and which may include a yield enhancement such as a success fee or deferred interest provision and are primarily interest only with all principal and any accrued but unpaid interest due at maturity. Generally, success fees accrue at a set rate and are contractually due upon a change of control of the business. Some debt securities have deferred interest whereby some portion of the interest payment is added to the principal balance so that the interest is paid, together with the principal, at maturity. This form of deferred interest is often called PIK interest.
Typically, our investments in equity securities take the form of common stock, preferred stock, limited liability company interests, or warrants or options to purchase the foregoing. Often, these equity investments occur in connection with our original investment, buyouts 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.recapitalizations of a business, or refinancing existing debt.
We are externally managed by our investment advisor, Gladstone Management Corporation (our(the “Adviser”), ana SEC registered investment adviser and an affiliate of ours, pursuant to an investment advisory and management agreement (the “Advisory Agreement”).the Advisory Agreement. The Adviser manages our investment activities. Our Board of Directors, which is composed of a majority of independent directors, supervises such investment activities. We have also entered into an administration agreement (the “Administration Agreement”) with Gladstone Administration, LLC (our “Administrator”), an affiliate of ours and the Adviser, whereby we pay separately for administrative services.
Business EnvironmentOur shares of common stock, 7.125% Series A Cumulative Term Preferred Stock (“Series A Term Preferred Stock”), 6.75% Series B Cumulative Term Preferred Stock (“Series B Term Preferred Stock”), and 6.50% Series C Cumulative Term Preferred Stock (“Series C Term Preferred Stock”) are traded on the NASDAQ Global Select Market (“NASDAQ”) under the trading symbols “GAIN,” “GAINP,” “GAINO,” and “GAINN,” respectively.
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 effects of the previous recession and the disruptions in the capital markets have
impacted our liquidity options and increased our cost of debt and equity capital. In addition, the recent federal government shutdown combined with the uncertainty surrounding the ability of the federal government to address its fiscal condition in both the near and long term have increased domestic and global economic instability. Many of our portfolio companies, as well as those that we evaluate for possible investments, are adversely impacted by these political and economic conditions. If these conditions persist, it may adversely affect their ability to repay our loans or engage in a liquidity event, such as a sale, recapitalization or initial public offering.
New Investment and Realized Gains/Losses from ExitsPortfolio Activity
While conditions remain challenging, we are seeing an increase in the number ofmany new investment opportunities consistent with our investinginvestment 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. For the fiscal year ended March 31, 2015, we invested a total of $108.2 million in six new deals, resulting in a net expansion in our overall portfolio to 34 portfolio companies and an increase year over year of 28.2% in our portfolio at cost. These opportunitiesnew investments, along with theour capital raising efforts discussed below, have allowed us to invest $310.1$419.0 million in 1925 new proprietary debt and equity deals since October 2010. DuringFor the fiscal year ended March 31, 2014, we invested a total of $125.6 million in nine new deals.
These2015, our new investments as well asconsisted of approximately 78.3% senior and subordinated secured term loans and 21.7% equity investments, based on the originating principal balances, respectively.
Generally, the majority of our debt securities in our portfolio, have a success fee component, which enhances the yield on our debt investments. Unlike paid-in-kind (“PIK”)PIK income, we generally do not recognize success fees as income until they are received in cash. As a result, as of March 31, 2014, we had an off-balance sheet success fee receivable of $17.2 million, or $0.65 per common share. Due to their contingent nature, there are no guarantees that we will be able to collect any or all of these success fees or know the timing of such collections. As a result, as of March 31, 2015, we had unrecognized success fees of $24.3 million, or $0.82 per common share. Consistent with accounting principles generally accepted in the U.S. (“GAAP”), we generally have not recognized our success fee receivable and related income in our accompanyingConsolidated Financial Statements.
The improved investing environment in the second quarterhas presented us with an opportunity to realize gains and other income from our investment in Venyu Solutions, Inc. (“Venyu”) as a result of its sale in August 2013. As a result of the sale, we received net cash proceeds of $32.2 million, resulting in a realized gain of $24.8 million and dividend income of $1.4 million. In addition, we received full repayment of our debt investments of $19 million and $1.8 million in success fee income. This represents our fourthfour management-supported buyout liquidity eventevents since June 2010, and in the aggregate, these four liquidity events have generated $54.5$54.4 million in realized gains and $13.1 million in other income, for a total increase to our net assets of $67.6$67.5 million. We believe each of these transactions was an equity-oriented investment success and supportexemplifies our investment strategy of striving to achieve returns through current income on the debt portion of our investments and capital gains from the equity portion. These successes, in part, enabled us to increase the monthly distribution 50% since March 2011, allowed us to declare a $0.03 per common share one-time special distribution in fiscal year 2012, and to declare a $0.05 per common share one-time special distribution in November 2013.
With the four liquidity events that have generated $54.5 millionresulted in realized gains since June 2010, we have primarilynearly overcome our cumulative realized losses since inception that were primarily incurred during the recession and in connection with the sale of performing loans at a realized loss to pay off a former lender. We tookThese successful exits, in part, enabled us to increase the opportunity during themonthly distribution 50.0% since March 2011 and allowed us to declare and pay a special distribution of $0.03 per common share in fiscal year ended March 31, 2014, to strategically sell our investments2012, $0.05 per common share in two of our portfolio companies, ASH Holding Corp. (“ASH”)November 2013, and Packerland Whey Products, Inc. (“Packerland”) to existing members of their management teams and other existing owners, respectively, which resulted$0.05 per common share in realized losses of $11.4 million and $1.8 million, respectively, as well as the write off of our equity investments in Noble Logistics, Inc. (“Noble”), which resulted in a realized loss of $3.4 million. These sales and write off, while at a realized loss, were accretive to our net asset value in aggregate by $5.7 million, reduced our distribution requirements related to our realized gains and reduced our non-accruals outstanding.December 2014.
Capital Raising Efforts
Despite the challenges that have existed in the economy for the past several years, we have been able to meet our capital needs through enhancementsextensions and increases to our revolving line of credit (our “Credit Facility”) and by accessing the capital markets in the form of public offerings of preferredstock. We have successfully extended our Credit Facility’s revolving period multiple times, most recently to June 2017, and common stock. For example, in March 2012,increased the commitment from $60.0 million to $185.0 million (with a total commitment of $250.0 million through additional commitments of new or existing lenders). Additionally, we issued 1.6approximately 1.7 million shares of our Series B Term Preferred Stock for gross proceeds of $40$41.4 million and, in October 2012, we issued 4.4November 2014, approximately 3.8 million shares of common stock for gross proceeds of $33 million. In October 2012, we extended the revolving period end date on$28.1 million in March and April 2015, and approximately 1.6 million shares of our Series C Term Preferred Stock for gross proceeds of $40.3 million in May 2015. Refer to“Liquidity and Capital Resources — Equity — Common Stock” and“Liquidity and Capital Resources — Equity — Term Preferred Stock” for further discussion of our common stock and mandatorily redeemable term preferred stock and “Liquidity and Capital Resources — Revolving Credit Facility” for further discussion of our Credit Facility an additional year to 2015, and subsequently, in April and May 2013, we further extended the revolving period end date another six months into 2016 and increased the commitment amount from $60 million to $105 million.Facility.
Although we were able to access the capital markets during 2012,2014 and 2015, we believe 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 May 12, 2014,19, 2015, the closing market price of our common stock was $7.92,$7.54, which represented a 5.0%17.9% discount to our March 31, 20142015 net asset value (“NAV”) per share of $8.34.$9.18. When our common stock trades below NAV, our ability to issue equity is constrained by provisions of the 1940 Act, which generally prohibitsprohibit 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 20132014 Annual Meeting of Stockholders held on August 8, 2013,7, 2014, our stockholders approved a proposal authorizing us to issue and 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 common shares issued and sold pursuant to such authority does not exceed 25%25.0% of our then outstanding common stock immediately prior to each such sale, provided that our Boardboard of Directorsdirectors (our “Board of Directors”) makes certain determinations prior to any such sale. This August 20132014 stockholder authorization is in effect for one year from the date of stockholder approval. Prior toWith our Board of Directors’ subsequent approval, we issued shares of our common stock in March and April 2015 at a price per share below the August 2013 stockholder authorization, wethen current NAV per share. We sought and obtained stockholder approval concerning a similar proposal at the Annual Meeting of Stockholders held in August 2012, and with our Board of Directors’ subsequent 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 allowed 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 increase our debt capital while still complying with our applicable debt-to-equity ratios. AtRefer to “Liquidity and Capital Resources — Equity — Common Stock” for further discussion of our 2014 Annual Meeting of Stockholders, scheduled to take place in August 2014, we expect to ask our stockholders to vote in favor of this proposal again so that it may be in effect for another year.common stock.
Regulatory Compliance
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(collectively the “Senior Securities.”Securities”). As of March 31, 2014,2015, our asset coverage ratio was 298%229.9%. Our status as a regulated investment company (“RIC”) under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”), in addition to other requirements, also requires us, at the close of each quarter of the taxable year, to meet an asset diversification test, which requires that at least 50% of the value of our assets consists of cash, cash items, U.S. government securities or certain other qualified securities (the (50% threshold”). In the past, we have obtained this ratio by entering into a short-term loan at quarter end to purchase qualifying assets, though a short term loan was not necessary at the end of the quarter ended March 31, 2014. Until the composition of our assets is above the required 50% threshold on a consistent basis by a significant margin, we may have to continue to obtain short-term loans on a quarterly basis. When deployed, 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.
Investment Highlights
DuringFor the fiscal year ended March 31, 2014,2015, we disbursed $125.6$108.2 million in new debt and equity investments and extended $6.6$24.7 million of investments to existing portfolio companies.companies through revolver draws or additions to term notes. From our initial public offering in June 2005 through March 31, 2014,2015, we have made 217237 investments in 107113 companies for a total of $925.6 million,approximately $1.1 billion, before giving effect to principal repayments on investments and divestitures.
Investment Activity
During the fiscal year ended March 31, 2014,2015, the following significant transactions occurred:
Recent Developments
Registration Statement
On June 3, 2014, we invested $15.7filed Post-Effective Amendment No. 3 to the registration statement on Form N-2 (File No. 333-181879), and subsequently filed a Post-Effective Amendment No. 4 to the registration statement on September 2, 2014, which the SEC declared effective on September 4, 2014. The registration statement permits us to issue, through one or more transactions, up to an aggregate of $300.0 million in Edge Adhesives Holdings, Inc. (“Edge”)securities, consisting of common stock, preferred stock, subscription rights, debt securities and warrants to purchase common or preferred stock, including through a combinationcombined offering of debt and equity. Edge, headquartered in Fort Worth, TX, is a developer and manufacturertwo or more of innovative adhesives, sealants, tapes and related solutions used in building products, transportation and electrical, among other markets. Gladstone Capital also participated as a co-investor by providing $11.1 million of debt and equity financing atsuch securities. We currently have the same price and terms as our investment.
Recent Developmentssecurities under the registration statement.
Credit Facility Extension and Expansion
On April 30, 2013,In June 2014, we, through our wholly-owned subsidiary, Gladstone Business Investment (“Business Investment”), entered into a fifth amendedAmendment No. 1 to the Fifth Amended and restated credit agreementRestated Credit Agreement originally entered into on April 30, 2013, with Key Equipment Finance, Inc.,a division of KeyBank National Association (“KeyBank”) as administrative agent, lead arranger and a lender (the “Administrative Agent”), Branch Banking and Trust Company as a lender and managing agent,lender; other lenders; and the Adviser, as servicer, to increase the commitment amount of the Credit Facility from $60 million to $70 million and to extend the revolving period to April 30, 2016 and if not renewed or extended by April 30, 2016, all principal andreduce the interest will be due and payable on or before April 30, 2017 (one year after therate of our revolving line of credit. The revolving period end date). In addition, there is one remaining one-year extension optionwas extended 14 months to be agreed upon by all parties, which may be exercised on or before April 30, 2015. Subject to certain terms and conditions, the Credit Facility may be expanded up to a total of $200 million through the addition of other lenders. Advances under the Credit Facility generally bear interest at 30-day LIBOR, plus 3.75% per annum, and the Credit Facility includes an unused fee of 0.50% on undrawn amounts.June 26, 2017. We incurred fees of $0.3$0.4 million in connection with this amendment.amendment, which are being amortized through our Credit Facility’s revolver period end date of June 26, 2017.
On June 12, 2013,In September 2014, we further increased theour borrowing capacity under theour Credit AgreementFacility from $70$105.0 million to $105$185.0 million (with a total commitment up to $250.0 million through additional commitments of new or existing lenders) by entering into Joinder Agreements pursuant to theour Credit AgreementFacility, by and among Business Investment, the Administrative Agent,KeyBank, the Adviser and eachother lenders. We incurred fees of Alostar Bank$1.3 million in connection with this expansion, which are being amortized through our Credit Facility’s revolver period end date of CommerceJune 26, 2017. Refer to “Liquidity and Everbank Commercial Finance, Inc.Capital Resources — Revolving Credit Facility” for further discussion of our Credit Facility
Term Preferred Stock Offerings
In November 2014, we completed a public offering of 1,656,000 shares of our Series B Term Preferred Stock at a public offering price of $25.00 per share. Gross proceeds totaled $41.4 million and net proceeds, after deducting underwriting discounts and offering expenses borne by us, were approximately $39.7 million.
In May 2015, we completed a public offering of 1,610,000 shares of our Series C Term Preferred Stock at a public offering price of $25.00 per share. Gross proceeds totaled $40.3 million and net proceeds, after deducting underwriting discounts and offering expenses borne by us, were approximately $38.6 million. Refer to “Short-Term LoanLiquidity and Capital Resources — Equity — Term Preferred Stock” for further discussion of our recently issued mandatorily redeemable preferred stock.
As of March 31, 2014, our asset composition satisfied the 50% threshold. However, excluding March 31, 2014, for each quarter end since June 30, 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 example, for the December 31, 2013 measurement date, we purchased $10 million of short-term United States Treasury Bills (“T-Bills”) through Jefferies & Company, Inc. (“Jefferies”) on December 27, 2013. The T-Bills were purchased on margin using $1.5 million in cash and the proceeds from an $8.5 million short-term loan from Jefferies with an effective annual interest rate of 1.35%. Executive Officers
On January 2, 2014, when9, 2015, David Watson resigned as the T-Bills matured,Company’s chief financial officer and treasurer. On January, 13, 2015, our Board of Directors accepted Mr. Watson’s resignation and appointed Melissa Morrison, Gladstone Capital’s chief financial officer and treasurer, as the Company’s chief financial officer and treasurer. On April 14, 2015, our Board of Directors appointed Julia Ryan as the Company’s chief accounting officer.
Common Stock Offering
In March 2015, we repaidcompleted a public offering of 3.3 million shares of our common stock. Gross proceeds totaled $24.4 million and net proceeds, after deducting underwriting discounts and offering expenses borne by us, were approximately $23.0 million. In April 2015, the $8.5underwriters fully exercised their overallotment option to purchase approximately 0.5 million loan from Jefferiesadditional shares of our common stock, resulting in net proceeds, after deducting underwriting discounts and received the $1.5 million margin payment sentoffering expenses borne by us, of approximately $3.5 million. Refer to Jefferies to complete the transaction.“Liquidity and Capital Resources — Equity — Common Stock” for further discussion of our common stock.
RESULTS OF OPERATIONS
Comparison of the Fiscal Year Ended March 31, 2015, to the Fiscal Year Ended March 31, 2014
| For the Fiscal Years Ended March 31, | ||||||||||||||||
| 2015 | 2014 | $ Change | % Change | |||||||||||||
INVESTMENT INCOME | ||||||||||||||||
Interest income | $ | 36,685 | $ | 30,460 | $ | 6,225 | 20.4 | % | ||||||||
Other income | 4,958 | 5,804 | (846 | ) | (14.6 | ) | ||||||||||
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Total investment income | 41,643 | 36,264 | 5,379 | 14.8 | ||||||||||||
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EXPENSES | ||||||||||||||||
Base management fee | 7,569 | 6,207 | 1,362 | 21.9 | ||||||||||||
Loan servicing fee | 4,994 | 4,326 | 668 | 15.4 | ||||||||||||
Incentive fee | 4,975 | 3,983 | 992 | 24.9 | ||||||||||||
Administration fee | 932 | 863 | 69 | 8.0 | ||||||||||||
Interest and dividend expense | 7,460 | 4,925 | 2,535 | 51.5 | ||||||||||||
Amortization of deferred financing costs | 1,329 | 1,024 | 305 | 29.8 | ||||||||||||
Other | 2,329 | 2,264 | 65 | 2.9 | ||||||||||||
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Total expenses before credits from Adviser | 29,588 | 23,592 | 5,996 | 25.4 | ||||||||||||
Credits to fees from Adviser | (7,842 | ) | (6,635 | ) | (1,207 | ) | (18.2 | ) | ||||||||
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Total expenses, net of credits to fees | 21,746 | 16,957 | 4,789 | 28.2 | ||||||||||||
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NET INVESTMENT INCOME | 19,897 | 19,307 | 590 | 3.1 | ||||||||||||
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REALIZED AND UNREALIZED GAIN (LOSS) | ||||||||||||||||
Net realized (loss) gain on investments | (73 | ) | 8,241 | (8,314 | ) | (100.9 | ) | |||||||||
Net realized loss on other | — | (29 | ) | 29 | 100.0 | |||||||||||
Net unrealized appreciation (depreciation) of investments | 29,940 | (29,206 | ) | 59,146 | NM | |||||||||||
Net unrealized depreciation of other | 450 | 358 | 92 | 25.7 | ||||||||||||
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Net realized and unrealized gain (loss) on investments and other | 30,317 | (20,636 | ) | 50,953 | NM | |||||||||||
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NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS | $ | 50,214 | $ | (1,329 | ) | $ | 51,543 | NM | ||||||||
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BASIC AND DILUTED PER COMMON SHARE: | ||||||||||||||||
Net investment income | $ | 0.75 | $ | 0.73 | $ | 0.02 | 2.7 | % | ||||||||
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Net increase (decrease) in net assets resulting from operations | $ | 1.88 | $ | (0.05 | ) | $ | 1.93 | NM | ||||||||
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NM = Not Meaningful
Investment Income
Total investment income increased by 14.8% for the year ended March 31, 2015, as compared to the prior year. This increase was due to an increase in interest income, which resulted primarily from an increase in the size of our portfolio during the year ended March 31, 2015, partially offset by a decline in other income for the same period. This decline in other income was primarily a result of success fees and dividend income related to the exit of Venyu, which were recorded during the year ended March 31, 2014, but did not recur in the year ended March 31, 2015.
Interest income from our investments in debt securities increased 20.4% for the year ended March 31, 2015, as compared to the prior year. The level of interest income from investments is directly related to the principal balance of our interest-bearing investment portfolio outstanding during the period multiplied by the weighted average yield. The weighted average principal balance of our interest-bearing investment portfolio during the year ended March 31, 2015, was approximately $292.2 million, compared to approximately $241.5 million for the prior year. This increase was primarily due to approximately $84.7 million in new debt investments originated after March 31, 2014, including Roanoke, Cambridge, Old World, B+T, Logo, and Counsel Press.
At March 31, 2015, the loans of one portfolio company, Tread, were on non-accrual status, with an aggregate weighted average principal balance of $11.6 million during the year ended March 31, 2015. These loans had an aggregate weighted average principal balance of $11.9 million during the year ended March 31, 2014. The weighted average yield on our interest-bearing investments, excluding cash and cash equivalents and receipts recorded as other income, was 12.6% for both years ended March 31, 2015 and 2014. The weighted average yield may vary from period to period, based on the current stated interest rate on interest-bearing investments.
Other income for the year ended March 31, 2015 decreased 14.6% from the prior year. During the year ended March 31, 2015, other income primarily consisted of $2.6 million and $0.6 million of dividend income received from Mathey Investments, Inc. (“Mathey”) and Drew Foam Company, Inc. (“Drew Foam”), respectively, and $0.5 million resulting from prepaid success fees received from SOG Specialty Knives and Tools, LLC (“SOG”). During the year ended March 31, 2014, other income primarily consisted of a combined $3.3 million in success fee and dividend income received in connection with the exit of Venyu, $0.8 million and $0.2 million in success and prepayment fees resulting from payoffs from Channel Technologies Group, LLC (“Channel”) and Cavert II Holding Corp. (“Cavert”), respectively, and SOG’s and Frontier Packaging, Inc.’s (“Frontier’s”) elections to prepay success fees of $0.5 million and $0.2 million, respectively.
The following table lists the investment income for our five largest portfolio company investments at fair value during the respective fiscal years:
| As of March 31, 2015 | Year Ended March 31, 2015 | |||||||||||||||
Company | Fair Value | % of Portfolio | Investment Income | % of Total Investment Income | ||||||||||||
Counsel Press, Inc.(A) | $ | 31,995 | 6.9 | % | $ | 9 | 0.0 | % | ||||||||
SOG Specialty Knives & Tools, LLC | 31,851 | 6.8 | 2,657 | 6.4 | ||||||||||||
Funko, LLC | 25,008 | 5.4 | 991 | 2.4 | ||||||||||||
Acme Cryogenics, Inc. | 23,019 | 4.9 | 1,691 | 4.1 | ||||||||||||
Old World Christmas, Inc. (A) | 22,427 | 4.8 | 1,060 | 2.5 | ||||||||||||
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Subtotal—five largest investments | 134,300 | 28.8 | 6,408 | 15.4 | ||||||||||||
Other portfolio companies | 331,753 | 71.2 | 35,235 | 84.6 | ||||||||||||
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Total investment portfolio | $ | 466,053 | 100.0 | % | $ | 41,643 | 100.0 | % | ||||||||
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| As of March 31, 2014 | Year Ended March 31, 2014 | |||||||||||||||
Company | Fair Value | % of Portfolio | Investment Income | % of Total Investment Income | ||||||||||||
SOG Specialty Knives and Tools, LLC | $ | 26,639 | 8.5 | % | $ | 3,157 | 8.7 | % | ||||||||
Acme Cryogenics, Inc. | 25,776 | 8.2 | 1,691 | 4.7 | ||||||||||||
Galaxy Tool Holding, Inc. | 18,512 | 5.9 | 2,124 | 5.9 | ||||||||||||
Ginsey Home Solutions, Inc. | 16,132 | 5.1 | 1,786 | 4.9 | ||||||||||||
Edge Adhesives Holdings, Inc. (A) | 15,969 | 5.1 | 142 | 0.4 | ||||||||||||
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Subtotal—five largest investments | 103,028 | 32.8 | 8,900 | 24.6 | ||||||||||||
Other portfolio companies | 211,365 | 67.2 | 27,364 | 75.4 | ||||||||||||
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Total investment portfolio | $ | 314,393 | 100.0 | % | $ | 36,264 | 100.0 | % | ||||||||
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| (A) | New investment during the applicable year. |
Expenses
Total expenses, net of any voluntary, irrevocable and non-contractual credits from the Adviser, increased 28.2% for the year ended March 31, 2015, as compared to the prior year period, primarily due to an increase in the net base management fee, incentive fee and interest and dividend expense, as compared to the prior year.
The net base management fee increased for the fiscal year ended March 31, 2015, as compared to the prior year period, as a result of the increased size of our portfolio over the respective periods. An incentive fee of $5.0 million was earned by the Adviser during the fiscal year ended March 31, 2015, compared to an incentive fee of $4.0 million for the prior year.
The base management fee, loan servicing fee, incentive fee, and their related unconditional and irrevocable voluntary credits are computed quarterly, as described under “Investment Advisory and Management Agreement” in Note 4 –Related Party Transactions of the notes to our accompanyingConsolidated Financial Statements and are summarized in the following table:
| Year Ended March 31, | ||||||||
| 2015 | 2014 | |||||||
Average total assets subject to base management fee(A) | $ | 378,450 | $ | 310,350 | ||||
Multiplied by annual base management fee of 2% | 2.0 | % | 2.0 | % | ||||
Base management fee(B) | 7,569 | 6,207 | ||||||
Credits to fees from Adviser—other(B) | (2,848 | ) | (2,309 | ) | ||||
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Net base management fee | $ | 4,721 | $ | 3,898 | ||||
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Loan servicing fee(B) | 4,994 | 4,326 | ||||||
Credits to base management fee — loan servicing fee(B) | (4,994 | ) | (4,326 | ) | ||||
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Net loan servicing fee | $ | — | $ | — | ||||
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Incentive fee(B) | 4,975 | 3,983 | ||||||
Credits to fees from Adviser — other(B) | — | — | ||||||
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Net incentive fee | $ | 4,975 | $ | 3,983 | ||||
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| (A) | Average total assets subject to the base management fee is defined as total assets, including investments made with proceeds of borrowings, less any uninvested cash or cash equivalents resulting from borrowings, valued at the end of the applicable quarters within the respective periods and adjusted appropriately for any share issuances or repurchases during the periods. |
| (B) | Reflected as a line item on our accompanyingConsolidated Statement of Operations. |
Interest and dividend expense increased 51.5% for the year ended March 31, 2015, as compared to the prior year, primarily due to increased average borrowings under our Credit Facility. The weighted average balance outstanding on our Credit Facility during the fiscal year ended March 31, 2015, was $79.2 million, as compared to $34.6 million in the prior year. The increase in average borrowings under our Credit Facility was partially offset by a decrease in the interest rate due to an amendment of our Credit Facility that occurred in June 2014. Dividends on mandatorily redeemable preferred stock increased as a result of the issuance of $41.4 million of our Series B Term Preferred Stock in November 2014.
Realized and Unrealized Gain (Loss)
Realized Gain (Loss) on Investments
During the year ended March 31, 2015, we recorded minimal realized activity. During the year ended March 31, 2014, we recorded a net realized gain of $8.2 million consisting of a $24.8 million gain on the Venyu sale, partially offset by realized losses of $11.4 million and $1.8 million related to the equity sales of ASH and Packerland, respectively, and realized losses of $3.4 million related to the restructuring of Noble.
Net Unrealized Appreciation (Depreciation) of Investments
During the year ended March 31, 2015, we recorded net unrealized appreciation of investments in the aggregate amount of $29.9 million.
The realized loss and unrealized appreciation (depreciation) across our investments for the year ended March 31, 2015, were as follows:
| Twelve Months Ended March 31, 2015 | ||||||||||||||||
Portfolio Company | Realized Loss | Unrealized Appreciation (Depreciation) | Reversal of Unrealized (Appreciation) Depreciation | Net Gain (Loss) | ||||||||||||
Funko, LLC | $ | — | $ | 13,090 | $ | — | $ | 13,090 | ||||||||
SOG Specialty Knives & Tools, LLC | — | 5,211 | — | 5,211 | ||||||||||||
Drew Foam Company, Inc. | — | 4,994 | — | 4,994 | ||||||||||||
Jackrabbit, Inc. | — | 4,575 | — | 4,575 | ||||||||||||
NDLI Inc. | — | 4,397 | — | 4,397 | ||||||||||||
Ginsey Home Solutions, Inc. | — | 3,904 | — | 3,904 | ||||||||||||
Mathey Investments, Inc. | — | 2,735 | — | 2,735 | ||||||||||||
Cambridge Sound Management, LLC | — | 2,698 | — | 2,698 | ||||||||||||
Alloy Die Casting Corp. | — | 2,068 | — | 2,068 | ||||||||||||
Tread Corp. | — | 1,896 | — | 1,896 | ||||||||||||
Frontier Packaging, Inc. | — | 1,816 | — | 1,816 | ||||||||||||
SBS, Industries, LLC | — | 1,746 | — | 1,746 | ||||||||||||
Behrens Manufacturing, LLC | — | 692 | — | 692 | ||||||||||||
Old World Christmas, Inc. | — | 477 | — | 477 | ||||||||||||
Quench Holdings Corp. | — | 375 | — | 375 | ||||||||||||
B+T Group Acquisition Inc. | — | 344 | — | 344 | ||||||||||||
Edge Adhesives Holdings, Inc. | — | (274 | ) | — | (274 | ) | ||||||||||
Meridian Rack & Pinion, Inc. | — | (411 | ) | — | (411 | ) | ||||||||||
D.P.M.S., Inc. | — | (605 | ) | — | (605 | ) | ||||||||||
Country Club Enterprises, LLC | — | (806 | ) | — | (806 | ) | ||||||||||
Channel Technologies Group, LLC | — | (807 | ) | — | (807 | ) | ||||||||||
Galaxy Tool Holding Corp. | — | (2,992 | ) | — | (2,992 | ) | ||||||||||
Acme Cryogenics, Inc. | — | (3,881 | ) | — | (3,881 | ) | ||||||||||
B-Dry, LLC | — | (4,081 | ) | — | (4,081 | ) | ||||||||||
Mitchell Rubber Products, Inc. | — | (7,178 | ) | — | (7,178 | ) | ||||||||||
Other, net (<$250 Net) | (73 | ) | (43 | ) | — | (116 | ) | |||||||||
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Total | $ | (73 | ) | $ | 29,940 | $ | — | $ | 29,867 | |||||||
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The primary reason for the change in our net unrealized appreciation of $29.9 million for the year ended March 31, 2015, was an increase in the equity valuations of Funko, SOG, Drew Foam, Jackrabbit, Inc. (“Jackrabbit”), and NDLI, due to an increase in the portfolio companies’ performance and an increase in certain comparable multiples used to estimate the fair value of our investments. This was partially offset by decreased performance in several of our portfolio companies.
During the year ended March 31, 2014, we recorded net unrealized depreciation on investments in the aggregate amount of $29.2 million, which included the reversal of $0.8 million in aggregate unrealized appreciation, primarily related to the sale of Venyu, partially offset by the sale of ASH and Packerland, and the restructure of Noble. Excluding reversals, we had $28.4 million in net unrealized depreciation for the year ended March 31, 2014.
Realized gains (losses) and unrealized appreciation (depreciation) across our investments for the year ended March 31, 2014,
were as follows:
| Year Ended March 31, 2014 | ||||||||||||||||
Portfolio Company | Realized Gain (Loss) | Unrealized (Depreciation) Appreciation | Reversal of Unrealized (Appreciation) Depreciation | Net Gain (Loss) | ||||||||||||
Venyu Solutions, Inc.(A) | $ | 24,798 | $ | (1,596 | ) | $ | (17,374 | ) | $ | 5,828 | ||||||
Auto Safety House, LLC (B) | (11,402 | ) | 4,925 | 11,410 | 4,933 | |||||||||||
Quench Holdings Corp. | — | 3,377 | — | 3,377 | ||||||||||||
Frontier Packaging, Inc. | — | 1,712 | — | 1,712 | ||||||||||||
Channel Technologies Group, LLC | — | 2,187 | (583 | ) | 1,604 | |||||||||||
B-Dry, LLC | — | 1,555 | — | 1,555 | ||||||||||||
Funko, LLC | — | 1,113 | — | 1,113 | ||||||||||||
Packerland Whey Products, Inc. (C) | (1,764 | ) | (369 | ) | 2,500 | 367 | ||||||||||
Tread Corp. | — | (735 | ) | — | (735 | ) | ||||||||||
Mathey Investments, Inc. | — | (922 | ) | — | (922 | ) | ||||||||||
D.P.M.S., Inc. | — | (1,229 | ) | — | (1,229 | ) | ||||||||||
Star Seed, Inc. | — | (1,406 | ) | — | (1,406 | ) | ||||||||||
Acme Cryogenics, Inc. | — | (1,564 | ) | — | (1,564 | ) | ||||||||||
Jackrabbit, Inc. | — | (1,687 | ) | — | (1,687 | ) | ||||||||||
Mitchell Rubber Products, Inc. | — | (2,016 | ) | — | (2,016 | ) | ||||||||||
Alloy Die Casting Corp. | — | (2,111 | ) | — | (2,111 | ) | ||||||||||
Galaxy Tool Holding Corp. | — | (2,364 | ) | — | (2,364 | ) | ||||||||||
Drew Foam Company, Inc. | — | (2,837 | ) | — | (2,837 | ) | ||||||||||
Noble Logistics, Inc. (D) | (3,432 | ) | (2,989 | ) | 3,432 | (2,989 | ) | |||||||||
SOG Specialty Knives & Tools, LLC | — | (3,183 | ) | — | (3,183 | ) | ||||||||||
Precision Southeast, Inc. | — | (3,227 | ) | — | (3,227 | ) | ||||||||||
Schylling, Inc. | — | (3,853 | ) | — | (3,853 | ) | ||||||||||
Ginsey Home Solutions, Inc. | — | (5,702 | ) | — | (5,702 | ) | ||||||||||
SBS, Industries, LLC | — | (5,823 | ) | — | (5,823 | ) | ||||||||||
Other, net (<$250 Net) | 41 | 328 | (175 | ) | 194 | |||||||||||
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Total | $ | 8,241 | $ | (28,416 | ) | $ | (790 | ) | $ | (20,965 | ) | |||||
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| (A) | Venu was sold in August 2013. |
| (B) | ASH equity investment was sold in October 2013. |
| (C) | Packerland equity investment was sold in November 2013. |
| (D) | Noble was restructured in February 2014. |
The primary changes in our net unrealized depreciation for the year ended March 31, 2014, were due to decreased equity valuations in several of our portfolio companies, primarily due to decreased portfolio company performance and decreases in certain comparable multiples used to estimate the fair value of our investments.
Over our entire investment portfolio, we recorded approximately $1.0 million of net unrealized appreciation on our debt positions and $28.9 million of net unrealized appreciation on our equity holdings for the year ended March 31, 2015. At March 31, 2015, the fair value of our investment portfolio was less than our cost basis by approximately $39.2 million, as compared to $69.1 million at March 31, 2014, representing net unrealized appreciation of $29.9 million for the year ended March 31, 2015. We believe that our aggregate investment portfolio is valued at a depreciated value due to the lingering effects of the recent recession on the performance of certain of our portfolio companies. Our entire portfolio was fair valued at 92.2% of cost as of March 31, 2015. The unrealized depreciation of our investments does not have an impact on our current ability to pay distributions to stockholders; however, it may be an indication of future realized losses, which could ultimately reduce our income available for distribution.
Net Realized Loss on Other
For the year ended March 31, 2014, we recorded a net realized loss of $29, due to the expiration of interest rate cap agreements. For the year ended March 31, 2015, no such amounts were incurred.
Net Unrealized Depreciation on Other
For the years ended March 31, 2015 and 2014, we recorded $0.5 million and $0.4 million, respectively, of net unrealized depreciation on our Credit Facility recorded at fair value.
Comparison of the Fiscal Year Ended March 31, 2014, to the Fiscal Year Ended March March��31, 2013
| For the Fiscal Years Ended March 31, | For the Fiscal Years Ended March 31, | |||||||||||||||||||||||||||||||
| 2014 | 2013 | $ Change | % Change | 2014 | 2013 | $ Change | % Change | |||||||||||||||||||||||||
INVESTMENT INCOME | ||||||||||||||||||||||||||||||||
Interest income | $ | 30,460 | $ | 24,798 | $ | 5,662 | 22.8 | % | $ | 30,460 | $ | 24,798 | $ | 5,662 | 22.8 | % | ||||||||||||||||
Other income | 5,804 | 5,740 | 64 | 1.1 | 5,804 | 5,740 | 64 | 1.1 | ||||||||||||||||||||||||
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Total investment income | 36,264 | 30,538 | 5,726 | 18.8 | 36,264 | 30,538 | 5,726 | 18.8 | ||||||||||||||||||||||||
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EXPENSES | ||||||||||||||||||||||||||||||||
Base management fee | 6,207 | 5,412 | 795 | 14.7 | 6,207 | 5,412 | 795 | 14.7 | ||||||||||||||||||||||||
Loan servicing fee | 4,326 | 3,725 | 601 | 16.1 | ||||||||||||||||||||||||||||
Incentive fee | 3,983 | 2,585 | 1,398 | 54.1 | 3,983 | 2,585 | 1,398 | 54.1 | ||||||||||||||||||||||||
Administration fee | 863 | 785 | 78 | 9.9 | 863 | 785 | 78 | 9.9 | ||||||||||||||||||||||||
Interest and dividend expense | 4,925 | 3,977 | 948 | 23.8 | 4,925 | 3,977 | 948 | 23.8 | ||||||||||||||||||||||||
Amortization of deferred financing costs | 1,024 | 791 | 233 | 29.5 | 1,024 | 791 | 233 | 29.5 | ||||||||||||||||||||||||
Other | 2,264 | 1,828 | 436 | 23.9 | 2,264 | 1,828 | 436 | 23.9 | ||||||||||||||||||||||||
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Total expenses before credits from Adviser | 19,266 | 15,378 | 3,888 | 25.3 | 23,592 | 19,103 | 4,489 | 23.5 | ||||||||||||||||||||||||
Credits to fees | (2,309 | ) | (1,328 | ) | (981 | ) | 73.9 | |||||||||||||||||||||||||
Credits to fees from Adviser | (6,635 | ) | (5,053 | ) | (1,582 | ) | (31.3 | ) | ||||||||||||||||||||||||
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Total expenses net of credits to fees | 16,957 | 14,050 | 2,907 | 20.7 | ||||||||||||||||||||||||||||
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Total expenses, net of credits to fees | 16,957 | 14,050 | 2,907 | 20.7 | ||||||||||||||||||||||||||||
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NET INVESTMENT INCOME | 19,307 | 16,488 | 2,819 | 17.1 | 19,307 | 16,488 | 2,819 | 17.1 | ||||||||||||||||||||||||
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REALIZED AND UNREALIZED (LOSS) GAIN ON: | ||||||||||||||||||||||||||||||||
REALIZED AND UNREALIZED (LOSS) GAIN | ||||||||||||||||||||||||||||||||
Net realized gain on investments | 8,241 | 843 | 7,398 | 877.6 | 8,241 | 843 | 7,398 | 877.6 | ||||||||||||||||||||||||
Net realized loss on other | (29 | ) | (41 | ) | 12 | (29.3 | ) | (29 | ) | (41 | ) | 12 | 29.3 | |||||||||||||||||||
Net unrealized (depreciation) appreciation of investments | (29,206 | ) | 804 | (30,010 | ) | NM | (29,206 | ) | 804 | (30,010 | ) | NM | ||||||||||||||||||||
Net unrealized appreciation (depreciation) of other | 358 | (815 | ) | 1,173 | NM | |||||||||||||||||||||||||||
Net unrealized depreciation (appreciation) of other | 358 | (815 | ) | 1,173 | NM | |||||||||||||||||||||||||||
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Net realized and unrealized (loss) gain on investments and other | (20,636 | ) | 791 | (21,427 | ) | NM | (20,636 | ) | 791 | (21,427 | ) | NM | ||||||||||||||||||||
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NET (DECREASE) INCREASE IN NET ASSETS RESULTING FROM OPERATIONS | $ | (1,329 | ) | $ | 17,279 | $ | (18,608 | ) | NM | $ | (1,329 | ) | $ | 17,279 | $ | (18,608 | ) | NM | ||||||||||||||
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BASIC AND DILUTED PER COMMON SHARE: | ||||||||||||||||||||||||||||||||
Net investment income | $ | 0.73 | $ | 0.68 | $ | 0.05 | 7.4 | % | $ | 0.73 | $ | 0.68 | $ | 0.05 | 7.4 | % | ||||||||||||||||
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Net (decrease) increase in net assets resulting from operations | (0.05 | ) | 0.71 | (0.76 | ) | NM | (0.05 | ) | 0.71 | (0.76 | ) | NM | ||||||||||||||||||||
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NM = Not Meaningful
Investment Income
Total investment income increased by 18.8% for the year ended March 31, 2014, as compared to the prior year. This increase was primarily due an overall increase in interest income in the year ended March 31, 2014, as a result of an increase in the size of our loan portfolio and holding higher-yielding debt investments.
Interest income from our investments in debt securities increased 22.8% for the year ended March 31, 2014, as compared to the prior year. The level of interest income from investments is directly related to the principal balance of our interest-bearing investment portfolio outstanding during the period multiplied by the weighted average yield. The weighted average principal balance of our interest-bearing investment portfolio during the year ended March 31, 2014, was approximately $241.5 million, compared to approximately $198.1 million for the prior year. This increase was primarily due to $125.6 million in new investments originated after March 31, 2013, including Jackrabbit, Funko, Star Seed, Schylling, ADC,Inc. (“Schylling”), Alloy Die Casting Corp. (“ADC”), Behrens Manufacturing, LLC (“Behrens”), Meridian Rack & Pinion, Inc. (“Meridian”), Head Country Food Products, Inc. (“Head Country”) and Edge Adhesives Holdings Inc. (“Edge”), partially offset by the exit of Venyu and the repayment of debt investments of Cavert and Channel.
As of March 31, 2014, our loans to Tread Corp. (“Tread”) were on non-accrual. ASH, which was on non-accrual as of September 30, 2013, was sold to certain members of its existing management team in October 2013. As a result of the sale, we retained a $5$5.0 million accruing revolving credit facility in ASH, which is no longer on non-accrual. The non-accrual aggregate weighted average principal balance was $19.9 million during the year ended March 31, 2014. As of March 31, 2013, loans to two portfolio companies, ASH and Tread, were on non-accrual, with an aggregate weighted average principal balance of $20.5 million during the year ended March 31, 2013. Tread was put on non-accrual and Country Club Enterprises, LLC (“CCE”) was taken off non-accrual during the three months ended December 31, 2012. The weighted average yield on our interest-bearing investments, excluding cash and cash equivalents and excluding receipts recorded as other income, for the year ended March 31, 2014, was 12.6%, compared to 12.5% for the prior year.
The following table lists the investmentOther income for our five largest portfolio company investments at fair value during the respective fiscal years:
| As of March 31, 2014 | Year Ended March 31, 2014 | |||||||||||||||
Company | Fair Value | % of Portfolio | Investment Income | % of Total Investment Income | ||||||||||||
SOG Specialty Knives and Tools, LLC | $ | 26,639 | 8.5 | % | $ | 3,157 | 8.7 | % | ||||||||
Acme Cryogenics, Inc. | 25,776 | 8.2 | 1,691 | 4.7 | ||||||||||||
Galaxy Tool Holding, Inc. | 18,512 | 5.9 | 2,124 | 5.9 | ||||||||||||
Ginsey Home Solutions, Inc. | 16,132 | 5.1 | 1,786 | 4.9 | ||||||||||||
Edge Adhesives Holdings, Inc. (A) | 15,969 | 5.1 | 142 | 0.4 | ||||||||||||
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Subtotal—five largest investments | 103,028 | 32.8 | 8,900 | 24.6 | ||||||||||||
Other portfolio companies | 211,365 | 67.2 | 27,364 | 75.4 | ||||||||||||
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Total investment portfolio | $ | 314,393 | 100.0 | % | $ | 36,264 | 100.0 | % | ||||||||
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| As of March 31, 2013 | Year Ended March 31, 2013 | |||||||||||||||
Company | Fair Value | % of Portfolio | Investment Income | % of Total Investment Income | ||||||||||||
Venyu Solutions, Inc. | $ | 43,970 | 15.4 | % | $ | 2,502 | 8.2 | % | ||||||||
SOG Specialty Knives and Tools, LLC | 29,822 | 10.4 | 2,657 | 8.7 | ||||||||||||
Acme Cryogenics, Inc. | 27,340 | 9.5 | 2,368 | 7.8 | ||||||||||||
Ginsey Home Solutions, Inc.(A) | 21,833 | 7.6 | 1,331 | 4.4 | ||||||||||||
Galaxy Tool Holding, Inc.(B) | 20,876 | 7.3 | 4,711 | 15.4 | ||||||||||||
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Subtotal—five largest investments | 143,841 | 50.2 | 13,569 | 44.5 | ||||||||||||
Other portfolio companies | 142,641 | 49.8 | 16,969 | 55.5 | ||||||||||||
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Total investment portfolio | $ | 286,482 | 100.0 | % | $ | 30,538 | 100.0 | % | ||||||||
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Other incomeyear ended March 31, 2014 remained relatively unchanged from the prior year. During the fiscal year ended March 31, 2014, other income primarily consisted of a combined $3.3 million in success fee and dividend income received in connection with the exit of Venyu, $0.8 million and $0.2 million in success and prepayment fees resulting from payoffs from Channel and Cavert, respectively, and SOG Specialty K&T, LLC’s (“SOG’s”)SOG’s and Frontier Packaging, Inc.’s (“Frontier’s”)Frontier’s elections to prepay success fees of $0.5 million and $0.2 million, respectively. During the fiscal year ended March 31, 2013, other income primarily consisted of $4.1 million of dividend income from the Galaxy Tool Holding Corp. (“Galaxy”) recapitalization, $0.7 million in cash dividendsdividend income received on preferred shares of Acme, Cryogenics, Inc. (“Acme”), and Mathey Investments, Inc.’s (“Mathey’s”)Mathey’s and Cavert’s elections to each prepay $0.4 million of success fees.
The following table lists the investment income for our five largest portfolio company investments at fair value during the respective fiscal years:
| As of March 31, 2014 | Year Ended March 31, 2014 | |||||||||||||||
Company | Fair Value | % of Portfolio | Investment Income | % of Total Investment Income | ||||||||||||
SOG Specialty Knives and Tools, LLC | $ | 26,639 | 8.5 | % | $ | 3,157 | 8.7 | % | ||||||||
Acme Cryogenics, Inc. | 25,776 | 8.2 | 1,691 | 4.7 | ||||||||||||
Galaxy Tool Holding, Inc. | 18,512 | 5.9 | 2,124 | 5.9 | ||||||||||||
Ginsey Home Solutions, Inc. | 16,132 | 5.1 | 1,786 | 4.9 | ||||||||||||
Edge Adhesives Holdings, Inc. (A) | 15,969 | 5.1 | 142 | 0.4 | ||||||||||||
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Subtotal—five largest investments | 103,028 | 32.8 | 8,900 | 24.6 | ||||||||||||
Other portfolio companies | 211,365 | 67.2 | 27,364 | 75.4 | ||||||||||||
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Total investment portfolio | $ | 314,393 | 100.0 | % | $ | 36,264 | 100.0 | % | ||||||||
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| As of March 31, 2013 | Year Ended March 31, 2013 | |||||||||||||||
Company | Fair Value | % of Portfolio | Investment Income | % of Total Investment Income | ||||||||||||
Venyu Solutions, Inc. (B) | $ | 43,970 | 15.4 | % | $ | 2,502 | 8.2 | % | ||||||||
SOG Specialty Knives and Tools, LLC | 29,822 | 10.4 | 2,657 | 8.7 | ||||||||||||
Acme Cryogenics, Inc. | 27,340 | 9.5 | 2,368 | 7.8 | ||||||||||||
Ginsey Home Solutions, Inc.(A) | 21,833 | 7.6 | 1,331 | 4.4 | ||||||||||||
Galaxy Tool Holding, Inc.(C) | 20,876 | 7.3 | 4,711 | 15.4 | ||||||||||||
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Subtotal—five largest investments | 143,841 | 50.2 | 13,569 | 44.5 | ||||||||||||
Other portfolio companies | 142,641 | 49.8 | 16,969 | 55.5 | ||||||||||||
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Total investment portfolio | $ | 286,482 | 100.0 | % | $ | 30,538 | 100.0 | % | ||||||||
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| (A) | New investment during the applicable year. |
| (B) | Venyu was sold in August 2013. |
| (C) | Investment income includes $4.1 million non-cash dividend recognized from recapitalization. |
Expenses
Total expenses, excluding any voluntary, irrevocable and irrevocablenon-contractual credits tofrom the base management and incentive fees,Adviser, increased 25.3%23.4% for the fiscal year ended March 31, 2014, as compared to the prior year, period, primarily due to an increase in the base management fee, incentive fee, and interest expense, as compared to the prior year period.year.
The base management fee increased for the fiscal year ended March 31, 2014, as compared to the prior year, period, as a result of the increased size of our portfolio over the respective periods.portfolio. Additionally, a net incentive fee of $3.9 million was earned by the Adviser during the fiscal year ended March 31, 2014, compared to $2.4 million for the prior year. The base management fee, loan servicing fee, and incentive feesfee, and their related unconditional and irrevocable voluntary credits, are computed quarterly, as described under “Investment
“Investment Advisory and Management Agreement” in Note 4 of the notes to our accompanyingConsolidated Financial Statements and are summarized in the following table:
| Year Ended March 31, | ||||||||
| 2014 | 2013 | |||||||
Average total assets subject to base management fee(A) | $ | 310,350 | $ | 270,600 | ||||
Multiplied by prorated annual base management fee of 2% | 2.0 | % | 2.0 | % | ||||
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Base management fee(B) | 6,207 | 5,412 | ||||||
Credit for fees received by Adviser from the portfolio companies | (2,309 | ) | (1,107 | ) | ||||
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Net base management fee | $ | 3,898 | $ | 4,305 | ||||
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Incentive fee(B) | 3,983 | 2,585 | ||||||
Credit from waiver issued by Adviser’s board of directors | — | (221 | ) | |||||
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Net Incentive fee | $ | 3,983 | $ | 2,364 | ||||
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Total credits to fees: | ||||||||
Credit for fees received by Adviser from the portfolio companies | (2,309 | ) | (1,107 | ) | ||||
Credit from waiver issued by Adviser’s board of directors | — | (221 | ) | |||||
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Credit to fees(B) | $ | (2,309 | ) | $ | (1,328 | ) | ||
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| Year Ended March 31, | ||||||||
| 2014 | 2013 | |||||||
Average total assets subject to base management fee(A) | $ | 310,350 | $ | 270,600 | ||||
Multiplied by annual base management fee of 2% | 2.0 | % | 2.0 | % | ||||
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Base management fee(B) | 6,207 | 5,412 | ||||||
Credits to fees from Adviser-other(B) | (2,309 | ) | (1,107 | ) | ||||
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Net base management fee | $ | 3,898 | $ | 4,305 | ||||
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Loan servicing fee(B) | 4,326 | 3,725 | ||||||
Credits to base management fee-loan servicing fee(B) | (4,326 | ) | (3,725 | ) | ||||
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Net loan servicing fee | $ | — | $ | — | ||||
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Incentive fee(B) | 3,983 | 2,585 | ||||||
Credits to fees from Adviser-other(B) | — | (221 | ) | |||||
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Net Incentive fee | $ | 3,983 | $ | 2,364 | ||||
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| (A) | Average total assets subject to the base management fee is defined as total assets, including investments made with proceeds of borrowings, less any uninvested cash or cash equivalents resulting from borrowings, valued at the end of the applicable quarters within the respective periods and adjusted appropriately for any share issuances or repurchases during the periods. |
| (B) | Reflected as a line item on our accompanyingConsolidated Statement of Operations. For the year ended March 31, 2013, the credits to incentive fee and the credits to base management fee are combined into one line item, Credits to fees from Adviser-other, on the accompanyingConsolidated Statement of Operations. |
Interest and dividend expense increased 23.8% for the fiscal year ended March 31, 2014, as compared to the prior year, primarily due to increased commitment (unused) fees related to the expansion of our Credit Facility from $60 million to $105 million and increased average borrowings under theour Credit Facility. The average balance outstanding on our Credit Facility during the fiscal year ended March 31, 2014, was $34.6 million, as compared to $15.5 million in the prior year.
Realized and Unrealized Gain (Loss)
Net Realized Gain on Investments
Realized Gain
During the fiscal year ended March 31, 2014, we recorded a net realized gain of $8.2 million consisting of a $24.8 million gain on the Venyu sale, partially offset by the realized losses of $11.4 million and $1.8 million related to the equity sales of ASH and Packerland, respectively, and the realized lossesloss of $3.4 million related to the restructuring of Noble. During the year ended March 31, 2013, we recorded a realized gain of $0.8 million relating to post-closing adjustments on the previous investment exit of A. Stucki Holding Corp. (“A. Stucki”).
Net Unrealized Appreciation and Depreciation(Depreciation) of Investments
During the year ended March 31, 2014, we recorded net unrealized depreciation on investments in the aggregate amount of $29.2 million, which included the reversal of $0.8 million in aggregate unrealized appreciation, primarily related to the sale of Venyu, partially offset by the sale of ASH and Packerland, and the restructure of Noble. Excluding reversals, we had $28.4 million in net unrealized depreciation for the year ended March 31, 2014.
The realized gains (losses) and unrealized appreciation (depreciation) across our investments for the year ended March 31, 2014, were as follows:
| Year Ended March 31, 2014 | Year Ended March 31, 2014 | |||||||||||||||||||||||||||||||
Portfolio Company | Realized Gain (Loss) | Unrealized Appreciation (Depreciation) | Reversal of Unrealized (Appreciation) Depreciation | Net Gain (Loss) | Realized Gain (Loss) | Unrealized Appreciation (Depreciation) | Reversal of Unrealized (Appreciation) Depreciation | Net Gain (Loss) | ||||||||||||||||||||||||
Venyu Solutions, Inc.(A) | $ | 24,798 | $ | (1,596 | ) | $ | (17,374 | ) | $ | 5,828 | $ | 24,798 | $ | (1,596 | ) | $ | (17,374 | ) | $ | 5,828 | ||||||||||||
Auto Safety House, LLC (B) | (11,402 | ) | 4,925 | 11,410 | 4,933 | (11,402 | ) | 4,925 | 11,410 | 4,933 | ||||||||||||||||||||||
Quench Holdings Corp. | — | 3,377 | — | 3,377 | — | 3,377 | — | 3,377 | ||||||||||||||||||||||||
Frontier Packaging, Inc. | — | 1,712 | — | 1,712 | — | 1,712 | — | 1,712 | ||||||||||||||||||||||||
Channel Technologies Group, LLC | — | 2,187 | (583 | ) | 1,604 | — | 2,187 | (583 | ) | 1,604 | ||||||||||||||||||||||
B-Dry, LLC | — | 1,555 | — | 1,555 | — | 1,555 | — | 1,555 | ||||||||||||||||||||||||
Funko, LLC | — | 1,113 | — | 1,113 | — | 1,113 | — | 1,113 | ||||||||||||||||||||||||
Packerland Whey Products, Inc. (C) | (1,764 | ) | (369 | ) | 2,500 | 367 | (1,764 | ) | (369 | ) | 2,500 | 367 | ||||||||||||||||||||
Tread Corp. | — | (735 | ) | — | (735 | ) | — | (735 | ) | — | (735 | ) | ||||||||||||||||||||
Mathey Investments, Inc. | — | (922 | ) | — | (922 | ) | — | (922 | ) | — | (922 | ) | ||||||||||||||||||||
Danco Acquisition Corp. | — | (1,229 | ) | — | (1,229 | ) | ||||||||||||||||||||||||||
D.P.M.S., Inc. | — | (1,229 | ) | — | (1,229 | ) | ||||||||||||||||||||||||||
Star Seed, Inc. | — | (1,406 | ) | — | (1,406 | ) | — | (1,406 | ) | — | (1,406 | ) | ||||||||||||||||||||
Acme Cryogenics, Inc. | — | (1,564 | ) | — | (1,564 | ) | — | (1,564 | ) | — | (1,564 | ) | ||||||||||||||||||||
Jackrabbit, Inc. | — | (1,687 | ) | — | (1,687 | ) | — | (1,687 | ) | — | (1,687 | ) | ||||||||||||||||||||
Mitchell Rubber Products, Inc. | — | (2,016 | ) | — | (2,016 | ) | — | (2,016 | ) | — | (2,016 | ) | ||||||||||||||||||||
Alloy Die Casting Corp. | — | (2,111 | ) | — | (2,111 | ) | — | (2,111 | ) | — | (2,111 | ) | ||||||||||||||||||||
Galaxy Tool Holding Corp. | — | (2,364 | ) | — | (2,364 | ) | — | (2,364 | ) | — | (2,364 | ) | ||||||||||||||||||||
Drew Foam Company, Inc. | — | (2,837 | ) | — | (2,837 | ) | — | (2,837 | ) | — | (2,837 | ) | ||||||||||||||||||||
Noble Logistics, Inc. (D) | (3,432 | ) | (2,989 | ) | 3,432 | (2,989 | ) | (3,432 | ) | (2,989 | ) | 3,432 | (2,989 | ) | ||||||||||||||||||
SOG Specialty K&T, LLC | — | (3,183 | ) | — | (3,183 | ) | ||||||||||||||||||||||||||
SOG Specialty Knives & Tools, LLC | — | (3,183 | ) | — | (3,183 | ) | ||||||||||||||||||||||||||
Precision Southeast, Inc. | — | (3,227 | ) | — | (3,227 | ) | — | (3,227 | ) | — | (3,227 | ) | ||||||||||||||||||||
Schylling Investments, LLC | — | (3,853 | ) | — | (3,853 | ) | ||||||||||||||||||||||||||
Schylling, Inc. | — | (3,853 | ) | — | (3,853 | ) | ||||||||||||||||||||||||||
Ginsey Home Solutions, Inc. | — | (5,702 | ) | — | (5,702 | ) | — | (5,702 | ) | — | (5,702 | ) | ||||||||||||||||||||
SBS, Industries, LLC | — | (5,823 | ) | — | (5,823 | ) | — | (5,823 | ) | — | (5,823 | ) | ||||||||||||||||||||
Other, net (<$250 Net) | 41 | 328 | (175 | ) | 194 | 41 | 328 | (175 | ) | 194 | ||||||||||||||||||||||
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Total | $ | 8,241 | $ | (28,416 | ) | $ | (790 | ) | $ | (20,965 | ) | $ | 8,241 | $ | (28,416 | ) | $ | (790 | ) | $ | (20,965 | ) | ||||||||||
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| (A) | Venyu was sold in August 2013. |
| (B) | ASH equity investment was sold in October 2013. |
| (C) | Packerland equity investment was sold in November 2013. |
| Noble was restructured in February 2014. |
The primary changes in our net unrealized depreciation for the year ended March 31, 2014, were due to decreased equity valuations in several of our portfolio companies, primarily due to decreased portfolio company performance and decreases in certain comparable multiples used to estimate the fair value of our investments.
During the year ended March 31, 2013, we recorded net unrealized depreciation on investments in the aggregate amount of $0.8 million. The realized gains (losses) and unrealized appreciation (depreciation) across our investments for the year ended March 31, 2013, were as follows:
| Year Ended March 31, 2013 | Year Ended March 31, 2013 | |||||||||||||||||||||||||||||||
Portfolio Company | Realized Gain (Loss) | Unrealized Appreciation (Depreciation) | Reversal of Unrealized (Appreciation) Depreciation | Net Gain (Loss) | Realized Gain (Loss) | Unrealized Appreciation (Depreciation) | Reversal of Unrealized (Appreciation) Depreciation | Net Gain (Loss) | ||||||||||||||||||||||||
Venyu Solutions, Inc. | $ | — | $ | 20,640 | $ | — | $ | 20,640 | $ | — | $ | 20,640 | $ | — | $ | 20,640 | ||||||||||||||||
Galaxy Tool Holdings, Inc. | — | 12,057 | 12,057 | — | 12,057 | 12,057 | ||||||||||||||||||||||||||
Country Club Enterprises, LLC | — | 7,467 | — | 7,467 | — | 7,467 | — | 7,467 | ||||||||||||||||||||||||
Mathey Investments, Inc. | — | 1,653 | — | 1,653 | — | 1,653 | — | 1,653 | ||||||||||||||||||||||||
Precision Southeast, Inc. | — | 1,594 | — | 1,594 | — | 1,594 | — | 1,594 | ||||||||||||||||||||||||
SBS, Industries, LLC | — | 1,238 | — | 1,238 | — | 1,238 | — | 1,238 | ||||||||||||||||||||||||
A. Stucki Holding Corp. | 861 | — | — | 861 | 861 | — | — | 861 | ||||||||||||||||||||||||
Drew Foam Company, Inc. | — | 750 | — | 750 | — | 750 | — | 750 | ||||||||||||||||||||||||
SOG Specialty K&T, LLC | — | (273 | ) | — | (273 | ) | ||||||||||||||||||||||||||
SOG Specialty Knives & Tools, LLC | — | (273 | ) | — | (273 | ) | ||||||||||||||||||||||||||
Ginsey Home Solutions, Inc. | — | (618 | ) | — | (618 | ) | — | (618 | ) | — | (618 | ) | ||||||||||||||||||||
Frontier Packaging, Inc. | — | (872 | ) | — | (872 | ) | — | (872 | ) | — | (872 | ) | ||||||||||||||||||||
Quench Holdings Corp. | — | (944 | ) | — | (944 | ) | — | (944 | ) | — | (944 | ) | ||||||||||||||||||||
Acme Cryogenics, Inc. | — | (962 | ) | — | (962 | ) | — | (962 | ) | — | (962 | ) | ||||||||||||||||||||
Channel Technologies Group, LLC | — | (1,288 | ) | — | (1,288 | ) | — | (1,288 | ) | — | (1,288 | ) | ||||||||||||||||||||
ASH Holdings Corp. | — | (1,458 | ) | — | (1,458 | ) | ||||||||||||||||||||||||||
Auto Safety House, LLC | — | (1,458 | ) | — | (1,458 | ) | ||||||||||||||||||||||||||
Mitchell Rubber Products, Inc. | — | (1,762 | ) | — | (1,762 | ) | — | (1,762 | ) | — | (1,762 | ) | ||||||||||||||||||||
Packerland Whey Products, Inc. | — | (2,131 | ) | — | (2,131 | ) | — | (2,131 | ) | — | (2,131 | ) | ||||||||||||||||||||
B-Dry, LLC | — | (3,953 | ) | — | (3,953 | ) | — | (3,953 | ) | — | (3,953 | ) | ||||||||||||||||||||
Noble Logistics, Inc. | — | (6,420 | ) | — | (6,420 | ) | — | (6,420 | ) | — | (6,420 | ) | ||||||||||||||||||||
Danco Acquisition Corp. | — | (8,225 | ) | — | (8,225 | ) | ||||||||||||||||||||||||||
D.P.M.S., Inc. | — | (8,225 | ) | — | (8,225 | ) | ||||||||||||||||||||||||||
Tread Corp. | — | (15,930 | ) | — | (15,930 | ) | — | (15,930 | ) | — | (15,930 | ) | ||||||||||||||||||||
Other, net (<$250 Net) | (18 | ) | 241 | — | 223 | (18 | ) | 241 | — | 223 | ||||||||||||||||||||||
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Total | $ | 843 | $ | 804 | $ | — | $ | 1,647 | $ | 843 | $ | 804 | $ | — | $ | 1,647 | ||||||||||||||||
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The primary changes in our net unrealized appreciation for the fiscal year ended March 31, 2013, were due to notable unrealized appreciation of our equity investment in Venyu, primarily due to increased portfolio company performance and an increase in certain comparable multiples used to estimate the fair value. We also experienced notable appreciation in our investments in Galaxy and CCE, primarily due to increased portfolio company performance. This unrealized appreciation was partially offset by notable depreciation of our debt investments in D.P.M.S., Inc. (d/b/a Danco Acquisition Corp.) (“Danco”) and in our debt and equity investments in Tread, Noble and B-Dry, LLC (“B-Dry”), primarily due to decreased portfolio company performance and, to a lesser extent, a decrease in certain comparable multiples used to estimate the fair value of our investments. Excluding the impact of the aforementioned portfolio companies, the net unrealized depreciation of $4.8 million recognized on our investments was primarily due to a decrease in certain comparable multiples used to estimate the fair value of our investments, partially offset by increases in the performance of certain of our portfolio companies.
Over our entire investment portfolio, we recorded, in the aggregate, $10.7 million of net unrealized appreciation and $39.9 million of net unrealized depreciation on our debt positions and equity holdings, respectively, for the year ended March 31, 2014. As of March 31, 2014, the fair value of our investment portfolio was less than our cost basis by $69.1 million, as compared to $39.9 million as of March 31, 2013, representing net unrealized depreciation of $29.2 million for fiscal year 2014. We believe that our aggregate investment portfolio was valued at a depreciated value due to the lingering effects of the recent recession on the performance of certain of our portfolio companies. Our entire investment portfolio was fair valued at 82.0% of cost as of March 31, 2014. The unrealized depreciation of our investments does not have an impact on our current ability to pay distributions to stockholders; however, it may be an indication of future realized losses, which could ultimately reduce our income available for distribution.
Realized and Unrealized Loss on Other
Realized Loss on Interest Rate CapsOther
For the fiscal years ended March 31, 2014 and 2013, we recorded a net realized loss of $29 and $41, respectively, due to the expiration of interest rate cap agreements in each year.
Net Unrealized Appreciation and Depreciation (Appreciation) on BorrowingsOther
For the fiscal yearyears ended March 31, 2014 and 2013, we recorded $0.4 million of net unrealized depreciation compared toand $0.9 million of net unrealized appreciation, in fiscal year ended March 31, 2013. Ourrespectively, on our Credit Facility wasrecorded at fair valued at $61.7 millionvalue.
LIQUIDITY AND CAPITAL RESOURCES
Operating Activities
Our cash flows from operating activities are primarily generated from cash collections of interest and $31.9 milliondividend payments from our portfolio companies, as well as cash proceeds received through repayments of March 31, 2014debt investments and 2013, respectively.
Comparisonsales of the Fiscal Year Ended March 31, 2013,equity investments. These cash collections are primarily used to pay distributions to our stockholders, interest payments on our Credit Facility, dividend payments on our three series of mandatorily redeemable preferred stock, management fees to the Fiscal Year Ended March 31, 2012
| For the Fiscal Years Ended March 31, | ||||||||||||||||
| 2013 | 2012 | $ Change | % Change | |||||||||||||
INVESTMENT INCOME | ||||||||||||||||
Interest income | $ | 24,798 | $ | 19,588 | $ | 5,210 | 26.6 | % | ||||||||
Other income | 5,740 | 1,654 | 4,086 | 247.0 | ||||||||||||
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Total investment income | 30,538 | 21,242 | 9,296 | 43.8 | ||||||||||||
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EXPENSES | ||||||||||||||||
Base management fee | 5,412 | 4,386 | 1,026 | 23.4 | ||||||||||||
Incentive fee | 2,585 | 19 | 2,566 | 13,505.3 | ||||||||||||
Administration fee | 785 | 684 | 101 | 14.8 | ||||||||||||
Interest and dividend expense | 3,977 | 966 | 3,011 | 311.7 | ||||||||||||
Amortization of deferred financing costs | 791 | 459 | 332 | 72.3 | ||||||||||||
Other | 1,828 | 2,145 | (317 | ) | (14.8 | ) | ||||||||||
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Total expenses before credits from Adviser | 15,378 | 8,659 | 6,719 | 77.6 | ||||||||||||
Credits to fees | (1,328 | ) | (1,160 | ) | (168 | ) | 14.5 | |||||||||
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Total expenses net of credits to fees | 14,050 | 7,499 | 6,551 | 87.4 | ||||||||||||
NET INVESTMENT INCOME | 16,488 | 13,743 | 2,745 | 20.0 | ||||||||||||
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REALIZED AND UNREALIZED GAIN ON: | ||||||||||||||||
Net realized gain on investments | 843 | 5,091 | (4,248 | ) | (83.4 | ) | ||||||||||
Net realized loss on other | (41 | ) | (40 | ) | (1 | ) | 2.5 | |||||||||
Net unrealized appreciation of investments | 804 | 3,163 | (2,359 | ) | NM | |||||||||||
Net unrealized (depreciation) appreciation of other | (815 | ) | 9 | (824 | ) | NM | ||||||||||
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Net realized and unrealized gain on investments and other | 791 | 8,223 | (7,432 | ) | (90.4 | ) | ||||||||||
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NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS | $ | 17,279 | $ | 21,966 | $ | (4,687 | ) | (21.3 | ) | |||||||
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Net investment income | $ | 0.68 | $ | 0.62 | $ | 0.06 | 9.7 | % | ||||||||
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Net increase in net assets resulting from operations | 0.71 | 0.99 | (0.28 | ) | (28.3 | ) | ||||||||||
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NM = Not Meaningful
Investment Income
Total investment income increased by 43.8%Adviser, and for other operating expenses. Net cash used in operating activities for the year ended March 31, 2013,2015, was approximately $97.6 million, as compared to the prior year. This increase was primarily due to a significant amount of other income, including success fee and dividend income, that we recorded in the current year and due to an overall increase in interest income as a result of an increase in the size of our loan portfolio and holding higher-yielding debt investments during the year ended March 31, 2013.
Interest income from our investments in debt securities increased 26.6%$33.6 million for the year ended March 31, 2013, as compared to the prior year. The level of interest income from investments is directly related to the principal balance of our interest-bearing investment portfolio outstanding during the period, multiplied by the weighted average yield. The weighted average principal balance of our interest-bearing investment portfolio during the year ended March 31, 2013, was $198.1 million, compared to $159 million for the prior year.2014. This increase in cash used in operating activities was primarily due to a decrease in principal repayments and proceeds from the sale of investments originated duringyear over year. Repayments and proceeds from the period in Ginsey, Drew Foam and Frontier and the recapitalizationsale of Galaxy. As of March 31, 2013, two loans, ASH and Tread, were on non-accrual, with an aggregate weighted average principal balance of $20.5investments totaled $11.3 million during the year ended March 31, 2013. Tread was put on non-accrual and CCE was taken off non-accrual during the three months ended December 31, 2012. As of March 31, 2012, two loans, ASH and CCE, were on non-accrual, with a weighted average principal balance of $14.32015, compared to $83.4 million during the year ended March 31, 2012.
The weighted average yield on our interest-bearing investments, excluding cash and cash equivalents and excluding receipts recorded as other income, for the year ended March 31, 2013, was 12.5%, compared to 12.3% for the prior year. The weighted average yield
varies from period to period, based on the current stated interest rate on interest-bearing investments. The increase in the weighted average yield for the year ended March 31, 2013, is a result of the addition of higher-yielding debt investments throughout the past two fiscal years, which had an aggregate, weighted average interest rate of 13.2% as of March 31, 2013.
The following table lists the investment income for our five largest portfolio company investments at fair value during the respective fiscal years:
| As of March 31, 2013 | Year Ended March 31, 2013 | |||||||||||||||
Company | Fair Value | % of Portfolio | Investment Income | % of Total Investment Income | ||||||||||||
Venyu Solutions, Inc. | $ | 43,970 | 15.4 | % | $ | 2,502 | 8.2 | % | ||||||||
SOG Specialty Knives and Tools, LLC | 29,822 | 10.4 | 2,657 | 8.7 | ||||||||||||
Acme Cryogenics, Inc. | 27,340 | 9.5 | 2,368 | 7.8 | ||||||||||||
Ginsey Home Solutions, Inc.(A) | 21,833 | 7.6 | 1,331 | 4.4 | ||||||||||||
Galaxy Tool Holding, Inc.(B) | 20,876 | 7.3 | 4,711 | 15.4 | ||||||||||||
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Subtotal—five largest investments | 143,841 | 50.2 | 13,569 | 44.5 | ||||||||||||
Other portfolio companies | 142,641 | 49.8 | 16,969 | 55.5 | ||||||||||||
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Total investment portfolio | $ | 286,482 | 100.0 | % | $ | 30,538 | 100.0 | % | ||||||||
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| As of March 31, 2012 | Year Ended March 31, 2012 | |||||||||||||||
Company | Fair Value | % of Portfolio | Investment Income | % of Total Investment Income | ||||||||||||
SOG Specialty Knives and Tools, LLC(A) | $ | 30,096 | 13.3 | % | $ | 1,725 | 8.1 | % | ||||||||
Acme Cryogenics, Inc. | 28,301 | 12.6 | 1,704 | 8.0 | ||||||||||||
Venyu Solutions, Inc. | 23,330 | 10.3 | 2,509 | 11.8 | ||||||||||||
Channel Technologies Group, LLC(A) | 19,066 | 8.5 | 484 | 2.3 | ||||||||||||
Mitchell Rubber Products, Inc. (A) | 18,491 | 8.2 | 1,758 | 8.3 | ||||||||||||
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Subtotal—five largest investments | 119,284 | 52.9 | 8,180 | 38.5 | ||||||||||||
Other portfolio companies | 106,368 | 47.1 | 13,062 | 61.5 | ||||||||||||
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Total investment portfolio | $ | 225,652 | 100.0 | % | $ | 21,242 | 100.0 | % | ||||||||
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Other income increased 247% from the prior year, primarily2014, largely due to $4.1 millionour exit of dividend income from the Galaxy recapitalization, $0.7 millionVenyu in cash dividends received on preferred shares of Acme and elections by each of Mathey and Cavert to prepay $0.4 million of success fees during the fiscal year ended March 31, 2013. Other income for the year ended March 31, 2012, primarily consisted of $0.7 million of cash dividends received on preferred shares of Cavert, in connection with its recapitalization in April 2011, as well as an aggregate of $0.7 million of success fee income resulting from prepayments received from Mathey and Cavert during the year ended March 31, 2012.
Expenses
Total expenses, excluding any voluntary and irrevocable credits to the base management and incentive fees, increased 77.6% for the year ended March 31,August 2013, primarily due to an increase in the incentive fee and dividend expense, as compared to the prior year.
The base management fee increased for the year ended March 31, 2013, as compared to the prior year, which is reflective of the increased size of our loan portfolio over the respective periods. An incentive fee was earned by the Adviser throughout the fiscal year ended March 31, 2013; however, the incentive fee was partially waived by the Adviser to ensure distributions to stockholders were covered entirely by net investment income during each respective quarter. The base management and incentive fees are computed quarterly, as described under “Investment Advisory and Management Agreement” in Note 4 of the notes to our accompanyingConsolidated Financial Statements and are summarized in the following table:
| Year Ended March 31, | ||||||||
| 2013 | 2012 | |||||||
Average total assets subject to base management fee(A) | $ | 270,600 | $ | 219,300 | ||||
Multiplied by prorated annual base management fee of 2% | 2.0 | % | 2.0 | % | ||||
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Base management fee(B) | 5,412 | 4,386 | ||||||
Credit for fees received by Adviser from the portfolio companies | (1,107 | ) | (1,106 | ) | ||||
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Net base management fee | $ | 4,305 | $ | 3,280 | ||||
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Incentive fee(B) | 2,585 | 19 | ||||||
Credit from waiver issued by Adviser’s board of directors | (221 | ) | (54 | ) | ||||
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Net Incentive fee | $ | 2,364 | $ | (35 | ) | |||
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Credit for fees received by Adviser from the portfolio companies | (1,107 | ) | (1,106 | ) | ||||
Credit from waiver issued by Adviser’s board of directors | (221 | ) | (54 | ) | ||||
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Credit to fees(B) | $ | (1,328 | ) | $ | (1,160 | ) | ||
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Interest and dividend expense increased 311.7% for the year ended March 31, 2013, as compared to the prior year, primarily due to $2.8 million of dividends we paid on our Term Preferred Stock during the fiscal year 2013, compared to $0.2 million for a portion of the prior year. Removing the effect of the preferred stock dividend payment, interest expense for the year ended March 31, 2013, increased 46.7% over the prior year, due mainly to increased average borrowings under the Credit Facility, partially offset by a decreased average borrowing rate upon renewal of the Credit Facility in October 2011, which resulted in the removalsale proceeds of the LIBOR minimum rate of 2%. The average balance outstanding on our Credit Facility during the year ended March 31, 2013, was $15.5 million, as compared to $7.3 million in the prior year. The effective interest rate charged on our borrowings for the year ended March 31, 2013, excluding the impact of deferred financing fees, was 5.5%, as compared to 10% for the prior year.
Amortization of deferred financing costs increased $0.3 million, or 72.3%, during the fiscal year ended March 31, 2013, as compared to the prior year, primarily due to the Term Preferred Stock offering costs being deferred and amortized, resulting in $0.4 million in amortization during the fiscal year ended March 31, 2013. Minimal amortization was recorded in the prior year, as the Term Preferred Stock offering was not completed until March 2012.
Realized and Unrealized Gain on Investments
Realized Gain
During the fiscal year ended March 31, 2013, we recorded a realized gain of $0.8 million consisting of post-closing adjustments on our previous investment exit of A. Stucki. In April 2011, we recapitalized our investment in Cavert, receiving $8.5 million in proceeds and realizing a gain of $5.5 million. Additionally, we recorded post-closing adjustments related to the A. Stucki exit in June 2010 and the Chase II Holding Corp (“Chase”) exit in December 2010, which resulted in a net aggregate loss of $0.3 million during the year ended March 31, 2012.
Unrealized Appreciation and Depreciation
During the year ended March 31, 2013, we recorded net unrealized depreciation on investments in the aggregate amount of $0.8 million. The realized gains (losses) and unrealized appreciation (depreciation) across our investments for the year ended March 31, 2013, were as follows:
| Year Ended March 31, 2013 | ||||||||||||||||
Portfolio Company | Realized Gain (Loss) | Unrealized Appreciation (Depreciation) | Reversal of Unrealized (Appreciation) Depreciation | Net Gain (Loss) | ||||||||||||
Venyu Solutions, Inc. | $ | — | $ | 20,640 | $ | — | $ | 20,640 | ||||||||
Galaxy Tool Holdings, Inc. | — | 12,057 | 12,057 | |||||||||||||
Country Club Enterprises, LLC | — | 7,467 | — | 7,467 | ||||||||||||
Mathey Investments, Inc. | — | 1,653 | — | 1,653 | ||||||||||||
Precision Southeast, Inc. | — | 1,594 | — | 1,594 | ||||||||||||
SBS, Industries, LLC | — | 1,238 | — | 1,238 | ||||||||||||
A. Stucki Holding Corp. | 861 | — | — | 861 | ||||||||||||
Drew Foam Company, Inc. | — | 750 | — | 750 | ||||||||||||
SOG Specialty K&T, LLC | — | (273 | ) | — | (273 | ) | ||||||||||
Ginsey Home Solutions, Inc. | — | (618 | ) | — | (618 | ) | ||||||||||
Frontier Packaging, Inc. | — | (872 | ) | — | (872 | ) | ||||||||||
Quench Holdings Corp. | — | (944 | ) | — | (944 | ) | ||||||||||
Acme Cryogenics, Inc. | — | (962 | ) | — | (962 | ) | ||||||||||
Channel Technologies Group, LLC | — | (1,288 | ) | — | (1,288 | ) | ||||||||||
ASH Holdings Corp. | — | (1,458 | ) | — | (1,458 | ) | ||||||||||
Mitchell Rubber Products, Inc. | — | (1,762 | ) | — | (1,762 | ) | ||||||||||
Packerland Whey Products, Inc. | — | (2,131 | ) | — | (2,131 | ) | ||||||||||
B-Dry, LLC | — | (3,953 | ) | — | (3,953 | ) | ||||||||||
Noble Logistics, Inc. | — | (6,420 | ) | — | (6,420 | ) | ||||||||||
Danco Acquisition Corp. | — | (8,225 | ) | — | (8,225 | ) | ||||||||||
Tread Corp. | — | (15,930 | ) | — | (15,930 | ) | ||||||||||
Other, net (<$250 Net) | (18 | ) | 241 | — | 223 | |||||||||||
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Total | $ | 843 | $ | 804 | $ | — | $ | 1,647 | ||||||||
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The primary changes in our net unrealized appreciation for the fiscal year ended March 31, 2013, were due to notable unrealized appreciation of our equity investment in Venyu, primarily due to increased portfolio company performance and an increase in certain comparable multiples used to estimate the fair value. We also experienced notable appreciation in our investments in Galaxy and CCE, primarily due to increased portfolio company performance. This unrealized appreciation was partially offset by notable depreciation of our debt investments in Danco and in our debt and equity investments in Tread, Noble and B-Dry, primarily due to decreased portfolio company performance and, to a lesser extent, a decrease in certain comparable multiples used to estimate the fair value of our investments. Excluding the impact of the aforementioned portfolio companies, the net unrealized depreciation of $4.8 million recognized on our investments was primarily due to a decrease in certain comparable multiples used to estimate the fair value of our investments, partially offset by increases in the performance of certain of our portfolio companies.
During the year ended March 31, 2012, we recorded net unrealized appreciation on investments in the aggregate amount of $3.2 million, which included the reversal of $6 million in aggregate unrealized appreciation, primarily related to the Cavert recapitalization. Excluding reversals, we had $9.2 million in net unrealized appreciation for the year ended March 31, 2012.
The realized gains (losses) and unrealized appreciation (depreciation) across our investments for the year ended March 31, 2012, were as follows:
| Year Ended March 31, 2012 | ||||||||||||||||
Portfolio Company | Realized Gain (Loss) | Unrealized Appreciation (Depreciation) | Reversal of Unrealized (Appreciation) Depreciation | Net Gain (Loss) | ||||||||||||
Acme Cryogenics, Inc. | $ | — | $ | 8,811 | $ | — | $ | 8,811 | ||||||||
Mathey Investments, Inc. | — | 4,366 | — | 4,366 | ||||||||||||
SBS, Industries, LLC | — | 3,434 | — | 3,434 | ||||||||||||
Mitchell Rubber Products, Inc. | — | 2,114 | — | 2,114 | ||||||||||||
Tread Corp. | — | 2,003 | — | 2,003 | ||||||||||||
Quench Holdings Corp. | — | 1,996 | — | 1,996 | ||||||||||||
SOG Specialty K&T, LLC | — | 1,948 | — | 1,948 | ||||||||||||
Survey Sampling, LLC | (1 | ) | 807 | 1 | 807 | |||||||||||
A. Stucki Holding Corp. | 412 | — | — | 412 | ||||||||||||
Cavert II Holding Corp. | 5,507 | 351 | (6,194 | ) | (336 | ) | ||||||||||
Noble Logistics, Inc. | — | (460 | ) | 95 | (365 | ) | ||||||||||
Chase II Holding Corp. | (563 | ) | — | — | (563 | ) | ||||||||||
Precision Southeast, Inc. | — | (619 | ) | — | (619 | ) | ||||||||||
Venyu Solutions, Inc. | — | (1,682 | ) | — | (1,682 | ) | ||||||||||
Danco Acquisition Corp. | — | (3,077 | ) | — | (3,077 | ) | ||||||||||
ASH Holdings Corp. | — | (3,147 | ) | — | (3,147 | ) | ||||||||||
Country Club Enterprises, LLC | — | (7,560 | ) | — | (7,560 | ) | ||||||||||
Other, net (<$250 Net) | (264 | ) | (101 | ) | 77 | (288 | ) | |||||||||
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Total | $ | 5,091 | $ | 9,184 | $ | (6,021 | ) | $ | 8,254 | |||||||
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The primary changes in our net unrealized appreciation for the year ended March 31, 2012, were notable appreciation in our equity investments in Acme, Mathey and SBS Industries, LLC (“SBS”), primarily due to both improved performance and an increase in multiples, and appreciation of our debt investment in Quench, which was paid off at par during the three months ended December 31, 2011. This appreciation was partially offset by increased notable depreciation in CCE, ASH and Danco, primarily due to decreased performance, as well as the reversal of previously-recorded unrealized appreciation on the Cavert recapitalization. Excluding the impact of the aforementioned portfolio companies, the net unrealized appreciation of $4.2 million recognized on our investments was primarily due to an increase in certain comparable multiples used to estimate the fair value of our investments, partially offset by decreases in the performance of certain of our portfolio companies.
Over our entire investment portfolio, we recorded, in the aggregate, $23.2 million of net unrealized depreciation and $24 million of net unrealized appreciation on our debt positions and equity holdings, respectively, for the year ended March 31, 2013. As of March 31, 2013, the fair value of our investment portfolio was less than our cost basis by $39.9 million, as compared to $40.7 million as of March 31, 2012, representing net unrealized appreciation of $0.8 million for fiscal year 2013. We believe that our aggregate investment portfolio as of March 31, 2013 was valued at a depreciated value due to the lingering effects of the recession that began in late 2007 and its effects on the performance of certain of our portfolio companies. Our entire investment portfolio was fair valued at 87.8% of cost as of March 31, 2013. The unrealized depreciation of our investments does not have an impact on our current ability to pay distributions to stockholders; however, it may be an indication of future realized losses, which could ultimately reduce our income available for distribution.
Realized and Unrealized Loss on Other
Realized Loss on Interest Rate Caps
For the fiscal years ended March 31, 2013 and 2012, we recorded a net realized loss of $41 and $40, respectively, due to the expiration of interest rate cap agreements in each year.
Net Unrealized Appreciation on Borrowings
For the fiscal years ended March 31, 2013 and 2012, we recorded $0.9$30.8 million and $0, respectively,principal repayments of net unrealized appreciation primarily due to increased borrowings outstanding and comparable market rates decreasing during the current year. Our Credit Facility was fair valued at $31.9 million as of March 31, 2013. There were no borrowings outstanding as of March 31, 2012.
LIQUIDITY AND CAPITAL RESOURCES
Operating Activities$19.0 million.
Net cash used in operating activities for the year ended March 31, 2014, was $33.6 million, as compared to $39.7 million during the year ended March 31, 2013. This decrease in cash used in operating activities was primarily due to an increase in principal repayments and sales proceeds of $55 million over the prior year, largely due to our exit of Venyu in August 2013, partially offset by increased investment originations of $48.7 million over the prior year. Our cash flows from operations generally come from cash collections
As of interest and dividend income from our portfolioMarch 31, 2015, we had equity investments in or loans to 34 private companies as well as cash proceeds received through repaymentswith an aggregate cost basis of loan investments and sales of equity investments. These cash collections are primarily used to invest in securities of new and existing portfolio companies, pay distributions to our stockholders, interest payments on our Credit Facility, management fees to the Adviser, and other entity-level expenses.
approximately $505.3 million. As of March 31, 2014, we had equity investments in or loans to 29 private companies with an aggregate cost basis of approximately $383.5 million. As of March 31, 2013, we had investments in equity of, loans to or syndicated participations in 21 private companies with an aggregate cost basis of $326.4 million. The following table summarizes our total portfolio investment activity duringfor the years ended March 31, 20142015 and 2013:2014:
| Years Ended March 31, | ||||||||
| 2014 | 2013 | |||||||
Beginning investment portfolio, at fair value | $ | 286,482 | $ | 225,652 | ||||
New investments | 125,567 | 68,004 | ||||||
Disbursements to existing portfolio companies | 6,636 | 15,498 | ||||||
Increase in investment balance due to PIK | 88 | — | ||||||
Scheduled principal repayments | (110 | ) | (363 | ) | ||||
Unscheduled principal repayments | (51,718 | ) | (24,856 | ) | ||||
Proceeds from sales | (31,587 | ) | (3,182 | ) | ||||
Net realized gain | 8,241 | 843 | ||||||
Net unrealized (depreciation) appreciation | (28,416 | ) | 804 | |||||
Reversal of net unrealized appreciation | (790 | ) | — | |||||
Other cash activity, net | — | (24 | ) | |||||
Other non-cash activity(A) | — | 4,106 | ||||||
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Ending investment portfolio, at fair value | $ | 314,393 | $ | 286,482 | ||||
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| Years Ended March 31, | ||||||||
| 2015 | 2014 | |||||||
Beginning investment portfolio, at fair value | $ | 314,393 | $ | 286,482 | ||||
New investments | 108,197 | 125,567 | ||||||
Disbursements to existing portfolio companies | 24,705 | 6,636 | ||||||
Increase in investment balance due to PIK | 78 | 88 | ||||||
Scheduled principal repayments | (878 | ) | (110 | ) | ||||
Unscheduled principal repayments | (10,382 | ) | (51,718 | ) | ||||
Proceeds from sales | — | (31,587 | ) | |||||
Net realized gain | — | 8,241 | ||||||
Net unrealized appreciation (depreciation) | 29,940 | (28,416 | ) | |||||
Reversal of net unrealized appreciation | — | (790 | ) | |||||
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Ending Investment Portfolio, at Fair Value | $ | 466,053 | $ | 314,393 | ||||
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The following table summarizes the contractual principal repayment and maturity of our investment portfolio by fiscal year, assuming no voluntary prepayments, as of March 31, 2014:2015:
| Amount | ||||||
For the fiscal year ending March 31: | 2015 | $ | 56,386 | |||
2016 | 30,190 | |||||
2017 | 43,314 | |||||
2018 | 51,983 | |||||
2019 | 89,181 | |||||
Thereafter | 7,587 | |||||
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Total contractual repayments | $ | 278,641 | ||||
Investments in equity securities | 104,896 | |||||
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Total cost basis of investments held as of March 31, 2014: | $ | 383,537 | ||||
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| Amount | ||||||
For the fiscal years ending March 31: | 2016 | $ | 19,567 | |||
| 2017 | 43,861 | |||||
| 2018 | 100,316 | |||||
| 2019 | 81,681 | |||||
| 2020 | 115,403 | |||||
| Thereafter | 9,618 | |||||
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| Total contractual repayments | $ | 370,446 | ||||
| Investments in equity securities | 134,812 | |||||
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| Total Cost Basis of Investments Held as of March 31, 2015: | $ | 505,258 | ||||
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Financing Activities
Net cash provided by financing activities for the year ended March 31, 2015, was approximately $97.9 million, which consisted primarily of $41.4 million of proceeds from the issuance of our Series B Term Preferred Stock, $23.0 million of net proceeds from the issuance of additional shares of our common stock, and $57.5 million of net borrowings on our Credit Facility, partially offset by $20.6 million in distributions to common stockholders. Net cash used in financing activities for the year ended March 31, 2014, was $47.7 million and consisted primarily of net repayments of our short-term borrowings of $58$58.0 million and distributions to common stockholders of $18.8 million, partially offset by $30.3 million in net borrowings from our Credit Facility. Net cash provided by financing activities for the year ended March 31, 2013, was $34.1 million, consisting primarily of proceeds from the common stock issuance of $31 million and net borrowings on the short-term loan and Credit Facility in excess of repayments by $18 million, partially offset by $14.5 million in distributions
Distributions to common stockholders.
Common Stock Distributions
To qualify to be taxed as a RIC and thus avoid corporate level federal income tax on the income we distribute to our stockholders, we are required under Subchapter M of the Code, to distribute at least 90% of our ordinary income and short-term capital gains to our stockholders on an annual basis.basis at least 90% of our investment company taxable income. Additionally, our Credit Facility generally restricts the amount of distributions to stockholders that we can pay out to be no greater than the sum of certain amounts, including, but not limited to, our net investment income, plus net capital gains, plus amounts elected by the Company to be considered as having been paid during the prior fiscal year in accordance with Section 855(a) of the Code. In accordance with these requirements, we declared and paid monthly cash distributions of $0.05 per common share for the six months from April 2013 through September 2013. From October 2013 through March 2014 our Board of Directors declared and we paid monthly cash distributions of $0.06 per common share which representedfor each month during the year ended March 31, 2015, as well as a 20% increase from the per common share distributions from April 2013 through September 2013. Additionally, our Board of Directors declared a one-time special distribution of $0.05 per common share for November 2013.in December 2014. In April 2014,2015, our Board of Directors also declared a monthly distribution of $0.06$0.0625 per common share for each of April, May, and June 2014.2015, which is a 4.2% run rate increase on a monthly basis. Our Board of Directors declared these distributions based on estimates of net taxable income for the fiscal year ending March 31, 2015.2016.
For federal income tax purposes, we determine the tax characterization of our common distributions as of the end of our fiscal year based upon our taxable income for the full fiscal year and distributions paid during the full fiscal year. The characterization of the common stockholder distributions declared and paid for the year ending March 31, 2016 will be determined after the 2016 fiscal year end based upon our taxable income for the full year and distributions paid during the full year. Such a characterization made on a quarterly basis may not be representative of the actual full year characterization.
For the fiscal yearsyear ended March 31, 2014 and 2013, our2015, distributions to common stockholders totaled $18.8of $20.6 million and $14.5 million, respectively, and were less than our taxable income overfor the same years.year, when also considering prior year spillover amounts under Section 855(a) of the Code. In addition, we recorded a $0.6 million adjustment for estimated book-tax differences, which decreased capital in excess of par value and increased net investment income in excess of distributions. At March 31, 2014 and 2013,2015, we elected to treat $3.9$4.0 million and $3.1 million, respectively, of the first distribution paid after fiscal year-end as having been paid in the prior fiscal year, in accordance with Section 855(a) of the Code. Additionally,For the covenants in our Credit Facility generally restrict the amount ofyear ended March 31, 2014, distributions that we can pay out to be no greatercommon stockholders totaled $18.8 million and were less than our net investment income.taxable income for the same year, when also considering prior year spillover amounts under Section 855(a) of the Code. At March 31, 2014, we elected to treat $3.9 million of the first distribution paid after fiscal year-end as having been paid in the prior fiscal year, in accordance with Section 855(a) of the Code.
We alsoPreferred Stock Dividends
Our Board of Directors declared and we paid monthly cash distributionsdividends of $0.1484375 per share to holders of our Series A Term Preferred Stock for each month during the year ended March 31, 2015. For the year ended March 31, 2015, our Board of Directors declared and we paid dividends for the twelve monthspro-rated month of November 2014 and for each full month from April 2013December 2014 through March 2014.31, 2015 in aggregate of $0.703125 per share to our holders of Series B Term Preferred Stock. In April 2014,2015, our Board of Directors also declared a monthly distributiondividend of $0.1484375 and $0.140625 per preferred share for each of April, May, and June 2014.2015 to the holders of our Series A Term Preferred Stock and Series B Term Preferred Stock, respectively. In May 2015, our Board of Directors declared a combined prorated dividend for May 2015 and a full month dividend for June 2015, which totaled $0.221181 per share, to the holders of our Series C Term Preferred Stock. In accordance with accounting principles generally accepted in the U.S. (“GAAP”),GAAP, we treat these monthly distributionsdividends as an operating expense. For federal income tax purposes, thesethe dividends paid by us to preferred distributions are deemed to be paid entirely out ofstockholders generally constitute ordinary income to the extent of our current and accumulated earnings and profits.
Dividend Reinvestment Plan
We offer a dividend reinvestment plan for our common stockholders who hold their shares through our transfer agent, Computershare, Inc. This is an “opt in” dividend reinvestment plan, meaning that common stockholders may elect to have their cash distributions automatically reinvested in additional shares of our common stock. Common stockholders who do not so elect will receive their distributions in cash. Common stockholders who receive distributions in the form of stock will be subject to the same federal, state
and local tax consequences as stockholders who elect to receive their distributions in cash. The common stockholder will have an adjusted basis in the additional common shares purchased through the plan equal to the amount of the reinvested distribution. The additional shares will have a new holding period commencing on the day following the date on which the shares are credited to the common stockholder’s account. Our plan agent purchases shares in the open market in connection with the obligations under the plan. We do not have a dividend reinvestment plan for our preferred stock stockholders.
Equity
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-effectivePre-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. On June 3, 2014, we filed Post-Effective Amendment No. 3 to the registration statement, and subsequently filed a Post-Effective Amendment No. 4 to the registration statement on September 2, 2014, which the SEC declared effective on September 4, 2014. The registration statement permits us to issue, through one or more transactions, up to an aggregate of $300$300.0 million in securities, consisting of common stock, preferred stock, subscription rights, debt securities and warrants to purchase common or preferred stock, including through a combined offering of two or more of such securities. We generated $33.0 million and $28.1 million of gross proceeds through the issuance of common stock under the registration statement in October and November 2012 and March 2015 and April 2015, respectively. Additionally, we issued $41.4 million of our Series B Term Preferred Stock and $40.3 million of our Series C Term Preferred Stock under the registration statement in November 2014 and May 2015, respectively. No other securities have been issued to date under the registration statement. Currently, we have the ability to issue up to $117.3 million in securities under the registration statement.
Common Stock
Pursuant to our registration statement on Form N-2 (Registration No. 333-181879), on October 5, 2012, we completed a public offering of 44.0 million shares of our common stock at a public offering price of $7.50 per share, which was below then current NAV of $8.65 per share. Gross proceeds totaled $30$30.0 million and net proceeds, after deducting underwriting discounts and offering expenses borne by us, were approximately $28.3 million, which was used to repay borrowings under our Credit Facility. In connection with the offering, in November 2012, 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$3.0 million and net proceeds, after deducting underwriting discounts, of approximately $2.8 million.
Also pursuant to our registration statement on Form N-2 (Registration No. 333-181879), on March 13, 2015, we completed a public offering of 3.3 million shares of our common stock at a public offering price of $7.40 per share, which was below then current NAV of $8.55 per share. Gross proceeds totaled $24.4 million and net proceeds, after deducting underwriting discounts and offering expenses borne by us, were approximately $23.0 million, which were primarily used to repay borrowings under our Credit Facility. In connection with the offering, on April 2, 2015, the underwriters exercised their option to purchase an additional 495,000 shares at the public offering price to cover over-allotments, which resulted in gross proceeds of $3.7 million and net proceeds, after deducting underwriting discounts, of approximately $3.5 million.
We anticipate issuing equity securities to obtain additional capital in the future. However, we cannot determine the terms of any future equity issuances or whether we will be able to issue equity on terms favorable to us, or at all. When our common stock is trading at a price below NAV per share, as it has consistently since September 30, 2008, the 1940 Act places regulatory constraints on our ability to obtain additional capital by issuing common stock. Generally, the 1940 Act provides that we may not issue and sell our common stock at a price below our NAV per common share, other than to our then existing common stockholders pursuant to a rights offering, without first obtaining approval from our stockholders and our independent directors. On May 12, 2014,19, 2015, the closing market price of our common stock was $7.92$7.54 per share, representing a 5.0%17.9% discount to our NAV of $8.34$9.18 as of March 31, 2014.2015. To the extent that our common stock continues to trade at a market price below our NAV per common share, we will generally be precluded from raising equity capital through public offerings of our common stock, other than pursuant to stockholder approval or through a rights offering to existing common stockholders. At our 20132014 Annual Meeting of Stockholders held on August 8, 2013,7, 2014, our stockholders approved a proposal authorizing us to issue and sell shares of our common stock at a price below our then current NAV per common share for a period of one year from the date of such approval, provided that our Board of Directors makes certain determinations prior to any such sale. At our 20142015 Annual Meeting of Stockholders, scheduled to take place in August 2014,2015, we expect towill again ask our stockholders to vote in favor of thisa similar proposal again so that it may be in effect for another year.
Term Preferred Stock
Pursuant to our prior registration statement on Form N-2 (File No. 333-160720), in March 2012, we completed an offering of 1.6 million1,600,000 shares of our Series A Term Preferred Stock at a public offering price of $25.00 per share. Gross proceeds totaled $40$40.0 million, and net proceeds, after deducting underwriting discounts and offering expenses borne by us, were $38approximately $38.0 million, a portion of which was used to repay borrowings under our Credit Facility, with the remaining proceeds being held to make additional investments and for general corporate purposes. We incurred $2$2.0 million in total offering costs related to the offering, which have been recorded as an asset in accordance with GAAPdeferred financing costs on our accompanyingConsolidated Statements of Assets and Liabilities and are being amortized over the redemption period ending February 28, 2017.2017, the mandatory redemption date.
TheOur Series A Term Preferred Stock provides for a fixed dividend equal to 7.125% per year, payable monthly (which equates to $2.9 million per year). We are required to redeem all of the outstanding Series A 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 the date of redemption. The Term Preferred Stock has a preference over our common stock with respect to dividends, whereby no distributions are payable on our common stock unless the stated dividends, including any accrued and unpaid dividends, on the Term Preferred Stock have been paid in full. TheOur Series A Term Preferred Stock is not convertible into our common stock or any other security. In addition, three other potential redemption triggers are as follows: (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 Series A 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 Series A 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 theour Series A Term Preferred Stock.
ThePursuant to our registration statement on Form N-2 (Registration No. 333-181879), in November 2014, we completed a public offering of 1,656,000 shares of our Series B Term Preferred Stock hasat a public offering price of $25.00 per share. Gross proceeds totaled $41.4 million and net proceeds, after deducting underwriting discounts and offering expenses borne by us, were $39.7 million. We incurred $1.7 million in total offering costs related to this offering, which have been recorded as deferred financing costs on our accompanyingConsolidated Statements of Assets and Liabilities and are being amortized over the period ending December 31, 2021, the mandatory redemption date.
Our Series B Term Preferred Stock is not convertible into our common stock or any other security. Our Series B Term Preferred Stock provides for a liabilityfixed dividend equal to 6.75% per year, payable monthly (which equates to $2.8 million per year). We are required to redeem all shares of our outstanding Series B Term Preferred Stock on December 31, 2021, 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, two other potential mandatory redemption triggers are as follows: (1) upon the occurrence of certain events that would constitute a change in control of us, we would be required to redeem all of our outstanding Series B 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 our outstanding Series B Term Preferred Stock or otherwise cure the ratio redemption trigger. We may also voluntarily redeem all or a portion of our Series B Term Preferred Stock at our sole option at the redemption price in order to have an asset coverage ratio of up to and including 215.0% and at any time on or after December 31, 2017.
Also pursuant to our registration statement on Form N-2 (Registration No. 333-181879), in May 2015, we completed a public offering of 1,610,000 shares of our Series C Term Preferred Stock at a public offering price of $25.00 per share. Gross proceeds totaled $40.3 million and net proceeds, after deducting underwriting discounts and offering expenses borne by us, were approximately $38.6 million. We incurred $1.6 million in total offering costs related to this offering, which will be recorded as deferred financing costs on future Consolidated Statements of Assets and Liabilities and are being amortized over the period ending May 31, 2022, the mandatory redemption date.
Our Series C Term Preferred Stock is not convertible into our common stock or any other security. Our Series C Term Preferred Stock provides for a fixed dividend equal to 6.50% per year, payable monthly (which equates to $2.6 million per year). We are required to redeem all shares of our outstanding Series C Term Preferred Stock on May 31, 2022, 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, two other potential mandatory redemption triggers are as follows: (1) upon the occurrence of certain events that would constitute a change in control of us, we would be required to redeem all of our outstanding Series C 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 our outstanding Series C Term Preferred Stock or otherwise cure the ratio redemption trigger. We may also voluntarily redeem all or a portion of our Series C Term Preferred Stock at our sole option at the redemption price in order to have an asset coverage ratio of up to and including 215.0% and at any time on or after May 31, 2018.
Each series of our mandatorily redeemable preferred stock has a preference over our common stock with respect to dividends, whereby no distributions are payable on our common stock unless the stated dividends, including any accrued and unpaid dividends, on the mandatorily redeemable preferred stock have been paid in full. The Series A, B, and C Term Preferred Stock are considered liabilities in accordance with GAAP and, as such, affectsaffect our asset coverage, exposing us to additional leverage risks.
Revolving Credit Facility
On April 30, 2013,June 26, 2014, we, through our wholly-owned subsidiary, Business Investment, entered into a fifth amended and restated credit agreementAmendment No. 1 to our Credit Facility, with Key Equipment Finance Inc., asKeyBank, administrative agent, lead arranger and a lender (the “Administrative Agent”), Branch Banking and Trust Company as a lender and managing agent,lender; other lenders; and the Adviser, as servicer, to increase the commitment amount of the revolving line of credit (the “Credit Facility”) from $60 million to $70 million and to extend the revolving period whichand reduce the interest rate of our revolving line of credit. The revolving period was extended 14 months to April 30, 2016. IfJune 26, 2017, and if not renewed or extended by April 30, 2016,June 26, 2017, all principal and interest will be due and payable on or before April 30, 2017 (one yearJune 26, 2019 (two years after the revolving period end date). In addition, there is one remainingwe have retained the two one-year extension optionoptions, to be agreed upon by all parties, which may be exercised on or before April 30, 2015.June 26, 2015 and 2016, respectively, and upon exercise, the options would extend the revolving period to June 26, 2018 and 2019 and the maturity date to June 26, 2020 and 2021, respectively. Subject to certain terms and conditions, theour Credit Facility maycan be expanded by up to $145.0 million, to a total facility amount of $200$250 million, through the additionadditional commitments of other lenders to the facility.existing or new committed lenders. Advances under theour Credit Facility generally bear interest at 30-day LIBOR, plus 3.75%3.25% per annum, down from 3.75% prior to the amendment, and theour Credit Facility includes an unused fee of 0.50% on undrawn amounts. Once the revolving period ends, the interest rate margin increases to 3.75% for the period from June 26, 2017 to June 26, 2018, and further increases to 4.25% through maturity. We incurred fees of $0.3$0.4 million in connection with this amendment.amendment, which are being amortized through our Credit Facility’s revolver period end date of June 26, 2017.
On June 12, 2013,September 19, 2014, we further increased theour borrowing capacity under theour Credit Facility from $70$105.0 million to $105$185.0 million by entering into Joinder Agreements pursuant to theour Credit Facility, by and among Business Investment, the Administrative Agent,KeyBank, the Adviser and eachother lenders. We incurred fees of Alostar Bank$1.3 million in connection with this expansion, which are being amortized through our Credit Facility’s revolver period end date of Commerce and Everbank Commercial Finance, Inc.June 26, 2017.
TheOur Credit Facility contains covenants that require Business Investment to maintain its status as a separate legal entity; prohibit certain significant corporate transactions (such as mergers, consolidations, liquidations or dissolutions) and restrict material changes to our credit and collection policies without lenders’ consent. The facilityCredit Facility generally also limits payments as distributions to be no greater than the aggregatesum of certain amounts, including, but not limited to, our net investment income, plus net capital gains, plus amounts elected by the Company to be considered as having been paid during the prior fiscal year in accordance with Section 855(a) of the Code, for each of the twelve month periods ending March 31, 2015, 2016 and 2017. We are also subject to certain limitations on the type of loan investments we can make, including restrictions on geographic concentrations, sector concentrations, loan size, dividend payout, payment frequency and status, average life and lien property. TheOur Credit Facility also requires us to comply with other financial and operational covenants, which obligate us to, among other things, maintain certain financial ratios, including asset and interest coverage a minimum net worth 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 of $170$170.0 million plus 50%50.0% of all equity and subordinated debt raised minus any equity or subordinated debt redeemed or retired after April 30, 2013,June 26, 2014, which equates to $170$202.9 million as of March 31, 2014,2015, (ii) “asset coverage” with respect to “senior securities representing indebtedness” of at least 200%, in accordance with Section 18 of the 1940 Act and (iii) our status as a BDC under the 1940 Act and as a RIC under the Code. As of March 31, 2014,2015, and as defined in the performance guaranty of our Credit Facility, we had a minimum net worth of $260.8$354.8 million, an asset coverage of 298%229.9% and an active status as a BDC and RIC. As of May 12, 2014,March 31, 2015, we were in compliance with all covenants.covenants under our Credit Facility.
In December 2011, we enteredOur Credit Facility also requires that any interest or principal payments on pledged loans be remitted directly by the borrower into a forward interest rate cap agreement, effective May 2012, forlockbox account with KeyBank and with The Bank of New York Mellon Trust Company, N.A. as custodian. KeyBank is also the trustee of the account and generally remits the collected funds to us once a notional amountmonth.
Pursuant to the terms of $50 million. We incurred a premium fee of $29our Credit Facility, in conjunction with this agreement, which expired in October 2013 and has resulted in a $29 realized loss for the year ended March 31, 2014. In July 2013, we entered into a forward interest rate cap agreement, effective October 2013 and expiring April 2016, for a notional amount of $45$45.0 million. We incurred a premium fee of $75 in conjunction with this agreement. Both of theseThe interest rate cap agreementsagreement effectively limitlimits the interest rate on a portion of the borrowings pursuant to the terms of theour Credit Facility.
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. The Administrative Agent is also the trustee of the account and generally remits the collected funds to us once a month.
Short-Term Loan
As of March 31, 2014, our asset composition satisfied the 50% threshold. However, excluding March 31, 2014, for each quarter end since June 30, 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 example, for the December 31, 2013 measurement date, we purchased $10 million of T-Bills through Jefferies on December 27, 2013. The T-Bills were purchased on margin using $1.5 million in cash and the proceeds from an $8.5 million short-term loan from Jefferies with an effective annual interest rate of 1.35%. On January 2, 2014, when the T-Bills matured, we repaid the $8.5 million loan from Jefferies and received the $1.5 million margin payment sent to Jefferies to complete the transaction.
Contractual Obligations and Off-Balance Sheet ArrangementsCONTRACTUAL OBLIGATIONS AND OFF-BALANCE SHEET ARRANGEMENTS
We have lines of credit and other uncalled capital commitments to certain of our portfolio companies that have not been fully drawn. Since these lines of credit and uncalled capital commitments have expiration dates and we expect many will never be fully drawn, the total line of credit and other uncalled capital commitment amounts do not necessarily represent future cash requirements. We estimate the fair value of the combined unused line of credit and other uncalled capital commitments as of March 31, 2014 and 20132015 to be minimal.
In addition to the lines of credit and other uncalled capital commitments to our portfolio companies, we have also extended certain guarantiesguarantees on behalf of some our portfolio companies, whereby we have guaranteed an aggregate of $3.6$2.6 million of obligations of ASH and CCE. As of March 31, 2014,2015, we have not been required to make any payments on any of the guaranties,guarantees, and we consider the credit risks to be remote and the fair value of the guaranties to be minimal.
The following table shows our contractual obligations as of March 31, 2014,2015, at cost:
| Payments Due by Period | ||||||||||||||||||||
Contractual Obligations(A) | Total | Less than 1 Year | 1-3 Years | 3-5 Years | More than 5 Years | |||||||||||||||
Credit Facility | $ | 61,250 | $ | — | $ | 61,250 | $ | — | $ | — | ||||||||||
Term Preferred Stock | 40,000 | — | — | 40,000 | — | |||||||||||||||
Other secured borrowings | 5,000 | — | — | 5,000 | — | |||||||||||||||
Interest payments on obligations(B) | 15,169 | 5,851 | 9,048 | 270 | — | |||||||||||||||
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Total | $ | 121,419 | $ | 5,851 | $ | 70,298 | $ | 45,270 | $ | — | ||||||||||
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Contractual Obligations(A) | Total | Less than 1 Year | 1-3 Years | 3-5 Years | More than 5 Years | |||||||||||||||
Credit Facility (B) | $ | 118,800 | $ | — | $ | 118,800 | $ | — | $ | — | ||||||||||
Mandatorily redeemable preferred stock(C) | 81,400 | — | 40,000 | — | 41,400 | |||||||||||||||
Secured borrowing | 5,096 | — | 5,096 | — | — | |||||||||||||||
Interest payments on obligations(D) | 35,681 | 10,571 | 17,301 | 5,674 | 2,135 | |||||||||||||||
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Total | $ | 240,977 | $ | 10,571 | $ | 181,197 | $ | 5,674 | $ | 43,535 | ||||||||||
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| (A) | Excludes our unused line of credit commitments and uncalled capital commitments and guaranties to our portfolio companies in the aggregate amount of |
| (B) | Principal balance of borrowings outstanding under our Credit Facility, based on the current contractual revolver period end date due to the revolving nature of the facility. |
| (C) | Excludes $40.3 million of our Series C Term Preferred Stock issued in May 2015 with a mandatory redemption date in May 2022. |
| (D) | Includes interest payments due on our Credit Facility and dividend obligations on |
LitigationOf our interest bearing debt investments as of March 31, 2015, 83.0% had a success fee component, which enhances the yield on our debt investments. Unlike PIK income, we generally recognize success fees as income only when the payment has been received. As a result, as of March 31, 2015 and 2014, we had aggregate off-balance sheet success fee receivables of $24.3 million and $17.7 million (or approximately $0.82 and $0.69 per common share), respectively, on our accruing debt investments that would be owed to us based on our current portfolio if fully paid off. Consistent with GAAP, we have not recognized our success fee receivable on our balance sheet or income statement. Due to our success fees’ 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.
We have been named a partyLitigation
From time to litigation describedtime, we may become involved in Part 1 Item 3 above.various investigations, claims and legal proceedings that arise in the ordinary course of our business. Furthermore, third parties may try to seek to impose liability on us in connection with the activities of our portfolio companies. While we believe plaintiffs’ claims are without meritdo not expect that the resolution of these matters if they arise would materially affect our business, financial condition, results of operations or cash flows, resolution will be subject to various uncertainties and we intend to vigorously defend the case, we expect to incur attorneys fees and defense costscould result in the current quarter, which may negatively impact our liquidityexpenditure of significant financial and results. Depending on the duration of the suit and the outcome, defense costs, any damages resulting from litigation, a ruling against us or a settlement of the litigation could have a negative impact on our liquidity, including our cash flows, and our financial results in future periods.managerial resources.
Critical Accounting Policies
The preparation of financial statements and related disclosures in conformity with GAAP requires management to make estimates and assumptions that affect the reported consolidated amounts of assets and liabilities, including disclosure of contingent assets and liabilities at the date of the financial statements, and revenues and expenses during the period reported. Actual results could differ materially from those estimates.estimates under different assumptions or conditions. We have identified our investment valuation processpolicy (which has been approved by our Board of Directors) (the “Policy”) as our most critical accounting policy.
Investment Valuation
The most significant estimate inherent in the preparation of our consolidated financial statements is the valuation of our investments and the related amounts of unrealized appreciation and depreciation of investments recorded.recorded in our accompanyingConsolidated Financial Statements.
General Valuation Policy:Accounting Recognition
We valuerecord our investments at fair value in accordance with the requirements of the 1940 Act. As discussed more fully below, we value securities for which market quotations are readily available and reliable at their market value. We value all other securities and assets at fair value, as determined in good faith by our Board of Directors. Such determination of fair values may involve subjective judgments and estimates.
The Financial Accounting Standards Board (“FASB”(the “FASB”) Accounting Standards Codification (“ASC”)Topic 820, “Fair“Fair Value Measurements and Disclosures,” definesDisclosures” (“ASC 820”) and the 1940 Act. Investment transactions are recorded on the trade date. Realized gains or losses are measured by the difference between the net proceeds from the repayment or sale and amortized cost basis of the investment, without regard to unrealized appreciation or depreciation previously recognized, and include investments charged off during the period, net of recoveries. Unrealized appreciation or depreciation primarily reflects the change in investment fair values, including the reversal of previously recorded unrealized appreciation or depreciation when gains or losses are realized.
In accordance with ASC 820, our investments’ fair value establishesis determined to be the price that would be received for an investment in a framework for measuringcurrent sale, which assumes an orderly transaction between willing market participants on the measurement date. This fair value and expands disclosures about assets and liabilities measured at fair value. ASC 820 provides a consistent definition of fair value that focuses on exit price in the principal, or most advantageous, market and prioritizes, within a measurement of fair value, the use of market-based inputs over entity-specific inputs. ASC 820 also establishes the following three-level hierarchy for fair value measurements based upon the transparency of inputs to the valuation of an asset or liabilitya financial instrument as of the measurement date.
| • | Level 1 — inputs to the valuation methodology are quoted prices (unadjusted) for identical |
| • | Level 2— inputs to the valuation methodology include quoted prices for similar |
| • | Level 3— inputs to the valuation methodology are unobservable and significant to the fair value measurement. Unobservable inputs are those inputs that reflect assumptions that market participants would use when pricing the |
When a determination is made to classify our investments 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 (or, components that are actively quoted and can be validated to external sources). The level in the fair value hierarchy within which the fair value measurement falls is determined based on the lowest level input that is significant to the fair value measurement. As of March 31, 20142015 and 2013,2014, all of our investments were valued using Level 3 inputs. See Note 3–Investmentsinputs and during the years ended March 31, 2015 and 2014, there were no investments transferred into or out of Level 1, 2 or 3.
Board Responsibility
In accordance with the 1940 Act, our Board of Directors has the ultimate responsibility for reviewing and approving, in our accompanying notes to ourConsolidated Financial Statements included elsewhere in this report for additional information regardinggood faith, the fair value measurements andof our applicationinvestments based on the Policy. Our Board of ASC 820.
Professionals fromDirectors reviews valuation recommendations that are provided by professionals of the Adviser and Administrator with oversight and direction from the chief valuation officer, (the “Valuation Team”) use generally accepted valuation techniques to. There is no single standard for determining fair value our portfolio unless it has(especially for privately-held businesses), as fair value depends upon the specific information about the valuefacts and circumstances of an investment to determine otherwise. From time to time we may accept an appraisal of a business in which we hold securities. These appraisals are expensive and occur infrequently but provide a third-party valuation opinion that may differ in results, techniques and scope used to value our investments. When these specific, third-party appraisals are obtained, the Valuation Team would use 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.
each individual investment. In determining the fair value of our investments, the Valuation Team, has established an investmentled by the chief valuation policy (the “Policy”). Theofficer, uses 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 Valuation Team havehas applied the Policy consistently and votes whether to accept the recommended valuationconsistently.
Use of our investment portfolio. Such determination of fair values may involve subjective judgments and estimates.Third Party Valuation Firms
The Policy applies to publicly traded securities, securities for which a limited market exists and securities for which no market exists.
Valuation Methods:
Publicly traded securities:The Valuation Team determines theengages third party valuation firms to provide independent assessments of fair value of a publicly traded security based on the closing price for the security on the exchange or securities market on which it is listed and primarily traded on the valuation date. To the extent that we own a restricted security that is not freely tradable, but for which a public market otherwise exists, the Valuation Team will use the market valuecertain of that security adjusted for any decrease in value resulting from the restrictive feature. Asour investments.
Standard & Poor’s Securities Evaluation, Inc. (“SPSE”) provides estimates of March 31, 2014 and 2013, we did not have any investments in publicly traded securities.
Securities for which a limited market exists:The Valuation Team 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 Valuation Team 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 Valuation Team 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 Valuation Team 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 Valuation Team uses the IBP as a basis for valuing the security, it may take further steps to consider additional information to validate that price in accordance with the Policy, including but not limited to reviewing a range of indicative bids to the extent the Valuation Team 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 Valuation Team 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 ASC 820, which provides guidance on the use of a reporting entity’s own assumptions about future cash flows and risk-adjusted discount rates when relevant observable inputs, such as quotes in active markets, are not available. When relevant observable market data does not exist, 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 Valuation Team 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 Valuation Team 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 Valuation Team believes a market participant would pay to purchase a syndicated loan in an active market, thereby establishing a fair value. The Valuation Team applies the DCF methodology in illiquid markets until quoted prices are available or are deemed reliable based on trading activity.
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.
In the case of Non-Public Debt Securities, the Valuation Team has engaged SPSE to submit opinions of value for our debt securities that are issued by portfolio companies in which we own no equity, or equity-like securities. SPSE will only evaluate the debt portion of our investments for which the Valuation Team specifically requests evaluation, and may decline to make requested evaluations for any reason, at its sole discretion. Quarterly, the Valuation Team collects data with respect to the investments (which includes portfolio company financial and operational performance and the information described below under “—Credit Information,” the risk ratings of the loans described below under “—Loan Grading and Risk Rating” and the factors described hereunder). This portfolio company data is then forwarded to SPSE for review and analysis. SPSE makes its independent assessment of the data that the Valuation Team has assembled and assesses its independent data to form an opinion as to what they consider to be the market values for the securities. With regard to its work, SPSE has issued the following paragraph:
SPSE provides evaluated price opinions which are reflective of what SPSE believes the bid side of the market would be for each loan after careful review and analysis of descriptive, market and credit information. Each price reflects SPSE’s best judgment based upon careful examination of a variety of market factors. Because of fluctuation in the market and in other factors beyond its control, SPSE cannot guarantee these evaluations. The evaluations reflect the market prices, or estimates thereof, on the date specified. The prices are based on comparable market prices for similar securities. Market information has been obtained from reputable secondary market sources. Although these sources are considered reliable, SPSE cannot guarantee their accuracy.
SPSE opinions of the value of our debt securities that are issued by portfolio companies in which we do not own equity, or equity-like securities are submitted to our Board of Directors along with the Valuation Team’s supplemental assessment and recommendation regarding valuation of each of these investments. The Valuation Team generally acceptsassigns SPSE’s estimates of fair value to our debt investments where we do not have the opinionability to effectuate a sale of the applicable portfolio company. The Valuation Team corroborates SPSE’s estimates of fair value using one or more of the valuation techniques discussed below. The Valuation Team’s estimate of value given by SPSE; however, in certain limited circumstances, such as when the Valuation Teamon a specific debt investment may learn new information regarding an investment between the time of submission to SPSE and the date ofsignificantly differ from SPSE’s. When this occurs, our Board of Directors’ assessment, the Valuation Team’s conclusions as to value may differ from the opinion of value delivered by SPSE. Our Board of Directors then reviews whether the Valuation Team has followed its established procedures for determinations ofthe Policy and whether the Valuation Team’s recommended fair value is reasonable in light of the Policy and other facts and circumstances and then votes to accept or reject the Valuation Team’s recommended fair value.
We may engage other independent valuation firms to provide earnings multiple ranges, as well as other information, and evaluate such information for incorporation into the total enterprise value of certain of our investments. Generally, at least once per year, we engage an independent valuation firm to value or review the Company’s valuation of our investment portfolio.significant equity investments, which includes providing the information noted above. The Valuation Team evaluates such information for incorporation into our total enterprise value, including review of all inputs provided by the independent valuation firm. The Valuation Team then makes a recommendation to our Board of Directors as to the fair value. Our Board of Directors reviews the recommended fair value and whether it is reasonable in light of the Policy and other relevant facts and circumstances and then votes to accept or reject the Valuation Team’s recommended fair value.
Because there is a delay between when we close an investment and when the investment can be evaluated by SPSE, new loans are not valued immediately by SPSE; rather,Valuation Techniques
In accordance with ASC 820, the Valuation Team makes its own determination aboutuses the value of these investments in accordance withfollowing techniques when valuing our Policy using the methods described herein.investment portfolio:
| Total Enterprise Value — In determining the fair value |
In gathering the sales to third parties of similar securities in similar industries; a comparison to publicly traded securities in similar industries, and other pertinent factors. The Valuation Team generally references industry statistics and may use outside experts when gathering this information. Once the TEV is determined for a portfolio company, the Valuation Team then generally allocates the TEV to the portfolio company’s securities in order of their relative priority in the capital structure. Generally, the Valuation Team uses TEV to value our equity investments and, in the circumstances where we have the ability to effectuate a sale of a portfolio company, our debt investments.
TEV is primarily calculated using EBITDA or revenue multiples; however, TEV may also be calculated using a discounted cash flow (“DCF”) analysis whereby future expected cash flows of the portfolio company are discounted to determine a net present value using estimated risk-adjusted discount rates, which incorporate adjustments for nonperformance and liquidity risks. Generally, the Valuation Team generally references industry statistics and may use outside experts.uses the DCF to calculate TEV is only an estimateto corroborate estimates of value and mayfor our equity investments where we do not behave the value received in an actual sale. Once the Valuation Team has estimated the TEVability to effectuate a sale of the issuer, it will subtract the valuea portfolio company or for debt 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 Valuation Team’s judgment, the liquidity waterfall approach does not accurately reflect the value of the debt component, the Valuation Team may recommend that we use a valuation by SPSE, or, if that is unavailable, a DCF valuation technique.credit impaired portfolio companies.
| Yield Analysis — The Valuation Team |
| • | Market Quotes — For |
| • | Investments in Funds — For equity investments in other funds, where we cannot effectuate a sale, the Valuation Team generally determines the fair value of |
DueIn addition to the above valuation techniques, the Valuation Team may also consider other factors when determining fair values of our investments, including but not limited to: the nature and realizable value of the collateral, including external parties’ guaranties; any relevant offers or letters of intent to acquire the portfolio company; and the markets in which the portfolio company operates. If applicable, new and follow-on debt and equity investments made during the current reporting quarter (the three months ended March 31, 2015) are generally valued at original cost basis.
Fair value measurements of our investments may involve subjective judgments and estimates and due to the uncertainty inherent in valuing these securities, the valuation process, such estimatesAdviser’s determinations of fair value may fluctuate from period to period and may differ significantly and materially from the values that would have beencould be obtained hadif a ready market for thethese securities existed. Our NAV could be materially affected if the Adviser’s determinations regarding the fair value of our investments are materially different from the values that we ultimately realize upon our disposal of such securities. Additionally, changes in the market environment and other events that may occur over the life of the investmentsinvestment may cause the gains or losses ultimately realized on these investments to be different than the valuations currently assigned. ThereFurther, such investments are generally subject to legal and other restrictions on resale or otherwise are less liquid than publicly traded securities. If we were required to liquidate a portfolio investment in a forced or liquidation sale, we could realize significantly less than the value at which it is no single standardrecorded.
Refer to Note 3—Investments in the accompanying notes to our accompanyingConsolidated Financial Statements included elsewhere in this report for determiningadditional information regarding fair value in good faith, as fair value depends upon circumstancesmeasurements and our application of each individual case. At times, the estimates of fair value calculated by the various valuation techniques (inclusive of the third-party valuations we receive) may materially differ from one another, resulting in a range of potential values. In these circumstances, the Valuation Team comes to its valuation conclusion based on all factsASC 820.
Credit Monitoring and circumstances considered, which is then presented to the Board for review and ultimate approval. In general, fair value is the amount that the Valuation Team might reasonably expect to receive upon the current sale of the security in an orderly transaction between market participants at the measurement date.
Other Valuation Considerations
From time to time, depending on certain circumstances, the Valuation Team may use the following valuation considerations, including but not limited to:
Because such valuations, particularly valuations of private securities and private companies, are not susceptible to precise determination, may fluctuate over short periods of time, and may be based on estimates, the Valuation Team’s determinations of fair value may differ from the values that might have actually resulted had a readily available market for these securities been available.
Credit Information:The Adviser monitors a wide variety of key credit statistics that provide information regarding our portfolio companies to help us assess credit quality and portfolio performance. Weperformance and, in some instances, used as inputs in our valuation techniques. Generally, we, through the Adviser, generally participate in the periodic board meetings of our portfolio companies in which we hold Controlboard seats and Affiliate investments and also generally require them to provide annual audited and monthly unaudited financial statements. Using these statements or comparable information and board discussions, the Adviser calculates and evaluates thecertain credit statistics.
Loan Grading and Risk Rating: As part of our valuation procedures above, weThe Adviser risk raterates all of our investments in debt securities. We useThe Adviser does not risk rate our equity securities. For loans that have been rated by a Nationally Recognized Statistical Rating Organization (“NRSRO”) (as defined in Rule 2a-7 under the 1940 Act), the Adviser generally uses the average of two corporate level NRSRO’s risk ratings for such security. For all other debt securities, the Adviser uses a proprietary risk rating system. OurWhile the Adviser seeks to mirror the NRSRO systems, we cannot provide any assurance that the Adviser’s risk rating system uses a scale of 0 to >10, with >10 beingwill provide the lowest probability of default. Thissame risk rating as an NRSRO for these securities. The Adviser’s risk rating system is used to estimate the probability of default on debt securities and the expected loss if there is a default. These types of systems are referred to as risk rating systems and are used by banks and rating agencies. The Adviser’s risk rating system covers both qualitative and quantitative aspectsuses a scale of 0 to >10, with >10 being the business and the securities we hold.
We seek to have our risk rating system mirror the risk rating systemslowest probability of major risk rating organizations, such as those provided by a Nationally Recognized Statistical Rating Organization (“NRSRO”). While we seek to mirror the NRSRO systems, we cannot provide any assurance that our risk rating system will provide the same risk rating as an NRSRO for these securities. The following chart is an estimate of the relationship of our risk rating system to the designations used by two NRSROs as they risk rate debt securities of major companies. Because our system rates debt securities of companies that are unrated by any NRSRO, there can be no assurance that the correlation to the NRSRO set out below is accurate. We believe our risk rating would be significantly higher than a typical NRSRO risk rating because the risk rating of the typical NRSRO is designed for larger businesses. However, our risk rating has been designed to risk rate the securities of smaller businesses that are not rated by a typical NRSRO. Therefore, when we use our risk rating on larger business securities, the risk rating is higher than a typical NRSRO rating. We believe the primary difference between our risk rating and the rating of a typical NRSRO is that our risk rating uses more quantitative determinants and includes qualitative determinants that we believe are not used in the NRSRO rating.default. It is ourthe Adviser’s understanding that most debt securities ofmedium-sized companies do not exceed the grade of BBB on aan NRSRO scale, so there would be no debt securities in the middle market that would meet the definition of AAA, AA or A. Therefore, the Adviser’s scale begins with the designation >10 as the best risk rating which may be equivalent to a BBB or Baa2 from an NRSRO,NRSRO; however, no assurance can be given that a >10 on the Adviser’s scale is equal to a BBB or Baa2 on an NRSRO scale.
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The above scale gives an indicationAdviser’s risk rating system covers both qualitative and quantitative aspects of the probability of defaultbusiness and the magnitudesecurities we hold. During the three months ended June 30, 2014, we modified our risk rating model to incorporate additional factors in our qualitative and quantitative analysis. While the overall process did not change, we believe the additional factors enhance the quality of the expected loss if there isrisk ratings of our investments. No adjustments were made to prior periods as a default. Generally, our policy is to stop accruing interest on an investment if we determine that interest is no longer collectable. Asresult of March 31, 2014, Tread was the only portfolio investment on non-accrual with an aggregate fair value of $0. As of March 31, 2013, two investments, ASH and Tread, were on non-accrual with an aggregate fair value of $0. Additionally, we do not risk rate our equity securities.this modification.
The following table lists thereflects risk ratings for all proprietary loans in our portfolio as of March 31, 20142015 and 2013, representing 100%, of the principal balance of all loans in our portfolio at the end of each period:2014:
| As of March 31, | ||||||||||||||||
Rating | As of March 31, 2014 | As of March 31, 2013 | 2015 | 2014 | ||||||||||||
Highest | 9.1 | 7.4 | 10.0 | 9.1 | ||||||||||||
Average | 5.7 | 5.2 | 5.9 | 5.7 | ||||||||||||
Weighted Average | 5.2 | 5.3 | 6.4 | 5.2 | ||||||||||||
Lowest | 2.6 | 1.3 | 3.0 | 2.6 | ||||||||||||
Tax Status
Federal Income Taxes
We intend to continue to qualify for treatmentmaintain our qualification as a RIC under Subtitle A, Chapter 1 of Subchapter M of the Code.Code for federal income tax purposes. As a RIC, we are not subject to federal income tax on the portion of our taxable income and gains distributed to our stockholders. To qualifymaintain our qualification as a RIC, we must meet certain source-of-income and asset diversification and annual distribution requirements. For more information regarding the requirements we must meetIn addition, in order to qualify to be taxed as a RIC, see “—Business Environment.” Underwe must also meet certain annual stockholder distribution requirements. To satisfy the RIC annual distribution requirements,requirement, we are required tomust distribute to stockholders at least 90%90.0% of our investment company taxable income, as defined by the Code.income. Our practice has beenpolicy generally is to pay out asmake distributions to our stockholders in an amount up to 100%100.0% of that amount.our investment company taxable income.
In an effort to limit certain federal excise taxes imposed on RICs, we generallycurrently intend to distribute to our stockholders, during each calendar year, an amount at least equal to the sum ofof: (1) 98%98.0% of our ordinary income for the calendar year, (2) 98.2% of our capital gains in excess of capital lossesgain net income for the one-year period ending on October 31 of the calendar year, and (3) any ordinary income and capital gains in excess of capital losses forgain net income from preceding years that were not distributed during such years. However, we did incur an excise tax of $0.3 million and $31 for the calendar years ended December 31, 2013 and 2012, respectively. Under the RIC Modernization Act (the “RIC Act”), we are permitted to carry forwardcarryforward capital losses incurred in taxable years beginning after March 31,September 30, 2011, for an unlimited period. However, any losses incurred during those future taxable years mustwill be usedrequired to be utilized prior to the losses incurred in pre-enactment taxable years, which carry an expiration date. As a result of this ordering rule, pre-enactment capital loss carryforwards may be more likely to expire unused. Additionally, post-enactment capital loss carryforwards will retain their character as either short-term or long-term capital losses rather than only being considered all short-term as permitted under previous regulation.the Treasury regulations applicable to pre-enactment capital loss carryforwards. Our total capital loss carryforwardcarry forward balance was $8.7$0.3 million as of March 31, 2013, and, primarily as a result of the net $8.2 million capital gain related to the Venyu, ASH, Packerland and Noble exits or partial exits and other tax realized loss adjustments during the year ended March 31, 2014, we expect that all but $0.2 million in realized losses incurred in pre-enactment taxable years will be utilized during the fiscal year ended March 31, 2014.2015.
Revenue Recognition
Interest Income Recognition
Interest income, adjusted for amortization of premiums, amendment fees and acquisition costs and the accretion of discounts, is recorded on the accrual basis to the extent that such amounts are expected to be collected. Generally, when a loan becomes 90 days or more past due, or if 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 March 31, 2014,2015, our loans to Tread were on non-accrual status, with an aggregate debt cost basis of $11.7 million, or 4.2%3.1% of the cost basis of all debt investments in our portfolio, and an aggregate fair value of $0.$1.8 million, or 0.5% of the fair value of all debt investments in our portfolio. As of March 31, 2013, ASH and2014, our loans to Tread were on non-accrual status, with an aggregate debt cost basis of $24.9$11.7 million, or 10.4%4.2% of the cost basis of all debt investments in our portfolio, and an aggregate fair value of $0.
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. During the yearyears ended March 31, 2015 and 2014, we recorded PIK income of $0.1 million. We did not hold any loans in our portfolio that contained a PIK provision during the year ended March 31, 2013.
Other Income Recognition
We generally record success fees upon receipt of cash. Success fees are contractually due upon a change of control in a portfolio company.company, typically from an exit or sale. We recorded an aggregate of $1.4 million of success fees during the year ended March 31, 2015 related to prepaid success fees from SOG, ASH, Drew Foam, Frontier, and Mathey. We recorded an aggregate of $4.2 million of success fees in aggregate during the year ended March 31, 2014 related to debt exits or prepayments from Venyu, Channel, Cavert, SOG, Mathey and Frontier. We recorded $0.8 million of success fees duringDuring the year ended March 31, 2013, we recorded an aggregate of $0.8 million of success fees, representing prepayments received from Mathey and Cavert.
We accrue dividendDividend income on preferred and common equity securitiesinvestments is accrued 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.cash. During the year ended March 31, 2015, we recorded an aggregate of $3.5 million of dividend income from Funko, SOG, Drew Foam, Frontier, and Mathey. For the year ended March 31, 2014, we recorded $1.4 million in dividend income related to the exit of Venyu. We recorded $4.1 million and $0.7 million in dividend income duringDuring the year ended March 31, 2013, on accrued preferred shareswe recorded an aggregate of $4.8 million in dividend income, which resulted from payments from Galaxy and Acme, respectively.
Both dividendsdividend income and success fees are recorded in Otherother income in our accompanyingConsolidated Statements of Operations.
Recent Accounting Pronouncements
In April 2015, the FASB issued Accounting Standards Update 2015-03, “Simplifying the Presentation of Debt Issuance Costs” (“ASU-2015-03”), which simplifies the presentation of debt issuance costs. We are currently assessing the impact of ASU 2015-03 and do not anticipate a material impact on our financial position, results of operations or cash flows from adopting this standard. ASU 2015-03 is effective for annual reporting periods beginning after December 15, 2015 and interim periods within those years, with early adoption permitted.
In February 2015, the FASB issued Accounting Standards Update 2015-02, “Amendments to the Consolidation Analysis” (“ASU-2015-02”), which amends or supersedes the scope and consolidation guidance under existing GAAP. The new standard changes the way a reporting entity evaluates whether a) limited partnerships and similar entities should be consolidated, b) fees paid to decision makers or service provides are variable interests in a variable interest entity (“VIE”), and c) variable interests in a VIE held by related parties require the reporting entity to consolidate the VIE. ASU 2015-02 also eliminates the VIE consolidation model based on majority exposure to variability that applied to certain investment companies and similar entities. We do not anticipate ASU 2015-02 to have a material impact on our financial position, results of operations or cash flows. ASU 2015-02 is effective for annual reporting periods beginning after December 15, 2015 and interim periods within those years, with early adoption permitted.
In August 2014, the FASB issued Accounting Standards Update 2014–15, “Presentation of Financial Statements – Going Concern (Subtopic 205 – 40): Disclosure of Uncertainties About an Entity’s Ability to Continue as a Going Concern” (“ASU 2014-15”). ASU 2014-15 requires management to evaluate whether there are conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern, and to provide certain disclosures when it is probable that the entity will be unable to meet its obligations as they become due within one year after the date that the financial statements are issued. Since this guidance is primarily around certain disclosures to the financial statements, we anticipate no impact on our financial position, results of operations or cash flows from adopting this standard. We are currently assessing the additional disclosure requirements, if any, of ASU 2014-15. ASU 2014-15 is effective for the annual period ending after December 31, 2016 and for annual periods and interim periods thereafter, with early adoption permitted.
In May 2014, the FASB issued Accounting Standards Update 2014-09, “Revenue from Contracts with Customers” (“ASU 2014-09”), which supersedes or replaces nearly all GAAP revenue recognition guidance. The new guidance establishes a new control-based revenue recognition model, changes the basis for deciding when revenue is recognized over time or at a point in time and will expand disclosures about revenue. We are currently assessing the impact of ASU 2014-09 and anticipate no impact on our financial position, results of operations or cash flows from adopting this standard. ASU 2014-09 is effective for annual reporting periods that begin after December 15, 2016 and interim periods within those years, with early adoption not permitted.
In June 2013, the FASB issued ASUAccounting Standards Update 2013-08, “Financial“Financial Services – Investment Companies (Topic 946): Amendments to the Scope, Measurement, and Disclosure Requirements” (“ASU 2013-08”), 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 anticipatethere was no impact from adopting this standard on our financial position or results of operations. We are currently assessing whether additionaladopted ASU 2013-08 beginning with our quarter ended June 30, 2014, and have increased our disclosure requirements will beas necessary. ASU 2013-08 is effective for interim and annual reporting periods in fiscal years that begin after December 15, 2013.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk includes risks that arise from changes in interest rates, foreign currency exchange rates, commodity prices, equity prices and other market changes that affect market sensitive instruments. The prices of securities held by us may decline in response to certain events, including those directly involving the companies whose securities are owned by us; conditions affecting the general economy; overall market changes; local, regional or global political, social or economic instability; and interest rate fluctuations.
The primary risk we believe we are exposed to is interest rate risk. Because we borrow money to make investments, our net investment is dependent upon the difference between the rate at which we borrow funds and the rate at which we invest those funds. As a result, there can be no assurance that a significant change in market interest rates will not have a material adverse effect on our net investment income. We use a combination of debt and equity capital to finance our investing activities. We use interest rate risk management techniques to limit our exposure to interest rate fluctuations. Such techniques may include various interest rate hedging activities to the extent permitted by the 1940 Act.
We target to have approximately 10% of the loans in our portfolio at fixed rates, with approximately 90% at variable rates or variables rates with a floor mechanism. Currently, all of our variable-rate loans have rates associated with either the current 30-day LIBOR or prime rate. As of March 31, 2014,2015, our portfolio consisted of the following breakdown based on total principal balance of all outstanding debt investments:
| % | Variable rates with a floor | |||
Fixed rates | ||||
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| 100.0 | % | Total | ||
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On April 30, 2013,June 26, 2014, we, through our wholly-owned subsidiary, Business Investment, entered into Amendment No. 1 to the Fifth Amended and Restated Credit Agreement originally entered into on April 30, 2013, with KeyBank, as administrative agent, lead arranger and a Credit Facility providing for a $70 millionlender; other lenders; and the Adviser, as servicer, to extend the revolving period and reduce the interest rate of our revolving line of credit. On June 12, 2013, we further increased the borrowing capacity under the Credit Facility from $70 million to $105 million by adding two additional lenders. The Credit Facility revolving period ends on April 30, 2016,was extended 14 months to June 26, 2017, and if not renewed or extended by the revolving period end date,June 26, 2017, all principal and interest will be due and payable on or before April 30, 2017 (one yearJune 26, 2019 (two years after the revolving period end date). In addition, we have retained the two one-year extension options, to be agreed upon by all parties, which may be exercised on or before June 26, 2015 and 2016, respectively, and upon exercise, the options would extend the revolving period to June 26, 2018 and 2019 and the maturity date to June 26, 2020 and 2021, respectively. Subject to certain terms and conditions, our Credit Facility can be expanded by up to $145.0 million, to a total facility amount of $250.0 million, through additional commitments of existing or new committed lenders. On September 19, 2014, we further increased our borrowing capacity under our Credit Facility from $105.0 million to $185.0 million by entering into Joinder Agreements pursuant to our Credit Facility. Advances under theour Credit Facility will generally bear interest at the 30-day LIBOR, plus 3.75%3.25% per annum, with an unuseddown from 3.75% prior to the amendment, and our Credit Facility includes a fee of 0.50% on undrawn amounts. Once the revolving period ends, the interest rate margin increases to 3.75% for the period from June 26, 2017 to June 26, 2018, and further increases to 4.25% through maturity.
In connection with original closing date of our Credit Facility in July 2013, we entered into a forward interest rate cap agreement, effective October 2013 and expiring in April 2016. As of March 31, 2014,2015, the interest rate cap agreement had a minimal fair value.
The current interest rate cap agreement entitles us to receive payments, if any, equal to the amount by which interest payments on the current notional amount at the one month30-day LIBOR exceed the payments on the current notional amount at 6%6.0%. This agreement effectively caps our interest payments on our line of credit borrowings, up to the notional amount of the interest rate cap over the remaining term of the agreement. This mitigates our exposure to increases in interest rates on our borrowings on our line of credit, which are at variable rates.
To illustrate the potential impact of changes in interest rates on our net increase (decrease) increase in net assets resulting from operations, we have performed the following hypothetical analysis, which assumes that our balance sheet and interest rates remain constant as of March 31, 20142015 and no further actions are taken to alter our existing interest rate sensitivity.
Basis Point Change (a) | Increase in Interest Income | Increase (Decrease) in Interest Expense | Net (Decrease) Increase in Net Assets Resulting from Operations | Increase in Interest Income | Increase (Decrease) in Interest Expense | Net (Decrease) Increase in Net Assets Resulting from Operations | ||||||||||||||||||
Up 300 basis points | $ | 1,563 | $ | 1,838 | $ | (275 | ) | $ | 2,902 | $ | 3,564 | $ | (662 | ) | ||||||||||
Up 200 basis points | 306 | 1,225 | (919 | ) | 766 | 2,376 | (1,610 | ) | ||||||||||||||||
Up 100 basis points | 22 | 612 | (590 | ) | 80 | 1,188 | (1,108 | ) | ||||||||||||||||
Down 15 basis points | — | (93 | ) | 93 | ||||||||||||||||||||
Down 17 basis points | — | (204 | ) | 204 | ||||||||||||||||||||
| (a) | As of March 31, |
Although management believes that this analysis is indicative of our existing interest rate sensitivity, it does not adjust for potential changes in credit quality, size and composition of our loan portfolio on the balance sheet and other business developments that could affect net increase (decrease) increase in net assets resulting from operations. Accordingly, actual results could differ significantly from those in the hypothetical analysis in the table above.
We may also experience risk associated with investing in securities of companies with foreign operations. Some of our portfolio companies have operations located outside the U.S. These risks include, but are not limited to, fluctuations in foreign currency exchange rates, imposition of foreign taxes, changes in exportation regulations and political and social instability.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements
Management’s Annual Report on Internal Control over Financial Reporting
To the Stockholders and Board of Directors of Gladstone Investment Corporation:
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and include those policies and procedures that: (1) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect our transactions and the dispositions of our assets; (2) provide reasonable assurance that our transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with appropriate authorizations; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
Under the supervision and with the participation of our management, including our chief executive officer and our chief financial officer and treasurer, we assessed the effectiveness of our internal control over financial reporting as of March 31, 2014,2015, using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) inInternal Control—Integrated Framework (1992)(2013). Based on its assessment, management has concluded that our internal control over financial reporting was effective as of March 31, 2014.2015.
The effectiveness of our internal control over financial reporting as of March 31, 20142015 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which is included herein.
May 13, 201420, 2015
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors of Gladstone Investment Corporation:
In our opinion, the accompanying consolidated statements of assets and liabilities, including the consolidated schedules of investments, and the related consolidated statements of operations, of changes in net assets and of cash flows and the financial highlights present fairly, in all material respects, the financial position of Gladstone Investment Corporation and its subsidiaries (the “Company”) as of March 31, 20142015 and 2013,2014, and the results of their operations and their cash flows for each of the three years in the period ended March 31, 2014,2015, in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 15(a)(2) presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of March 31, 2014,2015, based on criteria established inInternal Control - Control—Integrated Framework (1992)(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements and financial statement schedule, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express opinions on these financial statements, on the financial statement schedule, and on the Company’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. Our proceduresWe believe that our audits, which included confirmation of securities as of March 31, 20142015 by correspondence with the custodian. We believe that our auditscustodian, provide a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
McLean, VA
May 13, 201420, 2015
GLADSTONE INVESTMENT CORPORATION
CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
| March 31, | ||||||||||||||||
| 2014 | 2013 | March 31, | ||||||||||||||
| 2015 | 2014 | |||||||||||||||
ASSETS | ||||||||||||||||
Investments at fair value | ||||||||||||||||
Control investments (Cost of$29,632 and $98,071 respectively) | $ | 21,104 | $ | 98,515 | ||||||||||||
Affiliate investments (Cost of$120,010 and $36,528, respectively) | 87,849 | 18,216 | ||||||||||||||
Non-Control/Non-Affiliate investments (Cost of$233,895 and $191,822, respectively) | 205,440 | 169,751 | ||||||||||||||
Non-Control/Non-Affiliate investments (Cost of$162,598 and $233,895, respectively) | $ | 174,373 | $ | 205,440 | ||||||||||||
Affiliate investments (Cost of$310,628 and $120,010, respectively) | 271,050 | 87,849 | ||||||||||||||
Control investments (Cost of$32,032 and $29,632 respectively) | 20,630 | 21,104 | ||||||||||||||
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Total investments at fair value (Cost of$383,537 and $326,421, respectively) | 314,393 | 286,482 | ||||||||||||||
Total investments at fair value (Cost of$505,258 and $383,537, respectively) | 466,053 | 314,393 | ||||||||||||||
Cash and cash equivalents | 4,553 | 85,904 | 4,921 | 4,553 | ||||||||||||
Restricted cash | 5,314 | 626 | ||||||||||||||
Restricted cash and cash equivalents | 260 | 5,314 | ||||||||||||||
Interest receivable | 1,289 | 1,309 | 1,867 | 1,289 | ||||||||||||
Due from custodian | 1,704 | 1,677 | 4,512 | 1,704 | ||||||||||||
Deferred financing costs | 2,355 | 2,336 | ||||||||||||||
Deferred financing costs, net | 4,529 | 2,355 | ||||||||||||||
Other assets | 1,086 | 1,469 | 1,379 | 1,086 | ||||||||||||
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TOTAL ASSETS | $ | 330,694 | $ | 379,803 | $ | 483,521 | $ | 330,694 | ||||||||
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LIABILITIES | ||||||||||||||||
Borrowings: | ||||||||||||||||
Short-term loan at fair value (Cost of$0 and $58,016, respectively) | $ | — | $ | 58,016 | ||||||||||||
Line of credit at fair value (Cost of$61,250 and $31,000, respectively) | 61,701 | 31,854 | ||||||||||||||
Line of credit at fair value (Cost of$118,800 and $61,250, respectively) | $ | 118,800 | $ | 61,701 | ||||||||||||
Other secured borrowings | 5,000 | 5,000 | 5,096 | 5,000 | ||||||||||||
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Total borrowings | 66,701 | 94,870 | 123,896 | 66,701 | ||||||||||||
Mandatorily redeemable preferred stock, $0.001 par value, $25 liquidation preference; 1,610,000 shares authorized,1,600,000 shares issued and outstanding as of March 31, 2014 and 2013 | 40,000 | 40,000 | ||||||||||||||
Mandatorily redeemable preferred stock, $0.001 par value, $25 liquidation preference; 3,610,000and 1,610,000 shares authorized, respectively;3,256,000 and 1,600,000 shares issued and outstanding, respectively | 81,400 | 40,000 | ||||||||||||||
Accounts payable and accrued expenses | 665 | 1,069 | 1,271 | 665 | ||||||||||||
Fees due to Adviser(A) | 1,225 | 2,067 | 1,502 | 1,225 | ||||||||||||
Fee due to Administrator(A) | 224 | 221 | 262 | 224 | ||||||||||||
Other liabilities | 1,042 | 613 | 1,761 | 1,042 | ||||||||||||
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TOTAL LIABILITIES | 109,857 | 138,840 | 210,092 | 109,857 | ||||||||||||
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Commitments and contingencies(B) | ||||||||||||||||
NET ASSETS | $ | 220,837 | $ | 240,963 | $ | 273,429 | $ | 220,837 | ||||||||
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ANALYSIS OF NET ASSETS | ||||||||||||||||
Common stock, $0.001 par value per share, 100,000,000 shares authorized,26,475,958 shares issued and outstanding as of March 31, 2014 and 2013, respectively | $ | 26 | $ | 26 | ||||||||||||
Common stock, $0.001 par value per share,100,000,000 shares authorized;29,775,958 and 26,475,958 shares issued and outstanding, respectively | $ | 30 | $ | 26 | ||||||||||||
Capital in excess of par value | 287,062 | 287,713 | 309,438 | 287,062 | ||||||||||||
Cumulative net unrealized depreciation of investments | (69,144 | ) | (39,939 | ) | (39,204 | ) | (69,144 | ) | ||||||||
Cumulative net unrealized depreciation of other | (525 | ) | (883 | ) | ||||||||||||
Cumulative net unrealized (depreciation) (appreciation) of other | (75 | ) | (525 | ) | ||||||||||||
Net investment income in excess of distributions | 3,616 | 2,691 | 3,511 | 3,616 | ||||||||||||
Accumulated net realized loss | (198 | ) | (8,645 | ) | (271 | ) | (198 | ) | ||||||||
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TOTAL NET ASSETS | $ | 220,837 | $ | 240,963 | $ | 273,429 | $ | 220,837 | ||||||||
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NET ASSET VALUE PER COMMON SHARE AT END OF YEAR | $ | 9.18 | $ | 8.34 | ||||||||||||
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NET ASSET VALUE PER SHARE AT END OF YEAR | $ | 8.34 | $ | 9.10 | ||||||||||||
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| (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 CONSOLIDATED FINANCIAL STATEMENTS.
GLADSTONE INVESTMENT CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
| Year Ended March 31, | Year Ended March 31, | |||||||||||||||||||||||
| 2014 | 2013 | 2012 | 2015 | 2014 | 2013 | |||||||||||||||||||
INVESTMENT INCOME | ||||||||||||||||||||||||
Interest income: | ||||||||||||||||||||||||
Non-Control/Non-Affiliate investments | $ | 17,541 | $ | 21,190 | $ | 15,292 | ||||||||||||||||||
Affiliate investments | 16,844 | 3,625 | 3,114 | |||||||||||||||||||||
Control investments | $ | 5,642 | $ | 6,388 | $ | 4,972 | 2,296 | 5,642 | 6,388 | |||||||||||||||
Affiliate investments | 3,625 | 3,114 | 1,497 | |||||||||||||||||||||
Non-Control/Non-Affiliate investments | 21,190 | 15,292 | 13,112 | |||||||||||||||||||||
Cash and cash equivalents | 3 | 4 | 7 | 4 | 3 | 4 | ||||||||||||||||||
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Total interest income | 30,460 | 24,798 | 19,588 | 36,685 | 30,460 | 24,798 | ||||||||||||||||||
Other income: | ||||||||||||||||||||||||
Non-Control/Non-Affiliate investments | 4,424 | 1,210 | 1,634 | |||||||||||||||||||||
Affiliate investments | 534 | 1,299 | — | |||||||||||||||||||||
Control investments | 3,295 | 4,106 | — | — | 3,295 | 4,106 | ||||||||||||||||||
Affiliate investments | 1,299 | — | — | |||||||||||||||||||||
Non-Control/Non-Affiliate investments | 1,210 | 1,634 | 1,654 | |||||||||||||||||||||
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Total other income | 5,804 | 5,740 | 1,654 | 4,958 | 5,804 | 5,740 | ||||||||||||||||||
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Total investment income | 36,264 | 30,538 | 21,242 | 41,643 | 36,264 | 30,538 | ||||||||||||||||||
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EXPENSES | ||||||||||||||||||||||||
Base management fee(A) | 6,207 | 5,412 | 4,386 | 7,569 | 6,207 | 5,412 | ||||||||||||||||||
Loan servicing fee(A) | 4,994 | 4,326 | 3,725 | |||||||||||||||||||||
Incentive fee(A) | 3,983 | 2,585 | 19 | 4,975 | 3,983 | 2,585 | ||||||||||||||||||
Administration fee(A) | 863 | 785 | 684 | 932 | 863 | 785 | ||||||||||||||||||
Interest expense on borrowings | 2,075 | 1,127 | 768 | 3,539 | 2,075 | 1,127 | ||||||||||||||||||
Dividends on mandatorily redeemable preferred stock | 2,850 | 2,850 | 198 | 3,921 | 2,850 | 2,850 | ||||||||||||||||||
Amortization of deferred financing costs | 1,024 | 791 | 459 | 1,329 | 1,024 | 791 | ||||||||||||||||||
Professional fees | 805 | 541 | 591 | 908 | 805 | 541 | ||||||||||||||||||
Other general and administrative expenses | 1,459 | 1,287 | 1,554 | 1,421 | 1,459 | 1,287 | ||||||||||||||||||
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Expenses before credits from Adviser | 19,266 | 15,378 | 8,659 | 29,588 | 23,592 | 19,103 | ||||||||||||||||||
Credits to fees(A) | (2,309 | ) | (1,328 | ) | (1,160 | ) | ||||||||||||||||||
Credits to base management fee – loan servicing fee(A) | (4,994 | ) | (4,326 | ) | (3,725 | ) | ||||||||||||||||||
Credits to fees from Adviser—other(A) | (2,848 | ) | (2,309 | ) | (1,328 | ) | ||||||||||||||||||
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Total expenses net of credits to fees | 16,957 | 14,050 | 7,499 | |||||||||||||||||||||
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Total expenses, net of credits to fees | 21,746 | 16,957 | 14,050 | |||||||||||||||||||||
NET INVESTMENT INCOME | $ | 19,307 | $ | 16,488 | $ | 13,743 | $ | 19,897 | $ | 19,307 | $ | 16,488 | ||||||||||||
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REALIZED AND UNREALIZED (LOSS) GAIN | ||||||||||||||||||||||||
Net realized gain: | ||||||||||||||||||||||||
REALIZED AND UNREALIZED GAIN (LOSS) | ||||||||||||||||||||||||
Net realized (loss) gain: | ||||||||||||||||||||||||
Non-Control/Non-Affiliate investments | — | (14,834 | ) | 849 | ||||||||||||||||||||
Affiliate investments | — | (1,763 | ) | — | ||||||||||||||||||||
Control investments | 24,838 | (6 | ) | (269 | ) | (73 | ) | 24,838 | (6 | ) | ||||||||||||||
Affiliate investments | (1,763 | ) | — | — | ||||||||||||||||||||
Non-Control/Non-Affiliate investments | (14,834 | ) | 849 | 5,360 | ||||||||||||||||||||
Other | (29 | ) | (41 | ) | (40 | ) | — | (29 | ) | (41 | ) | |||||||||||||
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Total net realized gain | 8,212 | 802 | 5,051 | |||||||||||||||||||||
Net unrealized (depreciation) appreciation: | ||||||||||||||||||||||||
Total net realized (loss) gain | (73 | ) | 8,212 | 802 | ||||||||||||||||||||
Net unrealized appreciation (depreciation): | ||||||||||||||||||||||||
Non-Control/Non-Affiliate investments | 37,047 | (6,382 | ) | (7,722 | ) | |||||||||||||||||||
Affiliate investments | (4,233 | ) | (1,481 | ) | (19,214 | ) | ||||||||||||||||||
Control investments | (21,343 | ) | 27,740 | 396 | (2,874 | ) | (21,343 | ) | 27,740 | |||||||||||||||
Affiliate investments | (1,481 | ) | (19,214 | ) | 1,945 | |||||||||||||||||||
Non-Control/Non-Affiliate investments | (6,382 | ) | (7,722 | ) | 822 | |||||||||||||||||||
Other | 358 | (815 | ) | 9 | 450 | 358 | (815 | ) | ||||||||||||||||
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Total net unrealized (depreciation) appreciation | (28,848 | ) | (11 | ) | 3,172 | |||||||||||||||||||
Total net unrealized appreciation (depreciation) | 30,390 | (28,848 | ) | (11 | ) | |||||||||||||||||||
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Net realized and unrealized (loss) gain | (20,636 | ) | 791 | 8,223 | ||||||||||||||||||||
Net realized and unrealized gain (loss) | 30,317 | (20,636 | ) | 791 | ||||||||||||||||||||
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NET (DECREASE) INCREASE IN NET ASSETS RESULTING FROM OPERATIONS | $ | (1,329 | ) | $ | 17,279 | $ | 21,966 | |||||||||||||||||
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NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS | $ | 50,214 | $ | (1,329 | ) | $ | 17,279 | |||||||||||||||||
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BASIC AND DILUTED PER COMMON SHARE: | �� | |||||||||||||||||||||||
Net investment income | $ | 0.73 | $ | 0.68 | $ | 0.62 | $ | 0.75 | $ | 0.73 | $ | 0.68 | ||||||||||||
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Net (decrease) increase in net assets resulting from operations | $ | (0.05 | ) | $ | 0.71 | $ | 0.99 | |||||||||||||||||
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Net increase (decrease) in net assets resulting from operations | $ | 1.88 | $ | (0.05 | ) | $ | 0.71 | |||||||||||||||||
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WEIGHTED AVERAGE SHARES OF COMMON STOCK OUTSTANDING: | ||||||||||||||||||||||||
Basic and diluted | 26,475,958 | 24,189,148 | 22,080,133 | 26,665,821 | 26,475,958 | 24,189,148 | ||||||||||||||||||
| (A) | Refer to Note 4—Related Party Transactions for additional information. |
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
GLADSTONE INVESTMENT CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS
(IN THOUSANDS)
| Year Ended March 31, | ||||||||||||
| 2014 | 2013 | 2012 | ||||||||||
OPERATIONS: | ||||||||||||
Net investment income | $ | 19,307 | $ | 16,488 | $ | 13,743 | ||||||
Net realized gain on investments | 8,241 | 843 | 5,091 | |||||||||
Net realized loss on other | (29 | ) | (41 | ) | (40 | ) | ||||||
Net unrealized (depreciation) appreciation of investments | (29,206 | ) | 804 | 3,163 | ||||||||
Net unrealized appreciation (depreciation) of other | 358 | (815 | ) | 9 | ||||||||
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Net (decrease) increase in net assets from operations | (1,329 | ) | 17,279 | 21,966 | ||||||||
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EQUITY CAPITAL ACTIVITY: | ||||||||||||
Issuance of common stock | — | 32,969 | — | |||||||||
Shelf offering registration costs, net | — | (1,954 | ) | — | ||||||||
Distributions to common stockholders from net investment income | (18,797 | ) | (14,547 | ) | (13,579 | ) | ||||||
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Net (decrease) increase in net assets from equity capital activity | (18,797 | ) | 16,468 | (13,579 | ) | |||||||
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Total (decrease) increase in net assets | (20,126 | ) | 33,747 | 8,387 | ||||||||
Net assets at beginning of year | 240,963 | 207,216 | 198,829 | |||||||||
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Net assets at end of year | $ | 220,837 | $ | 240,963 | $ | 207,216 | ||||||
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| Year Ended March 31, | ||||||||||||
| 2015 | 2014 | 2013 | ||||||||||
OPERATIONS | ||||||||||||
Net investment income | $ | 19,897 | $ | 19,307 | $ | 16,488 | ||||||
Net realized (loss) gain on investments | (73 | ) | 8,241 | 843 | ||||||||
Net realized loss on other | — | (29 | ) | (41 | ) | |||||||
Net unrealized appreciation (depreciation) of investments | 29,940 | (29,206 | ) | 804 | ||||||||
Net unrealized depreciation (appreciation) of other | 450 | 358 | (815 | ) | ||||||||
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Net increase (decrease) in net assets from operations | 50,214 | (1,329 | ) | 17,279 | ||||||||
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EQUITY CAPITAL ACTIVITY | ||||||||||||
Issuance of common stock | 24,420 | — | 32,969 | |||||||||
Offering costs for issuance of common stock | (1,458 | ) | — | (1,954 | ) | |||||||
Distributions to common stockholders | (20,584 | ) | (18,797 | ) | (14,547 | ) | ||||||
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Net increase (decrease) in net assets from equity capital activity | 2,378 | (18,797 | ) | 16,468 | ||||||||
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TOTAL INCREASE (DECREASE) IN NET ASSETS | 52,592 | (20,126 | ) | 33,747 | ||||||||
NET ASSETS AT BEGINNING OF YEAR | 220,837 | 240,963 | 207,216 | |||||||||
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NET ASSETS AT END OF YEAR | $ | 273,429 | $ | 220,837 | $ | 240,963 | ||||||
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THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
GLADSTONE INVESTMENT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
| Year Ended March 31, | Year Ended March 31, | |||||||||||||||||||||||
| 2014 | 2013 | 2012 | 2015 | 2014 | 2013 | |||||||||||||||||||
CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||||||||||||||||||
Net (decrease) increase in net assets resulting from operations | $ | (1,329 | ) | $ | 17,279 | $ | 21,966 | |||||||||||||||||
Adjustments to reconcile net (decrease) increase in net assets resulting from operations to net cash used in operating activities: | ||||||||||||||||||||||||
Net increase (decrease) in net assets resulting from operations | $ | 50,214 | $ | (1,329 | ) | $ | 17,279 | |||||||||||||||||
Adjustments to reconcile net increase (decrease) in net assets resulting from operations to net cash used in operating activities: | ||||||||||||||||||||||||
Purchase of investments | (132,203 | ) | (87,607 | ) | (91,298 | ) | (132,902 | ) | (132,203 | ) | (87,607 | ) | ||||||||||||
Principal repayments of investments | 51,828 | 25,243 | 19,154 | 11,260 | 51,828 | 25,243 | ||||||||||||||||||
Proceeds from the sale of investments | 31,587 | 3,181 | 8,031 | — | 31,587 | 3,181 | ||||||||||||||||||
Increase in investment balance due to paid in kind interest | (88 | ) | — | — | (78 | ) | (88 | ) | — | |||||||||||||||
Net realized gain on investments | (8,241 | ) | (843 | ) | (5,091 | ) | ||||||||||||||||||
Net realized loss (gain) on investments | 73 | (8,241 | ) | (843 | ) | |||||||||||||||||||
Net realized loss on other | 29 | 41 | 40 | — | 29 | 41 | ||||||||||||||||||
Net unrealized depreciation (appreciation) of investments | 29,206 | (804 | ) | (3,163 | ) | |||||||||||||||||||
Net unrealized (appreciation) depreciation of investments | (29,940 | ) | 29,206 | (804 | ) | |||||||||||||||||||
Net unrealized (appreciation) depreciation of other | (358 | ) | 815 | (9 | ) | (450 | ) | (358 | ) | 815 | ||||||||||||||
Amortization of deferred financing costs | 1,024 | 791 | 459 | 1,329 | 1,024 | 791 | ||||||||||||||||||
(Increase) decrease in restricted cash | (4,688 | ) | 1,302 | 2,571 | ||||||||||||||||||||
Decrease (increase) in interest receivable | 20 | (59 | ) | (513 | ) | |||||||||||||||||||
Decrease (increase) in restricted cash and cash equivalents | 4,981 | (4,688 | ) | 1,302 | ||||||||||||||||||||
(Increase) decrease in interest receivable | (578 | ) | 20 | (59 | ) | |||||||||||||||||||
Increase in due from custodian | (27 | ) | (150 | ) | (668 | ) | (2,808 | ) | (27 | ) | (150 | ) | ||||||||||||
Decrease (increase) in other assets | 383 | (867 | ) | 162 | ||||||||||||||||||||
(Decrease) increase in accounts payable and accrued expenses | (345 | ) | 613 | 197 | ||||||||||||||||||||
(Decrease) increase in fees due to Adviser(A) | (842 | ) | 1,571 | (3 | ) | |||||||||||||||||||
(Increase) decrease in other assets | (293 | ) | 383 | (867 | ) | |||||||||||||||||||
Increase (decrease) in accounts payable and accrued expenses | 606 | (345 | ) | 613 | ||||||||||||||||||||
Increase (decrease) in fees due to Adviser(A) | 277 | (842 | ) | 1,571 | ||||||||||||||||||||
Increase in administration fee payable to Administrator(A) | 3 | 3 | 47 | 38 | 3 | 3 | ||||||||||||||||||
Increase (decrease) in other liabilities | 429 | (243 | ) | (553 | ) | 719 | 429 | (243 | ) | |||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Net cash used in operating activities | (33,612 | ) | (39,734 | ) | (48,671 | ) | (97,552 | ) | (33,612 | ) | (39,734 | ) | ||||||||||||
CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||||||||||||||||||
Proceeds from issuance of common stock, net of expenses | — | 31,015 | — | |||||||||||||||||||||
Proceeds from issuance of common stock | 24,420 | — | 32,969 | |||||||||||||||||||||
Offering costs for issuance of common stock | (1,458 | ) | — | (1,954 | ) | |||||||||||||||||||
Proceeds from short-term loans | 56,514 | 250,063 | 254,507 | — | 56,514 | 250,063 | ||||||||||||||||||
Repayments on short-term loans | (114,530 | ) | (268,052 | ) | (218,502 | ) | — | (114,530 | ) | (268,052 | ) | |||||||||||||
Proceeds from Credit Facility | 145,350 | 144,000 | 59,200 | |||||||||||||||||||||
Repayments on Credit Facility | (115,100 | ) | (113,000 | ) | (59,200 | ) | ||||||||||||||||||
Proceeds from line of credit | 144,549 | 145,350 | 144,000 | |||||||||||||||||||||
Repayments on line of credit | (87,000 | ) | (115,100 | ) | (113,000 | ) | ||||||||||||||||||
Proceeds from other secured borrowings | — | 5,000 | — | 96 | — | 5,000 | ||||||||||||||||||
Proceeds from issuance of mandatorily redeemable preferred stock | — | — | 40,000 | 41,400 | — | — | ||||||||||||||||||
Purchase of derivatives | (75 | ) | — | (29 | ) | — | (75 | ) | — | |||||||||||||||
Payment of deferred financing costs | (1,101 | ) | (387 | ) | (2,760 | ) | (3,503 | ) | (1,101 | ) | (387 | ) | ||||||||||||
Distributions paid to common stockholders | (18,797 | ) | (14,547 | ) | (13,579 | ) | (20,584 | ) | (18,797 | ) | (14,547 | ) | ||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Net cash (used in) provided by financing activities | (47,739 | ) | 34,092 | 59,637 | ||||||||||||||||||||
Net cash provided by (used in) financing activities | 97,920 | (47,739 | ) | 34,092 | ||||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS | (81,351 | ) | (5,642 | ) | 10,966 | |||||||||||||||||||
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | 368 | (81,351 | ) | (5,642 | ) | |||||||||||||||||||
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR | 85,904 | 91,546 | 80,580 | 4,553 | 85,904 | 91,546 | ||||||||||||||||||
|
|
| ||||||||||||||||||||||
|
|
| ||||||||||||||||||||||
CASH AND CASH EQUIVALENTS, END OF YEAR | $ | 4,553 | $ | 85,904 | $ | 91,546 | $ | 4,921 | $ | 4,553 | $ | 85,904 | ||||||||||||
|
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|
|
|
| |||||||||||||||||||
CASH PAID DURING YEAR FOR INTEREST | $ | 1,952 | $ | 1,079 | $ | 777 | $ | 3,310 | $ | 1,952 | $ | 1,079 | ||||||||||||
|
|
| ||||||||||||||||||||||
|
|
| ||||||||||||||||||||||
NON-CASH ACTIVITIES(B) | $ | — | $ | 4,106 | $ | — | $ | — | $ | — | $ | 4,106 | ||||||||||||
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| |||||||||||||||||||
| (A) | Refer to Note 4—Related Party Transactionsfor additional information. |
| (B) | In February 2013, we recapitalized our investment in Galaxy Tool Holdings Corp. (“Galaxy”), converting $8.2 million of Galaxy preferred stock and its related $4.1 million in accrued dividends into a new $12.3 million senior debt investment in a non-cash transaction. We recognized $4.1 million in dividend income on ourConsolidated Statements of Operations during the year ended March 31, 2013 related to this recapitalization. |
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
GLADSTONE INVESTMENT CORPORATION
CONSOLIDATED SCHEDULE OF INVESTMENTS
MARCH 31, 20142015
(DOLLAR AMOUNTS IN THOUSANDS)
Company(A) | Industry | Investment(B) | Principal | Cost | Fair Value | |||||||||||
CONTROL INVESTMENTS: | ||||||||||||||||
Galaxy Tool Holding Corp. | Aerospace and Defense | Senior Subordinated Term Debt (13.5%, Due 8/2017) | $ | 15,520 | $ | 15,520 | $ | 15,520 | ||||||||
Preferred Stock (6,039,387 shares)(C)(F) | 11,464 | 2,992 | ||||||||||||||
Common Stock (88,843 shares)(C)(F) | 48 | — | ||||||||||||||
|
|
|
| |||||||||||||
| 27,032 | 18,512 | |||||||||||||||
NDLI Acquisition Inc. | Cargo Transport | Preferred Stock (2,600 shares)(C)(F) | 2,600 | 2,592 | ||||||||||||
Common Stock (545 shares)(C)(F) | — | — | ||||||||||||||
|
|
|
| |||||||||||||
| 2,600 | 2,592 | |||||||||||||||
|
|
|
| |||||||||||||
Total Control Investments (represents 6.7% of total investments at fair value) | $ | 29,632 | $ | 21,104 | ||||||||||||
|
|
|
| |||||||||||||
AFFILIATE INVESTMENTS: | ||||||||||||||||
Behrens Manufacturing, LLC | Diversified/Conglomerate Manufacturing | Senior Term Debt (13.0%, Due 12/2018) | $ | 9,975 | $ | 9,975 | $ | 9,975 | ||||||||
Preferred Stock (2,923 shares) (C)(F) | 2,922 | 2,754 | ||||||||||||||
|
|
|
| |||||||||||||
| 12,897 | 12,729 | |||||||||||||||
Channel Technologies Group, LLC | Diversified/Conglomerate Manufacturing | Preferred Stock (2,279 shares)(C)(F) | 2,864 | 3,122 | ||||||||||||
Common Stock (2,279,020 shares)(C)(F) | — | — | ||||||||||||||
|
|
|
| |||||||||||||
| 2,864 | 3,122 | |||||||||||||||
Danco Acquisition Corp. | Diversified/Conglomerate Manufacturing | Line of Credit, $700 available (4.0%, Due 8/2015)(D) | 3,450 | 3,450 | 690 | |||||||||||
Senior Term Debt (4.0%, Due 8/2015)(D) | 2,575 | 2,575 | 515 | |||||||||||||
Senior Term Debt (4.0%, Due 8/2015)(D) | 8,795 | 8,795 | 1,759 | |||||||||||||
Senior Term Debt (5.0%, Due 8/2015)(D)(E) | 1,150 | 1,150 | 236 | |||||||||||||
Preferred Stock (25 shares)(C)(F) | 2,500 | — | ||||||||||||||
Common Stock (1,241 shares)(C)(F) | 3 | — | ||||||||||||||
|
|
|
| |||||||||||||
| 18,473 | 3,200 | |||||||||||||||
Edge Adhesives Holdings, Inc. | Diversified/Conglomerate Manufacturing | Line of Credit, $705 available (10.5%, Due 8/2014)(H) | 795 | 795 | 795 | |||||||||||
Senior Term Debt (12.5%, Due 2/2019)(H) | 9,300 | 9,300 | 9,300 | |||||||||||||
Senior Subordinated Term Debt (13.5%, Due 2/2019)(H) | 2,400 | 2,400 | 2,400 | |||||||||||||
Preferred Stock (3,474 shares) (C)(F)(H) | 3,474 | 3,474 | ||||||||||||||
|
|
|
| |||||||||||||
| 15,969 | 15,969 | |||||||||||||||
Head Country Food Products, Inc. | Beverage, Food and Tobacco | Line of Credit, $500 available (10.0%, Due 8/2014)(H) | — | — | — | |||||||||||
Senior Term Debt (12.5%, Due 2/2019)(H) | 9,050 | 9,050 | 9,050 | |||||||||||||
Preferred Stock (4,000 shares)(C)(F)(H) | 4,000 | 4,000 | ||||||||||||||
|
|
|
| |||||||||||||
| 13,050 | 13,050 | |||||||||||||||
Meridian Rack & Pinion, Inc. | Automobile | Senior Term Debt (13.5%, Due 12/2018) (D) | 9,660 | 9,660 | 9,672 | |||||||||||
Preferred Stock (3,381 shares) (C)(F) | 3,381 | 3,468 | ||||||||||||||
|
|
|
| |||||||||||||
| 13,041 | 13,140 | |||||||||||||||
SOG Specialty K&T, LLC | Leisure, Amusement, Motion Pictures, Entertainment | Senior Term Debt (13.3%, Due 8/2016) | 6,200 | 6,200 | 6,200 | |||||||||||
Senior Term Debt (14.8%, Due 8/2016) | 12,199 | 12,199 | 12,199 | |||||||||||||
Preferred Stock (9,749 shares)(C)(F) | 9,749 | 8,240 | ||||||||||||||
|
|
|
| |||||||||||||
| 28,148 | 26,639 | |||||||||||||||
Tread Corp. | Oil and Gas | Line of Credit, $779 available (12.5%, Due 6/2014)(G) | 2,471 | 2,471 | — | |||||||||||
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)(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 | — | ||||||||||||||
|
|
|
| |||||||||||||
| 15,568 | — | |||||||||||||||
|
|
|
| |||||||||||||
Total Affiliate Investments (represents 27.9% of total investments at fair value) | $ | 120,010 | $ | 87,849 | ||||||||||||
|
|
|
| |||||||||||||
Company(A) | Industry | Investment(B) | Principal | Cost | Fair Value | |||||||||||
NON-CONTROL/NON-AFFILIATE INVESTMENTS(N): | ||||||||||||||||
Auto Safety House, LLC | Automobile | Secured Line of Credit, $1,000 available (7.0%, Due 10/2019)(I)(K) | $ | — | $ | — | $ | — | ||||||||
Senior Secured Term Debt (7.0%, Due 10/2019)(I)(K) | 5,000 | 5,000 | 4,938 | |||||||||||||
|
|
|
| |||||||||||||
| 5,000 | 4,938 | |||||||||||||||
Cavert II Holding Corp. | Containers, Packaging, and Glass | Preferred Stock (18,446 shares)(C)(F)(L) | 1,845 | 3,265 | ||||||||||||
|
|
|
| |||||||||||||
| 1,845 | 3,265 | |||||||||||||||
Country Club Enterprises, LLC | Automobile | Senior Subordinated Secured Term Debt (18.7%, Due 5/2017)(L) | 4,000 | 4,000 | 4,000 | |||||||||||
Preferred Stock (7,079,792 shares)(C)(F)(L) | 7,725 | 2,863 | ||||||||||||||
Guaranty ($2,000)(D) | ||||||||||||||||
Guaranty ($593)(D) | ||||||||||||||||
|
|
|
| |||||||||||||
| 11,725 | 6,863 | |||||||||||||||
Drew Foam Company, Inc. | Chemicals, Plastics, and Rubber | Senior Secured Term Debt (13.5%, Due 8/2017)(L) | 10,913 | 10,913 | 10,913 | |||||||||||
Preferred Stock (34,045 shares)(C)(F)(L) | 3,375 | 3,532 | ||||||||||||||
Common Stock (5,372 shares)(C)(F)(L) | 63 | 2,813 | ||||||||||||||
|
|
|
| |||||||||||||
| 14,351 | 17,258 | |||||||||||||||
Frontier Packaging, Inc. | Containers, Packaging, and Glass | Senior Secured Term Debt (12.0%, Due 12/2017)(L) | 12,000 | 12,000 | 12,000 | |||||||||||
Preferred Stock (1,373 shares)(C)(F)(L) | 1,373 | 1,404 | ||||||||||||||
Common Stock (152 shares)(C)(F)(L) | 152 | 2,777 | ||||||||||||||
|
|
|
| |||||||||||||
| 13,525 | 16,181 | |||||||||||||||
Funko, LLC(M) | Personal and Non-Durable Consumer Products (Manufacturing Only) | Senior Subordinated Secured Term Debt (9.3%, Due 5/2019)(I)(K) | 7,500 | 7,500 | 7,734 | |||||||||||
Senior Subordinated Secured Term Debt (9.3%, Due 5/2019)(I)(K) | 2,000 | 2,000 | 2,063 | |||||||||||||
Preferred Stock (1,305 shares)(C)(F)(L) | 1,305 | 15,211 | ||||||||||||||
|
|
|
| |||||||||||||
| 10,805 | 25,008 | |||||||||||||||
Ginsey Home Solutions, Inc. | Home and Office Furnishings, Housewares, and Durable | Senior Subordinate Secured Term Debt (13.5%, Due 1/2018)(H)(L) | 13,300 | 13,300 | 13,300 | |||||||||||
Consumer Products | Preferred Stock (18,898 shares)(C)(F)(L) | 9,583 | 7,176 | |||||||||||||
Common Stock (63,747 shares)(C)(F)(L) | 8 | — | ||||||||||||||
|
|
|
| |||||||||||||
| 22,891 | 20,476 | |||||||||||||||
Jackrabbit, Inc. | Farming and Agriculture | Senior Secured Term Debt (13.5%, Due 4/2018)(L) | 11,000 | 11,000 | 11,000 | |||||||||||
Preferred Stock (3,556 shares)(C)(F)(L) | 3,556 | 4,139 | ||||||||||||||
Common Stock (548 shares)(C)(F)(L) | 94 | 2,399 | ||||||||||||||
|
|
|
| |||||||||||||
| 14,650 | 17,538 | |||||||||||||||
Mathey Investments, Inc. | Machinery (Nonagriculture, | Senior Secured Term Debt (10.0%, Due 3/2016)(L) | 1,375 | 1,375 | 1,375 | |||||||||||
Nonconstruction, Nonelectronic) | Senior Secured Term Debt (12.0%, Due 3/2016)(L) | 3,727 | 3,727 | 3,727 | ||||||||||||
Senior Secured Term Debt (12.5%, Due 3/2016)(E)(I)(L) | 3,500 | 3,500 | 3,500 | |||||||||||||
Common Stock (29,102 shares)(C)(F)(L) | 777 | 7,630 | ||||||||||||||
|
|
|
| |||||||||||||
| 9,379 | 16,232 | |||||||||||||||
Mitchell Rubber Products, Inc. | Chemicals, Plastics, and Rubber | Subordinated Secured Term Debt (13.0%, Due 10/2016)(I)(K) | 13,560 | 13,560 | 8,136 | |||||||||||
Subordinated Secured Term Debt (13.0%, Due 12/2015)(I)(K) | 1,500 | 1,500 | 900 | |||||||||||||
Preferred Stock (27,900 shares)(C)(F)(L) | 2,790 | — | ||||||||||||||
Common Stock (27,900 shares)(C)(F)(L) | 28 | — | ||||||||||||||
|
|
|
| |||||||||||||
| 17,878 | 9,036 | |||||||||||||||
Quench Holdings Corp. | Home and Office Furnishings, Housewares, and Durable Consumer Products | Common Stock (4,770,391 shares)(C)(F)(L) | 3,397 | 5,432 | ||||||||||||
|
|
|
| |||||||||||||
| 3,397 | 5,432 | |||||||||||||||
SBS, Industries, LLC | Machinery (Nonagriculture, | Senior Secured Term Debt (14.0%, Due 8/2016)(L) | 11,355 | 11,355 | 11,355 | |||||||||||
Nonconstruction, Nonelectronic) | Preferred Stock (19,935 shares)(C)(F)(L) | 1,994 | 2,627 | |||||||||||||
Common Stock (221,500 shares)(C)(F)(L) | 222 | 183 | ||||||||||||||
|
|
|
| |||||||||||||
| 13,571 | 14,165 | |||||||||||||||
GLADSTONE INVESTMENT CORPORATION
CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)
MARCH 31, 20142015
(DOLLAR AMOUNTS IN THOUSANDS)
Company(A) | Industry | Investment(B) | Principal | Cost | Fair Value | |||||||||||
NON-CONTROL/NON-AFFILIATE INVESTMENTS: | ||||||||||||||||
Acme Cryogenics, Inc. | Chemicals, Plastics, and Rubber | Senior Subordinated Term Debt (11.5%, Due 3/2015) | $ | 14,500 | $ | 14,500 | $ | 14,500 | ||||||||
Preferred Stock (898,814 shares)(C)(F) | 6,984 | 11,276 | ||||||||||||||
Common Stock (418,072 shares)(C)(F) | 1,045 | — | ||||||||||||||
Common Stock Warrants (465,639 | 25 | — | ||||||||||||||
|
|
|
| |||||||||||||
| 22,554 | 25,776 | |||||||||||||||
Alloy Die Casting Corp. | Diversified/Conglomerate Manufacturing | Senior Term Debt (13.5%, Due 10/2018)(D) | 12,215 | 12,215 | 12,261 | |||||||||||
Preferred Stock (4,064 shares)(C)(F) | 4,064 | 1,948 | ||||||||||||||
Common Stock (630 share)(C)(F) | 41 | — | ||||||||||||||
|
|
|
| |||||||||||||
| 16,320 | 14,209 | |||||||||||||||
Auto Safety House, LLC | Automobile | Revolving Credit Facility, $1,000 available (7.0%, Due 10/2018)(D) | 5,000 | 5,000 | 4,925 | |||||||||||
Guaranty ($500) | ||||||||||||||||
Guaranty ($250) | ||||||||||||||||
|
|
|
| |||||||||||||
| 5,000 | 4,925 | |||||||||||||||
B-Dry, LLC | Buildings and Real Estate | Line of Credit, $0 available (6.5%, Due 5/2014) | 750 | 750 | 566 | |||||||||||
Senior Term Debt (13.5%, Due 5/2014) | 6,433 | 6,443 | 4,865 | |||||||||||||
Senior Term Debt (13.5%, Due 5/2014) | 2,840 | 2,840 | 2,144 | |||||||||||||
Common Stock Warrants (85 shares)(C)(F) | 300 | — | ||||||||||||||
|
|
|
| |||||||||||||
| 10,333 | 7,575 | |||||||||||||||
Cavert II Holding Corp. | Containers, Packaging, and Glass | Preferred Stock (18,446 shares)(C)(F) | 1,845 | 3,023 | ||||||||||||
|
|
|
| |||||||||||||
| 1,845 | 3,023 | |||||||||||||||
Country Club Enterprises, LLC | Automobile | Senior Subordinated Term Debt (18.6%, Due 11/2014) | 4,000 | 4,000 | 4,000 | |||||||||||
Preferred Stock (7,079,792 shares)(C)(F) | 7,725 | 3,670 | ||||||||||||||
Guaranty ($2,000) | ||||||||||||||||
Guaranty ($878) | ||||||||||||||||
|
|
|
| |||||||||||||
| 11,725 | 7,670 | |||||||||||||||
Drew Foam Company, Inc. | Chemicals, Plastics, and Rubber | Senior Term Debt (13.5%, Due 8/2017) | 10,913 | 10,913 | 10,913 | |||||||||||
Preferred Stock (34,045 shares)(C)(F) | 3,375 | 1,351 | ||||||||||||||
Common Stock (5,372 shares)(C)(F) | 63 | — | ||||||||||||||
|
|
|
| |||||||||||||
| 14,351 | 12,264 | |||||||||||||||
Frontier Packaging, Inc. | Containers, Packaging, and Glass | Senior Term Debt (12.0%, Due 12/2017) | 12,500 | 12,500 | 12,500 | |||||||||||
Preferred Stock (1,373 shares)(C)(F) | 1,373 | 1,522 | ||||||||||||||
Common Stock (152 shares)(C)(F) | 152 | 843 | ||||||||||||||
|
|
|
| |||||||||||||
| 14,025 | 14,865 | |||||||||||||||
Funko, LLC | Personal and Non-Durable Consumer Products (Manufacturing Only) | Senior Subordinated Term Debt (12.0% and 1.5% PIK, Due 5/2019)(D) | 7,587 | 7,587 | 7,729 | |||||||||||
Preferred Stock (1,305 shares)(C)(F) | 1,305 | 2,276 | ||||||||||||||
|
|
|
| |||||||||||||
| 8,892 | 10,005 | |||||||||||||||
Ginsey Home Solutions, Inc. | Home and Office Furnishings, Housewares, and Durable Consumer Products | Senior Subordinate Term Debt (13.5%, Due 1/2018) (I) | 13,050 | 13,050 | 13,050 | |||||||||||
Preferred Stock (18,898 shares)(C)(F) | 9,393 | 3,082 | ||||||||||||||
Common Stock (63,747 shares)(C)(F) | 8 | — | ||||||||||||||
|
|
|
| |||||||||||||
| 22,451 | 16,132 | |||||||||||||||
Jackrabbit, Inc. | Farming and Agriculture | Line of Credit, $3,000 available (13.5%, Due 4/2014) | — | — | — | |||||||||||
Senior Term Debt (13.5%, Due 4/2018) | 11,000 | 11,000 | 11,000 | |||||||||||||
Preferred Stock (3,556 shares)(C)(F) | 3,556 | 1,963 | ||||||||||||||
Common Stock (548 shares)(C)(F) | 94 | — | ||||||||||||||
|
|
|
| |||||||||||||
| 14,650 | 12,963 | |||||||||||||||
Mathey Investments, Inc. | Machinery (Nonagriculture, Nonconstruction, Nonelectronic) | Senior Term Debt (10.0%, Due 3/2016) | 1,375 | 1,375 | 1,375 | |||||||||||
Senior Term Debt (12.0%, Due 3/2016) | 3,727 | 3,727 | 3,727 | |||||||||||||
Senior Term Debt (12.5%, Due 3/2016)(E) | 3,500 | 3,500 | 3,500 | |||||||||||||
Common Stock (29,102 shares)(C)(F) | 777 | 4,895 | ||||||||||||||
|
|
|
| |||||||||||||
| 9,379 | 13,497 | |||||||||||||||
Mitchell Rubber Products, Inc. | Chemicals, Plastics, and Rubber | Subordinated Term Debt (13.0%, Due 10/2016)(D) | 13,560 | 13,560 | 13,628 | |||||||||||
Preferred Stock (27,900 shares)(C)(F) | 2,790 | 1,086 | ||||||||||||||
Common Stock (27,900 shares)(C)(F) | 28 | — | ||||||||||||||
|
|
|
| |||||||||||||
| 16,378 | 14,714 | |||||||||||||||
Company(A) | Industry | Investment(B) | Principal | Cost | Fair Value | |||||||||||
Schylling, Inc. | Leisure, Amusement, Motion | Senior Secured Term Debt (13.0%, Due 8/2018)(L) | $ | 13,081 | $ | 13,081 | $ | 13,081 | ||||||||
Pictures, Entertainment | Preferred Stock (4,000 shares)(C)(F)(L) | 4,000 | — | |||||||||||||
|
|
|
| |||||||||||||
| 17,081 | 13,081 | |||||||||||||||
Star Seed, Inc. | Farming and Agriculture | Senior Secured Term Debt (12.5%, Due 5/2018)(E)(K) | 5,000 | 5,000 | 4,900 | |||||||||||
Preferred Stock (1,499 shares)(C)(F)(L) | 1,499 | — | ||||||||||||||
Common Stock (600 shares)(C)(F)(L) | 1 | — | ||||||||||||||
|
|
|
| |||||||||||||
| 6,500 | 4,900 | |||||||||||||||
|
|
|
| |||||||||||||
Total Non-Control/Non-Affiliate Investments (represents 37.4% of total investments at fair value) |
| $ | 162,598 | $ | 174,373 | |||||||||||
|
|
|
| |||||||||||||
AFFILIATE INVESTMENTS(O): | ||||||||||||||||
Acme Cryogenics, Inc. | Chemicals, Plastics, and Rubber | Senior Subordinated Secured Term Debt (11.5%, Due 3/2020)(I)(L) | $ | 14,500 | $ | 14,500 | $ | 14,500 | ||||||||
Preferred Stock (965,982 shares)(C)(F)(L) | 7,956 | 8,519 | ||||||||||||||
Common Stock (549,908 shares)(C)(F)(L) | 1,197 | — | ||||||||||||||
Common Stock Warrants (465,639 shares)(C)(F)(L) | 25 | — | ||||||||||||||
|
|
|
| |||||||||||||
| 23,678 | 23,019 | |||||||||||||||
Alloy Die Casting Corp.(M) | Diversified/Conglomerate | Senior Secured Term Debt (13.5%, Due 10/2018)(K) | 12,215 | 12,215 | 12,154 | |||||||||||
Manufacturing | Preferred Stock (4,064 shares)(C)(F)(L) | 4,064 | 4,122 | |||||||||||||
Common Stock (630 shares)(C)(F)(L) | 41 | — | ||||||||||||||
|
|
|
| |||||||||||||
| 16,320 | 16,276 | |||||||||||||||
Behrens Manufacturing, LLC(M) | Diversified/Conglomerate | Senior Secured Term Debt (13.0%, Due 12/2018)(L) | 9,975 | 9,975 | 9,975 | |||||||||||
Manufacturing | Preferred Stock (2,923 shares)(C)(F)(L) | 2,922 | 3,447 | |||||||||||||
|
|
|
| |||||||||||||
| 12,897 | 13,422 | |||||||||||||||
B-Dry, LLC | Personal, Food and Miscellaneous Services | Secured Line of Credit, $175 available (6.5%, Due 12/2016)(L) | 2,075 | 2,075 | 1,124 | |||||||||||
Senior Secured Term Debt (13.5%, Due 12/2019)(L) | 6,433 | 6,443 | 3,490 | |||||||||||||
Senior Secured Term Debt (13.5%, Due 12/2019)(L) | 840 | 840 | 455 | |||||||||||||
Preferred Stock (2,250 shares)(C)(F)(L) | 2,250 | — | ||||||||||||||
Common Stock (2,250 shares)(C)(F)(L) | 300 | — | ||||||||||||||
|
|
|
| |||||||||||||
| 11,908 | 5,069 | |||||||||||||||
B+T Group Acquisition Inc.(M) | Telecommunications | Secured Line of Credit, $700 available (10.0%, Due 6/2015)(L) | 700 | 700 | 700 | |||||||||||
Senior Secured Term Debt (13.0%, Due 12/2019)(L) | 14,000 | 14,000 | 14,000 | |||||||||||||
Preferred Stock (12,841 shares)(C)(F)(L) | 4,196 | 4,541 | ||||||||||||||
|
|
|
| |||||||||||||
| 18,896 | 19,241 | |||||||||||||||
Cambridge Sound Management, Inc. | Home and Office Furnishing, | Senior Secured Term Debt (13.0%, Due 9/2019)(L) | 15,000 | 15,000 | 15,000 | |||||||||||
Housewares and Durable | Preferred Stock (4,500 shares)(C)(F)(L) | 4,500 | 7,198 | |||||||||||||
|
|
|
| |||||||||||||
Consumer Products | 19,500 | 22,198 | ||||||||||||||
Channel Technologies Group, LLC | Diversified/Conglomerate | Preferred Stock (2,279 shares)(C)(F)(L) | 2,864 | 2,315 | ||||||||||||
Manufacturing | Common Stock (2,279,020 shares)(C)(F)(L) | — | — | |||||||||||||
|
|
|
| |||||||||||||
| 2,864 | 2,315 | |||||||||||||||
Counsel Press, Inc. | Diversified/Conglomerate Services | Secured Line of Credit, $500 available (12.8%, Due 3/2017)(J) | 1,500 | 1,500 | 1,500 | |||||||||||
Senior Secured Term Debt (12.8%, Due 3/2020)(J) | 18,000 | 18,000 | 18,000 | |||||||||||||
Senior Secured Term Debt (14.0%, Due 3/2020)(J) | 5,500 | 5,500 | 5,500 | |||||||||||||
Preferred Stock (6,995 shares)(C)(F)(J) | 6,995 | 6,995 | ||||||||||||||
|
|
|
| |||||||||||||
| 31,995 | 31,995 | |||||||||||||||
D.P.M.S., Inc. | Diversified/Conglomerate Manufacturing | Secured Line of Credit, $550 available (4.0%, Due 8/2016)(I)(L) | 4,000 | 4,000 | 762 | |||||||||||
Senior Secured Term Debt (4.0%, Due 8/2016)(I)(L) | 2,575 | 2,575 | 490 | |||||||||||||
Senior Secured Term Debt (4.0%, Due 8/2016)(I)(L) | 8,795 | 8,795 | 1,674 | |||||||||||||
Senior Secured Term Debt (5.0%, Due 8/2016)(E)(L) | 1,150 | 1,150 | 219 | |||||||||||||
Preferred Stock (25 shares)(C)(F)(L) | 2,500 | — | ||||||||||||||
Common Stock Warrants (1,241 shares)(C)(F)(L) | 3 | — | ||||||||||||||
|
|
|
| |||||||||||||
| 19,023 | 3,145 | |||||||||||||||
GLADSTONE INVESTMENT CORPORATION
CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)
MARCH 31, 20142015
(DOLLAR AMOUNTS IN THOUSANDS)
Company(A) | Industry | Investment(B) | Principal | Cost | Fair Value | |||||||||||
Noble Logistics, Inc. | Cargo Transport | Line of Credit, $0 available (10.5%, Due 1/2015)(D) | 800 | 800 | 204 | |||||||||||
Senior Term Debt (11.0%, Due 1/2015)(D) | 7,227 | 7,227 | 1,842 | |||||||||||||
Senior Term Debt (10.5%, Due 1/2015)(D) | 3,650 | 3,650 | 931 | |||||||||||||
Senior Term Debt (10.5%, Due 1/2015)(D)(E) | 3,650 | 3,650 | 931 | |||||||||||||
|
|
|
| |||||||||||||
| 15,327 | 3,908 | |||||||||||||||
Precision Southeast, Inc. | Diversified/Conglomerate Manufacturing | Senior Term Debt (14.0%, Due 12/2015) | 5,617 | 5,617 | 5,617 | |||||||||||
Preferred Stock (19,091 shares)(C)(F) | 1,909 | — | ||||||||||||||
Common Stock (90,909 shares)(C)(F) | 91 | — | ||||||||||||||
|
|
|
| |||||||||||||
| 7,617 | 5,617 | |||||||||||||||
Quench Holdings Corp. | Home and Office Furnishings, Housewares, and Durable Consumer Products | Common Stock (4,770,391 shares)(C)(F) | 3,397 | 5,056 | ||||||||||||
|
|
|
| |||||||||||||
| 3,397 | 5,056 | |||||||||||||||
SBS, Industries, LLC | Machinery (Nonagriculture, Nonconstruction, Nonelectronic) | Senior Term Debt (14.0%, Due 8/2016) | 11,355 | 11,355 | 11,355 | |||||||||||
Preferred Stock (19,935 shares)(C)(F) | 1,994 | 1,064 | ||||||||||||||
Common Stock (221,500 shares)(C)(F) | 221 | — | ||||||||||||||
|
|
|
| |||||||||||||
| 13,570 | 12,419 | |||||||||||||||
Schylling Investments, LLC | Leisure, Amusement, Motion Pictures, Entertainment | Senior Term Debt (13.0%, Due 8/2017)(D) | 13,081 | 13,081 | 13,228 | |||||||||||
Preferred Stock (4,000 shares) (C)(F) | 4,000 | — | ||||||||||||||
|
|
|
| |||||||||||||
| 17,081 | 13,228 | |||||||||||||||
Star Seed, Inc. | Farming and Agriculture | Senior Term Debt (12.5%, Due 4/2018)(D) | 7,500 | 7,500 | 7,594 | |||||||||||
Preferred Stock (1,499 shares)(C)(F) | 1,499 | — | ||||||||||||||
Common Stock (600 shares)(C)(F) | 1 | — | ||||||||||||||
|
|
|
| |||||||||||||
| 9,000 | 7,594 | |||||||||||||||
|
|
|
| |||||||||||||
Total Non-Control/Non-Affiliate Investments (represents 65.4% of total investments at fair value) | $ | 233,895 | $ | 205,440 | ||||||||||||
|
|
|
| |||||||||||||
TOTAL INVESTMENTS(J) | $ | 383,537 | $ | 314,393 | ||||||||||||
|
|
|
| |||||||||||||
Company(A) | Industry | Investment(B) | Principal | Cost | Fair Value | |||||||||||
Edge Adhesives Holdings, Inc.(M) | Diversified/Conglomerate Manufacturing | Secured Line of Credit, $10 available (12.5%, Due 8/2015)(K) | $ | 1,490 | $ | 1,490 | $ | 1,488 | ||||||||
Senior Secured Term Debt (12.5%, Due 2/2019)(K) | 9,300 | 9,300 | 9,300 | |||||||||||||
Senior Subordinated Secured Term Debt (13.8%, Due 2/2019)(K) | 2,400 | 2,400 | 2,403 | |||||||||||||
Preferred Stock (3,474 shares)(C)(F)(L) | 3,474 | 3,199 | ||||||||||||||
|
|
|
| |||||||||||||
| 16,664 | 16,390 | |||||||||||||||
Head Country Food Products, Inc. | Beverage, Food and Tobacco | Senior Secured Term Debt (12.5%, Due 2/2019)(L) | 9,050 | 9,050 | 9,050 | |||||||||||
Preferred Stock (4,000 shares)(C)(F)(L) | 4,000 | 3,931 | ||||||||||||||
|
|
|
| |||||||||||||
| 13,050 | 12,981 | |||||||||||||||
Logo Sportswear, Inc. | Textiles and Leather | Secured Line of Credit, $500 available (10.0%, Due 9/2015)(J) | — | — | — | |||||||||||
Senior Secured Term Debt (12.5%, Due 3/2020)(J) | 9,200 | 9,200 | 9,200 | |||||||||||||
Preferred Stock (1,550 shares)(C)(F)(J) | 1,550 | 1,550 | ||||||||||||||
|
|
|
| |||||||||||||
| 10,750 | 10,750 | |||||||||||||||
Meridian Rack & Pinion, Inc.(M) | Automobile | Senior Secured Term Debt (13.5%, Due 12/2018)(K) | 9,660 | 9,660 | 9,612 | |||||||||||
Preferred Stock (3,381 shares)(C)(F)(L) | 3,381 | 3,117 | ||||||||||||||
|
|
|
| |||||||||||||
| 13,041 | 12,729 | |||||||||||||||
NDLI Acquisition, LLC | Cargo Transport | Secured Line of Credit, $50 available (10.5%, Due 1/2016)(L) | 2,875 | 2,875 | 2,308 | |||||||||||
Senior Secured Term Debt (11.0%, Due 1/2018)(L) | 7,227 | 7,227 | 5,803 | |||||||||||||
Senior Secured Term Debt (10.5%, Due 1/2018)(L) | 3,650 | 3,650 | 2,931 | |||||||||||||
Senior Secured Term Debt (10.5%, Due 1/2018)(E)(L) | 3,650 | 3,650 | 2,930 | |||||||||||||
Preferred Stock (3,600 shares)(C)(F)(L) | 3,600 | — | ||||||||||||||
Common Stock (545 shares)(C)(F)(L) | — | — | ||||||||||||||
|
|
|
| |||||||||||||
| 21,002 | 13,972 | |||||||||||||||
Old World Christmas, Inc. | Home and Office Furnishings, | Senior Secured Term Debt (13.3%, Due 10/2019)(L) | 15,770 | 15,770 | 15,770 | |||||||||||
Housewares, and Durable | Preferred Stock (6,180 shares)(C)(F)(L) | 6,180 | 6,657 | |||||||||||||
|
|
|
| |||||||||||||
Consumer Products | 21,950 | 22,427 | ||||||||||||||
Precision Southeast, Inc. | Diversified/Conglomerate | Senior Secured Term Debt (14.0%, Due 9/2020)(L) | 9,617 | 9,617 | 9,617 | |||||||||||
Manufacturing | Preferred Stock (37,391 shares)(C)(F)(J) | 3,739 | 1,830 | |||||||||||||
Common Stock (90,909 shares)(C)(F)(L) | 91 | — | ||||||||||||||
|
|
|
| |||||||||||||
| 13,447 | 11,447 | |||||||||||||||
SOG Specialty Knives & Tools, LLC | Leisure, Amusement, Motion Pictures, Entertainment | Senior Secured Term Debt (13.3%, Due 10/2017)(L) | 6,200 | 6,200 | 6,200 | |||||||||||
Senior Secured Term Debt (14.8%, Due 10/2017)(L) | 12,200 | 12,200 | 12,200 | |||||||||||||
Preferred Stock (9,749 shares)(C)(F)(L) | 9,749 | 13,451 | ||||||||||||||
|
|
|
| |||||||||||||
| 28,149 | 31,851 | |||||||||||||||
Tread Corporation | Oil and Gas | Secured Line of Credit, $853 available (12.5%, Due 2/2018)(G)(L) | 2,397 | 2,397 | 375 | |||||||||||
Senior Subordinated Secured Term Debt (12.5%, Due 2/2018)(G)(I)(L) | 5,000 | 5,000 | 782 | |||||||||||||
Senior Subordinated Secured Term Debt (12.5%, Due 2/2018)(G)(I)(L) | 2,750 | 2,750 | 430 | |||||||||||||
Senior Subordinated Secured Term Debt (12.5%, Due 2/2018)(G)(I)(L) | 1,000 | 1,000 | 156 | |||||||||||||
Senior Subordinated Secured Term Debt (12.5%, Due on Demand)(G)(I)(L) | 510 | 510 | 80 | |||||||||||||
Preferred Stock (3,332,765 shares)(C)(F)(L) | 3,333 | — | ||||||||||||||
Common Stock (7,716,320 shares)(C)(F)(L) | 501 | — | ||||||||||||||
Common Stock Warrants (2,372,727 shares)(C)(F)(L) | 3 | — | ||||||||||||||
|
|
|
| |||||||||||||
| 15,494 | 1,823 | |||||||||||||||
|
|
|
| |||||||||||||
Total Affiliate Investments (represents 58.2% of total investments at fair value) |
| $ | 310,628 | $ | 271,050 | |||||||||||
|
|
|
| |||||||||||||
GLADSTONE INVESTMENT CORPORATION
CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)
MARCH 31, 2015
(DOLLAR AMOUNTS IN THOUSANDS)
Company(A) | Industry | Investment(B) | Principal | Cost | Fair Value | |||||||||||
CONTROL INVESTMENTS(P): | ||||||||||||||||
Galaxy Tool Holding Corporation | Aerospace and Defense | Secured Line of Credit, $1,250 available (10.0%, Due 9/2015)(L) | $ | 3,250 | $ | 3,250 | $ | 3,250 | ||||||||
Senior Subordinated Secured Term Debt (13.5%, Due 8/2017)(L) | 15,520 | 15,520 | 15,520 | |||||||||||||
Preferred Stock (6,039,387 shares)(C)(F)(L) | 11,464 | — | ||||||||||||||
Common Stock (88,843 shares)(C)(F)(L) | 48 | — | ||||||||||||||
|
|
|
| |||||||||||||
| 30,282 | 18,770 | |||||||||||||||
Roanoke Industries Corp. | Buildings and Real Estate | Senior Secured Term Debt (10.0%, Due 11/2019)(I)(L) | 1,650 | 1,650 | 1,650 | |||||||||||
Common Stock (57 shares)(C)(F)(L) | 100 | 210 | ||||||||||||||
|
|
|
| |||||||||||||
| 1,750 | 1,860 | |||||||||||||||
|
|
|
| |||||||||||||
Total Control Investments (represents 4.4% of total investments at fair value) | $ | 32,032 | $ | 20,630 | ||||||||||||
|
|
|
| |||||||||||||
TOTAL INVESTMENTS(Q) | $ | 505,258 | $ | 466,053 | ||||||||||||
|
|
|
| |||||||||||||
| (A) | Certain of the securities listed |
| (B) | Percentages represent the weighted average cash interest rates in effect at March 31, |
| (C) | Security is non-income producing. |
| (D) |
| (E) | Last Out Tranche (“LOT”) of senior secured debt, meaning if the portfolio company is liquidated, the holder of the LOT is paid after the other senior debt but before the senior subordinated debt. |
| (F) | Where applicable, 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) |
| $ |
| (I) | Debt security has a fixed interest rate. |
| (J) | New portfolio investment valued at cost, as it was determined that the price paid during the three months ended March 31, 2015 best represents fair value as of March 31, 2015. |
| (K) | Fair value was based on internal yield analysis or on estimates of value submitted by Standard & Poor’s Securities Evaluations, Inc. (“SPSE”). |
| (L) | Fair value was based on the total enterprise value of the portfolio company, which is generally allocated to the portfolio company’s securities in order of their relative priority in the capital structure. |
| (M) | One of our affiliated funds, Gladstone Capital Corporation (“Gladstone Capital”), co-invested with us in this portfolio company pursuant to an exemptive order granted by the Securities and Exchange Commission (“SEC”). |
| (N) | Non-Control/Non-Affiliate investments, as defined by the 1940 Act, are those that are neither Control nor Affiliate investments and in which we own less than 5.0% of the issued and outstanding voting securities. |
| (O) | Affiliate investments, as defined by the 1940 Act, are those that are not Control investments, and in which we own, with the power to vote, between and inclusive of 5.0% and 25.0% of the issued and outstanding voting securities. |
| (P) | Control investments, as defined by the 1940 Act, are those where we have the power to exercise a controlling influence over the management or policies of the portfolio company, which may include owning, with the power to vote, more than 25.0% of the issued and outstanding voting securities. |
| (Q) | Cumulative gross unrealized depreciation for federal income tax purposes is |
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
GLADSTONE INVESTMENT CORPORATION
CONSOLIDATED SCHEDULE OF INVESTMENTS
MARCH 31, 20132014
(DOLLAR AMOUNTS IN THOUSANDS)
Company(A) | Industry | Investment(B) | Principal | Cost | Fair Value | |||||||||||
CONTROL INVESTMENTS: | ||||||||||||||||
Danco Acquisition Corp. | Diversified/Conglomerate Manufacturing | Line of Credit, $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 | |||||||||||||||
Galaxy Tool Holding Corp. | Aerospace and Defense | 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 | |||||||||||||||
SOG Specialty K&T, LLC | Leisure, Amusement, Motion Pictures, Entertainment | Senior Term Debt (13.3%, Due 8/2016) | 6,200 | 6,200 | 6,200 | |||||||||||
Senior Term Debt (14.8%, Due 8/2016) | 12,199 | 12,199 | 12,199 | |||||||||||||
Preferred Stock (9,749 shares)(C)(F) | 9,749 | 11,423 | ||||||||||||||
|
|
|
| |||||||||||||
| 28,148 | 29,822 | |||||||||||||||
Venyu Solutions, Inc. | Electronics | Senior Subordinated Term Debt (11.3%, Due 10/2015) | 7,000 | 7,000 | 7,000 | |||||||||||
Senior Subordinated Term Debt (14.0%, Due 10/2015) | 12,000 | 12,000 | 12,000 | |||||||||||||
Preferred Stock (5,400 shares)(C)(F) | 6,000 | 24,970 | ||||||||||||||
|
|
|
| |||||||||||||
| 25,000 | 43,970 | |||||||||||||||
|
|
|
| |||||||||||||
Total Control Investments (represents 34.4% of total investments at fair value) | $ | 98,701 | $ | 98,515 | ||||||||||||
|
|
|
| |||||||||||||
AFFILIATE INVESTMENTS: | ||||||||||||||||
Channel Technologies Group, LLC | Diversified/Conglomerate Manufacturing | Line of Credit, $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 | |||||||||||||||
Packerland Whey Products, Inc. | Beverage, Food, and Tobacco | Preferred Stock (248 shares)(C)(F) | 2,479 | 367 | ||||||||||||
Common Stock (247 shares)(C)(F) | 21 | — | ||||||||||||||
|
|
|
| |||||||||||||
| 2,500 | 367 | |||||||||||||||
Tread Corp. | Oil and Gas | Line of Credit, $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 | — | |||||||||||||||
|
|
|
| |||||||||||||
Total Affiliate Investments (represents 6.4% of total investments at fair value) | $ | 36,528 | $ | 18,216 | ||||||||||||
|
|
|
| |||||||||||||
Company(A) | Industry | Investment(B) | Principal | Cost | Fair Value | |||||||||||
NON-CONTROL/NON-AFFILIATE INVESTMENTS(N): | ||||||||||||||||
Acme Cryogenics, Inc. | Chemicals, Plastics, and Rubber | Senior Subordinated Secured Term Debt (11.5%, Due 3/2015)(I)(L) | $ | 14,500 | $ | 14,500 | $ | 14,500 | ||||||||
Preferred Stock (898,814 shares(C)(F)(L) | 6,984 | 11,276 | ||||||||||||||
Common Stock (418,072 shares)(C)(F)(L) | 1,045 | — | ||||||||||||||
Common Stock Warrants (465,639 shares)(C)(F)(L) | 25 | — | ||||||||||||||
|
|
|
| |||||||||||||
| 22,554 | 25,776 | |||||||||||||||
Alloy Die Casting Corp.(M) | Diversified/Conglomerate | Senior Secured Term Debt (13.5%, Due 10/2018)(K) | 12,215 | 12,215 | 12,261 | |||||||||||
Manufacturing | Preferred Stock (4,064 shares)(C)(F)(L) | 4,064 | 1,948 | |||||||||||||
Common Stock (630 shares)(C)(F)(L) | 41 | — | ||||||||||||||
|
|
|
| |||||||||||||
| 16,320 | 14,209 | |||||||||||||||
Auto Safety House, LLC(M) | Automobile | Secured Line of Credit, $1,000 available (7.0%, Due 10/2018)(I)(K) | 5,000 | 5,000 | 4,925 | |||||||||||
Guaranty ($500)(D) | ||||||||||||||||
Guaranty ($250)(D) | ||||||||||||||||
|
|
|
| |||||||||||||
| 5,000 | 4,925 | |||||||||||||||
B-Dry, LLC | Buildings and Real Estate | Secured Line of Credit, $0 available (6.5%, Due 5/2014)(K) | 750 | 750 | 566 | |||||||||||
Senior Secured Term Debt (13.5%, Due 5/2014)(K) | 6,433 | 6,443 | 4,865 | |||||||||||||
Senior Secured Term Debt (13.5%, Due 5/2014)(K) | 2,840 | 2,840 | 2,144 | |||||||||||||
Common Stock Warrants (85 shares)(C)(F)(L) | 300 | — | ||||||||||||||
|
|
|
| |||||||||||||
| 10,333 | 7,575 | |||||||||||||||
Cavert II Holding Corp. | Containers, Packaging, and Glass | Preferred Stock (18,446 shares)(C)(F)(L) | 1,845 | 3,023 | ||||||||||||
|
|
|
| |||||||||||||
| 1,845 | 3,023 | |||||||||||||||
Country Club Enterprises, LLC | Automobile | Senior Subordinated Secured Term Debt (18.6%, Due 11/2014)(L) | 4,000 | 4,000 | 4,000 | |||||||||||
Preferred Stock (7,079,792 shares)(C)(F)(L) | 7,725 | 3,670 | ||||||||||||||
Guaranty ($2,000)(D) | ||||||||||||||||
Guaranty ($878)(D) | ||||||||||||||||
|
|
|
| |||||||||||||
| 11,725 | 7,670 | |||||||||||||||
Drew Foam Company, Inc. | Chemicals, Plastics, and Rubber | Senior Secured Term Debt (13.5%, Due 8/2017)(L) | 10,913 | 10,913 | 10,913 | |||||||||||
| �� | Preferred Stock (34,045 shares)(C)(F)(L) | 3,375 | 1,351 | |||||||||||||
Common Stock (5,372 shares)(C)(F)(L) | 63 | — | ||||||||||||||
|
|
|
| |||||||||||||
| 14,351 | 12,264 | |||||||||||||||
Frontier Packaging, Inc. | Containers, Packaging, and Glass | Senior Secured Term Debt (12.0%, Due 12/2017)(L) | 12,500 | 12,500 | 12,500 | |||||||||||
Preferred Stock (1,373 shares)(C)(F)(L) | 1,373 | 1,522 | ||||||||||||||
Common Stock (152 shares)(C)(F)(L) | 152 | 843 | ||||||||||||||
|
|
|
| |||||||||||||
| 14,025 | 14,865 | |||||||||||||||
Funko, LLC(M) | Personal and Non-Durable Consumer Products (Manufacturing Only) | Senior Subordinated Secured Term Debt (12.0% and 1.5% PIK, Due 5/2019)(K) | 7,587 | 7,587 | 7,729 | |||||||||||
Preferred Stock (1,305 shares)(C)(F)(L) | 1,305 | 2,276 | ||||||||||||||
|
|
|
| |||||||||||||
| 8,892 | 10,005 | |||||||||||||||
Ginsey Home Solutions, Inc. | Home and Office Furnishings, | Senior Subordinate Secured Term Debt (13.5%, Due 1/2018)(H)(L) | 13,050 | 13,050 | 13,050 | |||||||||||
Housewares, and Durable | Preferred Stock (18,898 shares(C)(F)(L) | 9,393 | 3,082 | |||||||||||||
Consumer Products | Common Stock (63,747 shares)(C)(F)(L) | 8 | — | |||||||||||||
|
|
|
| |||||||||||||
| 22,451 | 16,132 | |||||||||||||||
Jackrabbit, Inc. | Farming and Agriculture | Secured Line of Credit, $3,000 available (13.5%, Due 4/2014)(L) | — | — | — | |||||||||||
Senior Secured Term Debt (13.5%, Due 4/2018)(L) | 11,000 | 11,000 | 11,000 | |||||||||||||
Preferred Stock (3,556 shares)(C)(F)(L) | 3,556 | 1,963 | ||||||||||||||
Common Stock (548 shares)(C)(F)(L) | 94 | — | ||||||||||||||
|
|
|
| |||||||||||||
| 14,650 | 12,963 | |||||||||||||||
Mathey Investments, Inc. | Machinery (Nonagriculture, | Senior Secured Term Debt (10.0%, Due 3/2016)(L) | 1,375 | 1,375 | 1,375 | |||||||||||
Nonconstruction, Nonelectronic) | Senior Secured Term Debt (12.0%, Due 3/2016)(L) | 3,727 | 3,727 | 3,727 | ||||||||||||
Senior Secured Term Debt (12.5%,Due 3/2016)(E)(I)(L) | 3,500 | 3,500 | 3,500 | |||||||||||||
Common Stock (29,102 shares)(C)(F)(L) | 777 | 4,895 | ||||||||||||||
|
|
|
| |||||||||||||
| 9,379 | 13,497 | |||||||||||||||
GLADSTONE INVESTMENT CORPORATION
CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)
MARCH 31, 20132014
(DOLLAR AMOUNTS IN THOUSANDS)
Company(A) | Industry | Investment(B) | Principal | Cost | Fair Value | |||||||||||
NON-CONTROL/NON-AFFILIATE INVESTMENTS: | ||||||||||||||||
Acme Cryogenics, Inc. | Chemicals, Plastics, and Rubber | Senior Subordinated Term Debt (11.5%, Due 3/2015) | $ | 14,500 | $ | 14,500 | $ | 14,500 | ||||||||
Preferred Stock (898,814 shares)(F) | 6,984 | 11,292 | ||||||||||||||
Common Stock (418,072 shares)(C)(F) | 1,045 | 1,179 | ||||||||||||||
Common Stock Warrants (465,639 | 25 | 369 | ||||||||||||||
|
|
|
| |||||||||||||
| 22,554 | 27,340 | |||||||||||||||
Auto Safety House, LLC | Automobile | Line of Credit, $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 | 4 | — | ||||||||||||||
Guaranty ($500) | — | — | ||||||||||||||
|
|
|
| |||||||||||||
| 16,410 | — | |||||||||||||||
B-Dry, LLC | Buildings and Real Estate | Line of Credit, $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 | |||||||||||||||
Cavert II Holding Corp. | Containers, Packaging, and Glass | 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 | |||||||||||||||
Country Club Enterprises, LLC | Automobile | Senior Subordinated Term Debt (18.6%, Due 11/2014) | 4,000 | 4,000 | 4,000 | |||||||||||
Preferred Stock (7,304,792 shares)(C)(F) | 7,725 | 3,467 | ||||||||||||||
Guaranty ($2,000) | — | — | ||||||||||||||
Guaranty ($1,370) | — | — | ||||||||||||||
|
|
|
| |||||||||||||
| 11,725 | 7,467 | |||||||||||||||
Drew Foam Company, Inc. | Chemicals, Plastics, and Rubber | 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. | Containers, Packaging, and Glass | Senior Term Debt (12.0%, 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 | |||||||||||||||
Ginsey Home Solutions, Inc. | Home and Office Furnishings, Housewares, and Durable Consumer Products | Senior Subordinate Term Debt (13.5%, Due 1/2018)(H) | 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. | Machinery (Nonagriculture, Nonconstruction, Nonelectronic) | 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. | Chemicals, Plastics, and Rubber | Subordinated Term Debt (13.0%, Due 10/2016)(D) | 13,560 | 13,560 | 13,679 | |||||||||||
Preferred Stock (27,900 shares)(C)(F) | 2,790 | 3,051 | ||||||||||||||
Common Stock (27,900 shares)(C)(F) | 28 | — | ||||||||||||||
|
|
|
| |||||||||||||
| 16,378 | 16,730 | |||||||||||||||
Noble Logistics, Inc. | Cargo Transport | Line of Credit, $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 | |||||||||||||||
Precision Southeast, Inc. | Diversified/Conglomerate Manufacturing | Senior Term Debt (14.0%, Due 12/2015) | 7,775 | 7,775 | 7,775 | |||||||||||
Preferred Stock (19,091 shares)(C)(F) | 1,909 | 2,273 | ||||||||||||||
Common Stock (90,909 shares)(C)(F) | 90 | 955 | ||||||||||||||
|
|
|
| |||||||||||||
| 9,774 | 11,003 | |||||||||||||||
Company(A) | Industry | Investment(B) | Principal | Cost | Fair Value | |||||||||||
Mitchell Rubber Products, Inc. | Chemicals, Plastics and Rubber | Subordinated Secured Term Debt (13.0%, Due 10/2016)(I)(K) | $ | 13,560 | $ | 13,560 | $ | 13,628 | ||||||||
Preferred Stock (27,900 shares)(C)(F)(L) | 2,790 | 1,086 | ||||||||||||||
Common Stock (27,900 shares)(C)(F)(L) | 28 | — | ||||||||||||||
|
|
|
| |||||||||||||
| 16,378 | 14,714 | |||||||||||||||
Noble Logistics, Inc. | Cargo Transport | Secured Line of Credit, $0 available (10.5%, Due 1/2015)(K) | 800 | 800 | 204 | |||||||||||
Senior Secured Term Debt (11.0%, Due 1/2015)(K) | 7,227 | 7,227 | 1,842 | |||||||||||||
Senior Secured Term Debt (10.5%, Due 1/2015)(K) | 3,650 | 3,650 | 931 | |||||||||||||
Senior Secured Term Debt (10.5%, Due 1/2015)(E)(K) | 3,650 | 3,650 | 931 | |||||||||||||
|
|
|
| |||||||||||||
| 15,327 | 3,908 | |||||||||||||||
Precision Southeast, Inc. | Diversified/Conglomerate | Senior Secured Term Debt (14.0%, Due 12/2015)(L) | 5,617 | 5,617 | 5,617 | |||||||||||
Manufacturing | Preferred Stock(19,091 shares)(C)(F)(L) | 1,909 | — | |||||||||||||
Common Stock (90,909 shares)(C)(F)(L) | 91 | — | ||||||||||||||
|
|
|
| |||||||||||||
| 7,617 | 5,617 | |||||||||||||||
Quench Holdings Corp. | Home and Office Furnishings, Housewares, and Durable Consumer Products | Common Stock (4,770,391 shares)(C)(F)(L) | 3,397 | 5,056 | ||||||||||||
|
|
|
| |||||||||||||
| 3,397 | 5,056 | |||||||||||||||
SBS, Industries, LLC | Machinery (Nonagriculture, | Senior Secured Term Debt (14.0%, Due 8/2016)(L) | 11,355 | 11,355 | 11,355 | |||||||||||
Nonconstruction, Nonelectronic) | Preferred Stock (19,935 shares)(C)(F)(L) | 1,994 | 1,064 | |||||||||||||
Common Stock (221,500 shares)(C)(F)(L) | 221 | — | ||||||||||||||
|
|
|
| |||||||||||||
| 13,570 | 12,419 | |||||||||||||||
Schylling, Inc. | Leisure, Amusement, Motion | Senior Secured Term Debt (13.0%, Due 8/2017)(K) | 13,081 | 13,081 | 13,228 | |||||||||||
Pictures, Entertainment | Preferred Stock (4,000 shares)(C)(F)(L) | 4,000 | — | |||||||||||||
|
|
|
| |||||||||||||
| 17,081 | 13,228 | |||||||||||||||
Star Seed, Inc. | Farming and Agriculture | Senior Secured Term Debt (12.5%, Due 4/2018)(K) | 7,500 | 7,500 | 7,594 | |||||||||||
Preferred Stock (1,499 shares)(C)(F)(L) | 1,499 | — | ||||||||||||||
Common Stock (600 shares)(C)(F)(L) | 1 | — | ||||||||||||||
|
|
|
| |||||||||||||
| 9,000 | 7,594 | |||||||||||||||
|
|
|
| |||||||||||||
Total Non-Control/Non-Affiliate Investments (represents 65.4% of total investments at fair value) | $ | 233,895 | $ | 205,440 | ||||||||||||
|
|
|
| |||||||||||||
AFFILIATE INVESTMENTS(O): | ||||||||||||||||
Behrens Manufacturing, LLC(M) | Diversified/Conglomerate | Senior Secured Term Debt (13.0%, Due 12/2018)(L) | $ | 9,975 | $ | 9,975 | $ | 9,975 | ||||||||
Manufacturing | Preferred Stock (2,923 shares)(C)(F)(L) | 2,922 | 2,754 | |||||||||||||
|
|
|
| |||||||||||||
| 12,897 | 12,729 | |||||||||||||||
Channel Technologies Group, LLC | Diversified/Conglomerate | Preferred Stock (2,279 shares)(C)(F)(L) | 2,864 | 3,122 | ||||||||||||
Manufacturing | Common Stock (2,279,020 shares)(C)(F)(L) | — | — | |||||||||||||
|
|
|
| |||||||||||||
| 2,864 | 3,122 | |||||||||||||||
D.P.M.S., Inc. | Diversified/Conglomerate | Secured Line of Credit, $700 available (4.0%, Due 8/2015)(I)(K) | 3,450 | 3,450 | 690 | |||||||||||
Manufacturing | Senior Secured Term Debt (4.0%, Due 8/2015)(I)(K) | 2,575 | 2,575 | 515 | ||||||||||||
Senior Secured Term Debt (4.0%, Due 8/2015)(I)(K) | 8,795 | 8,795 | 1,759 | |||||||||||||
Senior Secured Term Debt (5.0%, Due 8/2015)(E)(K) | 1,150 | 1,150 | 236 | |||||||||||||
Preferred Stock (25 shares)(C)(F)(L) | 2,500 | — | ||||||||||||||
Common Stock (1,241 shares)(C)(F)(L) | 3 | — | ||||||||||||||
|
|
|
| |||||||||||||
| 18,473 | 3,200 | |||||||||||||||
Edge Adhesives Holdings, Inc.(M) | Diversified/Conglomerate | Secured Line of Credit, $705 available (10.5%, Due 8/2014)(J) | 795 | 795 | 795 | |||||||||||
Manufacturing | Senior Secured Term Debt (12.5%, Due 2/2019)(J) | 9,300 | 9,300 | 9,300 | ||||||||||||
Senior Subordinated Secured Term Debt (13.5%, Due 2/2019)(J) | 2,400 | 2,400 | 2,400 | |||||||||||||
Preferred Stock (3,474 shares)(C)(F)(J) | 3,474 | 3,474 | ||||||||||||||
|
|
|
| |||||||||||||
| 15,969 | 15,969 | |||||||||||||||
Head Country Food Products, Inc. | Beverage, Food and Tobacco | Secured Line of Credit, $500 available (10.0%, Due 8/2014)(J) | — | — | — | |||||||||||
Senior Secured Term Debt (12.5%, Due 2/2019)(J) | 9,050 | 9,050 | 9,050 | |||||||||||||
Preferred Stock (4,000 shares)(C)(F)(J) | 4,000 | 4,000 | ||||||||||||||
|
|
|
| |||||||||||||
| 13,050 | 13,050 | |||||||||||||||
GLADSTONE INVESTMENT CORPORATION
CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)
MARCH 31, 20132014
(DOLLAR AMOUNTS IN THOUSANDS)
Company(A) | Industry | Investment(B) | Principal | Cost | Fair Value | |||||||||||
Quench Holdings Corp. | Home and Office Furnishings, Housewares, and Durable Consumer Products | Preferred Stock (388 shares)(C)(F) | $ | 2,950 | $ | 1,679 | ||||||||||
Common Stock (35,242 shares)(C)(F) | 447 | — | ||||||||||||||
|
|
|
| |||||||||||||
| 3,397 | 1,679 | |||||||||||||||
SBS, Industries, LLC | Machinery (Nonagriculture, Nonconstruction, Nonelectronic) | 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 | |||||||||||||||
|
|
|
| |||||||||||||
Total Non-Control/Non-Affiliate Investments (represents 59.2% of total investments at fair value) |
| $ | 191,822 | $ | 169,751 | |||||||||||
|
|
|
| |||||||||||||
TOTAL INVESTMENTS(I) |
| $ | 326,421 | $ | 286,482 | |||||||||||
|
|
|
| |||||||||||||
Company(A) | Industry | Investment(B) | Principal | Cost | Fair Value | |||||||||||
Meridian Rack & Pinion, Inc.(M) | Automobile | Senior Secured Term Debt (13.5%, Due 12/2018)(K) | $ | 9,660 | $ | 9,660 | $ | 9,672 | ||||||||
Preferred Stock (3,381 shares)(C)(F)(L) | 3,381 | 3,468 | ||||||||||||||
|
|
|
| |||||||||||||
| 13,041 | 13,140 | |||||||||||||||
SOG Specialty Knives & Tools, LLC. | Leisure, Amusement, Motion | Senior Secured Term Debt (13.3%, Due 8/2016)(L) | 6,200 | 6,200 | 6,200 | |||||||||||
Pictures, Entertainment | Senior Secured Term Debt (14.8%, Due 8/2016)(L) | 12,199 | 12,199 | 12,199 | ||||||||||||
Preferred Stock (9,749 shares)(C)(F)(L) | 9,749 | 8,240 | ||||||||||||||
|
|
|
| |||||||||||||
| 28,148 | 26,639 | |||||||||||||||
Tread Corporation | Oil and Gas | Secured Line of Credit, $779 available (12.5%, | 2,471 | 2,471 | — | |||||||||||
Senior Subordinated Secured Term Debt (12.5%, | 5,000 | 5,000 | — | |||||||||||||
Senior Subordinated Secured Term Debt (12.5%, | 2,750 | 2,750 | — | |||||||||||||
Senior Subordinated Secured Term Debt (12.5%, | 1,000 | 1,000 | — | |||||||||||||
Senior Subordinated Secured Term Debt (12.5%, | 510 | 510 | — | |||||||||||||
Preferred Stock (3,332,765 shares)(C)(F)(L) | 3,333 | — | ||||||||||||||
Common Stock (7,716,320 shares)(C)(F)(L) | 501 | — | ||||||||||||||
Common Stock Warrants (2,372,727 shares)(C)(F)(L) | 3 | — | ||||||||||||||
|
|
|
| |||||||||||||
| 15,568 | — | |||||||||||||||
|
|
|
| |||||||||||||
Total Affiliate Investments (represents 27.9% of total investments at fair value) | $ | 120,010 | $ | 87,849 | ||||||||||||
CONTROL INVESTMENTS(P): | ||||||||||||||||
Galaxy Tool Holding Corp. | Aerospace and Defense | Senior Subordinated Secured Term Debt (13.5%, | $ | 15,520 | $ | 15,520 | $ | 15,520 | ||||||||
Preferred Stock (6,039,387 shares)(C)(F)(L) | 11,464 | 2,992 | ||||||||||||||
Common Stock (88,843 shares)(C)(F)(L) | 48 | — | ||||||||||||||
|
|
|
| |||||||||||||
| 27,032 | 18,512 | |||||||||||||||
NDLI Acquisition, LLC | Cargo Transport | Preferred Stock (2,600 shares)(C)(F)(L) | 2,600 | 2,592 | ||||||||||||
Common Stock (545 shares)(C)(F)(L) | — | — | ||||||||||||||
|
|
|
| |||||||||||||
| 2,600 | 2,592 | |||||||||||||||
|
|
|
| |||||||||||||
Total Control Investments (represents 6.7% of total investments at fair value) | $ | 29,632 | $ | 21,104 | ||||||||||||
|
|
|
| |||||||||||||
TOTAL INVESTMENTS(Q) | $ | 383,537 | $ | 314,393 | ||||||||||||
|
|
|
| |||||||||||||
| (A) | Certain of the securities listed |
| (B) | Percentages represent the weighted average cash interest rates in effect |
| (C) | Security is non-income producing. |
| (D) |
| (E) | LOT of senior secured debt, meaning if the portfolio company is liquidated, the holder of the LOT is paid after the other senior debt |
| (F) | Where applicable, aggregates all shares of such class of stock owned without regard to specific series owned within such class |
| (G) | Debt security is on non-accrual status. |
| (H) | $ |
| (I) |
| (J) | New portfolio investment valued at cost, as it was determined that the price paid during the three months ended March 31, 2014 best represents fair value as of March 31, 2014. |
| (K) | Fair value was based on internal yield analysis or on estimates of value submitted by SPSE. |
| (L) | Fair value was based on the total enterprise value of the portfolio company, which is generally allocated to the portfolio company’s securities in order of their relative priority in the capital structure. |
| (M) | One of our affiliated funds, Gladstone Capital, co-invested with us in this portfolio company pursuant to an exemptive order granted by the SEC. |
| (N) | Non-Control/Non-Affiliate investments, as defined by the 1940 Act, are those that are neither Control nor Affiliate investments and in which we own less than 5.0% of the issued and outstanding voting securities. |
| (O) | Affiliate investments, as defined by the 1940 Act, are those that are not Control investments, and in which we own, with the power to vote, between and inclusive of 5.0% and 25.0% of the issued and outstanding voting securities. |
| (P) | Control investments, as defined by the 1940 Act, are those where we have the power to exercise a controlling influence over the management or policies of the portfolio company, which may include owning, with the power to vote, more than 25.0% of the issued and outstanding voting securities. |
| (Q) | Cumulative gross unrealized depreciation for federal income tax purposes is |
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
GLADSTONE INVESTMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 20132015
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA AND AS OTHERWISE INDICATED)
NOTE 1. ORGANIZATION
Gladstone Investment Corporation (“Gladstone Investment”) was incorporated under the General Corporation Law of the State of Delaware on February 18, 2005, and completed an initial public offering on June 22, 2005. The terms “the Company,” “we,” “our” and “us” all refer to Gladstone Investment and its consolidated subsidiaries. We are 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”), and is applying the guidance of FASB ASC Topic 946Financial Services-Investment Companies. 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 secured term loans, senior subordinated secured loans and junior subordinated secured 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. 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 allocation of approximately 80%75.0% debt investments and 20%25.0% 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 also have significant subsidiaries (as defined under Rule 1-02(w) of the U.S. Securities and Exchange Commission’s (“SEC”) Regulation S-X) whose financial statements are not consolidated with ours. Refer to Note 14—Unconsolidated Significant Subsidiaries for additional information regarding our unconsolidated significant subsidiaries.
We are externally managed by Gladstone Management Corporation (the “Adviser”), an affiliate of ours and a Securities and Exchange Commission (“SEC”)SEC registered investment adviser, pursuant to an investment advisory agreement and management agreement. Administrative services are provided by Gladstone Administration, LLC (the “Administrator”), an affiliate of ours and the Adviser, pursuant to an administration agreement.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
TheseConsolidated Financial Statements and the accompanying notes are prepared in accordance with GAAPaccounting principles generally accepted in the U.S. (“GAAP”) and conform to Regulation S-X under the Securities Exchange Act of 1934, as amended. Management believes it has made all necessary adjustments so that our accompanyingConsolidated Financial Statements are presented fairly and that all such adjustments are of a normal recurring nature. Our accompanyingConsolidated Financial Statements include our accounts and the accounts of our wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated.
Revisions
Certain amounts in the prior year’s financial statements have been revised to correct the presentation for the year ended March 31, 2014 with no effect on our financial condition or results of operations. The specific amounts that were revised relate to our change in the classification of certain of our investments between control, affiliate and non-control/non-affiliate. See “Classification of Investments” below for the current definition of each. The general change in the definition from prior reported periods to the year ended March 31, 2014, relate to the use of voting equity securities as the primary determinate of classification compared to the use of both voting and non-voting equity securities in prior periods. Management evaluated this error in presentation and concluded it was not material to any previously issued financial statements for the years ended March 31, 2013 and 2012. The impact of the revision is shown in the table below:
| As of March 31, 2013 | ||||||||
| As Previously Reported | As Revised | |||||||
Investments at fair value | ||||||||
Control investments | $ | 243,803 | $ | 98,515 | ||||
Affiliate investments | 36,659 | 18,216 | ||||||
Non-Control/Non-Affiliate investments | 6,020 | 169,751 | ||||||
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Total investments at fair value | $ | 286,482 | $ | 286,482 | ||||
Interest income Control investments Affiliate investments Non-Control/Non-Affiliate investments Cash and cash equivalents Total interest income Other income Control investments Affiliate investments Non-Control/Non-Affiliate investments Total other income Net realized gain Control investments Non-Control/Non-Affiliate investments Other Total net realized gain Net unrealized (depreciation) appreciation Control investments Affiliate investments Non-Control/Non-Affiliate investments Other Total net unrealized (depreciation) appreciation Year Ended March 31, 2013 Year Ended March 31, 2012 As Previously
Reported As Revised As Previously
Reported As Revised $ 17,568 $ 6,388 $ 12,548 $ 4,972 5,897 3,114 5,593 1,497 1,329 15,292 1,440 13,112 4 4 7 7 24,798 24,798 19,588 19,588 5,339 4,106 1,477 — 401 — — — — 1,634 177 1,654 5,740 5,740 1,654 1,654 843 (6 ) 5,087 (269 ) — 849 4 5,360 (41 ) (41 ) (40 ) (40 ) 802 802 5,051 5,051 9,480 27,740 3,045 396 (4,723 ) (19,214 ) (596 ) 1,945 (3,953 ) (7,722 ) 714 822 (815 ) (815 ) 9 9 $ (11 ) $ (11 ) $ 3,172 $ 3,172
Additionally, certain investments in ourConsolidated Schedule of Investments as of March 31, 2013 were moved based upon their new classifications.
Classification of Investments
In accordance with the BDC regulations in the 1940 Act, we classify portfolio investments on our accompanyingConsolidated Statements of Assets and Liabilities,Consolidated Statements of Operations andConsolidated Schedules of Investments into the following categories:
Consolidation
Under Article 6 of Regulation S-X under the Securities Act of 1933, as amended, 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 subsidiary or other entity that is not an investment company, including those in which we have a controlling interest.
Use of Estimates
Preparing financial statements requires management to make estimates and assumptions that affect the amounts reported in our accompanyingConsolidated Financial Statements and accompanying notes. Actual results may differ from those estimates.
CashRevisions
Certain amounts in our prior fiscal year’s financial statements have been revised to correct the net presentation of certain fees in our results of operations. The Adviser services, administers and collects on the loans held by Business Investment, in return for which the Adviser receives a 2.0% annual fee from Business Investment. This entire loan servicing fee paid to the Adviser by Business Investment is voluntarily and irrevocably credited against the base management fee otherwise payable to the Adviser, since Business Investment is a consolidated subsidiary of the Company, and overall, the base management fee (including any loan servicing fee) cannot exceed 2.0% of total assets (as reduced by cash and cash equivalents pledged to creditors) during any given calendar year pursuant to the Advisory Agreement. Previously, we incorrectly presented the loan servicing fee on a net basis, which is zero because it is 100.0% credited back to us. We have revised our fee presentation related to these loan servicing fees to reflect the gross fee and related gross credit amounts. Management evaluated this error in presentation and concluded it was not material to the previously issued consolidated financial statements for the years ended March 31, 2014 and 2013. The impact of the revisions are shown in the table below:
| Year Ended March 31, 2014 | Year Ended March 31, 2013 | |||||||||||||||
| As Previously Reported | As Revised | As Previously Reported | As Revised | |||||||||||||
Expenses | ||||||||||||||||
Aggregate expenses (not revised) | $ | 19,266 | $ | 19,266 | $ | 15,378 | $ | 15,378 | ||||||||
Loan servicing fee | — | 4,326 | — | 3,725 | ||||||||||||
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Expenses before credits from Adviser | 19,266 | 23,592 | 15,378 | 19,103 | ||||||||||||
Credits to base management fee—loan servicing fee | — | (4,326 | ) | — | (3,725 | ) | ||||||||||
Credits to fees from Adviser—other | (2,309 | ) | (2,309 | ) | (1,328 | ) | (1,328 | ) | ||||||||
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Total Expenses, Net of Credits to Fees | $ | 16,957 | $ | 16,957 | $ | 14,050 | $ | 14,050 | ||||||||
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Classification of Investments
We consider all short-term, highly liquidIn accordance with the BDC regulations in the 1940 Act, we classify portfolio investments that are both readily convertible to cashon our accompanyingConsolidated Statements of Assets and have a maturityLiabilities,Consolidated Statements of three months or less atOperations andConsolidated Schedules of Investments into the time of purchase to be cash equivalents. Cash is carried at cost, which approximates fair value. We place our cash with financial institutions, and at times, cash held in checking accounts may exceed the Federal Deposit Insurance Corporation insured limit. We seek to mitigate this concentration of credit risk by depositing funds with major financial institutions.following categories:
Restricted Cash
| • | Non-Control/Non-Affiliate Investments—Non-Control/Non-Affiliate investments are those that are neither control nor affiliate investments and in which we typically own less than 5.0% of the issued and outstanding voting securities; |
Restricted cash is cash held in escrow that was generally received as part of an investment exit. Restricted cash is carried at cost, which approximates fair value.
| • | Affiliate Investments—Affiliate investments are those that are not Control investments and in which we own, with the power to vote, between and inclusive of 5.0% and 25.0% of the issued and outstanding voting securities; and |
| • | Control Investments—Control investments are those where we have the power to exercise a controlling influence over the management or policies of the portfolio company, which may include owning, with the power to vote, more than 25.0% of the issued and outstanding voting securities. |
Investment Valuation Policy
Accounting Recognition
We carryrecord our investments at fair value in accordance with the Financial Accounting Standards Board (the “FASB”) Accounting Standards Codification Topic 820, “Fair Value Measurements and Disclosures” (“ASC 820”) and the 1940 Act. Investment transactions are recorded on the trade date. Realized gains or losses are measured by the difference between the net proceeds from the repayment or sale and amortized cost basis of the investment, without regard to unrealized appreciation or depreciation previously recognized, and include investments charged off during the extent that market quotationsperiod, net of recoveries. Unrealized appreciation or depreciation primarily reflects the change in investment fair values, including the reversal of previously recorded unrealized appreciation or depreciation when gains or losses are readily availablerealized.
Board Responsibility
In accordance with the 1940 Act, our Board of Directors has the ultimate responsibility for reviewing and reliable and otherwise at fair value as determinedapproving, in good faith, the fair value of our investments based on the Company’s investment valuation policy (which has been approved by our boardBoard of directors (our “BoardDirectors) (the “Policy”). Our Board of Directors”Directors reviews valuation recommendations that are provided by professionals of the Adviser and Administrator with oversight and direction from the chief valuation officer, (the “Valuation
Team”). There is no single standard for determining fair value (especially for privately-held businesses), as fair value depends upon the specific facts and circumstances of each individual investment. In determining the fair value of our investments, we have established an investmentthe Valuation Team, led by the chief valuation policy (the “Policy”). Theofficer, uses 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 professionals from the Adviser and Administrator (the “Valuation Team”) haveValuation Team has applied the Policy consistently and votes whether to accept the recommended valuationconsistently.
Use of our investment portfolio. Such determination of fair values may involve subjective judgments and estimates.Third Party Valuation Firms
The Valuation Team usesengages third party valuation firms to provide independent assessments of fair value of certain of our investments.
Standard & Poor’s Securities Evaluation, Inc. (“SPSE”) provides estimates of fair value on our debt investments. The Valuation Team generally assigns SPSE’s estimates of fair value to our debt investments where we do not have the ability to effectuate a sale of the applicable portfolio company. The Valuation Team corroborates SPSE’s estimates of fair value using one or more of the valuation techniques in accordance with GAAP todiscussed below. The Valuation Team’s estimate of value on a specific debt investment may significantly differ from SPSE’s. When this occurs, our portfolio. From time to time,Board of Directors reviews whether the Valuation Team has followed the Policy and whether the Valuation Team’s recommended fair value is reasonable in light of the Policy and other facts and circumstances and then votes to accept or reject the Valuation Team’s recommended fair value.
We may acceptengage other independent valuation firms to provide earnings multiple ranges, as well as other information, and evaluate such information for incorporation into the total enterprise value of certain of our investments. Generally, at least once per year, we engage an appraisal of a business in which we hold securities. These appraisals are expensive and occur infrequently, but provide a third-partyindependent valuation opinion that may differ in results, techniques and scope usedfirm to value or review the Company’s valuation of our investments. Whensignificant equity investments, which includes providing the Valuation Team obtains these specific third-party appraisals, the Valuation Team 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:information noted above. The Valuation Team determinesevaluates such information for incorporation into our total enterprise value, including review of all inputs provided by the value of a publicly traded security based on the closing price for the security on the exchange or securities market on which it is listed and primarily traded on theindependent valuation date. To the extent that we own a restricted security that is not freely tradable, but for which a public market otherwise exists, the Valuation Team will use the market value of that security adjusted for any decrease in value resulting from the restrictive feature. As of March 31, 2014 and 2013, we did not have any investments in publicly traded securities.
Securities for which a limited market exists:firm. The Valuation Team values securities that are not traded on an established secondary securities market, but for whichthen makes a limited market forrecommendation to our Board of Directors as to the security exists, such as certain participationsfair value. Our Board of Directors reviews the recommended fair value and whether it is reasonable in light of the Policy and other relevant facts and circumstances and then votes to accept or assignments of, syndicated loans, at the quoted bid price, which are non-binding. In valuing these assets,reject the Valuation Team 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. Team’s recommended fair value.
Valuation Techniques
In general, if the Valuation Team 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 Valuation Team 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 thataccordance with ASC 820, the Valuation Team uses the IBP as a basis forfollowing techniques when valuing the security, it may take further steps to consider additional information to validate that price in accordance with the Policy, including but not limited to reviewing a range of indicative bids to the extent the Valuation Team 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 Valuation Team will value our syndicated loans using alternative methods, such as estimated net present values of the future cash flows or discounted cash flows (“DCF”). The use of a DCF methodology follows that prescribed by the Financial Accounting Standards Board (the “FASB”) Accounting Standards Codification (“ASC”) 820, “Fair Value Measurements and Disclosures,” which provides guidance on the use of a reporting entity’s own assumptions about future cash flows and risk-adjusted discount rates when relevant observable inputs, such as quotes in active markets, are not available. When relevant observable market data does not exist, an alternative outlined in ASC 820 is the valuation of investments based on DCF. For the purposes of using DCF to provide fair value estimates, the Valuation Team 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 Valuation Team 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 Valuation Team believes a market participant would pay to purchase a syndicated loan in an active market, thereby establishing a fair value. The Valuation Team applies the DCF methodology in illiquid markets until quoted prices are available or are deemed reliable based on trading activity.
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.investment portfolio:
| Total Enterprise Value — In determining the |
In gathering the sales to third parties of similar securities in similar industries; a comparison to publicly traded securities in similar industries, and other pertinent factors. The Valuation Team generally references industry statistics and may use outside experts when gathering this information. Once the TEV is determined for a portfolio company, the Valuation Team then generally allocates the TEV to the portfolio company’s securities in order of their relative priority in the capital structure. Generally, the Valuation Team uses TEV to value our equity investments and, in the circumstances where we have the ability to effectuate a sale of a portfolio company, our debt investments.
TEV is primarily calculated using EBITDA or revenue multiples; however, TEV may also be calculated using a discounted cash flow (“DCF”) analysis whereby future expected cash flows of the portfolio company are discounted to determine a net present value using estimated risk-adjusted discount rates, which incorporate adjustments for nonperformance and liquidity risks. Generally, the Valuation Team generally references industry statistics and may use outside experts.uses the DCF to calculate TEV is only an estimateto corroborate estimates of value and mayfor our equity investments where we do not behave the value received in an actual sale. Once the Valuation Team has estimated the TEVability to effectuate a sale of the issuer, it will subtract the valuea portfolio company or for debt 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 Valuation Team’s judgment, the liquidity waterfall approach does not accurately reflect the value of the debt component, the Valuation Team may recommend that we use a valuation by SPSE, or, if that is unavailable, a DCF valuation technique.credit impaired portfolio companies.
| Yield Analysis — The Valuation Team |
| Market Quotes — For our investments for which a limited market exists, fair value is generally based on readily available and reliable market quotations which are corroborated by the Valuation Team (generally by using the yield analysis explained above). In addition, the Valuation Team assesses trading activity for similar investments and evaluates variances in quotations and other market insights to determine if any available quoted prices are reliable. Typically, the Valuation Team uses the lower indicative bid price (“IBP”) in the bid-to-ask price range obtained from the respective originating syndication agent’s trading desk on or near the valuation date. The Valuation Team may take further steps to consider additional information to validate that |
| • | Investments in Funds — For equity investments in other funds, where we cannot effectuate a sale, the Valuation Team generally determines the fair value of |
DueIn addition to the above valuation techniques, the Valuation Team may also consider other factors when determining fair values of our investments, including but not limited to: the nature and realizable value of the collateral, including external parties’ guaranties; any relevant offers or letters of intent to acquire the portfolio company; and the markets in which the portfolio company operates. If applicable, new and follow-on debt and equity investments made during the current reporting quarter (the three months ended March 31, 2015) are generally valued at our original cost basis.
Fair value measurements of our investments may involve subjective judgments and estimates and due to the uncertainty inherent in valuing these securities, the valuation process, such estimatesAdviser’s determinations of fair value may fluctuate from period to period and may differ significantly and materially from the values that would have beencould be obtained hadif a ready market for thethese securities existed. Our NAV could be materially affected if the Adviser’s determinations regarding the fair value of our investments are materially different from the values that we ultimately realize upon our disposal of such securities. Additionally, changes in the market environment and other events that may occur over the life of the investmentsinvestment 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. At times, the estimates of fair value calculated by the various valuation techniques (inclusive of the third-party valuationsFurther, such investments are generally subject to legal and other restrictions on resale or otherwise are less liquid than publicly traded securities. If we receive) may materially differ from one another, resultingwere required to liquidate a portfolio investment in a range of potential values. In these circumstances,forced or liquidation sale, we could realize significantly less than the Valuation Team comes to its valuation conclusion based on all facts and circumstances considered,value at which it is then presented to the Board for review and ultimate approval. In general, fair value is the amount that the Valuation Team might reasonably expect us to receive upon the current sale of the security in an orderly transaction between market participants at the measurement date.recorded.
Refer to Note 3—Investments for additional information regarding fair value measurements and our application of ASC 820.
Realized Gain or Loss and Unrealized Appreciation or Depreciation of Portfolio Investments
Gains or losses on the sale of investments are calculated by using the specific identification method. A realized gain or loss is recognized at the trade date, typically when an investment is disposed of, and is computed as the difference between our cost basis in the investment at the disposition date and the net proceeds received from such disposition. Unrealized appreciation or depreciation displays the difference between the fair value of the investment and the cost basis of such investment. We determine the fair value of each individual investment each reporting period and record changes in fair value as unrealized appreciation or depreciation in ourConsolidated Statement of Operations.
Interest Income Recognition
Interest income, adjusted for amortization of premiums, amendment fees and acquisition costs and the accretion of discounts, is recorded on the accrual basis to the extent that such amounts are expected to be collected. Generally, when a loan becomes 90 days or more past due, or if 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 March 31, 2015 and 2014, our loans to Tread Corp.Corporation (“Tread”) were on non-accrual status, with an aggregate debt cost basis at both period ends of $11.7 million, or 3.1% and 4.2% of the cost basis of all debt investments in our portfolio, and an aggregate fair value of $0. As of March 31, 2013, ASH Holdings Corp. (“ASH”)$1.8 million and Tread were on non-accrual, with an aggregate debt cost basis of $24.9 million,$0, or 10.4%0.5% and 0.0% of the cost basisfair value of all debt investments in our portfolio, and an aggregate fair value of $0.respectively.
PIK interest, computed at the contractual rate specified in the loan agreement, is added to the principal balance of the loan and recorded as interest income. To maintain our statusincome over the life of the obligation. As of March 31, 2015, we did not have any loans with a PIK interest component and as of March 31, 2014, we had one loan with 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.PIK interest component. During the yearyears ended March 31, 2015 and 2014, we recorded PIK income of $0.1 million. We did not hold any loans in our portfolio that contained a PIK provision during the year ended March 31, 2013. DuringWe collected $0.2 million PIK interest in cash during the year ended March 31, 2012, we recorded2015 and no PIK income of $7.interest in cash during the years ended March 31, 2014 and 2013.
Other Income Recognition
We generally record success fees upon receipt of cash. SuccessTypically, success fees are contractually due upon a change of control in a portfolio company. We recorded an aggregate of $1.4 million of success fees during the year ended March 31, 2015, which resulted from prepayments from Auto Safety House LLC (“ASH”), Drew Foam Company, Inc. (“Drew Foam”), Frontier Packaging, Inc. (“Frontier”), Mathey Investments, Inc. (“Mathey”), SOG Specialty Knives and Tools, LLC (“SOG”), and Star Seed, Inc. (“Star Seed”). We recorded an aggregate of $4.2 million of success fees in aggregate during the year ended March 31, 2014, related towhich resulted from debt exits or prepayments from Venyu Solutions, Inc.Cavert II Holding Group (“Venyu”Cavert”), Channel Technologies Group LLC (“Channel”), Cavert II Holding Corp. (“Cavert”),Frontier, Mathey, SOG, Specialty K&T, LLC (“SOG”), Mathey Investments,and Venyu Solutions, Inc. (“Mathey”) and Frontier Packaging, Inc. (“Frontier”Venyu”). We recorded an aggregate of $0.8 million of success fees during the year ended March 31, 2013, representingwhich resulted from prepayments received from MatheyCavert and Cavert. During the year ended March 31, 2012, we recorded success fees of $0.7 million representing prepayments received from Mathey and Cavert.Mathey.
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. For the year ended March 31, 2015, we recorded an aggregate of $3.5 million in dividend income, which resulted from payments from Drew Foam, Frontier, Funko, LLC (“Funko”), Mathey, and SOG. For the year ended March 31, 2014, we recorded $1.4 million in dividend income, related towhich resulted from the exit of Venyu. We recorded $4.1 million and $0.7an aggregate of $4.8 million in dividend income during the year ended March 31, 2013, on accrued preferred shares of Galaxy andwhich resulted from payments from Acme Cryogenics, Inc. (“Acme”), respectively. During the year ended March 31, 2012, we recorded and collected $0.7 million of dividends on accrued preferred shares in connection with the recapitalization of Cavert.Galaxy Tool Holding Corporation (“Galaxy”).
Both dividendsdividend and success feesfee income are recorded in Otherother income in our accompanyingConsolidated Statements of Operations.
Realized Gain or LossCash and Unrealized Appreciation or Depreciation of Portfolio InvestmentsCash Equivalents
GainsWe consider all short-term, highly liquid investments that are both readily convertible to cash and have a maturity of three months or losses on the sale of investments are calculated by using the specific identification method. A realized gain or loss is recognizedless at the trade date, typically whentime of purchase to be cash equivalents. Cash is carried at cost, which approximates fair value. We place our cash with financial institutions, and at times, cash held in checking accounts may exceed the Federal Deposit Insurance Corporation insured limit. We seek to mitigate this concentration of credit risk by depositing funds with major financial institutions.
Restricted Cash and Cash Equivalents
Restricted cash is cash held in escrow that was generally received as part of an investment exit. Restricted cash is disposed of, and is computed as the difference between ourcarried at cost, basis in the investment at the disposition date and the net proceeds received from such disposition. Unrealized appreciation or depreciation displays the difference between thewhich approximates fair value of the investment and the cost basis of such investment. We must determine the fair value of each individual investment on a quarterly basis and record changes in fair value as unrealized appreciation or depreciation in ourConsolidated Statement of Operations.value.
Deferred Financing Costs
Deferred financing costs consist of costs incurred to obtain financing, including legal fees, origination fees and administration fees. Costs associated with our line of credit and the issuance of the 7.125% Series A Cumulative Term Preferred Stock, par value $0.001 per share (“Term Preferred Stock”),our mandatorily redeemable preferred stock, are deferred and amortized using the straight-line method, which approximates the effective interest method, over the terms of the respective financings. See Note 5—Borrowingsand Note 6—Mandatorily Redeemable Preferred Stock for further discussion on the Term Preferred Stock.discussion.
Related Party CostsFees
We have entered into an investment advisory and management agreement (the “Advisory Agreement”) with the Adviser, which is controlled by our chairman and chief executive officer. In accordance with the Advisory Agreement, we pay the Adviser fees as compensation for its services, consisting of a base management fee, loan servicing fee, and an incentive fee.
We have entered into an administration agreement (the “Administration Agreement”) with the Administrator whereby we pay separately for administrative services. These fees are accrued when the services are performed and generally paid one month in arrears. Refer to Note 4—Related Party Transactionsfor additional information regarding these related party costs and agreements.
Federal Income Taxes
We intend to continue to qualify for treatment as a RIC under subchapter M of the Code, which generally allows us to avoid paying corporate income taxes on any income or gains that we distribute to our stockholders. We have distributed and intend to continue to distribute sufficient dividends to eliminate taxable income. In an effortRefer to limitNote 10— Federal and State Income Taxes for additional information regarding our RIC requirements.
We have certain excise taxes imposedwholly-owned taxable subsidiaries (the “Taxable Subsidiaries”), each of which holds one or more of our portfolio investments that are listed on RICs, we generally distribute during each calendar year, an amountour accompanyingConsolidated Schedules of Investments. The purpose of the Taxable Subsidiaries is to permit us to hold certain portfolio companies that are organized as limited liability companies (“LLCs”) (or other forms of pass-through entities) while satisfying the RIC tax requirement that at least equal90% of the RIC’s gross revenue for income tax purposes must
consist of qualifying investment income. When LLCs (or other pass-through entities) are owned by the Taxable Subsidiaries, their income is taxed to the sumTaxable Subsidiaries and does not flow through to the RIC, thereby helping us preserve our RIC status. The Taxable Subsidiaries are not consolidated for income tax purposes and may generate income tax expense as a result of (1) 98% of our ordinary income for the calendar year, (2) 98.2% of our capital gains in excess of capital losses for the one-year period ending on October 31their ownership of the calendar yearportfolio companies. This income tax expense is considered immaterial and, (3) any ordinary income and capital gains in excesstherefore, it is not recorded on our accompanyingConsolidated Statements of capital losses for preceding years that were not distributed during such years.Operations.
ASC 740, “Income Taxes”“Income Taxes” requires the evaluation of tax positions taken or expected to be taken in the course of preparing our tax returns to determine whether the tax positions are “more-likely-than-not” of being sustained by the applicable tax authorities. Tax positions not deemed to satisfy the “more-likely-than-not” threshold would be recorded as a tax benefit or expense in the current fiscal year. We have evaluated the implications of ASC 740, for all open tax years and in all major tax jurisdictions, and determined that there is no material impact on our accompanyingConsolidated Financial Statements. Our federal tax returns for fiscal years 2011,2014, 2013, and 2012 and 2013 remain subject to examination by the Internal Revenue Service.Service (“IRS”).
Distributions
Distributions to stockholders are recorded on the ex-dividend date. We are required to pay out at least 90% of our “investment company taxable income,” which is generally our net ordinary income andplus the excess of our net short-term capital gains over net long-term capital losses for each taxable year as a distribution to our stockholders in order to maintain our statusability to be taxed as a RIC under Subtitle A, Chapter 1 of Subchapter M of the Code. It is our policy to pay out as a distribution up to 100% of those amounts. The amount to be paid out as a distribution is determined by theour Board of Directors each quarter and is based on the annual earnings estimated by our management. Based on that estimate, a distribution is declared each quarter and is paid out monthly over the course of the respective quarter. At fiscal year-end, we elected to treat a portion of the first distribution paid after year-end as having been paid in the prior year, in accordance with Section 855(a) of the Code. Additionally, at year-end, we may pay a bonusspecial distribution in addition to the monthly distributions to ensure that we have paid out at least 90% of its ordinaryour investment company taxable income and short-term capital gains for the year. We typically retain long-term capital gains, if any, and do not pay them out as distributions. If we decide to retain long-term capital gains, the portion of the retained capital gains, net of any capital loss carryforward, if applicable, will be subject to a 35%35.0% tax.
Refer to Note 9—Distributions to Common Stockholders for further information. We have a dividend reinvestment plan for our common stockholders. This is an “opt in” dividend reinvestment plan, meaning that common stockholders may elect to have their cash dividends automatically reinvested in additional shares of our common stock. Common stockholders who do not so elect will receive their dividends in cash. Common stockholders who receive distributions in the form of stock will be subject to the same federal, state and local tax consequences as stockholders who elect to receive their distributions in cash. The plan agent purchases shares in the open market in connection with the obligations under the plan. We do not have a dividend reinvestment plan for our preferred stock stockholders.
Recent Accounting Pronouncements
In April 2015, the FASB issued Accounting Standards Update 2015-03, “Simplifying the Presentation of Debt Issuance Costs” (“ASU-2015-03”), which simplifies the presentation of debt issuance costs. We are currently assessing the impact of ASU 2015-03 and do not anticipate a material impact on our financial position, results of operations or cash flows from adopting this standard. ASU 2015-03 is effective for annual reporting periods beginning after December 15, 2015 and interim periods within those years, with early adoption permitted.
In February 2015, the FASB issued Accounting Standards Update 2015-02, “Amendments to the Consolidation Analysis” (“ASU-2015-02”), which amends or supersedes the scope and consolidation guidance under existing GAAP. The new standard changes the way a reporting entity evaluates whether a) limited partnerships and similar entities should be consolidated, b) fees paid to decision makers or service provides are variable interests in a variable interest entity (“VIE”), and c) variable interests in a VIE held by related parties require the reporting entity to consolidate the VIE. ASU 2015-02 also eliminates the VIE consolidation model based on majority exposure to variability that applied to certain investment companies and similar entities. We do not anticipate ASU 2015-02 to have a material impact on our financial position, results of operations or cash flows. ASU 2015-02 is effective for annual reporting periods beginning after December 15, 2015 and interim periods within those years, with early adoption permitted.
In August 2014, the FASB issued Accounting Standards Update 2014–15, “Presentation of Financial Statements – Going Concern (Subtopic 205 – 40): Disclosure of Uncertainties About an Entity’s Ability to Continue as a Going Concern” (“ASU 2014-15”). ASU 2014-15 requires management to evaluate whether there are conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern, and to provide certain disclosures when it is probable that the entity will be unable to meet its obligations as they become due within one year after the date that the financial statements are issued. Since this guidance is primarily around certain disclosures to the financial statements, we anticipate no impact on our financial position, results of operations or cash flows from adopting this standard. We are currently assessing the additional disclosure requirements, if any, of ASU 2014-15. ASU 2014-15 is effective for the annual period ending after December 31, 2016 and for annual periods and interim periods thereafter, with early adoption permitted.
In May 2014, the FASB issued Accounting Standards Update 2014-09, “Revenue from Contracts with Customers” (“ASU 2014-09”), which supersedes or replaces nearly all GAAP revenue recognition guidance. The new guidance establishes a new control-based revenue recognition model, changes the basis for deciding when revenue is recognized over time or at a point in time and will expand disclosures about revenue. We are currently assessing the impact of ASU 2014-09 and anticipate no impact on our financial position, results of operations or cash flows from adopting this standard. ASU 2014-09 is effective for annual reporting periods that begin after December 15, 2016 and interim periods within those years, with early adoption not permitted.
In June 2013, the FASB issued ASUAccounting Standards Update 2013-08, “Financial“Financial Services – Investment Companies (Topic 946): Amendments to the Scope, Measurement, and Disclosure Requirements” (“ASU 2013-08”), 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 anticipatethere was no impact from adopting this standard on our financial position or results of operations. We are currently assessing whether additionaladopted ASU 2013-08 beginning with our quarter ended June 30, 2014, and have increased our disclosure requirements will beas necessary. ASU 2013-08 is effective for interim and annual reporting periods in fiscal years that begin after December 15, 2013.
In accordance with ASC 820, definesour investments’ fair value establishesis determined to be the price that would be received for an investment in a framework for measuringcurrent sale, which assumes an orderly transaction between willing market participants on the measurement date. This fair value and expands disclosures about assets and liabilities measured at fair value. ASC 820 provides a consistent definition of fair value that focuses on exit price in the principal, or most advantageous, market and prioritizes, within a measurement of fair value, the use of market-based inputs over entity-specific inputs. ASC 820 also establishes the following three-level hierarchy for fair value measurements based upon the transparency of inputs to the valuation of an asset or liabilitya financial instrument as of the measurement date.
| • | Level 1 — inputs to the valuation methodology are quoted prices (unadjusted) for identical |
| • | Level 2— inputs to the valuation methodology include quoted prices for similar |
| • | Level 3— inputs to the valuation methodology are unobservable and significant to the fair value measurement. Unobservable inputs are those inputs that reflect assumptions that market participants would use when pricing the |
When a determination is made to classify our investments 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 (or, components that are actively quoted and can be validated to external sources). The level in the fair value hierarchy within which the fair value measurement falls is determined based on the lowest level input that is significant to the fair value measurement.
As of March 31, 20142015 and 2013,2014, 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 years ended March 31, 20142015 and 2013,2014, 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 March 31, 20142015 and 2013,2014, by caption on our accompanyingConsolidated 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:
| Total Recurring Fair Value Measurement Reported inConsolidated Statements of Assets and Liabilities | ||||||||
| March 31, 2014 | March 31, 2013 | |||||||
Control Investments | ||||||||
Senior debt | $ | — | $ | 22,246 | ||||
Senior subordinated debt | 15,520 | 34,520 | ||||||
Preferred equity | 5,584 | 41,749 | ||||||
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Total Control Investments | 21,104 | 98,515 | ||||||
Affiliate Investments | ||||||||
Senior debt | 60,391 | 17,573 | ||||||
Senior subordinated debt | 2,400 | — | ||||||
Preferred equity | 25,058 | 643 | ||||||
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Total Affiliate Investments | 87,849 | 18,216 | ||||||
Non-Control/Non-Affiliate Investments | ||||||||
Senior debt | 109,479 | 64,063 | ||||||
Senior subordinated debt | 52,907 | 52,291 | ||||||
Preferred equity | 32,259 | 39,765 | ||||||
Common equity/equivalents | 10,795 | 13,632 | ||||||
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Total Non-Control/Non-Affiliate Investments | 205,440 | 169,751 | ||||||
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Total Investments at fair value using Level 3 inputs | $ | 314,393 | $ | 286,482 | ||||
Cash Equivalents using Level 1 inputs | — | 65,000 | ||||||
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Total Investments and Cash Equivalents | $ | 314,393 | $ | 351,482 | ||||
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Non-Control/Non-Affiliate Investments Senior secured debt Senior subordinated secured debt Preferred equity Common equity/equivalents Total Non-Control/Non-Affiliate Investments Affiliate Investments Senior secured debt Senior subordinated secured debt Preferred equity Total Affiliate Investments Control Investments Senior secured debt Senior subordinated secured debt Preferred equity Common equity/equivalents Control Investments Total Investments and Cash Equivalents Total Recurring Fair Value Measurements
Reported in
Consolidated Statements of Assets and
Liabilities Using Significant Unobservable
Inputs (Level 3)
As of March 31, 2015 2014 $ 76,789 $ 109,479 36,133 52,907 40,217 32,259 21,234 10,795 174,373 205,440 181,452 60,391 18,725 2,400 70,873 25,058 271,050 87,849 4,900 — 15,520 15,520 — 5,584 210 — 20,630 21,104 $ 466,053 $ 314,393
In accordance with ASU 2011-04, “Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Reporting Standards (“IFRS”), (“ASU 2011-04”), the following table provides quantitative information about our Level 3 fair value measurements of our investments as of March 31, 20142015 and 2013. In addition to the techniques and inputs noted in the2014. 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 March 31, 2014 | Fair Value as of March 31, 2013 | Valuation Technique/ Methodology | Unobservable Input | Range / Weighted 2014 | Range / Weighted 2013 | |||||||||||
Senior debt | $ | 115,081 | $ | 69,544 | TEV | EBITDA multiples(B) | 3.4x – 7.3x / 5.1x | 4.6x – 7.3x / 5.6x | ||||||||
| EBITDA(B) | $1,558 – $6,230 / $3,609 | ($997) – $6,640 / $3,752 | ||||||||||||||
| 54,789 | 34,338 | SPSE(A) | EBITDA(B) | $118 – $3,818 / $1,956 | $29 – $3,225 / $1,248 | |||||||||||
| Risk Ratings(C) | 4.3 – 6.0 / 5.2 | 3.7 – 6.9 / 5.1 | ||||||||||||||
Senior subordinated debt | 49,470 | 66,070 | TEV | EBITDA multiples(B) | 4.1x – 7.3x / 5.0x | 4.5x – 9.7x / 6.5x | ||||||||||
| EBITDA(B) | $36 – $6,156 / $4,159 | ($2,866) – $8,695 / $4,400 | ||||||||||||||
| 21,357 | 20,741 | SPSE(A) | EBITDA(B) | $5,446 – $9,978 / $7,072 | $5,169 – $6,026 / $5,738 | |||||||||||
| Risk Ratings(C) | 5.3 – 5.8 / 5.5 | 4.1 – 6.2 / 4.8 | ||||||||||||||
Preferred equity | 62,901 | 82,157 | TEV | EBITDA multiples(B) | 3.5x – 8.5x / 5.1x | 4.2x – 9.7x / 5.9x | ||||||||||
| EBITDA(B) | $36 – $10,621 / $4,266 | ($2,866) – $8,695 / $4,344 | ||||||||||||||
Common equity/equivalents | 10,795 | 13,632 | TEV | EBITDA multiples(B) | 3.4x – 16.0x / 10.5x | 3.7x – 7.8x / 6.2x | ||||||||||
| EBITDA(B) | $36 – $10,621 / $6,008 | ($2,866) – $6,026 / $1,959 | ||||||||||||||
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Total | $ | 314,393 | $ | 286,482 | ||||||||||||
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| Quantitative Information about Level 3 Fair Value Measurements | ||||||||||||||||
| Fair Value as of March 31, 2015 | Fair Value as of March 31, 2014 | Valuation Technique/ Methodology | Unobservable Input | Range / Weighted Average as of March 31, 2015 | Range / Weighted Average as of March 31, 2014 | |||||||||||
Senior secured debt(A) | $ | 220,750 | $ | 115,081 | TEV | EBITDA multiples | 4.4x –18.2x / 6.9x | 4.6x – 7.3x / 5.6x | ||||||||
| EBITDA | $712 – $5,871 / $3,302 | $1,558 – $6,230 / $3,609 | ||||||||||||||
| 42,391 | 54,789 | Yield Analysis | Discount Rate | 7.4% -13.7% /12.6% | 7.6% – 30.0% / 19.2% | |||||||||||
Senior subordinated secured debt(B) | 49,142 | 49,470 | TEV | EBITDA multiples | 4.2x – 7.0x / 5.8x | 4.1x – 7.3x / 5.0x | ||||||||||
| EBITDA | $1,135 – $5,462 / $2,834 | $36 – $6,156 / $4,159 | ||||||||||||||
| 21,236 | 21,357 | Yield Analysis | Discount Rate | 5.0% – 20.5% / 14.4% | 12.8% – 12.8% / 12.8% | |||||||||||
Preferred equity(C) | 111,090 | 62,901 | TEV | EBITDA multiples | 3.6x – 18.2x / 6.6x | 3.5x – 8.5x / 5.1x | ||||||||||
| EBITDA | $712 – $29,235 / $3,749 | $36 – $10,621 / $4,266 | ||||||||||||||
Common equity/equivalents | 21,444 | 10,795 | TEV | EBITDA multiples | 3.6x – 18.2x / 9.4x | 3.4x – 16.0x / 10.5x | ||||||||||
| EBITDA | $712 – $15,240 / $9,149 | $36 – $10,621 / $6,008 | ||||||||||||||
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Total | $ | 466,053 | $ | 314,393 | ||||||||||||
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| (A) |
| (B) |
| (C) |
A portfolio company’s
Fair value measurements can be sensitive to changes in one or more of the valuation inputs. Changes in market yields, discounts rates, leverage, EBITDA andor EBITDA multiples are(or revenue or revenue multiples), each in isolation, may change the significant unobservable inputs generally includedfair value of certain of our investments. Generally, an increase or decrease in the Adviser’s internally assessed TEV models used to value our proprietary debt and equity investments. Holding all other factors constant, increases (decreases)market yields, discount rates or leverage or a decrease in the EBITDA and/or the EBITDA multiples inputs would(or revenue or revenue multiples) may result in a higher (lower)corresponding decrease or increase, respectively, in the fair value measurement. Perof certain of our Policy, the Adviser generally uses an indexed EBITDA multiple in these TEVs. EBITDA and EBITDA multiple inputs do not have to directionally correlate since EBITDA is a company performance metric and EBITDA multiples can be influenced by market, industry, company size and other factors.investments.
Changes in Level 3 Fair Value Measurements of Investments
The following tables provide the changes in fair value of our portfolio, broken out by security type, during the years ended March 31, 20142015 and 20132014 for all investments for which we determinethe Adviser determines fair value using unobservable (Level 3) factors. When a determination is made to classify a financial instrument within Level 3 of the valuation hierarchy, 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 Using Significant Unobservable Inputs (Level 3)
Fiscal Year 2014:
| Senior Debt | Senior Subordinated Debt | Preferred Equity | Common Equity/ Equivalents | Total | ||||||||||||||||
Year ended March 31, 2014: | ||||||||||||||||||||
Fair value as of March 31, 2013 | $ | 103,882 | $ | 86,811 | $ | 82,157 | $ | 13,632 | $ | 286,482 | ||||||||||
Total (loss) gain: | ||||||||||||||||||||
Net realized (loss) gain(A) | (2,856 | ) | (6,050 | ) | 18,806 | (1,659 | ) | 8,241 | ||||||||||||
Net unrealized depreciation(B) | 3,165 | (660 | ) | (25,000 | ) | (5,921 | ) | (28,416 | ) | |||||||||||
Reversal of previously-recorded depreciation (appreciation) upon realization(B) | 2,274 | 5,874 | (10,644 | ) | 1,706 | (790 | ) | |||||||||||||
New investments, repayments and settlements(C): | ||||||||||||||||||||
Issuances / Originations | 88,267 | 11,818 | 32,067 | 139 | 132,291 | |||||||||||||||
Settlements / Repayments | (24,862 | ) | (26,966 | ) | — | — | (51,828 | ) | ||||||||||||
Sales | — | — | (31,535 | ) | (52 | ) | (31,587 | ) | ||||||||||||
Transfers(D) | — | — | (2,950 | ) | 2,950 | — | ||||||||||||||
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Fair value as of March 31, 2014 | $ | 169,870 | $ | 70,827 | $ | 62,901 | $ | 10,795 | $ | 314,393 | ||||||||||
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Fiscal Year 2013:
| Senior Debt | Senior Subordinated Debt | Preferred Equity | Common Equity/ Equivalents | Total | ||||||||||||||||
Year ended March 31, 2013: | ||||||||||||||||||||
Fair value as of March 31, 2012 | $ | 94,886 | $ | 70,661 | $ | 46,669 | $ | 13,436 | $ | 225,652 | ||||||||||
Total gain (loss): | ||||||||||||||||||||
Net realized gain(A) | — | — | — | 843 | 843 | |||||||||||||||
Net unrealized (depreciation) appreciation(B) | (16,273 | ) | (6,935 | ) | 24,562 | (550 | ) | 804 | ||||||||||||
New investments, repayments and settlements(C): | ||||||||||||||||||||
Issuances / Originations | 35,132 | 33,271 | 18,925 | 279 | 87,607 | |||||||||||||||
Settlements / Repayments | (9,863 | ) | (15,380 | ) | — | — | (25,243 | ) | ||||||||||||
Sales | — | — | (2,305 | ) | (876 | ) | (3,181 | ) | ||||||||||||
Transfers(D) | 5,194 | (5,694 | ) | 500 | — | |||||||||||||||
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Fair value as of March 31, 2013 | $ | 103,882 | $ | 86,811 | $ | 82,157 | $ | 13,632 | $ | 286,482 | ||||||||||
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| Senior Secured Debt | Senior Subordinated Secured Debt | Preferred Equity | Common Equity/ Equivalents | Total | ||||||||||||||||
Year ended March 31, 2015: | ||||||||||||||||||||
Fair value as of March 31, 2014 | $ | 169,870 | $ | 70,827 | $ | 62,901 | $ | 10,795 | $ | 314,393 | ||||||||||
Total gain (loss): | ||||||||||||||||||||
Net realized (loss) gain(A) | — | — | — | — | — | |||||||||||||||
Net unrealized appreciation (depreciation)(B) | 5,056 | (4,038 | ) | 18,525 | 10,397 | 29,940 | ||||||||||||||
Reversal of previously-recorded depreciation (appreciation) upon realization(B) | — | — | — | — | — | |||||||||||||||
New investments, repayments and settlements(C): | ||||||||||||||||||||
Issuances / originations | 96,693 | 6,661 | 27,724 | 1,902 | 132,980 | |||||||||||||||
Settlements / repayments | (8,128 | ) | (3,072 | ) | (60 | ) | — | (11,260 | ) | |||||||||||
Sales | — | — | — | — | — | |||||||||||||||
Transfers(D) | (350 | ) | — | 2,000 | (1,650 | ) | — | |||||||||||||
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Fair Value as of March 31, 2015 | $ | 263,141 | $ | 70,378 | $ | 111,090 | $ | 21,444 | $ | 466,053 | ||||||||||
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| Senior Secured Debt | Senior Subordinated Secured Debt | Preferred Equity | Common Equity/ Equivalents | Total | ||||||||||||||||
Year ended March 31, 2014: | ||||||||||||||||||||
Fair value as of March 31, 2013 | $ | 103,882 | $ | 86,811 | $ | 82,157 | $ | 13,632 | $ | 286,482 | ||||||||||
Total (loss) gain: | ||||||||||||||||||||
Net realized (loss) gain(A) | (2,856 | ) | (6,050 | ) | 18,806 | (1,659 | ) | 8,241 | ||||||||||||
Net unrealized appreciation (depreciation)(B) | 3,165 | (660 | ) | (25,000 | ) | (5,921 | ) | (28,416 | ) | |||||||||||
Reversal of previously-recorded depreciation (appreciation) upon realization(B) | 2,274 | 5,874 | (10,644 | ) | 1,706 | (790 | ) | |||||||||||||
New investments, repayments and settlements(C): | ||||||||||||||||||||
Issuances / originations | 88,267 | 11,818 | 32,067 | 139 | 132,291 | |||||||||||||||
Settlements / repayments | (24,862 | ) | (26,966 | ) | — | — | (51,828 | ) | ||||||||||||
Sales | — | — | (31,535 | ) | (52 | ) | (31,587 | ) | ||||||||||||
Transfers(D) | — | — | (2,950 | ) | 2,950 | — | ||||||||||||||
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Fair Value as of March 31, 2014 | $ | 169,870 | $ | 70,827 | $ | 62,901 | $ | 10,795 | $ | 314,393 | ||||||||||
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| (A) | Included in |
| (B) | Included in |
| (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) |
2013: Transfer represents $32014: Transfers represent $3.0 million of senior subordinated term debt from Tread, at cost, aspreferred equity of June 30, 2012, that weQuench Holding Corp. (“Quench”), which was converted into preferred and common equity during the quarter ended September 30, 2012, and $8.2 million of preferred stock from Galaxy, at cost, as of December 31, 2012, that we converted into senior subordinated term debt as part of a recapitalization in the quarter ended March 31, 2013.
Investment Activity
During the year ended March 31, 2014,2015, the following significant transactions occurred:
Investment Concentrations
As of March 31, 2014,2015, our investment portfolio consisted of investments in 2934 portfolio companies located in 1416 states across 1418 different industries with an aggregate fair value of $314.4$466.1 million, of which our investments in Counsel Press, SOG, Specialty K&T, LLC (“SOG”),Funko, Acme Cryogenics, Inc. (“Acme”), and Galaxy Tool Holdings Corp. (“Galaxy”),Old World, our threefive largest portfolio investments at fair value, collectively comprised $70.9$134.3 million, or 22.6%28.8%, of our total investment portfolio at fair value.
The following table summarizes our investments by security type as of March 31, 20142015 and 2013:2014:
| March 31, 2014 | March 31, 2013 | March 31, 2015 | March 31, 2014 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Cost | Fair Value | Cost | Fair Value | Cost | Fair Value | Cost | Fair Value | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Senior debt | $ | 196,293 | 51.2 | % | $ | 169,870 | 54.0 | % | $ | 135,745 | 41.6 | % | $ | 103,882 | 36.3 | % | ||||||||||||||||||||||||||||||||||||||||||||||||
Senior subordinated debt | 82,348 | 21.5 | 70,827 | 22.5 | 103,547 | 31.7 | 86,811 | 30.3 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Senior secured debt | $ | 284,509 | 56.3 | % | $ | 263,141 | 56.5 | % | $ | 196,293 | 51.2 | % | $ | 169,870 | 54.0 | % | ||||||||||||||||||||||||||||||||||||||||||||||||
Senior subordinated secured debt | 85,937 | 17.0 | 70,378 | 15.1 | 82,348 | 21.5 | 70,827 | 22.5 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Total debt | 278,641 | 72.7 | 240,697 | 76.5 | 239,292 | 73.3 | 190,693 | 66.6 | 370,446 | 73.3 | 333,519 | 71.6 | 278,641 | 72.7 | 240,697 | 76.5 | ||||||||||||||||||||||||||||||||||||||||||||||||
Preferred equity | 98,099 | 25.6 | 62,901 | 20.0 | 81,710 | 25.0 | 82,157 | 28.7 | 127,762 | 25.3 | 111,090 | 23.8 | 98,099 | 25.6 | 62,901 | 20.0 | ||||||||||||||||||||||||||||||||||||||||||||||||
Common equity/equivalents | 6,797 | 1.7 | 10,795 | 3.5 | 5,419 | 1.7 | 13,632 | 4.7 | 7,050 | 1.4 | 21,444 | 4.6 | 6,797 | 1.7 | 10,795 | 3.5 | ||||||||||||||||||||||||||||||||||||||||||||||||
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Total equity/equivalents | 104,896 | 27.3 | 73,696 | 23.5 | 87,129 | 26.7 | 95,789 | 33.4 | 134,812 | 26.7 | 132,534 | 28.4 | 104,896 | 27.3 | 73,696 | 23.5 | ||||||||||||||||||||||||||||||||||||||||||||||||
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Total Investments | $ | 383,537 | 100.0 | % | $ | 314,393 | 100.0 | % | $ | 326,421 | 100.0 | % | $ | 286,482 | 100.0 | % | $ | 505,258 | 100.0 | % | $ | 466,053 | 100.0 | % | $ | 383,537 | 100.0 | % | $ | 314,393 | 100.0 | % | ||||||||||||||||||||||||||||||||
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Investments at fair value consisted of the following industry classifications as of March 31, 20142015 and 2013:2014:
| March 31, 2014 | March 31, 2013 | March 31, 2015 | March 31, 2014 | |||||||||||||||||||||||||||||
| Fair Value | Percentage of Total Investments | Fair Value | Percentage of Total Investments | Fair Value | Percentage of Total Investments | Fair Value | Percentage of Total Investments | |||||||||||||||||||||||||
Home and Office Furnishings, Housewares, and Durable Consumer Products | $ | 70,533 | 15.1 | % | $ | 21,188 | 6.7 | % | ||||||||||||||||||||||||
Diversified/Conglomerate Manufacturing | $ | 54,845 | 17.4 | % | $ | 32,698 | 11.4 | % | 62,996 | 13.5 | 54,845 | 17.4 | ||||||||||||||||||||
Chemicals, Plastics, and Rubber | 52,753 | 16.8 | 59,170 | 20.7 | 49,312 | 10.6 | 52,753 | 16.8 | ||||||||||||||||||||||||
Leisure, Amusement, Motion Pictures, Entertainment | 39,867 | 12.7 | 29,822 | 10.4 | 44,931 | 9.6 | 39,867 | 12.7 | ||||||||||||||||||||||||
Diversified/Conglomerate Service | 31,995 | 6.9 | — | — | ||||||||||||||||||||||||||||
Machinery (Non-agriculture, Non-construction, Non-electronic) | 25,917 | 8.2 | 32,662 | 11.4 | 30,397 | 6.5 | 25,917 | 8.2 | ||||||||||||||||||||||||
Personal and Non-Durable Consumer Products (Manufacturing Only) | 25,008 | 5.4 | 10,005 | 3.2 | ||||||||||||||||||||||||||||
Automobile | 25,735 | 8.2 | 7,467 | 2.6 | 24,530 | 5.3 | 25,735 | 8.2 | ||||||||||||||||||||||||
Home and Office Furnishings, Housewares, and Durable Consumer Products | 21,188 | 6.7 | 23,512 | 8.2 | ||||||||||||||||||||||||||||
Farming and Agriculture | 20,557 | 6.5 | — | — | 22,438 | 4.8 | 20,557 | 6.5 | ||||||||||||||||||||||||
Containers, Packaging, and Glass | 19,447 | 4.2 | 17,889 | 5.7 | ||||||||||||||||||||||||||||
Telecommunications | 19,241 | 4.1 | — | — | ||||||||||||||||||||||||||||
Aerospace and Defense | 18,512 | 5.9 | 20,876 | 7.3 | 18,770 | 4.0 | 18,512 | 5.9 | ||||||||||||||||||||||||
Containers, Packaging, and Glass | 17,889 | 5.7 | 23,019 | 8.0 | ||||||||||||||||||||||||||||
Cargo Transport | 13,972 | 3.0 | 6,500 | 2.1 | ||||||||||||||||||||||||||||
Beverage Food and Tobacco | 13,050 | 4.2 | 369 | 0.1 | 12,982 | 2.8 | 13,050 | 4.2 | ||||||||||||||||||||||||
Personal and Non-Durable Consumer Products (Manufacturing Only) | 10,005 | 3.2 | — | — | ||||||||||||||||||||||||||||
Textiles and Leather | 10,750 | 2.3 | — | — | ||||||||||||||||||||||||||||
Buildings and Real Estate | 7,575 | 2.4 | 6,020 | 2.2 | 1,860 | 0.4 | 7,575 | 2.4 | ||||||||||||||||||||||||
Cargo Transport | 6,500 | 2.1 | 6,897 | 2.4 | ||||||||||||||||||||||||||||
Electronics | — | — | 43,970 | 15.3 | ||||||||||||||||||||||||||||
Other < 2.0% | 6,891 | 1.5 | — | — | ||||||||||||||||||||||||||||
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Total Investments | $ | 314,393 | 100.0 | % | $ | 286,482 | 100.0 | % | $ | 466,053 | 100.0 | % | $ | 314,393 | 100.0 | % | ||||||||||||||||
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Investments at fair value were included in the following geographic regions of the U.S. as of March 31, 20142015 and 2013:2014:
| March 31, 2014 | March 31, 2013 | March 31, 2015 | March 31, 2014 | |||||||||||||||||||||||||||||
| Fair Value | Percentage of Total Investments | Fair Value | Percentage of Total Investments | Fair Value | Percentage of Total Investments | Fair Value | Percentage of Total Investments | |||||||||||||||||||||||||
West | $ | 117,781 | 37.5 | % | $ | 81,400 | 28.4 | % | $ | 161,444 | 34.6 | % | $ | 117,781 | 37.5 | % | ||||||||||||||||
Northeast | 133,814 | 28.7 | 67,862 | 21.6 | ||||||||||||||||||||||||||||
South | 89,915 | 28.6 | 125,518 | 43.8 | 133,703 | 28.7 | 89,915 | 28.6 | ||||||||||||||||||||||||
Northeast | 67,862 | 21.6 | 58,319 | 20.4 | ||||||||||||||||||||||||||||
Midwest | 38,835 | 12.3 | 21,245 | 7.4 | 37,092 | 8.0 | 38,835 | 12.3 | ||||||||||||||||||||||||
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Total Investments | $ | 314,393 | 100.0 | % | $ | 286,482 | 100.0 | % | $ | 466,053 | 100.0 | % | $ | 314,393 | 100.0 | % | ||||||||||||||||
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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 for the next five fiscal years and thereafter, assuming no voluntary prepayments, as of March 31, 2014:2015:
| Amount | ||||||
For the fiscal year ending March 31: | 2015 | $ | 56,386 | |||
2016 | 30,190 | |||||
2017 | 43,314 | |||||
2018 | 51,983 | |||||
2019 | 89,181 | |||||
Thereafter | 7,587 | |||||
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Total contractual repayments | $ | 278,641 | ||||
Investments in equity securities | 104,896 | |||||
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Total cost basis of investments held as of March 31, 2014: | $ | 383,537 | ||||
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| Amount | ||||||
For the fiscal years ending March 31: | 2016 | $ | 19,567 | |||
| 2017 | 43,861 | |||||
| 2018 | 100,316 | |||||
| 2019 | 81,681 | |||||
| 2020 | 115,403 | |||||
| Thereafter | 9,618 | |||||
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| Total contractual repayments | $ | 370,446 | ||||
| Investments in equity securities | 134,812 | |||||
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| Total Cost Basis of Investments Held as of March 31, 2015: | $ | 505,258 | ||||
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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 accompanyingConsolidated Statements of Assets and Liabilities. We generally maintain an allowance for uncollectible receivables from portfolio companies whichwhen the receivable balance becomes 90 days or more past due or if it is
determined, based on historical experience andupon management’s expectations of future losses.judgment, that the portfolio company is unable to pay its obligations. We charge the accounts receivable to the established provisionallowance when collection efforts have been exhausted and the receivables are deemed uncollectible. As of March 31, 20142015 and 2013,2014, we had gross receivables from portfolio companies of $0.9$1.5 million and $1.2 million, respectively. The allowance for uncollectible receivables was $163$349 and $44 as of March 31, 2015 and 2014, and 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, loan servicing fee and an incentive fee, each as described below. On July 9, 2013,15, 2014, our Board of Directors, including a majority of the directors who are not parties to the Advisory Agreement or interested persons of such party, approved the annual renewal of the Advisory Agreement through August 31, 2014.2015.
The following table summarizes the management fees, loan servicing fees, incentive fees and associated voluntary, non-contractual and irrevocable credits reflected in our accompanyingConsolidated Statements of Operations:
| Year Ended March 31, | ||||||||||||
| 2014 | 2013 | 2012 | ||||||||||
Average total assets subject to base management fee(A) | $ | 310,350 | $ | 270,600 | $ | 219,300 | ||||||
Multiplied by prorated annual base management fee of 2% | 2.0 | % | 2.0 | % | 2.0 | % | ||||||
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Base management fee(B) | 6,207 | 5,412 | 4,386 | |||||||||
Credit for fees received by Adviser from the portfolio companies | (2,309 | ) | (1,107 | ) | (1,106 | ) | ||||||
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Net base management fee | $ | 3,898 | $ | 4,305 | $ | 3,280 | ||||||
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Incentive fee(B) | 3,983 | 2,585 | 19 | |||||||||
Credit from waiver issued by Adviser’s board of directors | — | (221 | ) | (54 | ) | |||||||
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Net Incentive fee | $ | 3,983 | $ | 2,364 | $ | (35 | ) | |||||
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Total credits to fees: | ||||||||||||
Credit for fees received by Adviser from the portfolio companies | (2,309 | ) | (1,107 | ) | (1,106 | ) | ||||||
Credit from waiver issued by Adviser’s board of directors(C) | — | (221 | ) | (54 | ) | |||||||
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Credit to fees(B) | $ | (2,309 | ) | $ | (1,328 | ) | $ | (1,160 | ) | |||
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| Year Ended March 31, | ||||||||||||
| 2015 | 2014 | 2013 | ||||||||||
Average total assets subject to base management fee(A) | $ | 378,450 | $ | 310,350 | $ | 270,600 | ||||||
Multiplied by annual base management fee of 2% | 2.0 | % | 2.0 | % | 2.0 | % | ||||||
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Base management fee(B) | 7,569 | 6,207 | 5,412 | |||||||||
Credits to fees from Adviser—other(B)(C) | (2,848 | ) | (2,309 | ) | (1,107 | ) | ||||||
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Net base management fee | $ | 4,721 | $ | 3,898 | $ | 4,305 | ||||||
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Loan servicing fee(B) | 4,994 | 4,326 | 3,725 | |||||||||
Credits to base management fee—loan servicing fee(B) | (4,994 | ) | (4,326 | ) | (3,725 | ) | ||||||
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Net loan servicing fee | $ | — | $ | — | $ | — | ||||||
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Incentive fee(B) | 4,975 | 3,983 | 2,585 | |||||||||
Credits to fees from Adviser—other(B)(D) | — | — | (221 | ) | ||||||||
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Net incentive fee | $ | 4,975 | $ | 3,983 | $ | 2,364 | ||||||
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| (A) | Average total assets subject to the base management fee is defined as total assets, including investments made with proceeds of borrowings, less any uninvested cash or cash equivalents resulting from borrowings, valued at the end of the applicable quarters within the respective periods and adjusted appropriately for any share issuances or repurchases during the periods. |
| (B) | Reflected as a line item on our accompanyingConsolidated Statement of Operations. For the year ended March 31, 2013, the credits to incentive fee and the credits to base management fee are combined into one line item, Credits to fees from Adviser — other, on the accompanyingConsolidated Statement of Operations. |
| (C) | Pursuant to the requirements of the 1940 Act, the Adviser makes available significant managerial assistance to our portfolio companies. The Adviser may also provide other services to our portfolio companies under other agreements and may receive fees for services other than managerial assistance. The Adviser generally credits 100.0% of these fees against the base management fee that we would otherwise be required to pay to the Adviser; however, pursuant to the terms of the Advisory Agreement, a small percentage of certain of such fees is retained by the Adviser. |
| (D) | Our Board of Directors accepted an unconditional and irrevocable voluntary credit from the Adviser to reduce the income-based incentive fee to the extent net investment income did not 100.0% cover distributions to common stockholders for the year ended March 31, 2013. |
Base Management Fee
The base management fee is computed and generally payable quarterly to the Adviser and is assessed at an annual rate of 2%. It is2.0%, computed on the basis of the value of our average gross assets at the end of the two most recently completed quarters (inclusive of the current quarter), 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 makeAdditionally, pursuant to the requirements of the 1940 Act, the Adviser makes available significant managerial assistance to our portfolio companies andcompanies. The Adviser may also 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 under other agreements and receivesmay receive fees for theseservices other services. 50%than managerial assistance. Such services may include, but are not limited to: (i) assistance obtaining, sourcing or structuring credit facilities, long term loans or additional equity from unaffiliated third parties; (ii) negotiating important contractual financial relationships; (iii) consulting services regarding restructuring of certainthe portfolio company and financial modeling as it relates to raising additional debt and equity capital from unaffiliated third parties; and (iv) primary role in interviewing, vetting and negotiating employment contracts with candidates in connection with adding and retaining key portfolio company management team members. The Adviser generally voluntarily and irrevocably credits 100% of these fees and 100% of others historically have been credited against the base management fee that we would otherwise be required to pay to our Adviser. Effective October 1, 2013, 100% of all these fees are credited against the base management fee that we would otherwise be required to pay to our Adviser; however, pursuant to the terms of the Advisory Agreement, a small percentage of certain of such fees, primarily for the valuation of portfolio companies, is retained by the Adviser in the form of reimbursement, at cost, for certain tasks completed by personnel of the Adviser.
Loan Servicing Fee
The Adviser also services the loans held by our wholly-owned subsidiary, Business Investment, in return for which the Adviser receives a 2.0% annual fee based on the monthly aggregate outstanding balance of loans pledged under our revolving line of credit. These loan servicing fees are 100% credited back to us by the Adviser. Overall, the base management fee, inclusive of the loan servicing fee, due to the Adviser cannot exceed 2.0% of total assets (as reduced by cash and cash equivalents pledged to creditors) during any given calendar year.
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 anThe income-based incentive fee with respect to our pre-incentive fee net investment income in each calendar quarteris generally payable quarterly to the Adviser and is computed as follows:
The second part of the incentive fee is a capital gains-based incentive fee that will beis 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%20.0% of our realized capital gains, less any realized capital losses and unrealized depreciation, calculated as of the end of the fiscalpreceding calendar year. In determining theThe capital gains-based incentive fee payable to the Adviser we will calculate theis calculated based on (i) cumulative aggregate realized capital gains andsince our inception, less (ii) cumulative aggregate realized capital losses since our inception, andless (iii) the entire portfolio’s aggregate net unrealized capital depreciation, if any, as of the date of the calculation. If this number is positive at the applicable calculation as applicable, withdate, then the capital gains-based incentive fee for such year equals 20.0% of such amount, less the aggregate amount of any capital gains-based incentive fees paid in respect to each of the investmentsour portfolio in our portfolio.all prior years. For this purpose,calculation purposes, cumulative aggregate realized capital gains, if any, equals the sum of the differencesexcess 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 whichdeficit between the net sales price of each investment, when sold, is less thanand the original cost of such investment since our inception. Aggregate netThe entire portfolio’s aggregate unrealized capital depreciation, if any, equals the sum of the difference, if negative,deficit between the valuationfair value of each investment security 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 anyinvestment security. We have not incurred 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 ourfrom inception through March 31, 2014,2015, 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 reporting period, then GAAP requires us to record a capital gains-based incentive fee equal to 20%20.0% 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 any such unrealized capital appreciation will be realized in the future. NoThere has been no GAAP accrual recorded for a capital gains-based incentive fee has been recorded since our inception through March 31, 2014.2015.
Our Board of Directors accepted an unconditional and irrevocable voluntary credit from the Adviser to reduce the income-based incentive fee to the extent net investment income did not cover 100% of the distributions to common stockholders for the year ended March 31, 2013, which credit totaled $0.2 million. There have been no incentive fee credits from the Adviser for the years ended March 31, 2015 and 2014
Administration Agreement
We have entered into an administration agreement (the “Administration Agreement”) with the Administrator, whereby we pay separately for administrative services. The Administration Agreement provides for payments equal to our allocable portion of the Administrator’s overhead expenses inincurred while performing its obligations under the Administration Agreement, including, but not limitedservices to us, which are primarily rent and the salaries and benefits expenses of the Administrator’s employees, including our
chief financial officer and treasurer, chief accounting officer, chief compliance officer internaland general counsel and secretary (who also serves as the Administrator’s president) and their respective staffs. Ourstaff. Prior to July 1, 2014, our allocable portion of administrativethe expenses iswere generally derived by multiplying that portion of the
Administrator’s totalexpenses allocable expensesto all funds managed by the Adviser by the percentage of our total assets at the beginning of theeach quarter in comparison to the total assets at the beginning of theeach quarter of all funds managed by the Adviser.
Effective July 1, 2014, our allocable portion of the Administrator’s expenses are generally derived by multiplying the Administrator’s total expenses by the approximate percentage of time during the current quarter the Administrator’s employees performed services for us in relation to their time spent performing services for all companies serviced by the Administrator under similar agreements.Administrator. These administrative fees are accrued at the end of the quarter when the services are performed and recorded on our accompanyingConsolidated Statements of Operations and generally paid the following quarter. On July 9, 2013,15, 2014, our Board of Directors approved the annual renewal of the Administration Agreement through August 31, 2014.2015.
Related Party Fees Due
Amounts due to related parties on our accompanyingConsolidated Statements of Assets and Liabilities were as follows:
| As of March 31, | As of March 31, | |||||||||||||||
| 2014 | 2013 | 2015 | 2014 | |||||||||||||
Base management fee due to Adviser | $ | 63 | $ | 625 | $ | 191 | $ | 63 | ||||||||
Incentive fee due to Adviser | 1,161 | 1,454 | 1,249 | 1,161 | ||||||||||||
Other due to (from) Adviser | 1 | (12 | ) | |||||||||||||
Other due to Adviser | 62 | 1 | ||||||||||||||
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Total fees due to Adviser | $ | 1,225 | $ | 2,067 | 1,502 | 1,225 | ||||||||||
Fee due to Administrator | $ | 224 | $ | 221 | 262 | 224 | ||||||||||
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Total Related Party Fees Due | $ | 1,764 | $ | 1,449 | ||||||||||||
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Total related party fees due | $ | 1,449 | $ | 2,288 | ||||||||||||
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Net co-investment expenses payable to Gladstone Capital (for reimbursement purposes) and payables to other affiliates totaled $305 and $41 as of March 31, 2015 and 2014, respectively. These expenses were paid in full subsequent to fiscal year end and have been included in other liabilities on the accompanyingConsolidated Statements of Assets and Liabilitiesas of March 31, 2015 and 2014.
NOTE 5. BORROWINGS
Line of Credit
On April 30, 2013,June 26, 2014, we, through our wholly-owned subsidiary, Business Investment, entered into a fifth amendedAmendment No. 1 to the Fifth Amended and restated credit agreementRestated Credit Agreement originally entered into on April 30, 2013, with Key Equipment Finance, Inc.a division of KeyBank National Association (“KeyBank”), as administrative agent, lead arranger and a lender (the “Administrative Agent”), Branch Banking and Trust Company (“BB&T”) as a lender and managing agent,lender; other lenders; and the Adviser, as servicer, to increaseextend the commitment amountrevolving period and reduce the interest rate of theour revolving line of credit (the(our “Credit Facility”) from $60 million to $70 million and to extend the. The revolving period was extended 14 months to April 30, 2016. IfJune 26, 2017, and if not renewed or extended by April 30, 2016,June 26, 2017, all principal and interest will be due and payable on or before April 30, 2017 (one yearJune 26, 2019 (two years after the revolving period end date). In addition, there is one remainingwe have retained the two one-year extension optionoptions, to be agreed upon by all parties, which may be exercised on or before April 30, 2015.June 26, 2015 and 2016, respectively, and upon exercise, the options would extend the revolving period to June 26, 2018 and 2019 and the maturity date to June 26, 2020 and 2021, respectively. Subject to certain terms and conditions, theour Credit Facility maycan be expanded by up to $145.0 million, to a total facility amount of $200$250.0 million, through the additionadditional commitments of other lenders to the facility.existing or new committed lenders. Advances under theour Credit Facility generally bear interest at 30-day LIBOR, plus 3.75%3.25% per annum, with an unuseddown from 3.75% prior to the amendment, and our Credit Facility includes a fee of 0.50% on undrawn amounts. Once the revolving period ends, the interest rate margin increases to 3.75% for the period from June 26, 2017 to June 26, 2018, and further increases to 4.25% through maturity. We incurred fees of $0.3$0.4 million in connection with this amendment.amendment, which are being amortized through our Credit Facility’s revolver period end date of June 26, 2017.
On June 12, 2013,September 19, 2014, we further increased theour borrowing capacity under theour Credit Facility from $70$105.0 million to $105$185.0 million by entering into Joinder Agreements pursuant to theour Credit Facility, by and among Business Investment, the Administrative Agent,KeyBank, the Adviser and eachother lenders. We incurred fees of Alostar Bank$1.3 million in connection with this expansion, which are being amortized through our Credit Facility’s revolver period end date of Commerce and Everbank Commercial Finance, Inc.June 26, 2017.
The following tables summarize noteworthy information related to our Credit Facility:
| As of March 31, | As of March 31, | |||||||||||||||
| 2014 | 2013 | 2015 | 2014 | |||||||||||||
Commitment amount | $ | 105,000 | $ | 60,000 | $ | 185,000 | $ | 105,000 | ||||||||
Borrowings outstanding at cost | 61,250 | 31,000 | 118,800 | 61,250 | ||||||||||||
Availability | 43,750 | 29,000 | 66,200 | 43,750 | ||||||||||||
| For the Years Ended March 31, | For the Years Ended March 31, | |||||||||||||||||||||||
| 2014 | 2013 | 2012 | 2015 | 2014 | 2013 | |||||||||||||||||||
Weighted average borrowings outstanding | $ | 34,632 | $ | 15,533 | $ | 7,336 | $ | 79,158 | $ | 34,632 | $ | 15,533 | ||||||||||||
Effective interest rate(A) | 4.90 | % | 5.49 | % | 10.0 | % | 3.98 | % | 4.90 | % | 5.49 | % | ||||||||||||
Commitment (unused) fees incurred | $ | 318 | $ | 225 | $ | 371 | $ | 347 | $ | 318 | $ | 225 | ||||||||||||
| (A) | Excludes the impact of deferred financing fees and includes weighted average unused commitment fees. |
Interest is payable monthly during the term of theour Credit Facility. Available borrowings are subject to various constraints imposed under theour 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 AgentOur Credit Facility also requires that any interest or principal payments on pledged loans be remitted directly by the borrower into a lockbox account with KeyBank and with The Bank of New York Mellon Trust Company, N.A as custodian. The Administrative AgentKeyBank is also the trustee of the account and generally remits the collected funds to us once a month.
Generally,Among other things, 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 generally also limits paymentsseeks to restrict distributions on distributionsour common stock to the aggregatesum of certain amounts, including, but not limited to, our net investment income, for eachplus net capital gains, plus amounts elected by the Company to be considered as having been paid during the prior fiscal year in accordance with Section 855(a) of the twelve month periods ending March 31,
2015, 2016 and 2017.Code. Business Investment is also subject to certain limitations on the type of loan investments it can apply toward available credit in the borrowing base, including restrictions on geographic concentrations, sector concentrations, loan size, 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 million plus 50% of all equity and subordinated debt raised minus any equity or subordinated debt redeemed or retired after April 30, 2013,June 26, 2014, which equates to $170$202.9 million as of March 31, 2014,2015, (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 March 31, 2014,2015, and as defined in the performance guaranty of our Credit Facility, we had a minimum net worth of $260.8$354.8 million, an asset coverage of 298%229.9% 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 March 31, 2014,2015, Business Investment had 2127 obligors. As of March 31, 2014,2015, we were in compliance with all covenants.covenants under our Credit Facility.
We havePursuant to the terms of our Credit Facility, in July 2013, we entered into multiplean interest rate cap agreementsagreement with BB&T and Keybank National AssociationKeyBank that effectively limit the interest rate on a portion of our borrowings under the line of credit pursuant to the terms of our Credit Facility. The current agreement, which expires April 2016, provides that the interest rate on $45$45.0 million of our borrowings is capped at 6%6.0%, plus 3.25% per annum, when 30-day LIBOR is in excess of 6%that certain interest rate.
6.0%. We incurred a premium fee of $75 in conjunction with this agreement, which is recorded in other assets on our accompanyingShort-Term LoanConsolidated Statements of Assets and Liabilities
As. At each of March 31, 2015 and 2014, our asset composition satisfied the 50% threshold. However, excluding March 31, 2014, for each quarter end since June 30, 2009 (the “measurement dates”), we satisfied the 50% threshold to maintainfair value of 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 example, for the December 31, 2013 measurement date, we purchased $10 million of short-term United States Treasury Bills (“T-Bills”) through Jefferies & Company, Inc. (“Jefferies”) on December 27, 2013. The T-Bills were purchased on margin using $1.5 million in cash and the proceeds from an $8.5 million short-term loan from Jefferies with an effective annual interest rate of 1.35%. On January 2, 2014, when the T-Bills matured, we repaid the $8.5 million loan from Jefferies and received the $1.5 million margin payment sent to Jefferies to complete the transaction.cap agreement was $0.
Secured Borrowing
In August 2012, we entered into a participation agreement with a third-party related to $5$5.0 million of our senior subordinated term debt investment in Ginsey Home Solutions, Inc. (“Ginsey”). We evaluated whetherIn May 2014, we amended the transaction should be accounted for as a sale or a financing-type transaction underagreement with the applicable guidance of third-party to include an additional $0.1 million. Accounting Standards Codification Topic 860, “Transfers and Servicing” (“ASC 860. Based on the terms of the participation agreement, we are required860”) requires us 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 accompanyingConsolidated Statements of AssistsAssets and Liabilities reflects the entire senior subordinated secured term debt investment in Ginsey and a corresponding $5$5.1 million secured borrowing liability. The secured borrowing has a stated interest rate of 7%,7.0% and a maturity date of January 3, 2018, and cost approximates fair value.2018.
Fair Value
We elected to apply the fair value option of ASC 825, “Financial“Financial Instruments,” specifically for our Credit Facility, and short-term loan, which was consistent with theour application of ASC 820 to our investments. Generally, the Adviser estimates the fair value of our Credit Facility is determined using estimates of value provided by an independent third partya yield analysis which includes a DCF calculation and itsalso takes into account the Valuation Team’s own assumptions, inincluding, but not limited to, the absence of observable market data, including estimated remaining life, counterparty credit risk, current market yield and interest rate spreads of similar securities as of the measurement date. Additionally, due to the seven-day duration of the short-term loan as of March 31, 2013, cost was deemed to approximate fair value. At each of March 31, 2015 and 2014, and 2013, allthe discount rate used to determine the fair value of our borrowings wereCredit Facility was 3.7% and 4.2%, respectively. Generally, an increase or decrease in the discount rate used in the DCF calculation may result in a corresponding increase or decrease, respectively, in the fair value of our Credit Facility. At each of March 31, 2015 and 2014, our Credit Facility was valued using Level 3 inputs. inputs and any changes in its fair value are recorded in net unrealized depreciation (appreciation) of other on our accompanyingConsolidated Statements of Operations.
The following tables present the short-term loan, where applicable, andour Credit Facility carried at fair value as of March 31, 20142015 and 2013,2014, by caption on our accompanyingConsolidated 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 yearyears ended March 31, 20142015 and 2013:2014:
| Level 3 – Borrowings | ||||||||
| Total Recurring Fair Value Measurement Reported inConsolidated Statements of Assets and Liabilities | ||||||||
| March 31, 2014 | March 31, 2013 | |||||||
Short-Term Loan | $ | — | $ | 58,016 | ||||
Credit Facility | 61,701 | 31,854 | ||||||
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Total | $ | 61,701 | $ | 89,870 | ||||
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Credit Facility Total Recurring Fair Value Measurement Reported in Consolidated Statements of Assets and Liabilities Using Significant Unobservable Inputs (Level 3)
As of March 31, 2015 2014 $ 118,800 $ 61,701
Fair Value Measurements of Borrowings Using Significant Unobservable Inputs (Level 3)
Total Fair Value Reported in Consolidated Statements | ||||||||||||||||||||||||
| Short-Term Loan | Credit Facility | |||||||||||||||||||||||
Year ended March 31, 2015: | ||||||||||||||||||||||||
Fair value as of March 31, 2014 | $ | — | $ | 61,701 | $ | 61,701 | ||||||||||||||||||
Borrowings | — | 144,549 | 144,549 | |||||||||||||||||||||
Repayments | — | (87,000 | ) | (87,000 | ) | |||||||||||||||||||
Net unrealized depreciation(A) | — | (450 | ) | (450 | ) | |||||||||||||||||||
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Fair value as of March 31, 2015 | $ | — | $ | 118,800 | $ | 118,800 | ||||||||||||||||||
| Short-Term Loan | Credit Facility | Total Fair Value Reported in Consolidated Statements of Assets and Liabilities |
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Year ended March 31, 2014: | ||||||||||||||||||||||||
Fair value as of March 31, 2013 | $ | 58,016 | $ | 31,854 | $ | 89,870 | $ | 58,016 | $ | 31,854 | $ | 89,870 | ||||||||||||
Borrowings | 56,514 | 145,350 | 201,864 | 56,514 | 145,350 | 201,864 | ||||||||||||||||||
Repayments | (114,530 | ) | (115,100 | ) | (229,630 | ) | (114,530 | ) | (115,100 | ) | (229,630 | ) | ||||||||||||
Net unrealized depreciation(a) | — | (403 | ) | (403 | ) | |||||||||||||||||||
Net unrealized depreciation(A) | — | (403 | ) | (403 | ) | |||||||||||||||||||
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Fair value as of March 31, 2014 | $ | — | $ | 61,701 | $ | 61,701 | $ | — | $ | 61,701 | $ | 61,701 | ||||||||||||
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Year ended March 31, 2013: | ||||||||||||||||||||||||
Fair value as of March 31, 2012 | $ | 76,005 | $ | — | $ | 76,005 | ||||||||||||||||||
Borrowings | 250,063 | 144,000 | 394,063 | |||||||||||||||||||||
Repayments | (268,052 | ) | (113,000 | ) | (381,052 | ) | ||||||||||||||||||
Net unrealized appreciation(a) | — | 854 | 854 | |||||||||||||||||||||
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Fair value as of March 31, 2013 | $ | 58,016 | $ | 31,854 | $ | 89,870 | ||||||||||||||||||
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| (A) | Included in net unrealized (depreciation) appreciation on our accompanyingConsolidated Statement of Operations for the |
The fair value of the collateral under our Credit Facility was $288.6$435.9 million and $263.7$288.6 million as of March 31, 2015 and 2014, and 2013, respectively. The fair value of the collateral under the short-term loan was $65 million as of March 31, 2013.
NOTE 6. MANDATORILY REDEEMABLE PREFERRED STOCK
In November 2014, we completed a public offering of 1,656,000 shares of 6.75% Series B Cumulative Term Preferred Stock (our “Series B Term Preferred Stock”) at a public offering price of $25.00 per share. Gross proceeds totaled $41.4 million and net proceeds, after deducting underwriting discounts and offering expenses borne by us, were $39.7 million. We incurred $1.7 million in total offering costs related to these transactions, which have been recorded as deferred financing costs on our accompanyingConsolidated Statements of Assets and Liabilities and are being amortized over the period ending December 31, 2021, the mandatory redemption date.
The shares of Series B Term Preferred Stock are traded under the ticker symbol GAINO on the NASDAQ Global Select Market (“NASDAQ”). Our Series B Term Preferred Stock is not convertible into our common stock or any other security. Our Series B Term Preferred Stock provides for a fixed dividend equal to 6.75% per year, payable monthly. We are required to redeem all shares of our outstanding Series B Term Preferred Stock on December 31, 2021, 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, two other potential mandatory redemption triggers are as follows: (1) upon the occurrence of certain events that would constitute a change in control of us, we would be required to redeem all of our outstanding Series B 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 our outstanding Series B Term Preferred Stock or otherwise cure the ratio redemption trigger. We may also voluntarily redeem all or a portion of our Series B Term Preferred Stock at our sole option at the redemption price in order to have an asset coverage ratio of up to and including 215.0% and at any time on or after December 31, 2017.
In March 2012, we completed a public offering of 1,600,000 shares of 7.125% Series A Cumulative Term Preferred Stock (our “Term“Series A Term Preferred Stock”)Stock) at a public offering price of $25.00 per share. Gross proceeds totaled $40$40.0 million and net proceeds, after deducting underwriting discounts and offering expenses borne by us, were $38$38.0 million. We incurred $2$2.0 million in total offering costs related to these transactions, which have been recorded as deferred financing costs on our accompanyingConsolidated Statements of Assets and Liabilities and will be amortized over the redemption period ending February 28, 2017.2017, the mandatory redemption date.
The shares haveSeries A Term Preferred Stock has a redemption date of February 28, 2017, and areis traded under the ticker symbol GAINP on the NASDAQ Global Select Market. The Series A Term Preferred Stock is not convertible into our common stock or any other security. The Series A 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 shares of our Series A 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, three other potential redemption triggers are as follows: (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 Series A 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 Series A 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 Series A Term Preferred Stock.
For the years ended March 31, 2015, 2014, and 2013 our Board of Directors declared and we paid a monthly distributiondividend of $0.1484375 per share, or $1.78125 per share in aggregate, to holders of our Series A Term Preferred Stock. For the year ended March 31, 2015, our Board of Directors declared and we paid dividends for the pro-rated month of November 2014 (based on the number of days between the issuance date and November 30, 2014) and all full months from December 2014 through March 2015, that totaled $0.703125 per share to holders of our Series B Term Preferred Stock. The tax character of dividends paid by us to preferred stockholders.stockholders generally constitute ordinary income to the extent of our current and accumulated earnings and profits.
In accordance with ASC 480, “Distinguishing“Distinguishing Liabilities from Equity,” mandatorily redeemable financial instruments should be classified as liabilities onin the balance sheet and therefore, thewe have recorded our mandatorily redeemable term preferred stock at cost as of March 31, 2015 and 2014. The related dividenddistribution payments to preferred stockholders are treated as dividend expense on our accompanying Consolidated Statementsstatement of Operations atoperations as of the ex-dividend date. TheFor disclosure purposes, the fair value of theour Series A Term Preferred Stock, which we consider to be a levelLevel 1 liability within the fair value hierarchy, based on the last reported closing sale price as of March 31, 2015 and 2014, was $41.5 million and 2013, was $42.4 million, and $42.7 million, respectively.
Aggregate The fair value of our Series B Term Preferred Stock, distributions declared and paid forwhich we consider to be a Level 1 liability within the years endedfair value hierarchy, based on the last reported closing sale price as of March 31, 20142015, was $42.2 million.
Refer to Note 15 –Subsequent Events for information regarding the recent offering of our newly designated and 2013, were both $2.9 million. The tax character of distributions paid by usissued 6.50% Series C Cumulative Term Preferred Stock (“Series C Term Preferred Stock”) subsequent to preferred stockholders is from ordinary income.
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-effectivePre-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. On June 3, 2014, we filed Post-Effective Amendment No. 3 to the registration statement, and subsequently filed a Post-Effective Amendment No. 4 to the registration statement on September 2, 2014, which the SEC declared effective on September 4, 2014. The registration statement permits us to issue, through one or more transactions, up to an aggregate of $300$300.0 million in securities, consisting of common stock, preferred stock, subscription rights, debt securities and warrants to purchase common or preferred stock, including through a combined offering of two or more of such securities. We currently have the ability to issue up to $117.3 million in securities under the registration statement.
On March 13, 2015, we completed a public offering of 3.3 million shares of our common stock at a public offering price of $7.40 per share, which was below our then current NAV per share. Gross proceeds totaled $24.4 million and net proceeds, after deducting underwriting discounts and offering expenses borne by us, were approximately $23.0 million, which was used to repay borrowings under our Credit Facility. Refer to Note 15 –Subsequent Events for additional information regarding shares issued pursuant to the underwriters’ overallotment option occurring subsequent to March 31, 2015.
On October 5, 2012, we completed a public offering of 44.0 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”)NAV per share. Gross proceeds totaled $30$30.0 million and net proceeds, after deducting underwriting discounts and offering expenses borne by us, were approximately $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$3.0 million and net proceeds, after deducting underwriting discounts, of approximately $2.8 million.
NOTE 8. NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS PER COMMON SHARE
The following table sets forth the computation of basic and diluted net increase (decrease) increase in net assets resulting from operations per common share for the years ended March 31, 2015, 2014, 2013, and 2012:2013:
| Year Ended March 31, | ||||||||||||
| 2014 | 2013 | 2012 | ||||||||||
Numerator for basic and diluted net (decrease) increase in net assets resulting from operations per common share | $ | (1,329 | ) | $ | 17,279 | $ | 21,966 | |||||
Denominator for basic and diluted weighted average common shares | 26,475,958 | 24,189,148 | 22,080,133 | |||||||||
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Basic and diluted net (decrease) increase in net assets resulting from operations per common share | $ | (0.05 | ) | $ | 0.71 | $ | 0.99 | |||||
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| Year Ended March 31, | ||||||||||||
| 2015 | 2014 | 2013 | ||||||||||
Numerator for basic and diluted-net increase (decrease) in net assets resulting from operations per common share | $ | 50,214 | $ | (1,329 | ) | $ | 17,279 | |||||
Denominator for basic and diluted-weighted average common shares | 26,665,821 | 26,475,958 | 24,189,148 | |||||||||
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Basic and diluted net increase (decrease) in net assets resulting from operations per common share | $ | 1.88 | $ | (0.05 | ) | $ | 0.71 | |||||
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We are required to pay out as distributions 90% of our ordinary income and short-term capital gains for each taxable year in orderNOTE 9. DISTRIBUTIONS TO COMMON STOCKHOLDERS
To qualify to be taxed as a RIC, under Subtitle A, Chapter 1, Subchapter Mwe are required to distribute to our common stockholders 90% of the Code.our investment company taxable income. The amount to be paid out as a distributiondistributions to our stockholders is determined by our Board of Directors each quarterquarterly and is based on our estimatedmanagement’s estimate of the investment company taxable income by management.income. Based on that estimate, our Board of Directors declares three monthly common distributions are declared each quarter.
The federal income tax characteristics of all distributions (including preferred stock dividends) will be reported to stockholders on the Internal Revenue Service Form 1099 at the end of each calendar year. For calendar years ended December 31, 2014, 2013 2012 and 2011,2012, 100% of our common distributions during these periods were deemed to be paid from ordinary income for 1099 shareholderstockholder reporting purposes.
Our Board of Directors declaredWe paid the following monthly distributions to common stockholders for the years ended March 31, 20142015 and 2013:2014:
Fiscal Year | Declaration Date | Record Date | Payment Date | Distribution per Common Share | ||||||
2014 | April 9, 2013 | April 22, 2013 | April 30, 2013 | $ | 0.050 | |||||
| April 9, 2013 | May 20, 2013 | May 31, 2013 | 0.050 | |||||||
| April 9, 2013 | June 19, 2013 | June 28, 2013 | 0.050 | |||||||
| July 9, 2013 | July 17, 2013 | July 31, 2013 | 0.050 | |||||||
| July 9, 2013 | August 19, 2013 | August 30, 2013 | 0.050 | |||||||
| July 9, 2013 | September 16, 2013 | September 30, 2013 | 0.050 | |||||||
| October 8, 2013 | October 22, 2013 | October 31, 2013 | 0.060 | |||||||
| October 8, 2013 | November 14, 2013 | November 29, 2013 | 0.060 | |||||||
| October 8, 2013 | November 18, 2013 | November 29, 2013 | 0.050 | (A) | ||||||
| October 8, 2013 | December 16, 2013 | December 31, 2013 | 0.060 | |||||||
| January 7, 2014 | January 22, 2014 | January 31, 2014 | 0.060 | |||||||
| January 7, 2014 | February 19. 2014 | February 28, 2014 | 0.060 | |||||||
| January 7, 2014 | March 17, 2014 | March 31, 2014 | 0.060 | |||||||
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Year Ended March 31, 2014: | $ | 0.710 | ||||||||
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2013 | April 11, 2012 | April 20, 2012 | April 30, 2012 | $ | 0.050 | |||||
| April 11, 2012 | May 18, 2012 | May 31, 2012 | 0.050 | |||||||
| April 11, 2012 | June 20, 2012 | June 29, 2012 | 0.050 | |||||||
| July 10, 2012 | July 20, 2012 | July 31, 2012 | 0.050 | |||||||
| July 10, 2012 | August 22, 2012 | August 31, 2012 | 0.050 | |||||||
| July 10, 2012 | September 19, 2012 | September 28, 2012 | 0.050 | |||||||
| October 10, 2012 | October 22, 2012 | October 31, 2012 | 0.050 | |||||||
| October 10, 2012 | November 19, 2012 | November 30, 2012 | 0.050 | |||||||
| October 10, 2012 | December 19, 2012 | December 31, 2012 | 0.050 | |||||||
| January 8, 2013 | January 18, 2013 | January 31, 2013 | 0.050 | |||||||
| January 8, 2013 | February 15, 2013 | February 28, 2013 | 0.050 | |||||||
| January 8, 2013 | March 15, 2013 | March 28, 2013 | 0.050 | |||||||
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Year Ended March 31, 2013: | $ | 0.600 | ||||||||
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Fiscal Year | Declaration Date | Record Date | Payment Date | Distribution per Common Share | ||||||
2015 | April 16, 2014 | April 21, 2014 | April 30, 2014 | $ | 0.060 | |||||
| May 16, 2014 | May 20, 2014 | May 30, 2014 | 0.060 | |||||||
| June 17, 2014 | June 19, 2014 | June 30, 2014 | 0.060 | |||||||
| July 23, 2014 | July 25, 2014 | August 5, 2014 | 0.060 | |||||||
| August 18, 2014 | August 20, 2014 | August 29, 2014 | 0.060 | |||||||
| September 17, 2014 | September 19, 2014 | September 30, 2014 | 0.060 | |||||||
| October 20, 2014 | October 22, 2014 | October 31, 2014 | 0.060 | |||||||
| November 13, 2014 | November 17, 2014 | November 26, 2014 | 0.060 | |||||||
| December 17, 2014 | December 19, 2014 | December 31, 2014 | 0.050 | (A) | ||||||
| December 17, 2014 | December 19, 2014 | December 31, 2014 | 0.060 | |||||||
| January 21, 2015 | January 23, 2015 | February 3, 2015 | 0.060 | |||||||
| February 13, 2015 | February 18, 2015 | February 27, 2015 | 0.060 | |||||||
| March 18, 2015 | March 20, 2015 | March 31, 2015 | 0.060 | |||||||
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| Year Ended March 31, 2015: | $ | 0.770 | ||||||||
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2014 Year Ended March 31, 2014: April 9, 2013 April 22, 2013 April 30, 2013 $ 0.050 April 9, 2013 May 20, 2013 May 31, 2013 0.050 April 9, 2013 June 19, 2013 June 28, 2013 0.050 July 9, 2013 July 17, 2013 July 31, 2013 0.050 July 9, 2013 August 19, 2013 August 30, 2013 0.050 July 9, 2013 September 16, 2013 September 30, 2013 0.050 October 8, 2013 October 22, 2013 October 31, 2013 0.060 October 8, 2013 November 14, 2013 November 29, 2013 0.060 October 8, 2013 November 18, 2013 November 29, 2013 0.050 (A) October 8, 2013 December 16, 2013 December 31, 2013 0.060 January 7, 2014 January 22, 2014 January 31, 2014 0.060 January 7, 2014 February 19. 2014 February 28, 2014 0.060 January 7, 2014 March 17, 2014 March 31, 2014 0.060 $ 0.710
| (A) | A |
Aggregate common distributions declared quarterly and paid to our common stockholders for the years ended March 31, 2015 and 2014 were $20.6 million and 2013 were $18.8 million, and $14.5 million, respectively, whichand were declared based on estimates of net investment income for the respective fiscal years. For each of the fiscal years ended March 31, 20142015 and 2013,2014, 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 $3.9$4.0 million and $3.1$3.9 million, respectively, of the first common distributions paid in fiscal year 20152016 and 2014,2015, respectively, as having been paid in the respective prior year.
The components of our net assets on a tax basis were as follows:
| Year Ended March 31, | Year Ended March 31, | |||||||||||||||
| 2014 | 2013 | 2015 | 2014 | |||||||||||||
Common stock | $ | 26 | $ | 26 | $ | 30 | $ | 26 | ||||||||
Paid-in-capital | 287,062 | 287,713 | ||||||||||||||
Net unrealized depreciation of investments | (69,283 | ) | (40,310 | ) | ||||||||||||
Net unrealized depreciation of other | (525 | ) | (883 | ) | ||||||||||||
Capital in excess of par value | 309,438 | 287,062 | ||||||||||||||
Cumulative unrealized depreciation of investments | (39,204 | ) | (69,283 | ) | ||||||||||||
Cumulative unrealized (depreciation) (appreciation) of other | (75 | ) | (525 | ) | ||||||||||||
Undistributed ordinary income | 3,918 | 3,106 | 4,002 | 3,918 | ||||||||||||
Capital loss carryforward | (216 | ) | (8,663 | ) | (288 | ) | (216 | ) | ||||||||
Post October loss deferral | — | — | ||||||||||||||
Other temporary differences | (163 | ) | (44 | ) | (490 | ) | (163 | ) | ||||||||
Other | 18 | 18 | 16 | 18 | ||||||||||||
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Net assets | $ | 220,837 | $ | 240,963 | ||||||||||||
Net Assets | $ | 273,429 | $ | 220,837 | ||||||||||||
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We generally intend to retain some or all of our realized gains first to the extent we have available capital loss carryforwards and second, through a deemed distribution. As of March 31, 2014,2015, we had $0.2$0.3 million of capital loss carryforwards that expire in 2018. We had no deemed distributions during the years ended March 31, 2015, 2014, and 2013.
For the years ended March 31, 20142015 and 2013,2014, we recorded the following adjustments for permanent book-tax differences to reflect tax character. Results of operations, and net assets, and cash flows were not affected by this revision.these adjustments.
| Tax Year Ended March 31, | Tax Year Ended March 31, | |||||||||||||||
| 2014 | 2013 | 2015 | 2014 | |||||||||||||
Undistributed net investment income | $ | 416 | $ | 428 | $ | 584 | $ | 416 | ||||||||
Accumulated net realized gain | 235 | — | — | 235 | ||||||||||||
Paid-in-capital | (651 | ) | (428 | ) | (584 | ) | (651 | ) | ||||||||
The tax character of distributions paid by us to common stockholders is summarized as follows:for the years ended March 31, 2015, 2014 and 2013 were 100.0% from ordinary income.
| Tax Year Ended March 31, | ||||||||||||
| 2014 | 2013 | 2012 | ||||||||||
Distributions from ordinary income | $ | 18,797 | $ | 14,547 | $ | 13,579 | ||||||
Distributions from capital gains | — | — | — | |||||||||
Distributions from return of capital | — | — | — | |||||||||
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Total common distributions | $ | 18,797 | $ | 14,547 | $ | 13,579 | ||||||
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NOTE 10. FEDERAL AND STATE INCOME TAXES
We intend to continue to qualify for treatmentmaintain our qualifications as a RIC under Subtitle A, Chapter 1 of Subchapter M of the Code.for federal income tax purposes. As a RIC, we are not subject to federal income tax on the portion of our taxable income and gains distributedthat we distribute to stockholders. To qualifymaintain our qualification as a RIC, we must meet certain source-of-income and asset diversification andrequirements. In addition, in order to qualify to be taxed as a RIC, we must also meet certain annual stockholder distribution requirements. To satisfy the RIC annual distribution requirements. Under the annual distribution requirements,requirement, we are required to must
distribute to stockholders at least 90% of our investment company taxable income, as defined by the Code.income. Our practice has beenpolicy generally is to pay out asmake distributions to our stockholders in amount up to 100% of that amount.our investment company taxable income. Because we have distributed more than 90% of our investment company taxable income, no income tax provisions have been recorded for the years ended March 31, 2015, 2014, and 2013.
In an effort to limit certain federal excise taxes imposed on RICs, we generally distribute during each calendar year, an amount at least equal to the sum of (1) 98% of our ordinary income for the calendar year, (2) 98.2% of our capital gains in excess of capital losses for the one-year period ending on October 31 of the calendar year and (3) any ordinary income and capital gains in excess of capital losses for preceding years that were not distributed during such years. However, we did incurWe incurred an excise tax of $0.1 million, $0.3 million, $31 and $30$31 for the calendar years ended December 31, 2014, 2013 and 2012, and 2011, respectively.
Under the RIC Modernization Act (the “RIC Act”), we are permitted to carry forward capital losses incurred in taxable years beginning after March 31,September 30, 2011, for an unlimited period. However, any losses incurred during those future taxable years mustwill be usedrequired to be utilized prior to the losses incurred in pre-enactment taxable years, which carry an expiration date. As a result of this ordering rule, pre-enactment capital loss carryforwards may be more likely to expire unused. Additionally, post-enactment capital loss carryforwards will retain their character as either short-term or long-term capital losses rather than only being considered all short-term as permitted under previous regulation.the Treasury regulations applicable to pre-enactment capital losses. Our total capital loss carryforward balance was $8.7 million as of March 31, 2013,2015 and primarily as a result of the net $8.22014 was $0.3 million capital gain related to the Venyu, ASH, Packerland and Noble exits or partial exits and other tax realized loss adjustments during the year ended March 31, 2014, we anticipate that when we file taxes for the fiscal year ended March 31, 2014 we expect that all but $0.2 million, in realized losses incurred in pre-enactment taxable years will be utilized during the fiscal year ended March 31, 2014.respectively.
AsNOTE 11. COMMITMENTS AND CONTINGENCIES
Legal Proceedings
We are party to certain legal proceedings incidental to the normal course of our business, including the enforcement of our rights under contracts with our portfolio companies. We are required to establish reserves for litigation matters where those matters present loss contingencies that are both probable and estimable. When loss contingencies are not both probable and estimable, we do not establish reserves. Based on current knowledge, we do not believe that loss contingencies, if any, arising from pending investigations, litigation or regulatory matters will have a material adverse effect on our financial condition, results of operation or cash flows. Additionally, based on our current knowledge, we do not believe such loss contingencies are both probable and estimable and therefore, as of as of March 31, 2015, we have not established reserves for such loss contingencies.
Escrow Holdbacks
From time to time, we will enter into arrangements as it relates to exits of certain investments whereby specific amounts of the proceeds are held in escrow in order to be used to satisfy potential obligations as stipulated in the sales agreements. We record escrow amounts in restricted cash and cash equivalents on our accompanyingConsolidated Statements of Assets and Liabilities. We establish a contingent liability against the escrow amounts if we determine that it is probable and estimable that a portion of the escrow amounts will not be ultimately received at the end of the escrow period. The aggregate contingent liability recorded against the escrow amounts was $0 and $35 as of March 31, 2015 and 2014, werespectively.
Financial Commitments and Obligations
We have lines of credit and other uncalled capital commitments to certain of our portfolio companies that have not been fully drawn. Since these lines of credit and other uncalled capital commitments have expiration dates and we expect many will never be fully drawn, the total line of credit and other uncalled capital commitment amounts do not necessarily represent future cash requirements. In February 2015, we executed a capital call commitment with Tread and its senior credit facility lender, which expires in February 2018. Under the terms of the agreement, we may be required to fund additional capital up to $10.0 million in Tread, but in all cases limited to the actual amount outstanding under Tread’s senior credit facility. The actual amount outstanding under Tread’s senior credit facility as of March 31, 2015 was $4.4 million. We estimate the fair value of the combined unused line of credit and other uncalled capital commitments as of March 31, 2015 and 2014 to be minimal.
In addition to the lines of credit and other uncalled capital commitments to certainour portfolio companies, we have also extended certain guaranteesguaranties on behalf of some of our portfolio companies. As ofDuring the years ended March 31, 2015, 2014 and 2013, we have not been required to make any payments on any of the guarantees discussed below,guaranties, and we consider the credit riskrisks to be remote and the fair valuesvalue of the guaranteesguaranties to be minimal.
As of March 31, 2015, the following guaranties were outstanding:
As of March 31, 2014, the following guaranties were outstanding:
In February 2010, we executed a guarantee of a wholesale financing facility agreement (the “Floorthe Floor Plan Facility”)Facility between Agricredit Acceptance, LLC (“Agricredit”) and Country Club Enterprises, LLC (“CCE”).CCE. The Floor Plan Facility provides CCE with financing of up to $2$2.0 million to bridge the time and cash flow gap between the order and delivery of golf carts to
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The following table summarizes the dollar balance of unused line of credit and other uncalled capital commitments and guaranteesguaranties as of March 31, 20142015 and 2013:2014:
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Unused line of credit commitments | $ | 6,684 | $ | 1,584 | ||||
Guarantees | 3,628 | 3,870 | ||||||
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Total | $ | 10,312 | $ | 5,454 | ||||
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Unused line of credit and other uncalled capital commitments Guaranties Total Escrow Holdbacks As of March 31, 2015 2014 $ 10,031 $ 6,684 2,593 3,628 $ 12,624 $ 10,312
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 accompanyingConsolidated Statements of Assets and Liabilities. In August 2013, the sale of Venyu resulted in $4.9 million in escrow amounts, of which $0.6 million is held on behalf of the other sellers. The $0.6 million amount held on behalf of the other sellers is recorded in other liabilities on our accompanyingConsolidated 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 $35 and $41 as of March 31, 2014 and 2013, respectively.
NOTE 12. FINANCIAL HIGHLIGHTS
| Year Ended March 31, | As of and for the Year Ended March 31, | |||||||||||||||||||||||||||||||||||||||
| 2014 | 2013 | 2012 | 2011 | 2010 | 2015 | 2014 | 2013 | 2012 | 2011 | |||||||||||||||||||||||||||||||
Per Common Share Data: | Per Common Share Data: |
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Net asset value at beginning of year (A) | $ | 9.10 | $ | 9.38 | $ | 9.00 | $ | 8.74 | $ | 9.73 | ||||||||||||||||||||||||||||||
Net asset value, beginning of year (A) | $ | 8.34 | $ | 9.10 | $ | 9.38 | $ | 9.00 | $ | 8.74 | ||||||||||||||||||||||||||||||
Income from investment operations(B) | ||||||||||||||||||||||||||||||||||||||||
Net investment income | 0.73 | 0.68 | 0.62 | 0.73 | 0.48 | 0.75 | 0.73 | 0.68 | 0.62 | 0.73 | ||||||||||||||||||||||||||||||
Net realized gain (loss) on investments and other | 0.31 | 0.03 | 0.23 | 1.06 | (1.63 | ) | ||||||||||||||||||||||||||||||||||
Net unrealized (depreciation) appreciation on investments and Other | (1.09 | ) | — | 0.14 | (1.05 | ) | 0.65 | |||||||||||||||||||||||||||||||||
Net realized gain on investments and other | — | 0.31 | 0.03 | 0.23 | 1.06 | |||||||||||||||||||||||||||||||||||
Net unrealized appreciation (depreciation) on investments and other | 1.13 | (1.09 | ) | — | 0.14 | (1.05 | ) | |||||||||||||||||||||||||||||||||
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Total from investment operations | (0.05 | ) | 0.71 | 0.99 | 0.74 | (0.50 | ) | 1.88 | (0.05 | ) | 0.71 | 0.99 | 0.74 | |||||||||||||||||||||||||||
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Cash distributions to common stockholders from net investment income(C) | (0.71 | ) | (0.60 | ) | (0.61 | ) | (0.48 | ) | (0.48 | ) | ||||||||||||||||||||||||||||||
Cash distributions to common stockholders(C) | (0.77 | ) | (0.71 | ) | (0.60 | ) | (0.61 | ) | (0.48 | ) | ||||||||||||||||||||||||||||||
Shelf registration offering costs | — | (0.08 | ) | — | — | (0.01 | ) | (0.03 | ) | — | (0.08 | ) | — | — | ||||||||||||||||||||||||||
Net dilutive effect of equity offering(D) | — | (0.31 | ) | — | — | — | (0.22 | ) | — | (0.31 | ) | — | — | |||||||||||||||||||||||||||
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Total from equity capital activity | (0.71 | ) | (0.99 | ) | (0.61 | ) | (0.48 | ) | (0.49 | ) | (1.02 | ) | (0.71 | ) | (0.99 | ) | (0.61 | ) | (0.48 | ) | ||||||||||||||||||||
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Other, net(B)(E) | (0.02 | ) | — | — | — | — | ||||||||||||||||||||||||||||||||||
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Net asset value at end of year(A) | $ | 8.34 | $ | 9.10 | $ | 9.38 | $ | 9.00 | $ | 8.74 | $ | 9.18 | $ | 8.34 | $ | 9.10 | $ | 9.38 | $ | 9.00 | ||||||||||||||||||||
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Per common share market value at beginning of year | $ | 7.31 | $ | 7.57 | $ | 7.79 | $ | 6.01 | $ | 3.67 | $ | 8.27 | $ | 7.31 | $ | 7.57 | $ | 7.79 | $ | 6.01 | ||||||||||||||||||||
Per common share market value at end of year | 8.27 | 7.31 | 7.57 | 7.76 | 5.98 | 7.40 | 8.27 | 7.31 | 7.57 | 7.76 | ||||||||||||||||||||||||||||||
Total return(E) | 24.26 | % | 4.73 | % | 5.58 | % | 38.56 | % | 79.80 | % | ||||||||||||||||||||||||||||||
Total return(F) | 11.96 | % | 24.26 | % | 4.73 | % | 5.58 | % | 38.56 | % | ||||||||||||||||||||||||||||||
Common stock outstanding at end of year(A) | 26,475,958 | 26,475,958 | 22,080,133 | 22,080,133 | 22,080,133 | 29,775,958 | 26,475,958 | 26,475,958 | 22,080,133 | 22,080,133 | ||||||||||||||||||||||||||||||
Statement of Assets and Liabilities Data: | ||||||||||||||||||||||||||||||||||||||||
Net assets at end of year | $ | 220,837 | $ | 240,963 | $ | 207,216 | $ | 198,829 | $ | 192,978 | $ | 273,429 | $ | 220,837 | $ | 240,963 | $ | 207,216 | $ | 198,829 | ||||||||||||||||||||
Average net assets | 231,356 | 216,751 | 204,595 | 192,893 | 191,112 | 229,350 | 231,356 | 216,751 | 204,595 | 192,893 | ||||||||||||||||||||||||||||||
Senior Securities Data: | ||||||||||||||||||||||||||||||||||||||||
Total borrowings at cost | $ | 66,250 | $ | 94,016 | $ | 76,005 | $ | 40,000 | $ | 102,812 | ||||||||||||||||||||||||||||||
Total borrowings, at cost | $ | 123,896 | $ | 66,250 | $ | 94,016 | $ | 76,005 | $ | 40,000 | ||||||||||||||||||||||||||||||
Mandatorily redeemable preferred stock | 40,000 | 40,000 | 40,000 | — | — | 81,400 | 40,000 | 40,000 | 40,000 | — | ||||||||||||||||||||||||||||||
Asset coverage ratio(G) | 298 | % | 272 | % | 268 | % | 534 | % | 281 | % | ||||||||||||||||||||||||||||||
Average coverage per unit(H) | $ | 2,978 | $ | 2,725 | $ | 2,676 | $ | 5,344 | $ | 2,814 | ||||||||||||||||||||||||||||||
Asset coverage ratio(H) | 230 | % | 298 | % | 272 | % | 268 | % | 534 | % | ||||||||||||||||||||||||||||||
Average coverage per unit(I) | $ | 2,301 | $ | 2,978 | $ | 2,725 | $ | 2,676 | $ | 5,344 | ||||||||||||||||||||||||||||||
Ratios/Supplemental Data: | ||||||||||||||||||||||||||||||||||||||||
Ratio of expenses to average net assets(I) | 8.33 | % | 7.09 | % | 4.23 | % | 5.48 | % | 5.76 | % | ||||||||||||||||||||||||||||||
Ratio of net expenses to average net assets(J)(K) | 7.33 | 6.48 | 3.67 | 5.13 | 5.33 | |||||||||||||||||||||||||||||||||||
Ratio of net investment income to average net assets(L) | 8.35 | 7.61 | 6.72 | 8.38 | 5.55 | |||||||||||||||||||||||||||||||||||
Ratio of expenses to average net assets(J) | 12.90 | % | 10.20 | % | 8.81 | % | 5.71 | % | 6.90 | % | ||||||||||||||||||||||||||||||
Ratio of net expenses to average net assets(K)(L) | 9.48 | 7.33 | 6.48 | 3.67 | 5.13 | |||||||||||||||||||||||||||||||||||
Ratio of net investment income to average net assets(M) | 8.68 | 8.35 | 7.61 | 6.72 | 8.38 | |||||||||||||||||||||||||||||||||||
| (A) | Based on actual shares outstanding at the end of the corresponding year. |
| (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. |
| (D) | In fiscal |
| (E) | Represents the impact of the different share amounts (weighted average shares outstanding during the fiscal year and shares outstanding at the end of the fiscal year) in the per share data calculations and rounding impacts. |
| (F) | Total return equals the change in the market value of our common stock from the beginning of the year, 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 9—Distributions to Common Stockholders. |
| Calculated using the average balance of net assets at the end of each month of the reporting year. |
| 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. |
| Asset coverage per unit is the asset coverage ratio expressed in terms of dollar amounts per one thousand dollars of indebtedness. |
| Ratio of expenses to average net assets is computed using expenses before credits from the Adviser. The ratio of expenses to average net assets for the twelve months ended March 31, 2014, 2013, 2012, and 2011 were revised from the previously reported ratios, which were 8.33%, 7.09%, 4.23%, and 5.48%, respectively. Refer to Note 2 –Summary of Significant Accounting Policiesfor additional information on the revision. |
| Ratio of net expenses to average net assets is computed using total expenses, net of credits to the base management |
| Had we not received any voluntary |
| Had we not received any voluntary |
NOTE 13. SELECTED QUARTERLY DATA (UNAUDITED)
| Quarter Ended | ||||||||||||||||
Fiscal Year 2014 | June 30, 2013 | September 30, 2013 | December 31, 2013 | March 31, 2014 | ||||||||||||
Total investment income | $ | 7,398 | $ | 11,359 | $ | 8,696 | $ | 8,811 | ||||||||
Net investment income | 4,033 | 6,228 | 4,402 | 4,644 | ||||||||||||
Net (decrease) increase in net assets resulting from operations | (6,519 | ) | 14,939 | (10,686 | ) | 937 | ||||||||||
Net (decrease) increase in net assets resulting from operations per weighted average common share – basic & diluted | $ | (0.25 | ) | $ | 0.57 | $ | (0.40 | ) | $ | 0.03 | ||||||
| Quarter Ended | ||||||||||||||||
Year ended March 31, 2015 | June 30, 2014 | September 30, 2014 | December 31, 2014 | March 31, 2015 | ||||||||||||
Total investment income | $ | 9,837 | $ | 9,071 | $ | 11,562 | $ | 11,173 | ||||||||
Net investment income | 4,859 | 4,204 | 5,839 | 4,995 | ||||||||||||
Net increase in net assets resulting from operations | 10,770 | 2,697 | 7,589 | 29,158 | ||||||||||||
Net increase in net assets resulting from operations per weighted average common share – basic & diluted | $ | 0.41 | $ | 0.10 | $ | 0.29 | $ | 1.08 | ||||||||
| Quarter Ended | ||||||||||||||||
Fiscal Year 2013 | June 30, 2012 | September 30, 2012 | December 31, 2012 | March 31, 2013 | ||||||||||||
Total investment income | $ | 5,905 | $ | 6,974 | $ | 7,184 | $ | 10,475 | ||||||||
Net investment income | 3,238 | 3,451 | 3,952 | 5,847 | ||||||||||||
Net (decrease) increase in net assets resulting from operations | (3,017 | ) | (353 | ) | 4,699 | 15,950 | ||||||||||
Net (decrease) increase in net assets resulting from operations per weighted average common share – basic & diluted | $ | (0.13 | ) | $ | (0.02 | ) | $ | 0.18 | $ | 0.60 | ||||||
| Quarter Ended | ||||||||||||||||
Year ended March 31, 2014 | June 30, 2013 | September 30, 2013 | December 31, 2013 | March 31, 2014 | ||||||||||||
Total investment income | $ | 7,398 | $ | 11,359 | $ | 8,696 | $ | 8,811 | ||||||||
Net investment income | 4,033 | 6,228 | 4,402 | 4,644 | ||||||||||||
Net (decrease) increase in net assets resulting from operations | (6,519 | ) | 14,939 | (10,686 | ) | 937 | ||||||||||
Net (decrease) increase in net assets resulting from operations per weighted average common share – basic & diluted | $ | (0.25 | ) | $ | 0.57 | $ | (0.40 | ) | $ | 0.03 | ||||||
NOTE 14. UNCONSOLIDATED SIGNIFICANT SUBSIDIARIES
In accordance with the SEC’s Regulation S-X and GAAP, we are not permitted to consolidate any subsidiary or other entity that is not an investment company, including those in which we have a controlling interest. We had three unconsolidated subsidiaries, that are not required to be consolidated. We have an unconsolidated subsidiary, Venyu, as of March 31, 2013D.P.M.S., Inc. (d/b/a Danco Acquisition Corporation), Galaxy, and for the years ended March 31, 2014 and 2013, that meetsSOG, which met at least one of the significance conditions under Rule 1-02(w) of the SEC’s Regulation S-X.S-X during at least one of the years ended March 31, 2015, 2014 and 2013. Accordingly, audited and unaudited financial statements, as applicable, for these subsidiaries have been included as exhibits to this Form 10-K. In addition, we had one unconsolidated subsidiary, Venyu, which met at least one of the significance conditions under Rule 1-02(w) of the SEC’s Regulation S-X for the years ended March 31, 2014 and 2013. Accordingly, summarized, comparative financial information is presented below for Venyu, which is a leader in commercial-grade, customizable solutions for data protection, data hosting, and disaster recovery.
Income Statement | For the Five Months Ended August 30, 2013(A) | For the Year Ended March 31, 2013 | For the Year Ended March 31, 2012 | |||||||||
Net sales | $ | 10,120 | $ | 23,905 | $ | 23,635 | ||||||
Gross profit | 5,254 | 12,861 | 9,987 | |||||||||
Net loss | (294 | ) | (329 | ) | (5,300 | ) | ||||||
Balance Sheet | As of March 31, 2013 | |||
Current assets | $ | 6,382 | ||
Noncurrent assets | 31,092 | |||
Current liabilities | 2,235 | |||
Noncurrent liabilities | 32,966 | |||
Income Statement | For the Five Months Ended August 30, 2013(A) | For the Year Ended March 31, 2013 | ||||||
Net sales | $ | 10,120 | $ | 23,905 | ||||
Gross profit | 5,254 | 12,861 | ||||||
Net loss | (294 | ) | (329 | ) | ||||
| (A) | Venyu was exited in August 2013 and is no longer in our portfolio as of March 31, 2015 or 2014. Rule 4-08(g) information is being provided herein in lieu of Rule 3-09 separate financial statements pursuant to relief provided by the Staff of the SEC’s Office of Chief Accountant in the Division of Investment Management. |
NOTE 15. SUBSEQUENT EVENTS
New Portfolio ActivityCommon stock offering
In connection with the March 13, 2015 common stock offering, the underwriters exercised their option in April 2015 to purchase an additional 495,000 shares at the public offering price of $7.40 per share to cover over-allotments, which resulted in gross proceeds of $3.7 million and net proceeds, after deducting underwriting discounts, of approximately $3.5 million.
Term preferred stock offering
In May 2014, NDLI2015, we completed the purchasea public offering of certain1,610,000 shares of Noble’s assets outour Series C Term Preferred Stock at a public offering price of bankruptcy. The resulting entity assumed the name Noble Distribution & Logistics Inc.$25.00 per share. Gross proceeds totaled $40.3 million and will be listed as one portfolio company on ourConsolidated Schedules of Investments beginning with the three months ending June 30, 2014.
net proceeds, after deducting underwriting discounts and offering expenses borne by us, were approximately $38.6 million.
Distributions and dividends
OnIn April 8, 2014,2015, our Board of Directors declared the following monthly cash distributions to common stockholders and preferred stockholders:dividends to holders of our Series A and B Term Preferred Stock:
Record Date April 24, 2015 May 19, 2015 June 19, 2015 Total for the Quarter: Payment Date Distribution per
Common Share Dividend per
Series A Term
Preferred Share Dividend per
Series B Term
Preferred Share April 30, 2014 $ 0.0625 $ 0.1484375 $ 0.140625 May 29, 2015 0.0625 0.1484375 0.140625 June 30, 2015 0.0625 0.1484375 0.140625 $ 0.1875 $ 0.4453125 $ 0.421875
In May 2015, our Board of Directors declared the following combined cash dividend (for a prorated month of May 2015, based upon the issuance date, and a full month of June 2015) to holders of our Series C Term Preferred Stock:
Record Date | Payment Date | Distribution per Common Share | Distribution per Term Preferred Share | |||||||
April 21, 2014 | April 30, 2014 | $ | 0.06 | $ | 0.1484375 | |||||
May 20, 2014 | May 30, 2014 | 0.06 | 0.1484375 | |||||||
June 19, 2014 | June 30, 2014 | 0.06 | 0.1484375 | |||||||
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Total for the Quarter: | $ | 0.18 | $ | 0.4453125 | ||||||
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Record Date | Payment Date | Dividend per Series C Term Preferred Share | ||||||
June 19, 2015 | June 30, 2015 | $ | 0.221181 | |||||
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Total for the Quarter: | $ | 0.221181 | ||||||
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
As of March 31, 20142015 (the end of the period covered by this report), we, including our chief executive officer and chief financial officer and treasurer, evaluated the effectiveness and design and operation of our disclosure controls and procedures. Based on that evaluation, our management, including the chief executive officer and chief financial officer and treasurer, concluded that our disclosure controls and procedures were effective in timely alerting management, including the chief executive officer and chief financial officer and treasurer, of material information about us required to be included in periodic SEC filings. However, in evaluation of the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
Management’s Annual Report on Internal Control over Financial Reporting
Refer to Management’s Annual Report on Internal Control over Financial Reporting located in Item 8 of this Form 10-K.
Attestation Report of the Independent Registered Public Accounting Firm
Refer to the Report of Independent Registered Public Accounting Firm located in Item 8 of this Form 10-K.
Change in Internal Control over Financial Reporting
There were no changes in internal controls for the periodquarter ended March 31, 20142015 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
| ITEM 9B. | OTHER INFORMATION. |
Not applicable.
We will file a definitive Proxy Statement for our 20142015 Annual Meeting of Stockholders (the “2014“2015 Proxy Statement”) with the SEC, pursuant to Regulation 14A, not later than 120 days after the end of our fiscal year. Accordingly, certain information required by Part III has been omitted under General Instruction G(3) to Form 10-K. Only those sections of the 20142015 Proxy Statement that specifically address the items set forth herein are incorporated by reference.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by Item 10 is hereby incorporated by reference from our 20142015 Proxy Statement under the captions “Election of Directors” and “Section 16(a) Beneficial Ownership Reporting Compliance.”
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is hereby incorporated by reference from our 20142015 Proxy Statement under the captions “Compensation Discussion and Analysis—Executive Compensation” and “Director Compensation.”
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information required by Item 12 is hereby incorporated by reference from our 20142015 Proxy Statement under the caption “Security Ownership of Certain Beneficial Owners and Management.”
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by Item 13 is hereby incorporated by reference from our 20142015 Proxy Statement under the captions “Certain Transactions” and “Information Regarding the Board of Directors and Corporate Governance.”
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by Item 14 is hereby incorporated by reference from our 20142015 Proxy Statement under the caption “Independent Registered Public Accounting Firm Fees.”
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
| ITEM 15. | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES |
| a. | DOCUMENTS FILED AS PART OF THIS REPORT | |
| 1. | The following financial statements are filed herewith: | |
2. | The following financial statement schedule is filed herewith: | |||||
No other financial statement schedules are filed herewith because (1) such schedules are not required or (2) the information has been presented in the aforementioned financial statements. | ||
3. | Exhibits |
The following exhibits are filed as part of this report or hereby incorporated by reference to exhibits previously filed with the SEC: | ||
3.1 | Amended and Restated Certificate of Incorporation, incorporated by reference to Exhibit A.2 to Pre-Effective Amendment No. 1 to the Registration Statement on Form N-2 (File No. 333-123699), filed May 13, 2005. | ||
3.1.a | Certificate of Designation of 7.125% Series A Cumulative Term Preferred Stock, incorporated by reference to Exhibit 2.A.2 to Post-Effective Amendment No. 5 to the Registration Statement on Form N-2 (File No. 333-160720), filed February 29, 2012. | ||
3.1.b | Certificate of Designation of 6.75% Series B Cumulative Term Preferred Stock, incorporated by reference to Exhibit 3.3 to the Registration Statement on Form 8-A (File No. 001-34007), filed November 7, 2014. | ||
3.1.c | Certificate of Designation of 6.50% Series C Cumulative Term Preferred Stock, incorporated by reference to Exhibit 3.4 to the Registration Statement on Form 8-A (File No. 001-34007), filed May 11, 2015. | ||
3.2 | Amended and Restated Bylaws, incorporated by reference to Exhibit B.2 to the Pre-Effective Amendment No. 3 to the Registration Statement on Form N-2 (File No. 333-123699), filed June 21, 2005. | ||
3.3 | First Amendment to Amended and Restated Bylaws of the Registrant, incorporated by reference to Exhibit 99.1 to the Current Report on Form 8-K (File No. 814-00704) filed July 10, 2007. | ||
4.1 | Specimen Stock Certificate, incorporated by reference to Exhibit 99.D to Pre-Effective Amendment No. 3 to the Registration Statement on Form N-2 (File No. 333-123699), filed June 21, 2005. | ||
4.2 | Specimen 7.125% Series A Cumulative Term Preferred Stock Certificate, incorporated by reference to Exhibit 2.D.4 to Post-Effective Amendment No. 5 to the Registration Statement on Form N-2 (File No. 333-160720), filed February 29, 2012. | ||
4.3 | |||
4.4 | Specimen 6.50% Series C Cumulative Term Preferred Stock Certificate incorporated by reference to Exhibit 4.4 to the Registration Statement on Form 8-A (File No. 001-34007), filed May 11, 2015. | ||
10.1 | Investment Advisory and Management Agreement between the Registrant and Gladstone Management Corporation, dated June 22, 2005, incorporated by reference to Exhibit 10.1 to the Annual Report on Form 10-K (File No. 814-00704) filed June 14, 2006. | ||
10.2 | Administration Agreement between the Registrant and Gladstone Administration, LLC, dated June 22, 2005, incorporated by reference to Exhibit 10.2 to the Annual Report on Form 10-K (File No. 814-00704) filed June 14, 2006. | ||
10.3 | Stock Transfer Agency Agreement between the Registrant and The Bank of New York, incorporated by reference to Exhibit K.1 to Pre-Effective Amendment No. 1 to the Registration Statement on Form N-2 (File No. 333-123699), filed May 13, 2005. | ||
10.4 | Custody Agreement between the Registrant and The Bank of New York, incorporated by reference to Exhibit 99.J to Pre-Effective Amendment No. 3 to the Registration Statement on Form N-2 (File No. 333-123699), filed June 21, 2005. | ||
10.5 | Custodial Agreement by and among Gladstone Business Investment, LLC, the Registrant, Gladstone Management Corporation, The Bank of New York Trust Company, N.A. and Deutsche Bank AG, New York Branch, dated October 10, 2006, incorporated by reference to Exhibit 2.j.2 to Post-Effective Amendment No. 2 to the Registration Statement on Form N-2 (File No. 333-181879), filed June 7, 2013. | ||
| 10.6 | Amendment No. 1 to Custodial Agreement by and among Gladstone Business Investment, LLC, the Registrant, Gladstone Management Corporation, The Bank of New York Trust Company, N.A. and Deutsche Bank AG, New York Branch, dated April 14, 2009, incorporated by reference to Exhibit 2.j.3 to Post-Effective Amendment No. 2 to the Registration Statement on Form N-2 (File No. 333-181879), filed June 7, 2013. | |
| 10.7 | ||
| Fifth Amended and Restated Credit Agreement, dated as of April 30, 2013, by and among Gladstone Business Investment, LLC, as Borrower, Gladstone Management Corporation, as Servicer, the Financial Institutions as party thereto, as Lenders and Managing Agents, and Key Equipment Finance, Inc., as Administrative Agent and Lead Arranger, incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K (File No. 814-00704), filed May 2, 2013. | ||
| Joinder Agreement, dated as of June 12, 2013, by and among the Gladstone Business Investment, LLC, Gladstone Management Corporation, Key Equipment Finance Inc. and Everbank Commercial Finance, Inc., incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K (File No. 814-00704), filed June 17, 2013. | ||
| Joinder Agreement, dated as of June 12, 2013, by and among the Gladstone Business Investment, LLC, Gladstone Management Corporation, Key Equipment Finance Inc. and Alostar Bank of Commerce, incorporated by reference to Exhibit 10.2 of the Current Report on Form 8-K (File No. 814-00704), filed June 17, 2013. | ||
| 10.10 | Amendment No. 1 to Fifth Amended and Restated Credit Agreement, dated as of June 26, 2014, by and among Gladstone Business Investment, LLC, as Borrower, Gladstone Management Corporation, as Servicer, the Financial Institutions as party thereto, as Lenders and Managing Agents, and Key Equipment Finance, a division of KeyBank National Association, as Administrative Agent, incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K (File No. 814-00704), filed June 30, 2014. | |
| 10.11 | Joinder Agreement, dated as of September 19, 2014, by and among the Gladstone Business Investment, LLC, Gladstone Management Corporation, Key Equipment Finance, a division of KeyBank National Association, and East West Bank, incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K (File No. 814-00704), filed September 22, 2014. | |
| 10.12 | Joinder Agreement, dated as of September 19, 2014, by and among the Gladstone Business Investment, LLC, Gladstone Management Corporation, Key Equipment Finance, a division of KeyBank National Association, and Manufacturers and Traders Trust, incorporated by reference to Exhibit 10.2 of the Current Report on Form 8-K (File No. 814-00704), filed September 22, 2014. | |
| 10.13 | Joinder Agreement, dated as of September 19, 2014, by and among the Gladstone Business Investment, LLC, Gladstone Management Corporation, Key Equipment Finance, a division of KeyBank National Association, and Customers Bank, incorporated by reference to Exhibit 10.3 of the Current Report on Form 8-K (File No. 814-00704), filed September 22, 2014. | |
| 10.14 | Joinder Agreement, dated as of September 19, 2014, by and among the Gladstone Business Investment, LLC, Gladstone Management Corporation, Key Equipment Finance, a division of KeyBank National Association, and Talmer Bank and Trust, incorporated by reference to Exhibit 10.4 of the Current Report on Form 8-K (File No. 814-00704), filed September 22, 2014. | |
| 11 | Computation of Per Share Earnings (included in the notes to the audited financial statements contained in this report). | |
| 12* | Statements re: Computation of Ratios | |
| 14 | Code of Ethics and Business Conduct, dated January 28, 2013, incorporated by reference to Exhibit 2.r to the Post-effective Amendment No. 2 to the Registration Statement on Form N-2 (File No. 333-181979), filed June 7, 2013. | |
| 21* | Subsidiaries of the Registrant. | |
| 31.1* | Certification of Chief Executive Officer filed pursuant to section 302 of The Sarbanes-Oxley Act of 2002. | |
| 31.2* | Certification of Chief Financial Officer filed pursuant to section 302 of The Sarbanes-Oxley Act of 2002. | |
| 32.1† | Certification of Chief Executive Officer furnished pursuant to section 906 of The Sarbanes-Oxley Act of 2002. | |
| 32.2† | Certification of Chief Financial Officer furnished pursuant to section 906 of The Sarbanes-Oxley Act of 2002. | |
| 99.1* | Financial Statements of Danco Acquisition Corporation as of and for the years ended December 31, 2014 and 2013 | |
| 99.2* | Financial Statements of Danco Acquisition Corporation as of and for the years ended December 31, 2012 and | |
| 99.3* | Financial Statements of Galaxy Tool Holding Corporation and | |
| 99.4* | Financial Statements of Galaxy Tool Holding Corporation and | |
| 99.5* | Financial Statements of SOG Specialty Knives and Tools, LLC as of and for the years ended December 31, 2014 and 2013 (unaudited). | |
| 99.6* | Financial Statements of SOG Specialty Knives and Tools, LLC as of and for the years ended December 31, 2013 and | |
* Filed herewith
† Furnished herewith
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| GLADSTONE INVESTMENT CORPORATION | |||||||
| Date: May | 20, 2015 | By: | /s/ | ||||
| Chief Financial Officer and Treasurer | |||||||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| Date: May | 20, 2015 | By: | /s/ DAVID GLADSTONE | ||||
| David Gladstone | |||||||
| Chief Executive Officer and Chairman of the Board of Directors (principal executive officer) | |||||||
| Date: May | 20, 2015 | By: | /s/ TERRY LEE BRUBAKER | ||||
| Terry Lee Brubaker | |||||||
| Vice Chairman and Chief Operating Officer | |||||||
| Date: May | 20, 2015 | By: | /s/ DAVID A. R. DULLUM | ||||
| David A. R. Dullum | |||||||
| President and Director | |||||||
| Date: May | 20, 2015 | By: | /s/ | ||||
| Chief Financial Officer and Treasurer (principal financial and accounting officer) | |||||||
| Date: May | 20, 2015 | By: | /s/ ANTHONY W. PARKER | ||||
| Anthony W. Parker | |||||||
| Director | |||||||
| Date: May | 20, 2015 | By: | /s/ MICHELA A. ENGLISH | ||||
| Michela A. English | |||||||
| Director | |||||||
| Date: May | 20, 2015 | By: | /s/ PAUL ADELGREN | ||||
| Paul Adelgren | |||||||
| Director | |||||||
| Date: May | 20, 2015 | By: | /s/ JOHN | ||||
| John | |||||||
| Director | |||||||
| Date: May | 20, 2015 | By: | /s/ | ||||
| Director | |||||||
| Date: May 20, 2015 | By: | /s/ WALTER H. WILKINSON, JR. | |||||
| Walter H. Wilkinson, Jr. | |||||||
| Director | |||||||
GLADSTONE INVESTMENT CORPORATION
INVESTMENTS IN AND ADVANCES TO AFFILIATES
(AMOUNTS IN THOUSANDS)
Name of Issuer(A) | Title of Issue or | Amount of Dividends or Interest Credited to Income(C) | Value as of March 31, 2013 | Gross Additions(D) | Gross Reductions(E) | Value as of March 31, 2014 | ||||||||||||||||
CONTROL INVESTMENTS | ||||||||||||||||||||||
Galaxy Tool Holding Corp. | Senior Subordinated Term Debt | $ | 2,124 | $ | 15,520 | $ | — | $ | — | $ | 15,520 | |||||||||||
Preferred Stock | — | 5,356 | 3,280 | (5,644 | ) | 2,992 | ||||||||||||||||
Common Stock | — | — | — | — | — | |||||||||||||||||
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| |||||||||||||
| 2,124 | 20,876 | 3,280 | (3,644 | ) | 18,512 | |||||||||||||||||
NDLI Acquisition Inc. | Preferred Stock | — | — | 2,600 | (8 | ) | 2,592 | |||||||||||||||
Common Stock | — | — | — | — | — | |||||||||||||||||
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| — | — | 2,600 | (8 | ) | 2,592 | |||||||||||||||||
Venyu Solutions, Inc. | Senior Subordinated Term Debt | 330 | 7,000 | — | (7,000 | ) | — | |||||||||||||||
Senior Subordinated Term Debt | 705 | 12,000 | — | (12,000 | ) | — | ||||||||||||||||
Preferred Stock | 1,465 | 24,970 | — | (24,970 | ) | — | ||||||||||||||||
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| 2,500 | 43,970 | — | (43,970 | ) | — | |||||||||||||||||
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| |||||||||||||
TOTAL CONTROL INVESTMENTS | $ | 4,624 | $ | 64,846 | $ | 5,880 | $ | (49,622 | ) | $ | 21,104 | |||||||||||
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AFFILIATE INVESTMENTS | ||||||||||||||||||||||
Behrens Manufacturing, LLC | Senior Term Debt | 382 | — | 9,975 | — | 9,975 | ||||||||||||||||
Preferred Stock | — | — | 2,923 | (169 | ) | 2,754 | ||||||||||||||||
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| |||||||||||||
| 382 | — | 12,898 | (168 | ) | 12,729 | |||||||||||||||||
Channel Technologies Group, LLC | Revolving Credit Facility | 5 | 1,248 | — | (1,248 | ) | — | |||||||||||||||
Senior Term Debt | 257 | 5,589 | — | (5,589 | ) | — | ||||||||||||||||
Senior Term Debt | 706 | 10,737 | — | (10,737 | ) | — | ||||||||||||||||
Preferred Stock | — | 275 | 2,847 | — | 3,122 | |||||||||||||||||
Common Stock | — | — | — | — | — | |||||||||||||||||
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| |||||||||||||
| 968 | 17,849 | 2,847 | (17,574 | ) | 3,122 | |||||||||||||||||
Danco Acquisition Corp. | Revolving Credit Facility | 123 | 717 | 603 | (630 | ) | 690 | |||||||||||||||
Senior Term Debt | 105 | 644 | 26 | (155 | ) | 515 | ||||||||||||||||
Senior Term Debt | 357 | 2,199 | 88 | (528 | ) | 1,759 | ||||||||||||||||
Senior Term Debt | 58 | 287 | 12 | (63 | ) | 236 | ||||||||||||||||
Preferred Stock | — | — | — | — | — | |||||||||||||||||
Common Stock Warrants | — | — | — | — | — | |||||||||||||||||
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| |||||||||||||
| 643 | 3,847 | 729 | (1,376 | ) | 3,200 | |||||||||||||||||
Edge Adhesives Holdings, Inc. | Revolving Credit Facility | 9 | — | 795 | — | 795 | ||||||||||||||||
Senior Term Debt | 103 | — | 9,300 | — | 9,300 | |||||||||||||||||
Senior Subordinated Term Debt | 29 | — | 2,400 | — | 2,400 | |||||||||||||||||
Preferred Stock | — | — | 3,474 | — | 3,474 | |||||||||||||||||
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| 141 | — | 15,969 | — | 15,969 | ||||||||||||||||||
Head Country Food Products, Inc. | Revolving Credit Facility | 1 | — | — | — | — | ||||||||||||||||
Senior Term Debt | 145 | — | 9,050 | — | 9,050 | |||||||||||||||||
Preferred Stock | — | — | 4,000 | — | 4,000 | |||||||||||||||||
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| |||||||||||||
| 146 | — | 13,050 | — | 13,050 | ||||||||||||||||||
Meridian Rack & Pinion, Inc. | Senior Term Debt | 344 | — | 9,672 | — | 9,672 | ||||||||||||||||
Preferred Stock | — | — | 3,468 | — | 3,468 | |||||||||||||||||
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| |||||||||||||
| 344 | — | 13,140 | — | 13,140 | ||||||||||||||||||
Packerland Whey Products, Inc. | Preferred Stock | — | 367 | — | (367 | ) | — | |||||||||||||||
Common Stock | — | — | — | — | — | |||||||||||||||||
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| |||||||||||||
| — | 367 | — | (367 | ) | — | |||||||||||||||||
SOG Specialty Knives and Tools, LLC | Senior Term Debt | 833 | 6,200 | — | — | 6,200 | ||||||||||||||||
Senior Term Debt | 1,824 | 12,199 | — | — | 12,199 | |||||||||||||||||
Preferred Stock | — | 11,423 | 3,140 | (6,323 | ) | 8,240 | ||||||||||||||||
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| |||||||||||||
| 2,657 | 29,822 | 3,140 | (6,323 | ) | 26,639 | |||||||||||||||||
Name of Issuer(A) | Title of Issue or | Amount of Investment Income(C) | Value as of March 31, 2014 | Gross Additions(D) | Gross Reductions(E) | Value as of March 31, 2015 | ||||||||||||||||
CONTROL INVESTMENTS | ||||||||||||||||||||||
Galaxy Tool Holding Corporation | Secured Line of Credit | $ | 103 | $ | — | $ | 3,250 | $ | — | $ | 3,250 | |||||||||||
| Senior Subordinated Secured Term Debt | 2,124 | 15,520 | — | — | 15,520 | |||||||||||||||||
Preferred Stock | — | 2,992 | — | (2,992 | ) | — | ||||||||||||||||
Common Stock | — | — | — | — | — | |||||||||||||||||
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| |||||||||||||
| 2,227 | 18,512 | 3,250 | (2,992 | ) | 18,770 | |||||||||||||||||
Roanoke Industries Corp. | Senior Secured Term Debt | 69 | — | 1,650 | — | 1,650 | ||||||||||||||||
Common Stock | — | — | 1,860 | (1,650 | ) | 210 | ||||||||||||||||
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| 69 | — | 3,510 | (1,650 | ) | 1,860 | |||||||||||||||||
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TOTAL CONTROL INVESTMENTS | $ | 2,296 | $ | 18,512 | $ | 6,760 | $ | (4,642 | ) | $ | 20,630 | |||||||||||
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AFFILIATE INVESTMENTS | ||||||||||||||||||||||
Acme Cryogenics, Inc. | Senior Subordinated Secured Term Debt | $ | 1,269 | $ | 14,500 | $ | — | $ | — | $ | 14,500 | |||||||||||
Preferred Stock | — | 11,276 | 972 | (3,729 | ) | 8,519 | ||||||||||||||||
Common Stock | — | — | — | — | — | |||||||||||||||||
Common Stock Warrants | — | — | — | — | — | |||||||||||||||||
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| 1,269 | 25,776 | 972 | (3,729 | ) | 23,019 | |||||||||||||||||
Alloy Die Casting Corp. | Senior Secured Term Debt | 1,255 | 12,261 | — | (107 | ) | 12,154 | |||||||||||||||
Preferred Stock | — | 1,948 | 2,174 | — | 4,122 | |||||||||||||||||
Common Stock | — | — | — | — | — | |||||||||||||||||
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| 1,255 | 14,209 | 2,174 | (107 | ) | 16,276 | |||||||||||||||||
Behrens Manufacturing, LLC | Senior Secured Term Debt | 1,315 | 9,975 | — | — | 9,975 | ||||||||||||||||
Preferred Stock | — | 2,754 | 693 | — | 3,447 | |||||||||||||||||
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| |||||||||||||
| 1,315 | 12,729 | 693 | — | 13,422 | ||||||||||||||||||
B-Dry, LLC | Secured Line of Credit | 39 | 566 | 1,325 | (767 | ) | 1,124 | |||||||||||||||
Senior Secured Term Debt | 440 | 4,865 | — | (1,375 | ) | 3,490 | ||||||||||||||||
Senior Secured Term Debt | 122 | 2,144 | — | (1,689 | ) | 455 | ||||||||||||||||
Common Stock | — | — | — | — | — | |||||||||||||||||
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| 601 | 7,575 | 1,325 | (3,831 | ) | 5,069 | |||||||||||||||||
B+T Group Acquisition, Inc. | Secured Line of Credit | 22 | — | 700 | — | 700 | ||||||||||||||||
Senior Secured Term Debt | 521 | — | 14,000 | — | 14,000 | |||||||||||||||||
Preferred Stock | — | — | 4,541 | — | 4,541 | |||||||||||||||||
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| 543 | — | 19,241 | — | 19,241 | ||||||||||||||||||
Cambridge Sound Management, Inc. | Secured Line of Credit | 14 | — | 675 | (675 | ) | — | |||||||||||||||
| Senior Secured Term Debt | 991 | — | 15,000 | — | 15,000 | |||||||||||||||||
Preferred Equity | — | — | 4,500 | 2,698 | 7,198 | |||||||||||||||||
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| 1,005 | — | 20,175 | 2,023 | 22,198 | ||||||||||||||||||
Channel Technologies Group, LLC | Preferred Stock | — | 3,122 | — | (807 | ) | 2,315 | |||||||||||||||
| Common Stock | — | — | — | — | — | |||||||||||||||||
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| |||||||||||||
| — | 3,122 | — | (807 | ) | 2,315 | |||||||||||||||||
Counsel Press, Inc. | Secured Line of Credit | 1 | — | 1,500 | — | 1,500 | ||||||||||||||||
Senior Secured Term Debt | 6 | — | 18,000 | — | 18,000 | |||||||||||||||||
Senior Secured Term Debt | 2 | — | 5,500 | — | 5,500 | |||||||||||||||||
Preferred Equity | — | — | 6,995 | — | 6,995 | |||||||||||||||||
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| |||||||||||||
| 9 | — | 31,995 | — | 31,995 | ||||||||||||||||||
GLADSTONE INVESTMENT CORPORATION
INVESTMENTS IN AND ADVANCES TO AFFILIATES (Continued)
(AMOUNTS IN THOUSANDS)
Name of Issuer(A) | Title of Issue or | Amount of Dividends or Interest Credited to Income(C) | Value as of March 31, 2013 | Gross Additions(D) | Gross Reductions(E) | Value as of March 31, 2014 | ||||||||||||||||
Tread Corp. | Revolving Credit Facility (F) | $ | — | $ | — | $ | 1,830 | $ | (1,830 | ) | $ | — | ||||||||||
Senior Subordinated Term Debt(F) | — | — | — | — | — | |||||||||||||||||
Senior Subordinated Term Debt(F) | — | — | — | — | — | |||||||||||||||||
Preferred Stock | — | — | — | — | — | |||||||||||||||||
Common Stock | — | — | — | — | — | |||||||||||||||||
Common Stock Warrants | — | — | — | — | — | |||||||||||||||||
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| — | — | 1,830 | (1,830 | ) | — | |||||||||||||||||
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TOTAL AFFILIATE INVESTMENTS | $ | 5,281 | $ | 51,885 | $ | 63,603 | $ | (27,639 | ) | $ | 87,849 | |||||||||||
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Name of Issuer(A) | Title of Issue or | Amount of Investment Income(C) | Value as of March 31, 2014 | Gross Additions(D) | Gross Reductions(E) | Value as of March 31, 2015 | ||||||||||||||||
D.P.M.S., Inc. | Secured Line of Credit | $ | 161 | $ | 690 | $ | 550 | $ | (478 | ) | $ | 762 | ||||||||||
Senior Secured Term Debt | 104 | 515 | — | (25 | ) | 490 | ||||||||||||||||
Senior Secured Term Debt | 357 | 1,759 | — | (85 | ) | 1,674 | ||||||||||||||||
Senior Secured Term Debt | 58 | 236 | — | (17 | ) | 219 | ||||||||||||||||
Preferred Stock | — | — | — | — | — | |||||||||||||||||
Common Stock Warrants | — | — | — | — | — | |||||||||||||||||
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| 680 | 3,200 | 550 | (605 | ) | 3,145 | |||||||||||||||||
Edge Adhesives Holdings, Inc. | Secured Line of Credit | 130 | 795 | 1,590 | (897 | ) | 1,488 | |||||||||||||||
| Senior Secured Term Debt | 1,179 | 9,300 | — | — | 9,300 | |||||||||||||||||
Senior Secured Term Debt | 39 | — | 877 | (877 | ) | — | ||||||||||||||||
Senior Subordinated Term Debt | 335 | 2,400 | 3 | — | 2,403 | |||||||||||||||||
Preferred Stock | — | 3,474 | — | (275 | ) | 3,199 | ||||||||||||||||
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| 1,683 | 15,969 | 2,470 | (2,049 | ) | 16,390 | |||||||||||||||||
Head Country Food Products, Inc. | Secured Line of Credit | 2 | — | — | — | — | ||||||||||||||||
| Senior Secured Term Debt | 1,147 | 9,050 | — | — | 9,050 | |||||||||||||||||
Preferred Stock | — | 4,000 | — | (69 | ) | 3,931 | ||||||||||||||||
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| 1,149 | 13,050 | — | (69 | ) | 12,981 | |||||||||||||||||
Logo Sportswear, Inc. | Secured Line of Credit | 1 | — | 250 | (250 | ) | — | |||||||||||||||
Senior Secured Term Debt | 83 | — | 9,200 | — | 9,200 | |||||||||||||||||
Preferred Stock | — | — | 1,550 | — | 1,550 | |||||||||||||||||
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| 84 | — | 11,000 | (250 | ) | 10,750 | |||||||||||||||||
Meridian Rack & Pinion, Inc. | Senior Secured Term Debt | 1,322 | 9,672 | — | (60 | ) | 9,612 | |||||||||||||||
Preferred Stock | — | 3,468 | — | (351 | ) | 3,117 | ||||||||||||||||
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| 1,322 | 13,140 | — | (411 | ) | 12,729 | |||||||||||||||||
NDLI Acquisition, LLC | Secured Line of Credit | 163 | — | 2,875 | (567 | ) | 2,308 | |||||||||||||||
Senior Secured Term Debt | 840 | — | 7,227 | (1,424 | ) | 5,803 | ||||||||||||||||
Senior Secured Term Debt | 405 | — | 3,650 | (719 | ) | 2,931 | ||||||||||||||||
Senior Secured Term Debt | 405 | — | 3,650 | (720 | ) | 2,930 | ||||||||||||||||
Preferred Stock | — | 2,592 | 1,000 | (3,592 | ) | — | ||||||||||||||||
Common Stock | — | — | — | — | — | |||||||||||||||||
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| 1,813 | 2,592 | 18,402 | (7,022 | ) | 13,972 | |||||||||||||||||
Old World Christmas, Inc. | Secured Line of Credit | 79 | — | 2,430 | (2,430 | ) | — | |||||||||||||||
Senior Secured Term Debt | 981 | — | 15,770 | — | 15,770 | |||||||||||||||||
Preferred Stock | — | — | 6,657 | — | 6,657 | |||||||||||||||||
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| 1,060 | — | 24,857 | (2,430 | ) | 22,427 | |||||||||||||||||
Precision Southeast, Inc. | Senior Secured Term Debt | 399 | 5,617 | 4,000 | — | 9,617 | ||||||||||||||||
Preferred Stock | — | — | 1,830 | — | 1,830 | |||||||||||||||||
Common Stock | — | — | — | — | — | |||||||||||||||||
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| 399 | 5,617 | 5,830 | — | 11,447 | ||||||||||||||||||
SOG Specialty Knives & Tools, LLC | Senior Secured Term Debt | 833 | 6,200 | — | — | 6,200 | ||||||||||||||||
| Senior Secured Term Debt | 1,824 | 12,199 | 1 | — | 12,200 | |||||||||||||||||
| Preferred Stock | 534 | 8,240 | 5,211 | — | 13,451 | |||||||||||||||||
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| 3,191 | 26,639 | 5,212 | — | 31,851 | ||||||||||||||||||
GLADSTONE INVESTMENT CORPORATION
INVESTMENTS IN AND ADVANCES TO AFFILIATES (Continued)
(AMOUNTS IN THOUSANDS)
Name of Issuer(A) | Title of Issue or | Amount of Investment Income(C) | Value as of March 31, 2014 | Gross Additions(D) | Gross Reductions(E) | Value as of March 31, 2015 | ||||||||||||||||
Tread Corporation | Secured Line of Credit (F) | $ | — | $ | — | $ | 3,282 | $ | (2,907 | ) | $ | 375 | ||||||||||
Senior Subordinated Secured Term Debt(F) | — | — | 782 | — | 782 | |||||||||||||||||
Senior Subordinated Secured Term Debt(F) | — | — | 430 | — | 430 | |||||||||||||||||
Senior Subordinated Secured Term Debt(F) | — | — | 156 | — | 156 | |||||||||||||||||
Senior Subordinated Secured Term Debt(F) | — | — | 80 | — | 80 | |||||||||||||||||
Preferred Stock | — | — | — | — | — | |||||||||||||||||
Common Stock | — | — | — | — | — | |||||||||||||||||
Common Stock Warrants | — | — | — | — | — | |||||||||||||||||
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| — | — | 4,730 | (2,907 | ) | 1,823 | |||||||||||||||||
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TOTAL AFFILIATE INVESTMENTS | $ | 17,378 | $ | 143,618 | $ | 149,626 | $ | (22,194 | ) | $ | 271,050 | |||||||||||
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| (A) | Certain of the listed securities are issued by affiliate(s) of the indicated portfolio company. |
| (B) | Common stock, warrants, options and, in some cases, preferred stock are generally non-income-producing and restricted. The principal amount of debt and the number of shares of common stock and preferred stock are shown in the accompanyingConsolidated |
| (C) | Represents the total amount of interest or |
| (D) | Gross additions include increases in investments resulting from new portfolio investments, paid-in-kind interest or dividends, the amortization of discounts and fees and the exchange of one or more existing securities for one or more new securities. Gross additions also include net increases in unrealized appreciation or decreases in unrealized depreciation. |
| (E) | Gross reductions include decreases in investments resulting from principal collections related to investment repayments or sales, the amortization of premiums and acquisition costs and the exchange of one or more existing securities for one or more new securities. Gross reductions also include net increases in unrealized depreciation or decreases in unrealized appreciation. |
| (F) | Debt security is on non-accrual status and, therefore, is considered non-income producing |
| ** | Information related to the amount of equity in the net profit and loss for the period for the investments listed has not been included in this schedule. This information is not considered to be meaningful due to the complex capital structures of the portfolio companies, with different classes of equity securities outstanding with different preferences in liquidation. These investments are not consolidated, nor are they accounted for under the equity method of accounting. |
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