UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED JUNE 30, 2001.
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 814-00237
GLADSTONE CAPITAL CORPORATION
(Exact name of registrant as specified in its charter)
MARYLAND 54-2040781
------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1750 TYSONS BLVD., 4TH FLOOR
MCLEAN, VIRGINIA 22102
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(Address of principal executive office)
(703) 744-1165
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days. Yes |_| No |X|.
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date. The number of shares
of the issuer's Common Stock, $0.001 par value, outstanding as of October 4,
2001 was 10,060,208.
GLADSTONE CAPITAL CORPORATION
TABLE OF CONTENTS
Page
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PART I. FINANCIAL INFORMATION 1
Item 1. Financial Statements 1
Consolidated Balance Sheets as of June 30, 2001 (unaudited) and May 30, 2001 2
Consolidated Statement of Operations for the period ended June 30, 2001 (unaudited) 3
Consolidated Statement of Stockholders' Equity for the period ended June 30, 2001 (unaudited) 4
Consolidated Statement of Cash Flows for the period ended June 30, 2001 (unaudited) 5
Notes to Financial Statements (unaudited) 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8
Overview 8
Results of Operations 10
Financial Condition, Liquidity and Capital Resources 10
Item 3. Quantitative and Qualitative Disclosure About Market Risk 11
PART II. OTHER INFORMATION 11
Item 1. Legal Proceedings 11
Item 2. Changes in Securities and Use of Proceeds 11
o Recent Sales of Unregistered Securities 11
o Use of Proceeds from Initial Public Offering 12
Item 3. Defaults upon Senior Securities 12
Item 4. Submission of Matters to a Vote of Security Holders 12
Item 5. Other Information 12
Item 6. Exhibits and Reports on Form 8-K 13
SIGNATURES 14
PART I--FINANCIAL INFORMATION
Gladstone Capital Corporation
Consolidated Financial Statements
June 30 and May 30, 2001(Date of Inception)
CONTENTS
Consolidated Balance Sheets..............................................................................1
Consolidated Statement of Operations.....................................................................2
Consolidated Statement of Stockholders' Equity...........................................................3
Consolidated Statement of Cash Flows.....................................................................4
Notes to Consolidated Financial Statements...............................................................5
Page 1
Gladstone Capital Corporation
Consolidated Balance Sheets
June 30 May 30
2001 2001
(unaudited) (Date of Inception)
----------------------------------------------
ASSETS
Cash $ 652,631 $ -
Stock subscription receivable - 652,631
----------------------------------------------
Total assets $ 652,631 $ 652,631
==============================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Accrued offering costs $ 174,411 $ -
Accrued expenses and other liabilities 39,400 -
----------------------------------------------
Total liabilities 213,811 -
Common stock, $0.001 par value, 50,000,000 and 10,000,000 shares
authorized, respectively, and 43,508 shares issued and
outstanding 44 44
Capital in excess of par value 652,587 652,587
Accrued offering costs (174,411) -
Accumulated deficit (39,400) -
----------------------------------------------
Total stockholders' equity 438,820 652,631
----------------------------------------------
Total liabilities and stockholders' equity $ 652,631 $ 652,631
==============================================
SEE ACCOMPANYING NOTES.
Page 2
Gladstone Capital Corporation
Consolidated Statement of Operations
For the Period from May 30, 2001 (Date of Inception) through June 30, 2001
(Unaudited)
Expenses
Professional fees $39,400
---------------------
Total expenses $39,400
=====================
NET LOSS $39,400
=====================
SEE ACCOMPANYING NOTES.
Page 3
Gladstone Capital Corporation
Consolidated Statement of Stockholders' Equity
Common Stock Capital in Total
--------------------- Excess of Accumulated Stockholders
Shares Amount Par Value Deficit Equity
--------------------------------------------------------------------
Balance at May 30, 2001 43,508 $44 $ 652,587 $ 652,631
Accrual of offering costs (174,411) (174,411)
Net decrease in stockholders' equity
resulting from operations $(39,400) (39,400)
--------------------------------------------------------------------
Balance at June 30, 2001 43,508 $44 $ 478,176 $(39,400) $ 438,820
====================================================================
SEE ACCOMPANYING NOTES.
Page 4
Gladstone Capital Corporation
Consolidated Statement of Cash Flows
For the Period from May 30, 2001 (Date of Inception) through June 30, 2001
(Unaudited)
OPERATING ACTIVITIES:
Net decrease in stockholders' equity resulting from operations $ (39,400)
Adjustment to reconcile net decrease in stockholders' equity resulting from
operations to net cash provided by operating activities:
Increase in accrued expenses and other liabilities 39,400
-------------
Net cash provided by operating activities -
FINANCING ACTIVITIES:
Proceeds from subscription receivable 652,631
-------------
Net increase in cash 652,631
Cash at beginning of period -
-------------
Cash at end of period $ 652,631
=============
SEE ACCOMPANYING NOTES.
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Gladstone Capital Corporation
Notes to the Consolidated Financial Statements
(unaudited)
June 30, 2001
NOTE 1. UNAUDITED INTERIM FINANCIAL STATEMENTS
Interim financial statements of Gladstone Capital Corporation (the "Company")
are prepared in accordance with generally accepted accounting principles
("GAAP") for interim financial information and pursuant to the requirements for
reporting on Form 10-Q and Article 10 of Regulation S-X. Accordingly, certain
disclosures accompanying annual financial statements prepared in accordance with
GAAP are omitted. In the opinion of management, all adjustments, consisting
solely of normal recurring accruals, necessary for the fair presentation of
financial statements for the interim periods have been included. The current
period's results of operations are not necessarily indicative of results that
ultimately may be achieved for the year. The interim financial statements and
notes thereto should be read in conjunction with the financial statements and
notes thereto, as filed with the Securities and Exchange Commission.
NOTE 2. ORGANIZATION
The Company is a closed-end, non-diversified management investment company that
was incorporated under the General Corporation Laws of the State of Maryland on
May 30, 2001. The Company has elected to be treated as a business development
company ("BDC") under the Investment Company Act of 1940, as amended ("1940
Act"). From its inception, the Company has conducted its operations so as to
qualify to be taxed as a regulated investment company ("RIC") as defined in
Subtitle A, Chapter 1, under Subchapter M of the Internal Revenue Code of 1986,
as amended (the "Code").
NOTE 3. SUBSEQUENT EVENTS
INITIAL PUBLIC OFFERING
The Company completed its initial public offering of 8,200,000 shares of its
common stock at $15 per share on August 23, 2001 resulting in total proceed to
the Company of $114,390,000 after the underwriting discounts and commissions of
$8,610,000.
On August 24, 2001, the underwriters exercised an option to purchase additional
1,230,000 shares of the Company's common stock at the $15 per share. The Company
received approximately $17,158,500 in proceeds from the exercise of this option
after the underwriting discounts and commissions of $1,291,500.
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2001 EQUITY INCENTIVE PLAN
On August 23, 2001, the Company issued and sold an aggregate of 586,670 shares
of common stock to seven of its officers upon the exercise of options granted
under the Company's Amended and Restated 2001 Equity Incentive Plan. Each of the
officers exercised their options by delivering a full-recourse promissory note
for the full purchase price. The total principal amount of all of the promissory
notes was $8,800,000.
Page 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
ALL STATEMENTS CONTAINED HEREIN, OTHER THAN HISTORICAL FACTS, MAY
CONSTITUTE "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF SECTION 27A OF THE
SECURITIES ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE SECURITIES EXCHANGE
ACT OF 1934, AS AMENDED. THESE STATEMENTS MAY RELATE TO, AMONG OTHER THINGS,
FUTURE EVENTS OR OUR FUTURE PERFORMANCE OR FINANCIAL CONDITION. IN SOME CASES,
YOU CAN IDENTIFY FORWARD-LOOKING STATEMENTS BY TERMINOLOGY SUCH AS "MAY,"
"BELIEVE," "ENABLE," "WILL," "PROVIDE," "ANTICIPATE," "FUTURE," "COULD,"
"GROWTH," "PLAN," "INTEND," "PURSUE," "PROVIDE," "ANTICIPATE," "FUTURE,"
"EXPECT," "INCREASE," "MODIFYING," "FOCUS," "SHOULD," "WOULD" OR THE NEGATIVE OF
SUCH TERMS OR COMPARABLE TERMINOLOGY. THESE FORWARD-LOOKING STATEMENTS INVOLVE
KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND OTHER FACTORS THAT MAY CAUSE OUR
ACTUAL RESULTS, LEVELS OF ACTIVITY, PERFORMANCE OR ACHIEVEMENTS TO BE MATERIALLY
DIFFERENT FROM ANY FUTURE RESULTS, LEVELS OF ACTIVITY, PERFORMANCE OR
ACHIEVEMENTS EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS. SUCH
FACTORS INCLUDE, AMONG OTHERS, (1) ADVERSE CHANGES IN INTEREST RATES; (2) THE
COMPANY'S FAILURE OR INABILITY TO ESTABLISH OR MAINTAIN REFERRAL ARRANGEMENTS
WITH LEVERAGED BUYOUT FUNDS AND VENTURE CAPITAL FUNDS TO GENERATE LOAN
OPPORTUNITIES; (3) THE LOSS OF ONE OR MORE OF THE COMPANY'S EXECUTIVE OFFICERS,
IN PARTICULAR DAVID GLADSTONE OR TERRY LEE BRUBAKER; (4) THE COMPANY'S INABILITY
TO ESTABLISH OR MAINTAIN A CREDIT FACILITY ON TERMS REASONABLY ACCEPTABLE TO IT,
IF AT ALL; (5) THE COMPANY'S INABILITY TO SUCCESSFULLY SECURITIZE ITS LOAN
PORTFOLIO ON TERMS REASONABLY ACCEPTABLE TO IT, IF AT ALL; (6) THE DECISION OF
OUR POTENTIAL COMPETITORS TO AGGRESSIVELY SEEK TO MAKE SENIOR AND SUBORDINATED
LOANS TO SMALL AND MEDIUM SIZED BUSINESSES ON TERMS MORE FAVORABLE THAN WE
INTEND TO PROVIDE (7) THE COMPANY'S INABILITY TO CONSUMMATE LOAN TRANSACTIONS
WITH ONE OR MORE OF THE ENTITIES IDENTIFIED UNDER THE CAPTION "PROSPECTIVE
PORTFOLIO COMPANIES" OF THE COMPANY'S PROSPECTUS DATED AUGUST 23, 2001, AS FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 27, 2001 (THE
"PROSPECTUS") ON TERMS ACCEPTABLE TO US, IF AT ALL; AND (8) THOSE FACTORS LISTED
UNDER THE CAPTION "RISK FACTORS" OF THE PROSPECTUS. THE COMPANY CAUTIONS READERS
NOT TO PLACE UNDUE RELIANCE ON ANY SUCH FORWARD-LOOKING STATEMENTS, WHICH
STATEMENTS ARE MADE PURSUANT TO THE PRIVATE SECURITIES LITIGATION REFORM ACT ON
1995 AND, AS SUCH, SPEAK ONLY AS OF THE DATE MADE. THE COMPANY UNDERTAKES 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 FORM 10-Q.
THE FOLLOWING ANALYSIS OF THE FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF THE COMPANY SHOULD BE READ IN CONJUNCTION WITH THE COMPANY'S
FINANCIAL STATEMENTS AND THE NOTES THERETO CONTAINED ELSEWHERE IN THIS REPORT.
OVERVIEW
The Company was incorporated under the General Corporation Laws of the
State of Maryland on May 30, 2001. The Company's investment objectives are to
achieve a high level of current income by investing in debt securities,
consisting primarily of senior notes, senior subordinated notes and junior
subordinated notes, of established private businesses that are backed by
leveraged buyout funds, venture capital funds or others, with a particular
emphasis on senior subordinated notes. In addition, the Company may acquire
existing loans that meet this
Page 8
profile from leveraged buyout funds, venture capital funds and others. The
Company will also seek to provide its stockholders with long-term capital growth
through the appreciation in the value of warrants or other equity instruments
that it may receive when it makes loans. The Company operates as a closed-end,
non-diversified management investment company, and has elected to be treated as
a business development company under the Investment Company Act of 1940, as
amended (the "1940 Act").
The Company targets small and medium sized businesses that meet certain
criteria, including (1) the potential for growth in cash flow, (2) adequate
assets for loan collateral, (3) experienced management teams with significant
ownership interest in the borrower, (4) profitable operations based on the
borrower's cash flow, (5) reasonable capitalization of the borrower (usually by
leveraged buyout funds or venture capital funds) and (6) the potential for us to
realize appreciation and gain liquidity in the Company's equity position. The
Company anticipates that this liquidity will be achieved through a merger or
acquisition of the borrower, a public offering by the borrower or by the Company
exercising its right to require the borrower to buy back its warrants. The
Company expects to make loans to borrowers that need funds to finance growth,
restructure their balance sheets or effect a change of control.
As a business development company, the Company will make available
significant managerial assistance to its portfolio companies. Such assistance
will typically involve closely monitoring the operations of each company,
participating in its board and management meetings, being available for
consultation with its officers and providing organizational and financial
guidance.
The Company expects that its loans typically will range from $5 million
to $15 million, mature in no more than seven years, and accrue interest at a
fixed rate or an annualized variable rate that exceeds the prime rate. The
Company expects that most if not all of the debt securities it acquires will be
unrated. To the extent possible, the Company's loans generally will be
collateralized by a security interest in the borrower's assets. Interest
payments will generally be made monthly or quarterly with amortization of
principal generally being deferred for several years. The principal amount of
the loans and any accrued but unpaid interest will generally become due at
maturity at five to seven years. The Company will focus on making loans
accompanied by warrants to purchase stock in the borrowers. These warrants will
typically have a nominal exercise price and entitle the Company to purchase a
modest percentage of the borrower's stock.
To date, the Company has not made any investments, although it has entered into
non-binding commitments to lend up to $72 million to six companies. These loans
are subject to, among other things, the satisfactory completion of the Company's
due diligence investigation of each borrower, acceptance of terms and structure
and necessary consents. With respect to each of these non-binding commitments,
the Company will only agree to provide the loan if, among other things, the
results of its due diligence investigations are satisfactory, the terms and
conditions of the loan are acceptable and all necessary consents are received.
If, for any reason, the Company does not desire to make one of the loans, it
will not be obligated to do so. Similarly, none of the potential borrowers is
obligated to receive a loan from the Company. The Company's management has
initiated its due diligence investigations of the potential borrower,
Page 9
however, there can be no assurance that the Company will not discover facts in
the course of completing its due diligence that would render a particular
investment imprudent or that any of these loans will actually be made.
RESULTS OF OPERATIONS
The Company did not have any significant operations prior to the
completion of its initial public offering on August 29, 2001. Accordingly, the
Company's financial performance at June 30, 2001 is primarily composed of
organization costs and costs associated with its initial public offering,
including among other things, legal services. For the period ended June 30,
2001, Company incurred approximately $39,000 in professional fees in connection
with the Company's organization.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2001, the Company had no investments in portfolio
securities of any companies. At June 30, 2001, the Company had approximately
$653,000 of total assets. Net cash provided by financing activities was
approximately $653,000 for the period ending June 30, 2001. These amounts
consisted entirely of the proceeds of the sale of stock to David Gladstone on
May 30, 2001 in connection with the formation of the Company.
On August 29, 2001, the Company received approximately $130 million
(net of underwriting discounts and offering expenses) in connection with the
consummation of its initial public offering.
The Company currently has non-binding commitments to make six loans in
an aggregate amount of approximately $72 million. Each non-binding loan
commitment is conditioned upon, among other things, the satisfactory completion
of the Company's due diligence investigations of each borrower, the acceptance
of terms and structure and receipt of necessary consents. In many instances, the
loans will also require prior approval of the borrower's other lenders.
In order to qualify as a regulated investment company and to avoid
corporate level tax on the income the Company distributes to its stockholders,
the Company is required, under Subchapter M of the Internal Revenue Code, to
distribute at least 90% of its ordinary income and short-term capital gains on
an annual basis. While the Company provides stockholders with the option of
reinvesting their distributions in more common stock, the Company anticipates
borrowing funds to obtain additional capital once the proceeds of its initial
public offering have been fully invested.
The Company currently intends to pursue a strategy of securitizing its
loan portfolio in approximately 12 to 18 months. The Company would use the cash
it receives upon the sale of interests in its loans to repay bank borrowings and
make additional loans. There can be no assurance that this securitization
strategy will be successful.
Page 10
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company is subject to financial market risks, including changes in
interest rates. The Company expects that approximately 50% of the loans in its
portfolio will be made at fixed rates, with approximately 50% made at variable
rates. To date, the Company has not yet made any loans and substantially all of
the proceeds of the Company's assets are invested in money market instruments.
The Company also expects to borrow funds in order to finance future
lending activities after it has substantially fully invested the proceeds of its
initial public offering. These future borrowings may be at fixed rates or
variable rates. To date, the Company has not yet borrowed any funds.
The Company expects to hedge against interest rate fluctuations in the
future by using standard hedging instruments such as futures, options and
forward contracts. While hedging activities may insulate the Company against
adverse fluctuations in interest rates, they may also limit the Company's
ability to participate in the benefits of lower interest rates with respect to
its portfolio of investments.
PART II--OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Neither the Company nor its subsidiary is currently subject to any
material legal proceeding, nor, to the Company's knowledge, is any material
legal proceeding threatened against the Company or its subsidiary.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
RECENT SALES OF UNREGISTERED SECURITIES.
On May 30, 2001, the Company issued and sold 43,508 shares of common
stock for an aggregate purchase price of $652,631 to Mr. Gladstone, the
Company's chairman and chief executive officer. The Company issued these shares
to Mr. Gladstone in reliance upon the exemption from registration provided by
Section 4(2) under the Securities Act and Rule 506 promulgated thereunder.
On August 23, 2001, the Company issued and sold an aggregate of 586,670
shares of common stock to seven of its officers upon the exercise of options
granted under the Company's Amended and Restated 2001 Equity Incentive Plan.
Each of the officers exercised their options by delivering a promissory note for
the full purchase price. The total principal amount of all of the promissory
notes was $8.8 million. The Company issued these shares in reliance upon the
exemption from registration provided by Section 4(2) under the Securities Act
and Rule 506 promulgated thereunder.
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USE OF PROCEEDS FROM INITIAL PUBLIC OFFERING
On August 23, 2001, the Company's Registration Statement on Form N-2
(SEC File No. 333-63700), for the initial public offering of 8,200,000 shares of
common stock, par value $0.001, became effective. All 8,200,000 shares were sold
upon completion of the initial public offering at an aggregate offering price of
$123,000,000, reflecting an offering price of $15 per share. UBS Warburg LLC,
First Union Securities, Inc., Robertson Stephens, Inc., BB&T Capital
Markets/Scott & Stringfellow, Inc. and Ferris, Baker Watts, Incorporated acted
as managing underwriters for the initial public offering.
In connection with the initial public offering, the Company registered
and offered the underwriters an option to purchase an additional 1,230,000
shares of common stock at the $15 per share offering price. The underwriters
exercised this option on August 24, 2001. The gross proceeds from the exercise
of this option were $18,450,000.
Underwriting discounts and commissions for the shares sold in the
initial public offering (including the shares sold upon the exercise of the
over-allotment option) totaled $9,901,500. In connection with the initial public
offering, the Company incurred estimated expenses of approximately $1,000,000.
None of these expenses were paid directly or indirectly to the Company's
directors, officers or associates, or to persons owning 10% or more of the
Company's common stock or other affiliates. After deducting underwriting
discounts and commissions and other expenses, the Company received net proceeds
of approximately $130 million from the initial public offering.
The primary purposes of the initial public offering was to obtain
capital with which to make loans to small and medium businesses. To date, the
Company has not made any such loans. Accordingly, substantially all of the net
proceeds from the initial public offering have been invested in short-term,
investment grade, interest-bearing instruments.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
Page 12
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 * Employment Agreement, dated June 25, 2001, between the Company and
David Gladstone, incorporated by reference to Exhibit k.2 to
Pre-Effective Amendment No. 1 to the Registration Statement on Form
N-2 (File No. 333-63700), filed July 27, 2001.
10.2 * Employment Agreement, dated July 23, 2001, between the Company and
Terry Lee Brubaker, incorporated by reference to Exhibit k.3 to
Pre-Effective Amendment No. 1 to the Registration Statement on Form
N-2 (File No. 333-63700), filed July 27, 2001.
10.3 * Amendment to Employment Agreement, dated August 8, 2001, between the
Company and David Gladstone, incorporated by reference to Exhibit k.4
to Pre-Effective Amendment No. 2 to the Registration Statement on Form
N-2 (File No. 333-63700), filed August 10, 2001.
10.4 + Promissory Note of David Gladstone in favor of the Company, dated
August 23, 2001.
10.5 + Promissory Note of Terry Brubaker in favor of the Company, dated
August 23, 2001.
10.6 + Promissory Note of Harry Brill in favor of the Company, dated
August 23, 2001.
* Previously filed.
+ Filed herewith.
(b) No reports on Form 8-K were filed by the Company during the period for which
this report is filed.
Page 13
SIGNATURES
Pursuant to the requirements 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 CAPITAL CORPORATION
By: /s/ HARRY BRILL
---------------------------------------
Harry Brill
Chief Financial Officer and Treasurer
Date: October 4, 2001
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