XNAS:GLAD Gladstone Capital Corp Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012

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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

 

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

FOR THE QUARTER ENDED MARCH 31, 2012

 

¨ 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

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

1521 WESTBRANCH DRIVE, SUITE 200

MCLEAN, VIRGINIA 22102

(Address of principal executive office)

(703) 287-5800

(Registrant’s telephone number, including area code)

 

 

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

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

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

 

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. The number of shares of the issuer’s common stock, $0.001 par value per share, outstanding as of April 30, 2012 was 21,000,160.

 

 

 


Table of Contents

GLADSTONE CAPITAL CORPORATION

TABLE OF CONTENTS

 

PART I.  

FINANCIAL INFORMATION

  
Item 1.  

Financial Statements (Unaudited)

  
 

Condensed Consolidated Statements of Assets and Liabilities as of March 31, 2012 and September 30, 2011

     3   
 

Condensed Consolidated Statements of Operations for the three and six months ended March 31, 2012 and 2011

     4   
 

Condensed Consolidated Statements of Changes in Net Assets for the six months ended March 31, 2012 and 2011

     5   
 

Condensed Consolidated Statements of Cash Flows for the six months ended March 31, 2012 and 2011

     6   
 

Condensed Consolidated Schedules of Investments as of March 31, 2012 and September 30, 2011

     7   
 

Notes to Condensed Consolidated Financial Statements

     15   
Item 2.  

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

     34   
 

Overview

     34   
 

Results of Operations

     37   
 

Liquidity and Capital Resources

     46   
Item 3.  

Quantitative and Qualitative Disclosures About Market Risk

     56   
Item 4.  

Controls and Procedures

     57   
PART II.  

OTHER INFORMATION

  
Item 1.  

Legal Proceedings

     57   
Item 1A.  

Risk Factors

     57   
Item 2.  

Unregistered Sales of Equity Securities and Use of Proceeds

     57   
Item 3.  

Defaults Upon Senior Securities

     58   
Item 4.  

Mine Safety Disclosures

     58   
Item 5.  

Other Information

     58   
Item 6.  

Exhibits

     58   

SIGNATURES

     59   

 

2


Table of Contents

GLADSTONE CAPITAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES

(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

(UNAUDITED)

 

     March 31,     September 30,  
     2012     2011  

ASSETS

    

Investments at fair value

    

Non-Control/Non-Affiliate investments (Cost of $273,931 and $288,266, respectively)

   $ 246,235      $ 257,302   

Control investments (Cost of $99,029 and $94,549, respectively)

     41,932        45,645   
  

 

 

   

 

 

 

Total investments at fair value (Cost of $372,960 and $382,815, respectively)

     288,167        302,947   

Cash

     7,693        6,732   

Restricted cash

     1,225        —     

Interest receivable – investments in debt securities

     3,055        3,066   

Interest receivable – employees(A)

     62        —     

Due from custodian

     6,530        2,547   

Deferred financing fees

     3,476        650   

Other assets

     1,103        1,682   
  

 

 

   

 

 

 

TOTAL ASSETS

   $ 311,311      $ 317,624   
  

 

 

   

 

 

 

LIABILITIES

    

Borrowings at fair value (Cost of $65,800 and $99,400, respectively)

   $ 65,800      $ 100,012   

Mandatorily redeemable preferred stock, $0.001 par value per share, $25 liquidation preference per share; 4,000,000 and no shares authorized; 1,539,882 and no shares issued and outstanding at March 31, 2012 and September 30, 2011, respectively

     38,497        —     

Accounts payable and accrued expenses

     495        513   

Interest payable

     226        289   

Fees due to Adviser(A)

     2,063        1,760   

Fee due to Administrator(A)

     211        194   

Other liabilities

     2,017        1,135   
  

 

 

   

 

 

 

TOTAL LIABILITIES

   $ 109,309      $ 103,903   
  

 

 

   

 

 

 

Commitments and contingencies(B)

    

NET ASSETS

   $ 202,002      $ 213,721   
  

 

 

   

 

 

 

ANALYSIS OF NET ASSETS

    

Common stock, $0.001 par value per share, 46,000,000 and 50,000,000 shares authorized; 21,000,160 and 21,039,242 shares issued and outstanding at March 31, 2012 and September 30, 2011, respectively

   $ 21      $ 21   

Capital in excess of par value

     326,578        326,913   

Notes receivable from employees(A)

     (3,522     (3,858

Cumulative net unrealized depreciation of investments

     (84,793     (79,867

Cumulative net unrealized appreciation of borrowings

     —          (612

Net investment income in excess of distributions

     108        108   

Accumulated net realized losses

     (36,390     (28,984
  

 

 

   

 

 

 

TOTAL NET ASSETS

   $ 202,002      $ 213,721   
  

 

 

   

 

 

 

NET ASSET VALUE PER COMMON SHARE AT END OF PERIOD

   $ 9.62      $ 10.16   
  

 

 

   

 

 

 

 

(A) 

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

(B)

Refer to Note 10—Commitments and Contingencies for additional information.

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

 

3


Table of Contents

GLADSTONE CAPITAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

(UNAUDITED)

 

     Three Months Ended March 31,     Six Months Ended March 31,  
     2012     2011     2012     2011  

INVESTMENT INCOME

        

Interest income

        

Non-Control/Non-Affiliate investments

   $ 7,840      $ 5,754      $ 15,729      $ 12,680   

Control investments

     1,051        1,414        2,410        2,211   

Cash

     —          —          6        —     

Notes receivable from employees(A)

     63        122        130        244   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income

     8,954        7,290        18,275        15,135   

Other income

        

Non-Control/Non-Affiliate investments

     2,042        483        2,042        645   

Control investments

     —          625        —          625   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other income

     2,042        1,108        2,042        1,270   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total investment income

     10,996        8,398        20,317        16,405   
  

 

 

   

 

 

   

 

 

   

 

 

 

EXPENSES

        

Base management fee(A)

     1,538        1,365        3,094        2,712   

Incentive fee(A)

     1,304        1,102        2,339        2,261   

Administration fee(A)

     209        175        404        361   

Interest expense on borrowings

     999        478        2,138        358   

Dividend expense on mandatorily redeemable preferred stock

     686        —          1,120        —     

Amortization of deferred financing fees

     277        368        734        664   

Professional fees

     362        201        655        534   

Other general and administrative expenses

     528        383        773        603   
  

 

 

   

 

 

   

 

 

   

 

 

 

Expenses before credits from Adviser

     5,903        4,072        11,257        7,493   

Credits to fees from Adviser(A)

     (123     (102     (574     (154
  

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses net of credits

     5,780        3,970        10,683        7,339   
  

 

 

   

 

 

   

 

 

   

 

 

 

NET INVESTMENT INCOME

     5,216        4,428        9,634        9,066   
  

 

 

   

 

 

   

 

 

   

 

 

 

REALIZED AND UNREALIZED GAIN (LOSS)

        

Net realized gain (loss):

        

Non-Control/Non-Affiliate investments

     37        161        (8,212     161   

Control investments

     —          (156     —          (156
  

 

 

   

 

 

   

 

 

   

 

 

 

Total net realized gain (loss)

     37        5        (8,212     5   

Net unrealized (depreciation) appreciation:

        

Non-Control/Non-Affiliate investments

     (3,351     (3,020     3,267        (8,062

Control investments

     (3,818     (10,049     (8,193     (7,952

Borrowings

     313        255        612        693   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net unrealized depreciation

     (6,856     (12,814     (4,314     (15,321
  

 

 

   

 

 

   

 

 

   

 

 

 

Net realized and unrealized loss

     (6,819     (12,809     (12,526     (15,316
  

 

 

   

 

 

   

 

 

   

 

 

 

NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS

   $ (1,603   $ (8,381   $ (2,892   $ (6,250
  

 

 

   

 

 

   

 

 

   

 

 

 

NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS PER COMMON SHARE:

        

Basic and Diluted

   $ (0.08   $ (0.40   $ (0.14   $ (0.30
  

 

 

   

 

 

   

 

 

   

 

 

 

WEIGHTED AVERAGE SHARES OF COMMON STOCK OUTSTANDING:

        

Basic and Diluted

     21,005,402        21,039,242        21,022,087        21,039,242   

 

(A) 

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

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

 

4


Table of Contents

GLADSTONE CAPITAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS

(DOLLAR AMOUNTS IN THOUSANDS)

(UNAUDITED)

 

     Six Months Ended March 31,  
     2012     2011  

Operations:

    

Net investment income

   $ 9,634      $ 9,066   

Net realized (loss) gain on investments

     (8,212     5   

Net unrealized depreciation of investments

     (4,926     (16,014

Net unrealized depreciation of borrowings

     612        693   
  

 

 

   

 

 

 

Net decrease in net assets resulting from operations

     (2,892     (6,250
  

 

 

   

 

 

 

Distributions:

    

Distributions to common stockholders

     (8,830     (8,836
  

 

 

   

 

 

 

Capital transactions:

    

Stock redemption for repayment of principal on employee notes(A)

     (332     —     

Repayment of principal on employee notes(A)

     335        1,055   
  

 

 

   

 

 

 

Net increase in net assets from capital transactions

     3        1,055   
  

 

 

   

 

 

 

Total decrease in net assets

     (11,719     (14,031

Net assets at beginning of period

     213,721        249,246   
  

 

 

   

 

 

 

Net assets at end of period

   $ 202,002      $ 235,215   
  

 

 

   

 

 

 

 

(A) 

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

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

 

5


Table of Contents

GLADSTONE CAPITAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AMOUNTS)

(UNAUDITED)

 

     Six Months Ended March 31,  
     2012     2011  

CASH FLOWS FROM OPERATING ACTIVITIES

    

Net decrease in net assets resulting from operations

   $ (2,892   $ (6,250

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

    

Purchase of investments

     (29,609     (52,424

Principal repayments on investments

     24,760        35,227   

Proceeds from sale of investments

     6,459        777   

Increase in investment balance due to paid-in-kind interest

     —          (8

Increase in investment balance due to transferred interest

     —          (204

Net change in premiums, discounts and amortization

     (119     776   

Net realized loss (gain) on investments

     8,363        (163

Net unrealized depreciation of investments

     4,926        16,014   

Net unrealized depreciation of borrowings

     (612     (693

Increase in restricted cash

     (1,225     —     

Amortization of deferred financing fees

     734        664   

(Increase) decrease in interest receivable

     (51     251   

Increase in due from custodian

     (3,983     (1,024

Decrease (increase) in other assets

     579        (9

Decrease in accounts payable and accrued expenses

     (18     (296

Decrease in interest payable

     (63     (573

Increase in fees due to Adviser(A)

     303        1,118   

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

     17        (92

Increase in other liabilities

     882        186   
  

 

 

   

 

 

 

Net cash provided by (used in) operating activities

     8,451        (6,723
  

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES

    

Proceeds from borrowings

     32,900        50,800   

Repayments on borrowings

     (66,500     (34,400

Proceeds from issuance of mandatorily redeemable preferred stock

     38,497        —     

Deferred financing fees

     (3,560     (759

Distributions paid to common stockholders

     (8,830     (8,836

Receipt of principal on employee notes

     3        1,055   
  

 

 

   

 

 

 

Net cash (used in) provided by financing activities

     (7,490     7,860   
  

 

 

   

 

 

 

NET INCREASE IN CASH

     961        1,137   

CASH, BEGINNING OF PERIOD

     6,732        7,734   
  

 

 

   

 

 

 

CASH, END OF PERIOD

   $ 7,693      $ 8,871   
  

 

 

   

 

 

 

NON-CASH ACTIVITIES(B)

   $ 332      $ —     
  

 

 

   

 

 

 

 

(A) 

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

(B) 

Redemption of 39,082 shares of common stock to reduce the principal balance of an employee loan by $332. Refer to Note 7—Common Stock for additional information.

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

 

6


Table of Contents

GLADSTONE CAPITAL CORPORATION

CONDENSED CONSOLIDATED SCHEDULE OF INVESTMENTS

AS OF MARCH 31, 2012

(DOLLAR AMOUNTS IN THOUSANDS)

(UNAUDITED)

 

Company(A)

 

Industry

 

Investment(B)

  Principal     Cost     Fair Value  

NON-CONTROL/NON-AFFILIATE INVESTMENTS:

     

Non-syndicated Loans:

       

Access Television Network, Inc.

 

Service-cable airtime (infomercials)

 

Senior Term Debt (14.0%, Due 2/2011) (D) (H)

  $ 903      $ 903      $ —     

Allison Publications, LLC

 

Service-publisher of consumer oriented Magazines

 

Senior Term Debt (10.5%, Due 9/2012) (D)

    8,164        8,171        7,674   

BAS Broadcasting

 

Service-radio station operator

 

Senior Term Debt (11.5%, Due 7/2013) (D)

    7,465        7,465        4,106   

Chinese Yellow Pages Company

 

Service-publisher of Chinese language directories

 

Line of Credit, $0 available (7.3%, Due 11/2012) (D)

    450        450        270   
   

Senior Term Debt (7.3%, Due 11/2012) (D)

    78        78        47   
       

 

 

   

 

 

 
          528        317   

CMI Acquisition, LLC

 

Service-recycling

 

Senior Subordinated Term Debt (14.0%, Due 12/2016) (D)

    14,265        14,265        14,194   

FedCap Partners, LLC

 

Private equity fund

 

Class A Membership Units (80 units) (G)

      1,200        1,153   
   

Uncalled Capital Commitment ($800)

     

GFRC Holdings, LLC

 

Manufacturing-glass-fiber reinforced concrete

 

Senior Term Debt (11.5%, Due 12/2013) (D)

    5,324        5,324        2,928   
   

Senior Subordinated Term Debt (14.0%, Due 12/2013) (D)

    6,598        6,598        3,629   
       

 

 

   

 

 

 
          11,922        6,557   

Heartland Communications Group

 

Service-radio station operator

 

Line of Credit, $0 available (5.0%, Due 3/2013) (D)

    100        100        35   
   

Line of Credit, $55 available (10.0%, Due 3/2013) (D)

    45        45        16   
   

Senior Term Debt (5.0%, Due 3/2013) (D)

    4,342        4,325        1,520   
   

Common Stock Warrants (8.8% ownership) (F) (G)

      66        —     
       

 

 

   

 

 

 
          4,536        1,571   

International Junior Golf Training Acquisition Company

 

Service-golf training

 

Line of Credit, $125 available (11.0%, Due 5/2014) (D)

    2,125        2,125        1,424   
   

Senior Term Debt (10.5%, Due 5/2014) (D)

    661        661        443   
   

Senior Term Debt (12.5%, Due 5/2014) (C)(D)

    2,500        2,500        1,675   
       

 

 

   

 

 

 
          5,286        3,542   

Legend Communications of Wyoming, LLC

 

Service-operator of radio stations

 

Senior Term Debt (12.0%, Due 6/2013) (D)

    9,203        9,203        4,785   

North American Aircraft Services, LLC

 

Service - repairs and maintains aircraft fuel tanks and fuel systems

 

Line of Credit, $750 available (6.5%, Due 8/2012) (D)

    1,250        1,250        1,238   
   

Senior Term Debt (7.5%, Due 8/2016) (D)

    4,767        4,767        4,719   
   

Senior Subordinated Term Debt (11.8%, Due 8/2016) (D)

    4,750        4,750        4,703   
   

Senior Subordinated Term Debt (12.5%, Due 8/2016) (D)

    2,820        2,820        2,792   
   

Common Stock Warrants (5.8% ownership) (F) (G)

      350        608   
       

 

 

   

 

 

 
          13,937        14,060   

Northstar Broadband, LLC

 

Service-cable TV franchise owner

 

Senior Term Debt (0.7%, Due 12/2012) (D)

    50        44        42   

Ohana Media Group

 

Service – AM/FM radio broadcast

 

Senor Term Debt (10.0%, Due 10/2016) (D)

    1,590        1,590        1,447   

Precision Acquisition Group Holdings, Inc.

 

Manufacturing-consumable components for the Aluminum industry

 

Equipment Note (13.0%, Due 3/2013) (D)

    1,000        1,000        835   
   

Senior Term Debt (13.0%, Due 3/2013) (D)

    4,125        4,125        3,444   
   

Senior Term Debt (13.0%, Due 3/2013) (C) (D)

    4,053        4,053        3,384   
       

 

 

   

 

 

 
          9,178        7,663   

PROFIT Systems Acquisition Co.

 

Service-design and develop ERP Software

 

Line of Credit, $350 available (11.3%, Due 7/2012) (D)

    —          —          —     
   

Senior Term Debt (10.5%, Due 7/2014) (C) (D)

    2,850        2,850        2,708   
       

 

 

   

 

 

 
          2,850        2,708   

Reliable Biopharmaceutical Holdings, Inc.

 

Manufacturing-pharmaceutical and biochemical intermediates

 

Line of Credit, $500 available (9.0%, Due 1/2013) (D)

    3,500        3,500        3,316   
   

Mortgage Note (9.5%, Due 12/2014) (D)

    7,121        7,121        6,747   
   

Senior Term Debt (12.0%, Due 12/2014) (C) (D)

    11,513        11,513        10,908   
   

Senior Subordinated Term Debt (12.5%, Due 12/2014) (D)

    6,000        6,000        5,685   
   

Common Stock Warrants (764 shares) (F) (G)

      209        736   
       

 

 

   

 

 

 
          28,343        27,392   

Saunders & Associates

 

Manufacturing-equipment provider for frequency control devices

 

Line of Credit, $2,500 available (11.3%, Due 5/2013) (D)

    —          —          —     
   

Senior Term Debt (11.3%, Due 5/2013) (D)

    8,947        8,947        8,052   
       

 

 

   

 

 

 
          8,947        8,052   

Sunburst Media - Louisiana, LLC

 

Service-radio station operator

 

Senior Term Debt (10.5%, Due 1/2012) (D)

    6,000        6,000        2,400   

Thibaut Acquisition Co.

 

Service-design and distribute wall Covering

 

Line of Credit, $250 available (9.0%, Due 1/2014) (D)

    750        750        737   
   

Senior Term Debt (8.5%, Due 1/2014) (D)

    287        287        282   
   

Senior Term Debt (12.0%, Due 1/2014) (C) (D)

    3,000        3,000        2,933   
       

 

 

   

 

 

 
          4,037        3,952   

 

7


Table of Contents

GLADSTONE CAPITAL CORPORATION

CONDENSED CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

AS OF MARCH 31, 2012

(DOLLAR AMOUNTS IN THOUSANDS)

(UNAUDITED)

 

Company(A)

 

Industry

 

Investment(B)

  Principal     Cost     Fair Value  

NON-CONTROL/NON-AFFILIATE INVESTMENTS (Continued):

     

Westlake Hardware, Inc.

 

Retail-hardware and variety

 

Senior Subordinated Term Debt (12.3%, Due 1/2014) (D)

  $ 12,000      $ 12,000      $ 11,640   
   

Senior Subordinated Term Debt (13.5%, Due 1/2014) (D)

    8,000        8,000        7,700   
       

 

 

   

 

 

 
          20,000        19,340   

Westland Technologies, Inc.

 

Service-diversified conglomerate

 

Line of Credit, $1,000 available (6.5%, Due 4/2012) (D)

    —          —          —     
   

Senior Term Debt (7.5%, Due 4/2016) (D)

    1,850        1,850        1,804   
   

Senior Term Debt (12.5%, Due 4/2016) (D)

    4,000        4,000        3,900   
   

Common Stock Warrants (77,287 shares) (F) (G)

      350        279   
       

 

 

   

 

 

 
          6,200        5,983   

Winchester Electronics

 

Manufacturing-high bandwidth connectors and cables

 

Senior Term Debt (6.5%, Due 5/2013) (D)

    1,250        1,250        1,244   
   

Senior Term Debt (7.0%, Due 5/2013) (D)

    1,669        1,669        1,656   
   

Senior Subordinated Term Debt (13.5%, Due 6/2013) (D)

    9,750        9,750        9,628   
       

 

 

   

 

 

 
          12,669        12,528   
       

 

 

   

 

 

 

Subtotal – Non-syndicated loans

      $ 177,274      $ 149,466   
       

 

 

   

 

 

 

Syndicated Loans:

         

Airvana Network Solutions, Inc.

 

Service-telecommunications

 

Senior Term Debt (10.0%, Due 3/2015) (E)

  $ 3,928      $ 3,827      $ 3,732   

Allied Security Holdings, LLC

 

Service-contract security officer providers

 

Senior Subordinated Term Debt (8.5%, Due 2/2018) (E)

    1,000        991        1,003   

Allied Specialty Vehicles, Inc.

 

Manufacturing-specialty vehicles

 

Senior Term Debt (9.5%, Due 2/2016) (E)

    9,900        9,735        9,702   

Ameriqual Group, LLC

 

Manufacturing-production and distribution of food products

 

Senior Term Debt (9.0%, Due 3/2016) (E)

    7,444        7,319        7,295   

Applied Systems, Inc.

 

Software for property & casualty insurance industry

 

Senior Subordinated Term Debt (9.3%, Due 6/2017) (E)

    1,000        992        998   

Ascend Learning, LLC

 

Service-technology-based learning solutions

 

Senior Subordinated Term Debt (11.5%, Due 12/2017) (E)

    1,000        974        1,010   

Attachmate Corporate

 

Service-develops, implements and supports software

 

Senior Subordinated Term Debt (9.5%, Due 2/2017) (E)

    4,000        3,965        3,990   

Autoparts Holdings Limited

 

Supplier to the light and heavy-duty vehicle after market for replacement parts

 

Senior Term Debt (10.5%, Due 1/2018) (E)

    1,000        995        983   

Blue Coat Systems, Inc.

 

Provider of internet security and network acceleration appliances

 

Senior Subordinated Term Debt (11.5%, Due 8/2018) (E)

    8,500        8,497        8,542   

 

Covad Communications Group, Inc.

 

 

Service-telecommunications

 

 

Senior Term Debt (12.0%, Due 11/2015) (E)

    1,750        1,722        1,741   

Global Brass and Copper, Inc.

 

Manufacturing - steel wool products and metal fibers

 

Senior Term Debt (10.3%, Due 8/2015) (E)

    2,953        2,886        2,993   

HGI Holding, Inc

 

Service - distributor of disposable medical products

 

Senior Term Debt (6.8%, Due 10/2016) (E)

    1,757        1,725        1,757   

Hubbard Radio, LLC

 

Service-radio station operator

 

Senior Subordinated Term Debt (8.8%, Due 4/2018) (E)

    500        495        506   

Keypoint Government Solutions, Inc.

 

Service-security consulting services

 

Senior Term Debt (10.0%, Due 12/2015) (E)

    6,912        6,884        6,912   

Mood Media Corporation

 

Service-media and marketing solutions

 

Senior Term Debt (10.3%, Due 11/2018) (E)

    8,000        7,926        7,480   

National Surgical Hospitals, Inc.

 

Service-physician-partnered surgical facilities

 

Senior Term Debt (8.3%, Due 2/2017) (E)

    1,686        1,652        1,631   

Sensus USA, Inc.

 

Service-provider of utility communication Services

 

Senior Term Debt (8.5%, Due 5/2018) (E)

    500        495        496   

Springs Window Fashions, LLC

 

Manufacturing-window coverings

 

Senior Term Debt (11.3%, Due 11/2017) (E)

    7,000        6,843        6,825   

SRAM, LLC

 

Manufacturing-premium bicycle components

 

Senior Term Debt (8.5%, Due 12/2018) (E)

    2,500        2,477        2,512   

Targus Group International, Inc.

 

Manufacturing-carrying cases and accessories for notebook computers

 

Senior Term Debt (11.0%, Due 5/2016) (E)

    9,925        9,752        9,801   

Ulterra Drilling Technologies, LP

 

Manufacturing-oil field drill bits and slick-slip reduction tools

 

Senior Term Debt (9.5%, Due 6/2016) (E)

    1,925        1,891        1,915   

 

8


Table of Contents

GLADSTONE CAPITAL CORPORATION

CONDENSED CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

AS OF MARCH 31, 2012

(DOLLAR AMOUNTS IN THOUSANDS)

(UNAUDITED)

 

Company(A)

 

Industry

 

Investment(B)

  Principal     Cost     Fair Value  

NON-CONTROL/NON-AFFILIATE INVESTMENTS (Continued):

     

Vision Solutions, Inc.

 

Service-provider of information availability software

 

Senior Term Debt (9.5%, Due 7/2017) (E)

  $ 11,000      $ 10,921      $ 10,670   

Wall Street Systems Holdings, Inc.

 

Service-software provider

 

Senior Term Debt (9.0%, Due 6/2018) (E)

    3,000        2,972        3,007   

WP Evenflo Group Holdings, Inc.

 

Manufacturing-infant and juvenile Products

 

Senior Term Debt (8.0%, Due 2/2013) (E)

    277        277        270   
   

Senior Preferred Equity (333 shares) (F) (G)

      333        440   
   

Junior Preferred Equity (111 shares) (F) (G)

      111        155   
   

Common Stock (1,874 shares) (F) (G)

      —          403   
       

 

 

   

 

 

 
          721        1,268   
       

 

 

   

 

 

 

Subtotal - Syndicated loans

        $ 96,657      $ 96,769   
       

 

 

   

 

 

 

Total Non-Control/Non-Affiliate Investments (represented 85.4% of total investments at fair value)

    $ 273,931      $ 246,235   
       

 

 

   

 

 

 

CONTROL INVESTMENTS:

     

BERTL, Inc.

 

Service-web-based evaluator of imaging products

 

Line of Credit, $69 available (6.5%, Due 4/2012)(F) (H) (I)

  $ 1,358      $ 1,358      $ —     
   

Common Stock (100 shares) (F) (G)

      424        —     
       

 

 

   

 

 

 
          1,782        —     

Defiance Integrated Technologies, Inc.

 

Manufacturing-trucking parts

 

Senior Term Debt (11.0%, Due 4/2013) (C) (F)

    7,345        7,345        7,345   
   

Common Stock (15,500 shares) (F) (G)

      1        8,696   
       

 

 

   

 

 

 
          7,346        16,041   

Kansas Cable Holdings, Inc.

 

Service - cable, internet, voice provider

 

Line of Credit, $153 available (10.0%, Due 10/2012) (D) (H)

    672        662        5   
   

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

    1,500        1,444        11   
   

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

    1,039        1,000        8   
   

Common Stock (100 shares) (F) (G)

      —          —     
       

 

 

   

 

 

 
          3,106        24   

Lindmark Acquisition, LLC

 

Service-advertising

 

Senior Subordinated Term Debt (11.0%, Due 10/2012) (D) (H)

    10,000        10,000        1,300   
   

Senior Subordinated Term Debt (13.0%, Due 10/2012) (D) (H)

    2,000        2,000        260   
   

Senior Subordinated Term Debt (13.0%, Due Upon Demand) (D) (H)

    1,909        1,909        248   
   

Common Stock (100 shares) (F) (G)

      317        —     
       

 

 

   

 

 

 
          14,226        1,808   

LocalTel, LLC

 

Service-yellow pages publishing

 

Line of credit, $132 available (10.0%, Due 6/2012) (F) (H)

    2,218        2,218        559   
   

 

Line of Credit, $1,830 available (4.7%, Due 6/2012) (F) (H)

    1,170        1,170        —     
   

Senior Term Debt (12.5%, Due 2/2012) (F) (H)

    325        325        —     
   

Senior Term Debt (8.5%, Due 6/2012) (F) (H)

    2,688        2,688        —     
   

Senior Term Debt (10.5%, Due 6/2012) (C) (F) (H)

    2,750        2,750        —     
   

Common Stock Warrants (4,000 shares) (F) (G)

      —          —     
       

 

 

   

 

 

 
          9,151        559   

Midwest Metal Distribution, Inc.

 

Distribution-aluminum sheets and stainless steel

 

Senior Subordinated Term Debt (12.0%, Due 7/2013) (D)

    18,281        18,267        17,870   
   

Common Stock (501 shares) (F) (G)

      138        —     
       

 

 

   

 

 

 
          18,405        17,870   

Sunshine Media Holdings

 

Service-publisher regional B2B trade magazines

 

Line of credit, $498 available (4.8%, Due 8/2014) (D)

    1,502        1,502        225   
   

Senior Term Debt (4.8%, Due 5/2016) (D)

    16,948        16,948        2,542   
   

Senior Term Debt (5.5%, Due 5/2016) (C) (D) (H)

    10,700        10,700        1,605   
   

Junior Preferred Equity (11,013 shares) (F) (G)

      4,075        —     
   

Common Stock (934 shares) (F) (G)

      740        —     
       

 

 

   

 

 

 
          33,965        4,372   

U.S. Healthcare Communications, Inc.

 

Service-magazine publisher/operator

 

Line of credit, $131 available (6.0%, Due 12/2010) (F) (H)

    269        269        —     
   

Line of credit, $0 available (6.0%, Due 12/2010) (F) (H)

    450        450        —     
   

Common Stock (100 shares) (F) (G)

      2,470        —     
       

 

 

   

 

 

 
          3,189        —     

Viapack, Inc.

 

Manufacturing-polyethylene film

 

Line of Credit, $466 available (6.5%, Due 3/2013) (D)

    3,334        3,334        534   
   

Senior Real Estate Term Debt (5.0%, Due 3/2014) (D)

    600        600        96   
   

Senior Term Debt (6.2%, Due 3/2014) (C) (D) (H)

    3,925        3,925        628   
   

Preferred Equity (100 shares) (F) (G)

      —          —     
   

Guarantee ($600)

     
       

 

 

   

 

 

 
          7,859        1,258   
       

 

 

   

 

 

 

Total Control Investments (represented 14.6% of total investments at fair value)

    $ 99,029      $ 41,932   
       

 

 

   

 

 

 

Total Investments

      $ 372,960      $ 288,167   
       

 

 

   

 

 

 

 

9


Table of Contents

GLADSTONE CAPITAL CORPORATION

CONDENSED CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

AS OF MARCH 31, 2012

(DOLLAR AMOUNTS IN THOUSANDS)

(UNAUDITED)

 

 

(A) 

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

(B) 

Percentage represents interest rates in effect at March 31, 2012, and due date represents the contractual maturity date.

(C) 

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

(D) 

Fair value was primarily based on opinions of value submitted by Standard & Poor’s Securities Evaluations, Inc.

(E) 

Security valued based on the indicative bid price on or near March 31, 2012, offered by the respective syndication agent’s trading desk or secondary desk.

(F) 

Fair value was primarily based on the total enterprise value of the portfolio company using a liquidity waterfall approach. We also considered discounted cash flow methodologies.

(G) 

Security is non-income producing.

(H) 

Debt security is on non-accrual status.

(I) 

In April 2012, we amended the terms of the security extending the maturity date.

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

 

10


Table of Contents

GLADSTONE CAPITAL CORPORATION

CONDENSED CONSOLIDATED SCHEDULE OF INVESTMENTS

SEPTEMBER 30, 2011

(DOLLAR AMOUNTS IN THOUSANDS)

 

Company(A)

 

Industry

 

Investment(B)

  Principal     Cost     Fair
Value
 

NON-CONTROL/NON-AFFILIATE INVESTMENTS:

       

Non-syndicated Loans:

         

Access Television Network, Inc.

 

Service-cable airtime (infomercials)

 

Senior Term Debt (14.0%, Due 2/2011) (D) (H)

  $ 903      $ 903      $ 45   

Allison Publications, LLC

 

Service-publisher of consumer oriented magazines

 

Senior Term Debt (10.5%, Due 9/2012) (D)

    8,463        8,478        7,861   

BAS Broadcasting

 

Service-radio station operator

 

Senior Term Debt (11.5%, Due 7/2013) (D)

    7,465        7,465        6,233   

Chinese Yellow Pages Company

 

Service-publisher of Chinese language directories

 

Line of Credit, $250 available (7.3%, Due 11/2011) (D)

    450        450        338   
   

Senior Term Debt (7.3%, Due 11/2011) (D)

    168        168        126   
       

 

 

   

 

 

 
          618        464   

CMI Acquisition, LLC

 

Service-recycling

 

Senior Subordinated Term Debt (13.0%, Due 12/2016) (D)

    14,265        14,265        14,336   

FedCap Partners, LLC

 

Private equity fund

 

Class A Membership Units (80 units) (G)

      1,200        1,153   
   

Uncalled Capital Commitment ($800)

     

GFRC Holdings, LLC

 

Manufacturing-glass-fiber reinforced concrete

 

Senior Term Debt (11.5%, Due 12/2012) (D)

    5,617        5,617        4,719   
   

Senior Subordinated Term Debt (14.0%, Due 12/2012) (D)

    6,615        6,615        5,557   
       

 

 

   

 

 

 
          12,232        10,276   

Global Materials Technologies, Inc.

 

Manufacturing-steel wool products and metal fibers

 

Senior Term Debt (13.0%, Due 6/2012) (C) (D)

    2,635        2,635        2,212   

Heartland Communications Group

 

Service-radio station operator

 

Line of Credit, $0 available (5.0%, Due 3/2013) (D)

    100        100        41   
   

Line of Credit, $0 available (10.0%, Due 3/2013) (D)

    100        100        41   
   

Senior Term Debt (5.0%, Due 3/2013) (D)

    4,342        4,316        1,780   
   

Common Stock Warrants (8.8% ownership) (F) (G)

      66        —     
       

 

 

   

 

 

 
          4,582        1,862   

International Junior Golf Training Acquisition Company

 

Service-golf training

 

Line of Credit, $0 available (11.0%, Due 5/2012) (D)

    1,500        1,500        1,275   
   

Senior Term Debt (10.5%, Due 5/2012) (D)

    861        861        732   
   

Senior Term Debt (12.5%, Due 5/2012) (C)(D)

    2,500        2,500        2,125   
       

 

 

   

 

 

 
          4,861        4,132   

KMBQ Corporation

 

Service-AM/FM radio broadcaster

 

Line of Credit, $42 available (12.3%, Due 7/2010) (D) (H)

    162        158        76   
   

Senior Term Debt (12.3%, Due 7/2010) (D) (H)

    2,081        2,038        984   
       

 

 

   

 

 

 
          2,196        1,060   

Legend Communications of Wyoming, LLC

 

Service-operator of radio stations

 

Senior Term Debt (12.0%, Due 6/2013) (D)

    9,745        9,745        5,408   
   

Senior Term Debt (16.0%, Due 7/2011) (D)

    220        220        123   
       

 

 

   

 

 

 
          9,965        5,531   

Newhall Holdings, Inc.

 

Service-distributor of personal care products and supplements

 

Line of Credit, $0 available (8.0%, Due 12/2012) (D) (H)

    1,985        1,985        98   
   

Senior Term Debt (8.5%, Due 12/2012) (D) (H)

    1,870        1,870        94   
   

Senior Term Debt (3.5%, Due 12/2012) (C) (D) (H)

    2,000        2,000        100   
   

Senior Term Debt (3.5%, Due 12/2012) (C) (D) (H)

    4,648        4,648        232   
   

Preferred Equity (1,000,000 shares) (F) (G) (H)

      —          —     
   

Common Stock (688,500 shares) (F) (G)

      —          —     
       

 

 

   

 

 

 
          10,503        524   

North American Aircraft Services LLC

 

Service - repairs and maintains aircraft fuel tanks and fuel systems

 

Line of Credit, $1,500 available (6.5%, Due 8/2012) (D)

    500        500        500   
   

Senior Term Debt (7.5%, Due 8/2016) (D)

    3,250        3,250        3,250   
   

Senior Subordinated Term Debt (11.8%, Due 8/2016) (D)

    4,750        4,750        4,750   
   

Common Stock Warrants (4.8% ownership) (F) (G)

      350        350   
       

 

 

   

 

 

 
          8,850        8,850   

Northern Contours, Inc.

 

Manufacturing-veneer and laminate components

 

Senior Subordinated Term Debt (13.0%, Due 9/2012) (D)

    6,128        6,128        5,684   

Northstar Broadband, LLC

 

Service-cable TV franchise owner

 

Senior Term Debt (0.7%, Due 12/2012) (D)

    80        70        64   

Precision Acquisition Group Holdings, Inc.

 

Manufacturing-consumable components for the aluminum industry

 

Equipment Note (13.0%, Due 11/2011) (D)

    1,000        1,000        948   
   

Senior Term Debt (13.0%, Due 11/2011) (D)

    4,125        4,125        3,908   
   

Senior Term Debt (13.0%, Due 11/2011) (C) (D)

    4,053        4,053        3,840   
       

 

 

   

 

 

 
          9,178        8,696   

PROFIT Systems Acquisition Co.

 

Service-design and develop ERP software

 

Line of Credit, $350 available (11.25%, Due 7/2012) (D)

    —          —          —     
   

Senior Term Debt (10.5%, Due 7/2014) (C) (D)

    3,150        3,150        3,024   
       

 

 

   

 

 

 
          3,150        3,024   

 

11


Table of Contents

GLADSTONE CAPITAL CORPORATION

CONDENSED CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

AS OF SEPTEMBER 30, 2011

(DOLLAR AMOUNTS IN THOUSANDS)

 

Company(A)

 

Industry

 

Investment(B)

  Principal     Cost     Fair Value  

NON-CONTROL/NON-AFFILIATE INVESTMENTS (Continued):

     

RCS Management Holding Co.

 

Service-healthcare supplies

 

Senior Term Debt (9.5%, Due 1/2013) (D)

  $ 1,438      $ 1,438      $ 1,367   
   

Senior Term Debt (11.5%, Due 1/2013) (C) (D)

    3,060        3,060        2,907   
       

 

 

   

 

 

 
          4,498        4,274   

Reliable Biopharmaceutical Holdings, Inc.

 

Manufacturing-pharmaceutical and biochemical intermediates

 

Line of Credit, $2,800 available (9.0%, Due 1/2013) (D)

    1,200        1,200        1,176   
   

Mortgage Note (9.5%, Due 12/2014) (D)

    7,168        7,168        7,025   
   

Senior Term Debt (12.0%, Due 12/2014) (C)(D)

    11,573        11,573        10,906   
   

Senior Subordinated Term Debt (12.5%, Due 12/2014) (D)

    6,000        6,000        5,655   
   

Common Stock Warrants (764 shares) (F) (G)

      209        534   
       

 

 

   

 

 

 
          26,150        25,296   

Saunders & Associates

 

Manufacturing-equipment provider for frequency control devices

 

Line of Credit, $2,500 available (11.3%, Due 5/2013) (D)

    —          —          —     
   

Senior Term Debt (11.3%, Due 5/2013) (D)

    8,947        8,947        8,913   
       

 

 

   

 

 

 
          8,947        8,913   

Sunburst Media - Louisiana, LLC

 

Service-radio station operator

 

Senior Term Debt (10.5%, Due 12/2011) (D)

    6,100        6,103        3,964   

Thibaut Acquisition Co.

 

Service-design and distribute wall covering

 

Line of Credit, $400 available (9.0%, Due 1/2014) (D)

    600        600        585   
   

Senior Term Debt (8.5%, Due 1/2014) (D)

    550        550        536   
   

Senior Term Debt (12.0%, Due 1/2014) (C) (D)

    3,000        3,000        2,910   
       

 

 

   

 

 

 
          4,150        4,031   

Westlake Hardware, Inc.

 

Retail-hardware and variety

 

Senior Subordinated Term Debt (12.3%, Due 1/2014) (D)

    12,000        12,000        11,640   
   

Senior Subordinated Term Debt (13.5%, Due 1/2014) (D)

    8,000        8,000        7,700   
       

 

 

   

 

 

 
          20,000        19,340   

Westland Technologies, Inc.

 

Service-diversified conglomerate

 

Line of Credit, $1,000 available (6.5%, Due 4/2012) (D)

    —          —          —     
   

Senior Term Debt (7.5%, Due 4/2016) (D)

    2,000        2,000        1,995   
   

Senior Term Debt (12.5%, Due 4/2016) (D)

    4,000        4,000        3,990   
   

Common Stock Warrants (77,287 shares) (F) (G)

      350        307   
       

 

 

   

 

 

 
          6,350        6,292   

 

Winchester Electronics

 

 

Manufacturing-high bandwidth connectors and cables

 

 

Senior Term Debt (5.2%, Due 5/2012) (D)

    1,250        1,250        1,238   
   

Senior Term Debt (5.7%, Due 5/2013) (D)

    1,677        1,677        1,656   
   

Senior Subordinated Term Debt (14.0%, Due 6/2013) (D)

    9,800        9,800        9,628   
       

 

 

   

 

 

 
          12,727        12,522   
       

 

 

   

 

 

 

Subtotal – Non-syndicated loans

      $ 196,204      $ 166,639   
       

 

 

   

 

 

 

Syndicated Loans:

         

Airvana Network Solutions, Inc.

 

Service-telecommunications

 

Senior Term Debt (10.0%, Due 3/2015) (E)

  $ 6,048      $ 5,912      $ 6,048   

Allied Security Holdings, LLC

 

Service-contract security officer providers

 

Senior Subordinated Term Debt (8.5%, Due 2/2018) (E)

    1,000        991        965   

Allied Specialty Vehicles, Inc.

 

Manufacturing-specialty vehicles

 

Senior Term Debt (9.5%, Due 2/2016) (E)

    9,950        9,767        9,751   

Ameriqual Group, LLC

 

Manufacturing-production and distribution of food products

 

Senior Term Debt (9.0%, Due 3/2016) (E)

    7,481        7,344        7,332   

Applied Systems, Inc.

 

Software for property & casualty insurance industry

 

Senior Subordinated Term Debt (9.3%, Due 6/2017) (E)

    1,000        991        990   

Ascend Learning, LLC

 

Service-technology-based learning solutions

 

Senior Subordinated Term Debt (11.53%, Due 12/2017) (E)

    1,000        972        980   

Attachmate Corporate

 

Service-develops, implements and supports software

 

Senior Subordinated Term Debt (9.5%, Due 2/2017) (E)

    4,000        3,962        3,810   

Autoparts Holdings Limited

 

Supplier to the light and heavy-duty vehicle after market for replacement parts

 

Senior Term Debt (10.5%, Due 1/2018) (E)

    1,000        995        978   

Covad Communications Group, Inc.

 

Service-telecommunications

 

Senior Term Debt (12.0%, Due 11/2015) (E)

    1,850        1,818        1,795   

Ernest Health, Inc.

 

Service-post-acute care services

 

Senior Term Debt (10.3%, Due 5/2017) (E)

    2,000        1,971        1930   

Global Brass and Copper, Inc.

 

Manufacturing - steel wool products and metal fibers

 

Senior Term Debt (10.3%, Due 8/2015) (E)

    2,969        2,893        3,054   

HGI Holding, Inc

 

Service - distributor of disposable medical products

 

Senior Term Debt (6.8%, Due 10/2016) (E)

    1,757        1,723        1,687   

Hubbard Radio, LLC

 

Service-radio station operator

 

Senior Subordinated Term Debt (8.8%, Due 4/2018) (E)

    500        495        488   

Keypoint Government Solutions, Inc.

 

Service-security consulting services

 

Senior Term Debt (10.0%, Due 12/2015) (E)

    6,948        6,916        6,670   

 

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GLADSTONE CAPITAL CORPORATION

CONDENSED CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

AS OF SEPTEMBER 30, 2011

(DOLLAR AMOUNTS IN THOUSANDS)

 

Company(A)

 

Industry

 

Investment(B)

  Principal     Cost     Fair Value  

NON-CONTROL/NON-AFFILIATE INVESTMENTS (Continued):

     

Mood Media Corporation

 

Service-media and marketing solutions

 

Senior Term Debt (10.3%, Due 11/2018) (E)

  $ 8,000      $ 7,923      $ 7,370   

National Surgical Hospitals, Inc.

 

Service-physician-partnered surgical facilities

 

Senior Term Debt (8.3%, Due 2/2017) (E)

    1,694        1,658        1,627   

Sensus USA, Inc.

 

Service-provider of utility communication services

 

Senior Term Debt (8.5%, Due 5/2018) (E)

    500        495        483   

Springs Window Fashions, LLC

 

Manufacturing-window coverings

 

Senior Term Debt (11.3%, Due 11/2017) (E)

    5,000        4,855        4,750   

SRAM, LLC

 

Manufacturing-premium bicycle components

 

Senior Term Debt (8.5%, Due 12/2018) (E)

    2,500        2,476        2,475   

Targus Group International, Inc.

 

Manufacturing-carrying cases and accessories for notebook computers

 

Senior Term Debt (11.0%, Due 5/2016) (E)

    9,975        9,785        9,626   

Ulterra Drilling Technologies, LP

 

Manufacturing-oil field drill bits and slick-slip reduction tools

 

Senior Term Debt (9.5%, Due 6/2016) (E)

    1,975        1,937        1,916   

Vision Solutions, Inc.

 

Service-provider of information availability software

 

Senior Term Debt (9.5%, Due 7/2017) (E)

    11,000        10,915        10,560   

Wall Street Systems Holdings, Inc.

 

Service-software provider

 

Senior Term Debt (9.0%, Due 6/2018) (E)

    3,000        2,971        2,880   

WP Evenflo Group Holdings Inc.

 

Manufacturing-infant and juvenile products

 

Senior Term Debt (8.0%, Due 2/2013) (E)

    1,853        1,853        1,723   
   

Senior Preferred Equity (333 shares) (F) (G)

      333        419   
   

Junior Preferred Equity (111 shares) (F) (G)

      111        146   
   

Common Stock (1,874 shares) (F) (G)

      —          210   
       

 

 

   

 

 

 
          2,297        2,498   
       

 

 

   

 

 

 

Subtotal - Syndicated loans

      $ 92,062      $ 90,663   
       

 

 

   

 

 

 

Total Non-Control/Non-Affiliate Investments (represented 84.9% of total investments at fair value)

    $ 288,266      $ 257,302   
       

 

 

   

 

 

 

CONTROL INVESTMENTS:

       

BERTL, Inc.

 

Service-web-based evaluator of imaging products

 

Line of Credit, $6 available (6.4%, Due 10/2011)(F) (H)

  $ 1,427      $ 1,355      $ —     
   

Common Stock (100 shares) (F) (G)

      424        —     
       

 

 

   

 

 

 
          1779        —     

Defiance Integrated Technologies, Inc.

 

Manufacturing-trucking parts

 

Senior Term Debt (11.0%, Due 4/2013) (C) (F)

    7,505        7,505        7,505   
   

Common Stock (15,500 shares) (F) (G)

      1        7,534   
       

 

 

   

 

 

 
          7,506        15,039   

Kansas Cable Holdings, Inc.

 

Service - cable, internet, voice provider

 

Line of Credit, $179 available (10.0%, Due 10/2012) (D) (H)

    346        337        14   
   

 

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

    1,500        1,444        60   
   

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

    1,039        1,000        42   
   

Common Stock (100 shares) (F) (G)

      —          —     
       

 

 

   

 

 

 
          2,781        116   

Lindmark Acquisition, LLC

 

Service-advertising

 

Senior Subordinated Term Debt (11.0%, Due 10/2012)(D)(H)

    10,000        10,000        2,000   
   

Senior Subordinated Term Debt (13.0%, Due 10/2012)(D)(H)

    2,000        2,000        400   
   

Senior Subordinated Term Debt (13.0%, Due Upon Demand) (D) (H)

    1,908        1,908        383   
   

Common Stock (100 shares) (F) (G)

      317        —     
       

 

 

   

 

 

 
          14,225        2,783   

LocalTel, LLC

 

Service-yellow pages publishing

 

Line of credit, $2 available (10.0%, Due 12/2011) (F) (H)

    1,848        1,848        734   
   

Line of Credit, $1,830 available (4.7%, Due 6/2012) (F) (H)

    1,170        1,170        —     
   

Senior Term Debt (12.5%, Due 2/2012) (F) (H)

    325        325        —     
   

Senior Term Debt (8.5%, Due 6/2012) (F) (H)

    2,688        2,688        —     
   

Senior Term Debt (10.5%, Due 6/2012) (C) (F) (H)

    2,750        2,750        —     
   

Common Stock Warrants (4,000 shares) (F) (G)

      —          —     
       

 

 

   

 

 

 
          8,781        734   

Midwest Metal Distribution, Inc.

 

Distribution-aluminum sheets and stainless steel

 

Senior Subordinated Term Debt (12.0%, Due 7/2013) (D)

    18,281        18,262        17,184   
   

Common Stock (501 shares) (F) (G)

      138        —     
       

 

 

   

 

 

 
          18,400        17,184   

Sunshine Media Holdings

 

Service-publisher regional B2B trade magazines

 

Line of credit, $1,100 available (10.5%, Due 8/2014) (D)

    900        900        270   
   

Senior Term Debt (10.5%, Due 5/2016) (D)

    16,948        16,948        5,084   
   

Senior Term Debt (5.0%, Due 5/2016) (C) (D)

    10,700        10,700        3,210   
   

Junior Preferred Equity (6,689 shares) (F) (G)

      2,475        —     
   

Common Stock (934 shares) (F) (G)

      740        —     
       

 

 

   

 

 

 
          31,763        8,564   

 

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GLADSTONE CAPITAL CORPORATION

CONDENSED CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

AS OF SEPTEMBER 30, 2011

(DOLLAR AMOUNTS IN THOUSANDS)

 

Company(A)

 

Industry

 

Investment(B)

  Principal     Cost     Fair Value  

CONTROL INVESTMENTS (Continued):

     

U.S. Healthcare Communications, Inc.

 

Service-magazine publisher/operator

 

Line of credit, $131 available (6.0%, Due 12/2010) (F) (H)

  $ 269      $ 269      $ —     
   

Line of credit, $0 available (6.0%, Due 12/2010) (F) (H)

    450        450        —     
   

Common Stock (100 shares) (F) (G)

      2,470        —     
       

 

 

   

 

 

 
          3,189        —     

Viapack, Inc.

 

Manufacturing-polyethylene film

 

Line of Credit, $900 available (10.0%, Due 3/2013) (D)

    1,600        1,600        320   
   

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

    600        600        120   
   

Senior Term Debt (13.0%, Due 3/2014) (C) (D)

    3,925        3,925        785   
   

Preferred Equity (100 shares) (F) (G)

      —          —     
       

 

 

   

 

 

 
          6,125        1,225   
       

 

 

   

 

 

 

Total Control Investments (represented 15.1% of total investments at fair value)

    $ 94,549      $ 45,645   
       

 

 

   

 

 

 

Total Investments (I)

    $ 382,815      $ 302,947   
       

 

 

   

 

 

 

 

(A) 

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

(B) 

Percentage represents interest rates in effect at September 30, 2011, and due date represents the contractual maturity date.

(C) 

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

(D) 

Fair value was primarily based on opinions of value submitted by Standard & Poor’s Securities Evaluations, Inc.

(E) 

Security valued based on the indicative bid price on or near September 30, 2011, offered by the respective syndication agent’s trading desk or secondary desk.

(F) 

Fair value was primarily based on the total enterprise value of the portfolio company using a liquidity waterfall approach. We also considered discounted cash flow methodologies.

(G) 

Security is non-income producing.

(H) 

Debt security is on non-accrual status.

(I) 

For the year ended September 30, 2011, cumulative gross unrealized depreciation for federal income tax purposes is $88,670 and cumulative gross unrealized appreciation for federal income tax purposes is $8,566. For the year ended September 30, 2011, cumulative net unrealized depreciation is $80,104 based on a tax cost of $383,052.

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

 

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GLADSTONE CAPITAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

MARCH 31, 2012

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

NOTE 1. ORGANIZATION

Gladstone Capital Corporation was incorporated under the General Corporation Laws of the State of Maryland on May 30, 2001 and completed an initial public offering on August 23, 2001. The terms “we,” “our,” and “us” all refer to Gladstone Capital Corporation and its consolidated subsidiaries. We are a closed-end, non-diversified management investment company that has elected to be treated as a business development company (“BDC”) under the Investment Company Act of 1940, as amended (the “1940 Act”). In addition, we have elected to be treated for tax purposes as a regulated investment company (“RIC”) under the Internal Revenue Code of 1986, as amended (the “Code”). Our investment objective is to achieve a high level of current income by investing in debt securities, consisting primarily of senior notes, senior subordinated notes and junior subordinated notes, with a particular focus on senior notes, of established private businesses in the United States (“U.S”) that are substantially owned by leveraged buyout funds, individual investors or are family-owned businesses. In addition, we may acquire existing loans that meet this profile from other funds.

Gladstone Business Loan, LLC (“Business Loan”), a wholly-owned subsidiary of ours, was established on February 3, 2003 for the sole purpose of owning our portfolio of investments in connection with our line of credit.

Gladstone Financial Corporation (“Gladstone Financial”), a wholly-owned subsidiary of ours, was established on November 21, 2006 for the purpose of holding a license to operate as a Specialized Small Business Investment Company. Gladstone Financial (previously known as Gladstone SSBIC Corporation) acquired this license in February 2007. The license enables us, through this subsidiary, to make investments in accordance with the United States Small Business Administration guidelines for specialized small business investment companies.

The financial statements of the subsidiaries are consolidated with those of ours.

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

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Unaudited Interim Financial Statements and Basis of Presentation

We prepare our interim financial statements in accordance with accounting principles generally accepted in the U.S. (“GAAP”) for interim financial information and pursuant to the requirements for reporting on Form 10-Q and Article 10 of Regulation S-X under the Securities Act of 1933, as amended (the “Securities Act”). Accordingly, certain disclosures accompanying annual financial statements prepared in accordance with GAAP are omitted. The accompanying condensed consolidated financial statements include our accounts and those of our wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated. Under Article 6 of Regulation S-X under the Securities Act, and the authoritative accounting guidance provided by the AICPA Audit and Accounting Guide for Investment Companies, we are not permitted to consolidate any portfolio company investments, including those in which we have a controlling interest. In our opinion, all adjustments, consisting solely of normal recurring accruals, necessary for the fair statement of financial statements for the interim periods have been included. The results of operations for the three and six months ended March 31, 2012, are not necessarily indicative of results that ultimately may be achieved for the year. The interim financial statements and notes thereto should be read in conjunction with the financial statements and notes thereto included in our annual report on Form 10-K for the fiscal year ended September 30, 2011, as filed with the Securities and Exchange Commission (the “SEC”) on November 14, 2011.

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

Reclassifications

Certain amounts in the prior period’s financial statements have been reclassified to conform to the presentation for the three and six month periods ended March 31, 2012, with no effect to net decrease in net assets resulting from operations.

 

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Investment Valuation Policy

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

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

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

Publicly traded securities: We determine the value of publicly traded securities based on the closing price for the security on the exchange or securities market on which it is listed and primarily traded on the valuation date. To the extent that we own restricted securities that are not freely tradable, but for which a public market otherwise exists, we will use the market value of that security adjusted for any decrease in value resulting from the restrictive feature.

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

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

As of March 31, 2012 and September 30, 2011, we determined that the indicative bid prices were reliable indicators of fair value for our syndicate investments. However, because of the private nature of this marketplace (meaning actual transactions are not publicly reported); we determined that these valuation inputs were classified as Level 3 within the fair value hierarchy as defined in ASC 820.

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.

 

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

 

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

 

   

the issuer’s ability to make payments;

 

   

the earnings of the issuer;

 

   

recent sales to third parties of similar securities;

 

   

the comparison to publicly traded securities; and

 

   

DCF or other pertinent factors.

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

 

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

 

(D) Portfolio investments comprised of non-publicly traded, non-control equity securities of other funds: We generally value any uninvested capital of the non-control fund at par value and values any invested capital at the value provided by the non-control fund.

Due to the uncertainty inherent in the valuation process, such estimates of fair value may differ significantly and materially from the values that would have been obtained had a ready market for the securities existed. Additionally, changes in the market

 

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environment and other events that may occur over the life of the investments may cause the gains or losses ultimately realized on these investments to be different than the valuations currently assigned. There is no single standard for determining fair value in good faith, as fair value depends upon circumstances of each individual case. In general, fair value is the amount that we might reasonably expect to receive upon the current sale of the security in an orderly transaction between market participants at the measurement date.

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

Interest Income Recognition

Interest income, adjusted for amortization of premiums and acquisition costs, the accretion of discounts and the amortization of amendment fees, is recorded on the accrual basis to the extent that such amounts are expected to be collected. Generally, when a loan becomes 90 days or more past due, or if our qualitative assessment indicates that the debtor is unable to service its debt or other obligations, we will place the loan on non-accrual status and cease recognizing interest income on that loan until the borrower has demonstrated the ability and intent to pay contractual amounts due. However, we remain contractually entitled to this interest. Interest payments received on non-accrual loans may be recognized as income or applied to the cost basis, depending upon management’s judgment. Generally, non-accrual loans are restored to accrual status when past due principal and interest are paid and, in management’s judgment, are likely to remain current, or due to a restructuring such that the interest income is deemed to be collectable. At March 31, 2012, eight portfolio companies were either fully or partially on non-accrual with an aggregate debt cost basis of $43.8 million, or 12.1% of the cost basis of all debt investments in our portfolio, and an aggregate fair value of $4.6 million, or 1.7% of the fair value of all debt investments in our portfolio. At September 30, 2011, eight portfolio companies were on non-accrual with an aggregate debt cost basis of $41.1 million, or 11.0% of the cost basis of all debt investments in our portfolio, and an aggregate fair value of $5.3 million, or 1.8% of the fair value of all debt investments in our portfolio.

As of March 31, 2012 and September 30, 2011, we had 27 original issue discount (“OID”) loans, primarily from the syndicated loans in our portfolio. We recorded OID income of $74 and $0.2 million for the three and six months ended March 31, 2012, respectively, as compared to $29 and $53 for the three and six months ended March 31, 2011. The unamortized balance of OID investments as of March 31, 2012 and September 30, 2011 totaled $1.4 million and $1.5 million, respectively.

As of March 31, 2012 and September 30, 2011, we had no investments that bore PIK interest. PIK interest, computed at the contractual rate specified in a loan agreement, is added to the principal balance of a loan and recorded as income. To maintain our status as a RIC, this non-cash source of income must be paid out to common stockholders in the form of distributions, even though we have not yet collected the cash. We recorded no PIK income during the three and six months ended March 31, 2012, respectively, as compared to $4 and $8 for the three and six months ended March, 31, 2011, respectively.

We also transfer past due interest to the principal balance as stipulated in certain loan amendments with portfolio companies. There were no such transfers during the three and six months ended March 31, 2012. We transferred past due interest to the principal balance of $0.2 million for both the three and six months ended March 31, 2011, respectively.

Other Income Recognition

We record success fees upon receipt. Success fees are typically contractually due upon a change of control in a portfolio company and are recorded in other income in our accompanying Condensed Consolidated Statements of Operations. We recorded $2.0 million of success fess during the six months ended March 31, 2012, which resulted from our exit of Global Materials Technologies, Inc and RCS Management Holding Co. We recorded $0.6 million of success fees during the six months ended March 31, 2011, which resulted from our exits of Pinnacle Treatment Centers, Inc. and Interfilm Holdings, Inc.

Recent Accounting Pronouncements

In May 2011, the FASB issued ASU 2011-04 which results in a consistent definition of fair value and common requirements for measurement of and disclosure about fair value between GAAP and IFRS. ASU 2011-04 is effective for interim and annual periods beginning after December 15, 2011, and as such we have adopted this ASU beginning with our quarter ended March 31, 2012. We have increased our disclosures related to Level 3 fair value measurement, in addition to other required disclosures. There were no related impacts on our financial position or results of operations.

 

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NOTE 3. INVESTMENTS

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

 

 

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

 

 

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

 

 

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

We transfer investments in and out of Level 1, 2 and 3 securities as of the beginning balance sheet date, based on changes in the use of observable and unobservable inputs utilized to perform the valuation for the period. During the six months ended March 31, 2012 and 2011, there were no transfers in or out of Level 3.

The following table presents the investments carried at fair value as of March 31, 2012 and September 30, 2011, by caption on our accompanying Condensed Consolidated Statements of Assets and Liabilities and by security type, all of which are valued using Level 3 inputs:

 

     Total Recurring Fair Value
Measurements Reported in
Condensed
Consolidated Statements of Assets and
Liabilities
Using Significant
Unobservable Inputs (Level 3)
 
     March 31, 2012      September 30, 2011  

Non-Control/Non-Affiliate Investments

     

Senior term debt

   $ 166,442       $ 182,002   

Senior subordinated term debt

     76,019         72,182   

Preferred equity

     595         566   

Common equity/equivalents

     3,179         2,552   
  

 

 

    

 

 

 

Total Non-Control/Non-Affiliate Investments

   $ 246,235       $ 257,302   
  

 

 

    

 

 

 

Control Investments

     

Senior term debt

   $ 13,558       $ 18,143   

Senior subordinated term debt

     19,678         19,966   

Common equity/equivalents

     8,696         7,536   
  

 

 

    

 

 

 

Total Control Investments

   $ 41,932       $ 45,645   
  

 

 

    

 

 

 

Total Investments at Fair Value

   $ 288,167       $ 302,947   
  

 

 

    

 

 

 

 

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In accordance with ASU 2011-04, the following table provides quantitative information about our Level 3 fair value measurements of our investments as of March 31, 2012. In addition to the techniques and inputs noted in the table below, according to our valuation policy we may also use other valuation techniques and methodologies when determining our fair value measurements. The below table is not intended to be all-inclusive, but rather provides information on the significant Level 3 inputs as they relate to our fair value measurements. The weighted average calculations in the table below are based on the principal balances for all debt related calculations and on the cost basis for all equity related calculations for the particular input.

 

    Quantitative Information about Level 3 Fair Value Measurements  
    Fair Value as of
March 31, 2012
   

Valuation
Techniques/

Methodologies

  Unobservable
Input
  Range /  Weighted
Average
 

Non-syndicated debt only investments

  $ 99,306      SPSE (A)   EBITDA (B)     ($310) - $14,058 / $4,976   
      Risk Ratings  (C)     2.0 - 10.0 / 6.3   

Syndicated debt only investments

    95,503      Market Quotes   IBP (D)     93.5% - 101.4% / 98.3%   

Bundled debt and equity investments

    92,205      SPSE (A)   EBITDA (B)    
 
($1,595) - $6,406 /
$3,087
  
  
      Risk Ratings (C)     3.0 - 6.0 / 4.6   
    TEV   EBITDA multiples  (B)     4.6 - 9.7 / 5.9   
      EBITDA (B)    
 
($1,595) -
$25,026 / $2,921
  
  

Other Investments

    1,153         
 

 

 

       

Total Fair Value for Level 3 Investments

  $ 288,167         
 

 

 

       

 

(A) 

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

(B) 

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

(C) 

As part of our valuation procedures, we risk rate all of our investments in debt securities. We use the Nationally Recognized Statistical Rating Organization’s risk rating system for generally all of syndicated loans and a proprietary risk rating system for all other debt securities. Our risk rating system uses a scale of 0 to 10, with 10 being the lowest probability of default. The risk rating system covers both qualitative and quantitative aspects of the portfolio company business and the securities we hold.

(D) 

We generally base the value of our syndicated debt securities on the IBP offered by the respective originating syndication agent’s trading desk, or secondary desk, on or near the valuation date. These bid prices are non-binding and are generally based on the underlying company performance and security characteristics, as well as other market conditions and credit risk factors.

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

Changes in Level 3 Fair Value Measurements of Investments

The following tables provide the changes in fair value, broken out by security type, during the three and six-month periods ending March 31, 2012 and 2011 for all investments for which we determine fair value using unobservable (Level 3) factors. When a determination is made to classify a financial instrument within Level 3 of the valuation hierarchy, such determination is based upon the significance of the unobservable factors to the overall fair value measurement. However, Level 3 financial instruments typically include, in addition to the unobservable, or Level 3, inputs, observable inputs (that is, components that are actively quoted and can be validated to external sources). In these cases, we categorize all of the inputs as the lowest level input within the hierarchy. Accordingly, the gains and losses in the tables below include changes in fair value, due in part to observable factors that are part of the valuation methodology.

 

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Fair Value Measurements Using Significant Unobservable Inputs (Level 3)

Periods ended March 31, 2012:

 

Three months ended March 31, 2012:   Senior
Term
Debt
    Senior
Subordinated
Term Debt
    Preferred
Equity
    Common
Equity/
Equivalents
    Total  

Fair value as of December 31, 2011

  $ 192,821      $ 88,004      $ 581      $ 11,440      $ 292,846   

Total gains or losses

         

Net realized gain (a)

    37        —          —          —          37   

Net unrealized (depreciation) appreciation (b)

    (6,292     (784     (986     435        (7,627

Reversal of prior period net depreciation on realization (b)

    458        —          —          —          458   

New investments, repayments and settlements (c)

         

Issuances/originations

    8,858        8,500        1,000        —          18,358   

Settlements/repayments

    (13,912     (23     —          —          (13,935

Sales

    (1,970     —          —          —          (1,970
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Fair value as of March 31, 2012

  $ 180,000      $ 95,697      $ 595      $ 11,875      $ 288,167   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
Six months ended March 31, 2012:   Senior
Term
Debt
    Senior
Subordinated
Term Debt
    Preferred
Equity
    Common
Equity/
Equivalents
    Total  

Fair value as of September 30, 2011

  $ 200,145      $ 92,148      $ 566      $ 10,088      $ 302,947   

Total gains or losses

         

Net realized loss (a)

    (8,363     —          —          —          (8,363

Net unrealized (depreciation) appreciation (b)

    (15,128     (2,028     (1,572     1,787        (16,941

Reversal of prior period net depreciation on realization (b)

    11,571        444        —          —          12,015   

New investments, repayments and settlements (c)

         

Issuances/originations

    16,688        11,320        1,601        —          29,609   

Settlements/repayments

    (18,454     (6,187     —          —          (24,641

Sales

    (6,459     —          —          —          (6,459
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Fair value as of March 31, 2012

  $ 180,000      $ 95,697      $ 595      $ 11,875      $ 288,167   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

Periods ended March 31, 2011:

 

                             
Three months ended March 31, 2011:   Senior
Term
Debt
    Senior
Subordinated
Term Debt
    Preferred
Equity
    Common
Equity/
Equivalents
    Total  

Fair value as of December 31, 2010

  $ 169,882      $ 76,999      $ 523      $ 5,101      $ 252,505   

Total gains or losses

         

Net realized gain (loss) (a)

    177        (14     —          —          163   

Net unrealized (depreciation) appreciation (b)

    (11,268     (1,364     (361     134        (12,859

Reversal of prior period net appreciation on realization (b)

    (210     —          —          —          (210

New investments, repayments and settlements (c)

         

Issuances/originations

    37,544        1,038        375        1,880        40,837   

Settlements/repayments

    (22,523     (60     —          —          (22,583

Sales

    —          —          —          (740     (740
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Fair value as of March 31, 2011

  $ 173,602      $ 76,599      $ 537      $ 6,375      $ 257,113   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
Six months ended March 31, 2011:   Senior
Term
Debt
    Senior
Subordinated
Term Debt
    Preferred
Equity
    Common
Equity/
Equivalents
    Total  

Fair value as of September 30, 2010

  $ 172,596      $ 81,899      $ 386      $ 2,228      $ 257,109   

Total gains or losses

         

Net realized gain (loss) (a)

    177        (14     —          —          163   

Net unrealized (depreciation) appreciation (b)

    (17,218     (1,839     (224     2,974        (16,307

Reversal of prior period net (appreciation) depreciation on realization (b)

    (191     731        —          (247     293   

 

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Six months ended March 31, 2011:    Senior
Term
Debt
    Senior
Subordinated
Term Debt
    Preferred
Equity
     Common
Equity/
Equivalents
    Total  

New investments, repayments and settlements (c)

           

Issuances/originations

     46,942        3,122        375         2,197        52,636   

Settlements/repayments

     (28,704     (7,300     —           —          (36,004

Sales

     —          —          —           (777     (777
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Fair value as of March 31, 2011

   $ 173,602      $ 76,599      $ 537       $ 6,375      $ 257,113   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

 

(a) 

Included in net realized gain (loss) on Non-Control/Non-Affiliate and Control investments on our accompanying Condensed Consolidated Statements of Operations for the three and six months ended March 31, 2012 and 2011.

(b) 

Included in net unrealized depreciation on Non-Control/Non-Affiliate and Control investments on our accompanying Condensed Consolidated Statements of Operations for the three and six months ended March 31, 2012 and 2011.

(c) 

Includes increases in the cost basis of investments resulting from new portfolio investments, the amortization of discounts, premiums and closing fees as well as decreases in the cost basis of investments resulting from principal repayments or sales.

Non-Control/Non-Affiliate Investments

As of March 31, 2012 and September 30, 2011, we held 46 and 50 Non-Control/Non-Affiliate investments in the aggregate fair value of $246.2 million and $257.3 million, respectively. Of these, we had a total of 24 syndicate loans in the aggregate fair value of $96.8 million and $90.7 million, as of March 31, 2012 and September 30, 2011, respectively. During the six months ended March 31, 2012, we added two new Non-Control/Non-Affiliate investments, with an aggregate fair value of $10.0 million at March 31, 2012, and four Non-Control/Non-Affiliate investments paid off early, for which we received aggregate principal payments of $14.9 million. Additionally, we funded $11.4 million to existing Non-Control/Non-Affiliate portfolio companies during the six months ended March 31, 2012. The following sales and restructures of Non-Control/Non-Affiliate investments occurred during the six months ended March 31, 2012:

 

   

KMBQ Corporation – In November 2011, we invested $1.6 million in Ohana Media Group (“Ohana”) to facilitate its purchase of certain of KMBQ Corporation’s (“KMBQ”) assets out of receivership. In connection with this transaction, we received net proceeds of $1.2 million and recorded a realized loss during the three months ended December 31, 2011 totaling $1.0 million. Ohana replaced KMBQ on our Condensed Consolidated Schedule of Investments as a Non-Control/Non-Affiliate investment at December 31, 2011.

 

   

Newhall Holdings, Inc. – In December 2011, we sold our investments in Newhall Holdings, Inc. (“Newhall”) for net proceeds of $3.3 million, which resulted in a realized loss of $7.4 million recorded in the three months ended December 31, 2011.

Control Investments

As of March 31, 2012 and September 30, 2011, we held nine Control investments in the aggregate fair value of $41.9 million and $45.6 million, respectively. During the six months ended March 31, 2012, five Control investments made draws on their lines of credit, totaling $4.6 million. We did not exit any Control investments during the six months ended March 31, 2012. The following restructures of Control investments occurred during the six months ended March 31, 2012:

 

   

Sunshine Media Holdings - Effective October 1, 2011, we restructured Sunshine Media Holdings (“Sunshine”) by reducing the interest rates on its line of credit, senior term debt and LOT senior term debt to preserve capital at the portfolio company to further enable Sunshine to invest in new and existing initiatives. In addition, we funded $1.6 million through additional preferred equity investments and $2.1 million through additional line of credit draws to Sunshine for the six months ended March 31, 2012. We placed our investment in Sunshine’s LOT senior term debt on non-accrual status effective January 1, 2012.

 

   

Viapack, Inc. - Effective January 1, 2012, we restructured our investment in Viapack, Inc. (“Viapack”), by reducing the interest rates on its line of credit, senior real estate term debt and senior term debt to preserve capital at the portfolio company to enable it to invest in existing initiatives. In addition, we funded $1.8 million to Viapack through additional draws on its line of credit for the six months ended March 31, 2012. We placed our investment in Viapack’s LOT senior term debt on non-accrual status effective January 1, 2012.

 

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Investment Concentrations

As of March 31, 2012, our investment portfolio consisted of loans to 55 companies located in 26 states across 23 different industries with an aggregate fair value of $288.2 million. As of March 31, 2012, there were 24 syndicated investments totaling $96.7 million at cost and $96.8 million at fair value, or 25.9% and 33.6% of the total aggregate portfolio, respectively.

The following table outlines our investments by security type as of March 31, 2012 and September 30, 2011:

 

     March 31, 2012     September 30, 2011  
     Cost     Fair Value     Cost     Fair Value  

Senior term debt

   $ 249,904         67.0   $ 180,000         62.5   $ 266,491         69.6   $ 200,145         66.1

Senior subordinated term debt

     112,272         30.1        95,697         33.2        107,140         28.0        92,148         30.4   

Common equity/equivalents

     6,264         1.7        11,875         4.1        7,999         2.1        10,088         3.3   

Preferred equity

     4,520         1.2        595         0.2        1,185         0.3        566         0.2   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total investments

   $ 372,960         100.0   $ 288,167         100.0   $ 382,815         100.0   $ 302,947         100.0
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Investments at fair value consisted of the following industry classifications at March 31, 2012 and September 30, 2011:

 

     March 31, 2012     September 30, 2011  

Industry Classification

   Fair Value      Percentage
of Total
Investments
    Fair Value      Percentage
of Total
Investments
 

Electronics

   $ 53,484         18.6   $ 45,752         15.1

Mining, steel, iron & non-precious metals

     32,063         11.1        33,734         11.1   

Healthcare, education & childcare

     30,034         10.4        34,106         11.3   

Automobile

     26,725         9.3        25,768         8.5   

Broadcast (TV & radio)

     20,420         7.1        28,194         9.3   

Retail stores

     19,340         6.7        19,340         6.4   

Aerospace & defense

     15,212         5.3        10,003         3.3   

Printing & publishing

     12,923         4.5        17,623         5.8   

Textiles & leather

     9,801         3.4        9,626         3.2   

Personal & non-durable consumer products

     8,582         3.0        6,962         2.3   

Personal, food and miscellaneous services