XNAS:GLAD Gladstone Capital Corp Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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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 JUNE 30, 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 July 31, 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 June 30, 2012 and September 30, 2011      3   
  Condensed Consolidated Statements of Operations for the three and nine months ended June 30, 2012 and 2011      4   
  Condensed Consolidated Statements of Changes in Net Assets for the nine months ended June 30, 2012 and 2011      5   
  Condensed Consolidated Statements of Cash Flows for the nine months ended June 30, 2012 and 2011      6   
  Condensed Consolidated Schedules of Investments as of June 30, 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      35   
  Overview      35   
  Results of Operations      38   
  Liquidity and Capital Resources      48   

Item 3.

  Quantitative and Qualitative Disclosures About Market Risk      59   

Item 4.

  Controls and Procedures      59   

PART II.

  OTHER INFORMATION   

Item 1.

  Legal Proceedings      60   

Item 1A.

  Risk Factors      60   

Item 2.

  Unregistered Sales of Equity Securities and Use of Proceeds      60   

Item 3.

  Defaults Upon Senior Securities      60   

Item 4.

  Mine Safety Disclosures      60   

Item 5.

  Other Information      60   

Item 6.

  Exhibits      60   

SIGNATURES

     61   

 

2


Table of Contents

GLADSTONE CAPITAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES

(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

(UNAUDITED)

 

     June 30,
2012
    September 30,
2011
 

ASSETS

    

Investments at fair value

    

Non-Control/Non-Affiliate investments (Cost of $293,579 and $288,266, respectively)

   $ 260,757      $ 257,302   

Control investments (Cost of $100,923 and $94,549, respectively)

     37,830        45,645   
  

 

 

   

 

 

 

Total investments at fair value (Cost of $394,502 and $382,815, respectively)

     298,587        302,947   

Cash

     9,327        6,732   

Restricted cash

     1,175        —     

Interest receivable – investments in debt securities

     2,871        3,066   

Interest receivable – employees(A)

     62        —     

Due from custodian

     5,410        2,547   

Deferred financing fees

     3,212        650   

Other assets

     1,062        1,682   
  

 

 

   

 

 

 

TOTAL ASSETS

   $ 321,706      $ 317,624   
  

 

 

   

 

 

 

LIABILITIES

    

Borrowings at fair value (Cost of $87,300 and $99,400, respectively)

   $ 91,777      $ 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 June 30, 2012 and September 30, 2011, respectively

     38,497        —     

Accounts payable and accrued expenses

     339        513   

Interest payable

     225        289   

Fees due to Adviser(A)

     1,726        1,760   

Fee due to Administrator(A)

     175        194   

Other liabilities

     1,954        1,135   
  

 

 

   

 

 

 

TOTAL LIABILITIES

   $ 134,693      $ 103,903   
  

 

 

   

 

 

 

Commitments and contingencies(B)

    

NET ASSETS

   $ 187,013      $ 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 June 30, 2012 and September 30, 2011, respectively

   $ 21      $ 21   

Capital in excess of par value

     326,580        326,913   

Notes receivable from employees(A)

     (3,519     (3,858

Cumulative net unrealized depreciation of investments

     (95,915     (79,867

Cumulative net unrealized appreciation of borrowings

     (4,477     (612

Net investment income in excess of distributions

     108        108   

Accumulated net realized losses

     (35,785     (28,984
  

 

 

   

 

 

 

TOTAL NET ASSETS

   $ 187,013      $ 213,721   
  

 

 

   

 

 

 

NET ASSET VALUE PER COMMON SHARE AT END OF PERIOD

   $ 8.91      $ 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 PER SHARE AMOUNTS)

(UNAUDITED)

 

     Three Months Ended June 30,     Nine Months Ended June 30,  
     2012     2011     2012     2011  

INVESTMENT INCOME

        

Interest income

        

Non-Control/Non-Affiliate investments

   $ 8,093      $ 7,028      $ 23,822      $ 19,722   

Control investments

     827        1,406        3,236        3,604   

Cash

     1        —          7        1   

Notes receivable from employees(A)

     62        102        192        346   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income

     8,983        8,536        27,257        23,673   

Other income

        

Non-Control/Non-Affiliate investments

     978        444        3,020        1,089   

Control investments

     —          —          —          625   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other income

     978        444        3,020        1,714   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total investment income

     9,961        8,980        30,277        25,387   
  

 

 

   

 

 

   

 

 

   

 

 

 

EXPENSES

        

Base management fee(A)

     1,561        1,451        4,655        4,164   

Incentive fee(A)

     1,217        1,133        3,556        3,395   

Administration fee(A)

     175        174        579        535   

Interest expense on borrowings

     1,167        958        3,305        1,316   

Dividend expense on mandatorily redeemable preferred stock

     686        —          1,806        —     

Amortization of deferred financing fees

     252        368        987        1,032   

Professional fees

     135        360        790        894   

Other general and administrative expenses

     281        196        1,054        799   
  

 

 

   

 

 

   

 

 

   

 

 

 

Expenses before credits from Adviser

     5,474        4,640        16,732        12,135   

Credits to fees from Adviser(A)

     (382     (194     (956     (348
  

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses net of credits

     5,092        4,446        15,776        11,787   
  

 

 

   

 

 

   

 

 

   

 

 

 

NET INVESTMENT INCOME

     4,869        4,534        14,501        13,600   
  

 

 

   

 

 

   

 

 

   

 

 

 

REALIZED AND UNREALIZED GAIN (LOSS)

        

Net realized gain (loss):

        

Non-Control/Non-Affiliate investments

     150        —          (8,062     161   

Control investments

     —          (2     —          (158
  

 

 

   

 

 

   

 

 

   

 

 

 

Total net realized gain (loss)

     150        (2     (8,062     3   

Net unrealized (depreciation) appreciation:

        

Non-Control/Non-Affiliate investments

     (5,128     (13,706     (1,862     (21,768

Control investments

     (5,994     (5,083     (14,186     (13,035

Borrowings

     (4,477     (53     (3,865     640   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net unrealized depreciation

     (15,599     (18,842     (19,913     (34,163
  

 

 

   

 

 

   

 

 

   

 

 

 

Net realized and unrealized loss

     (15,449     (18,844     (27,975     (34,160
  

 

 

   

 

 

   

 

 

   

 

 

 

NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS

   $ (10,580   $ (14,310   $ (13,474   $ (20,560
  

 

 

   

 

 

   

 

 

   

 

 

 

NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS PER COMMON SHARE

        

Basic and Diluted

   $ (0.50   $ (0.68   $ (0.64   $ (0.98
  

 

 

   

 

 

   

 

 

   

 

 

 

WEIGHTED AVERAGE SHARES OF COMMON STOCK OUTSTANDING

        

Basic and Diluted

     21,000,160        21,039,242        21,014,805        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)

 

     Nine Months Ended June 30,  
     2012     2011  

OPERATIONS:

    

Net investment income

   $ 14,501      $ 13,600   

Net realized (loss) gain on investments

     (8,062     3   

Net unrealized depreciation of investments

     (16,048     (34,803

Net unrealized (appreciation) depreciation of borrowings

     (3,865     640   
  

 

 

   

 

 

 

Net decrease in net assets resulting from operations

     (13,474     (20,560
  

 

 

   

 

 

 

DISTRIBUTIONS:

    

Distributions to common stockholders

     (13,240     (13,255
  

 

 

   

 

 

 

CAPITAL TRANSACTIONS:

    

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

     (332     —     

Repayment of principal on employee notes(A)

     338        2,105   
  

 

 

   

 

 

 

Net increase in net assets from capital transactions

     6        2,105   
  

 

 

   

 

 

 

Total decrease in net assets

     (26,708     (31,710

NET ASSETS AT BEGINNING OF PERIOD

     213,721        249,246   
  

 

 

   

 

 

 

NET ASSETS AT END OF PERIOD

   $ 187,013      $ 217,536   
  

 

 

   

 

 

 

 

(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)

(UNAUDITED)

 

     Nine Months Ended June 30,  
     2012     2011  

CASH FLOWS FROM OPERATING ACTIVITIES

    

Net decrease in net assets resulting from operations

   $ (13,474   $ (20,560

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

    

Purchase of investments

     (66,254     (118,646

Principal repayments on investments

     39,980        39,855   

Proceeds from sale of investments

     6,459        777   

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

     —          (12

Increase in investment balance due to transferred interest

     —          (204

Net change in premiums, discounts and amortization

     (115     1,420   

Net realized loss (gain) on investments

     8,242        (163

Net unrealized depreciation of investments

     16,048        34,803   

Net unrealized appreciation (depreciation) of borrowings

     3,865        (640

Increase in restricted cash

     (1,175     —     

Amortization of deferred financing fees

     987        1,032   

Decrease in interest receivable

     133        36   

Increase in due from custodian

     (2,863     (1,667

Decrease (increase) in other assets

     620        (42

Decrease in accounts payable and accrued expenses

     (175     (151

Decrease in interest payable

     (64     (430

(Decrease) increase in fees due to Adviser(A)

     (19     1,118   

Decrease in fee due to Administrator(A)

     (34     (93

Increase in other liabilities

     819        118   
  

 

 

   

 

 

 

Net cash used in operating activities

     (7,020     (63,449
  

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES

    

Proceeds from borrowings

     69,900        109,800   

Repayments on borrowings

     (82,000     (34,400

Proceeds from issuance of mandatorily redeemable preferred stock

     38,497        —     

Deferred financing fees

     (3,548     (759

Distributions paid to common stockholders

     (13,240     (13,255

Receipt of principal on employee notes

     6        2,105   
  

 

 

   

 

 

 

Net cash provided by financing activities

     9,615        63,491   
  

 

 

   

 

 

 

NET INCREASE IN CASH

     2,595        42   

CASH, BEGINNING OF PERIOD

     6,732        7,734   
  

 

 

   

 

 

 

CASH, END OF PERIOD

   $ 9,327      $ 7,776   
  

 

 

   

 

 

 

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 JUNE 30, 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)     8,014        8,018        7,453   

BAS Broadcasting

  Service-radio station operator   Senior Term Debt (11.5%, Due 7/2013) (D)     7,465        7,465        2,240   

Chinese Yellow Pages Company

  Service-publisher of Chinese language directories  

Line of Credit, $0 available (7.3%,

Due 11/2012) (D)

    450        450        225   
    Senior Term Debt
(7.3%, Due 11/2012) (D)
    33        33        17   
       

 

 

   

 

 

 
          483        242   

CMI Acquisition, LLC

  Service-recycling   Senior Subordinated Term Debt (14.0%,
Due 12/2016) (D)
    14,265        14,265        13,552   

FedCap Partners, LLC

  Private equity fund   Class A Membership Units (80 units) (G)       1,200        2,163   
    Uncalled Capital Commitment ($800)      

Francis Drilling Fluids, Ltd.

  Service—oil and natural gas drilling logistics network provider   Senior Subordinated Term Debt (12.0%, Due 11/2017) (I)     15,000        15,000        15,000   
    Common Stock Warrants (4.2% ownership) (G) (I)       1,000        1,000   
       

 

 

   

 

 

 
          16,000        16,000   

GFRC Holdings, LLC

  Manufacturing-glass-fiber reinforced concrete   Senior Term Debt (11.5%, Due 12/2013) (D)     5,224        5,224        2,612   
    Senior Subordinated Term Debt (14.0%,
Due 12/2013) (D)
    6,598        6,598        3,299   
       

 

 

   

 

 

 
          11,822        5,911   

Heartland Communications Group

  Service-radio station operator   Line of Credit, $0 available (5.0%, Due 3/2013) (D)     100        100        33   
    Line of Credit, $55 available (10.0%, Due 3/2013) (D)     45        45        15   
    Senior Term Debt (5.0%, Due 3/2013) (D)     4,343        4,329        1,411   
    Common Stock Warrants (8.8% ownership) (F) (G)       66        —     
       

 

 

   

 

 

 
          4,540        1,459   

International Junior Golf Training Acquisition Company

  Service-golf training  

Line of Credit, $200 available (11.0%,

Due 5/2014) (D)

    2,025        2,025        1,215   
    Senior Term Debt (10.5%, Due 5/2014) (D)     561        561        337   
    Senior Term Debt (12.5%, Due 5/2014) (C)(D)     2,500        2,500        1,500   
       

 

 

   

 

 

 
          5,086        3,052   

Legend Communications of Wyoming, LLC

  Service-operator of radio stations   Senior Term Debt (12.0%, Due 6/2013) (D)     8,932        8,932        4,466   

North American Aircraft Services, LLC

  Service—repairs and maintains aircraft fuel tanks and fuel systems  

Line of Credit, $500 available (6.5%,

Due 8/2012) (D)

    1,500        1,500        1,478   
    Senior Term Debt (7.5%,
Due 8/2016) (D)
    4,516        4,516        4,448   
    Senior Subordinated Term Debt (11.8%, Due 8/2016) (D)     4,750        4,750        4,679   
    Senior Subordinated Term Debt (12.5%, Due 8/2016) (D)     2,820        2,820        2,778   
    Common Stock Warrants (4.6% ownership) (F) (G)       350        452   
       

 

 

   

 

 

 
          13,936        13,835   

Northstar Broadband, LLC

  Service-cable TV franchise owner   Senior Term Debt (0.7%,
Due 12/2012) (D)
    35        31        30   

Ohana Media Group

  Service—AM/FM radio broadcast   Senior Term Debt (10.0%, Due 10/2016) (D)     1,590        1,590        1,423   

POP Radio, L.P.

  Service—advertiser-supported in-store radio network   Senior Term Debt (11.8%, Due 5/2017) (I)     11,500        11,500        11,500   
    Senior Subordinated Term Debt (11.0%, Due 11/2017) (I)     500        500        500   
       

 

 

   

 

 

 
          12,000        12,000   

Precision Acquisition Group Holdings, Inc.

  Manufacturing-consumable components for the Aluminum industry   Equipment Note (13.0%,
Due 3/2013) (D)
    1,000        1,000        820   
    Senior Term Debt (13.0%, Due 3/2013) (D)     4,125        4,125        3,383   
   

Senior Term Debt (13.0%,

Due 3/2013) (C) (D)

    4,053        4,053        3,323   
       

 

 

   

 

 

 
          9,178        7,526   

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)

    2,700        2,700        2,538   
       

 

 

   

 

 

 
          2,700        2,538   

Reliable Biopharmaceutical Holdings, Inc.

  Manufacturing-pharmaceutical and biochemical intermediates   Line of Credit, $1,100 available (9.0%,
Due 1/2013) (D)
    2,900        2,900        2,683   
    Mortgage Note (9.5%,
Due 12/2014) (D)
    7,098        7,098        6,566   
   

Senior Term Debt (12.0%,

Due 12/2014) (C) (D)

    11,482        11,482        10,621   
    Senior Subordinated Term Debt (12.5%,
Due 12/2014) (D)
    6,000        6,000        5,550   
    Common Stock Warrants (764 shares) (F) (G)       209        —     
       

 

 

   

 

 

 
          27,689        25,420   

 

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Table of Contents

GLADSTONE CAPITAL CORPORATION

CONDENSED CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

AS OF JUNE 30, 2012

(DOLLAR AMOUNTS IN THOUSANDS)

(UNAUDITED)

 

Company(A)

  

Industry

  

Investment(B)

   Principal      Cost      Fair Value  

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

  

Saunders & Associates    Manufacturing-equipment provider for frequency control devices    Line of Credit, $1,500 available (11.3%, Due 5/2013) (D)    $ —         $ —         $ —     
     

Senior Term Debt (11.3%,

Due 5/2013) (D)

     8,947         8,947         7,828   
           

 

 

    

 

 

 
              8,947         7,828   
Sunburst Media—Louisiana, LLC    Service-radio station operator    Senior Term Debt (10.5%, Due 11/2013) (D)      6,000         6,000         1,800   
Thibaut Acquisition Co.    Service-design and distribute wall Covering    Line of Credit, $450 available (9.0%, Due 1/2014) (D)      550         550         538   
     

Senior Term Debt (8.5%,

Due 1/2014) (D)

     156         156         153   
     

Senior Term Debt (12.0%,

Due 1/2014) (C) (D)

     3,000         3,000         2,917   
           

 

 

    

 

 

 
              3,706         3,608   
Westlake Hardware, Inc.    Retail-hardware and variety    Senior Subordinated Term Debt (12.3%, Due 1/2014) (D)      12,000         12,000         11,580   
      Senior Subordinated Term Debt (13.5%, Due 1/2014) (D)      8,000         8,000         7,680   
           

 

 

    

 

 

 
              20,000         19,260   
Westland Technologies, Inc.    Service-diversified conglomerate   

Senior Term Debt (7.5%,

Due 4/2016) (D)

     1,650         1,650         1,567   
     

Senior Term Debt (12.5%,

Due 4/2016) (D)

     4,000         4,000         3,800   
      Common Stock Warrants (77,287 shares) (F) (G)         350         260   
           

 

 

    

 

 

 
              6,000         5,627   
Winchester Electronics    Manufacturing-high bandwidth connectors and cables   

Senior Term Debt (6.5%,

Due 5/2013) (D) (J)

     1,250         1,250         1,250   
     

Senior Term Debt (7.0%,

Due 5/2013) (D) (J)

     1,665         1,665         1,665   
      Senior Subordinated Term Debt (13.5%, Due 6/2013) (D) (J)      9,725         9,725         9,725   
           

 

 

    

 

 

 
              12,640         12,640   
           

 

 

    

 

 

 
Subtotal —Non-syndicated loans             $ 203,131       $ 170,073   
           

 

 

    

 

 

 
Syndicated Loans:               
Airvana Network Solutions, Inc.    Service-telecommunications   

Senior Term Debt (10.0%,

Due 3/2015) (E)

   $ 2,143       $ 2,077       $ 2,078   
Allied Security Holdings, LLC    Service-contract security officer providers    Senior Subordinated Term Debt (8.5%, Due 2/2018) (E)      1,000         991         990   
Allied Specialty Vehicles, Inc.    Manufacturing-specialty vehicles   

Senior Term Debt (9.5%,

Due 2/2016) (E)

     9,875         9,719         9,677   
Ameriqual Group, LLC    Manufacturing-production and distribution of food products   

Senior Term Debt (9.0%,

Due 3/2016) (E)

     7,425         7,307         7,276   
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 (11.5%, Due 12/2017) (E)      1,000         974         997   
Autoparts Holdings Limited    Distributor—light and heavy-duty vehicle replacement parts   

Senior Term Debt (10.5%,

Due 1/2018) (E)

     1,000         996         870   
Blue Coat Systems, Inc.    Distributor—internet security and network acceleration appliances    Senior Subordinated Term Debt (11.5%, Due 8/2018) (E)      8,500         8,497         8,500   
HGI Holding, Inc    Service— distributor of disposable medical products   

Senior Term Debt (6.8%,

Due 10/2016) (E)

     1,566         1,538         1,566   
Hubbard Radio, LLC    Service-radio station operator    Senior Subordinated Term Debt (8.8%, Due 4/2018) (E)      500         496         499   
Keypoint Government Solutions, Inc.    Service-security consulting services   

Senior Term Debt (10.0%,

Due 12/2015) (E)

     6,380         6,354         6,284   
Mood Media Corporation    Service-media and marketing solutions   

Senior Term Debt (10.3%,

Due 11/2018) (E)

     8,000         7,928         7,760   
National Surgical Hospitals, Inc.    Service-physician-partnered surgical facilities   

Senior Term Debt (8.3%,

Due 2/2017) (E)

     1,682         1,649         1,631   
PLATO Learning, Inc.    Service—education based software provider    Senior Subordinated Term Debt (11.3%, Due 5/2019) (E)      5,000         4,901         4,900   
Sensus USA, Inc.    Service-provider of utility communication Services   

Senior Term Debt (8.5%,

Due 5/2018) (E)

     500         496         497   
Springs Window Fashions, LLC    Manufacturing-window coverings   

Senior Term Debt (11.3%,

Due 11/2017) (E)

     7,000         6,848         6,790   

 

8


Table of Contents

GLADSTONE CAPITAL CORPORATION

CONDENSED CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

AS OF JUNE 30, 2012

(DOLLAR AMOUNTS IN THOUSANDS)

(UNAUDITED)

 

Company(A)

  

Industry

  

Investment(B)

   Principal      Cost      Fair
Value
 

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

  

SRAM, LLC    Manufacturing-premium bicycle components   

Senior Term Debt (8.5%,

Due 12/2018) (E)

   $ 2,500       $ 2,478       $ 2,513   
Targus Group International, Inc.    Manufacturing-carrying cases and accessories for notebook computers   

Senior Term Debt (11.0%,

Due 5/2016) (E)

     9,900         9,735         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)

     1,888         1,856         1,892   
Vision Solutions, Inc.    Service-provider of information availability software   

Senior Term Debt (9.5%,

Due 7/2017) (E)

     11,000         10,923         10,890   
Wall Street Systems Holdings, Inc.    Service-software provider   

Senior Term Debt (9.0%,

Due 6/2018) (E)

     3,000         2,973         3,008   
WP Evenflo Group Holdings, Inc.    Manufacturing-infant and juvenile Products   

Senior Term Debt (8.0%,

Due 2/2013) (E)

     277         277         274   
     

Senior Preferred Equity

(333 shares) (F) (G)

        111         450   
     

Junior Preferred Equity

(111 shares) (F) (G)

        333         160   
      Common Stock (1,874 shares) (F) (G)         —           389   
           

 

 

    

 

 

 
              721         1,273   
           

 

 

    

 

 

 

Subtotal—Syndicated loans

            $ 90,448       $ 90,682   
           

 

 

    

 

 

 
Total Non-Control/Non-Affiliate Investments (represented 87.3% of total investments at fair value)       $ 293,579       $ 260,755   
           

 

 

    

 

 

 
CONTROL INVESTMENTS:               
BERTL, Inc.    Service-web-based evaluator of imaging products    Line of Credit, $150 available (6.5%, Due 7/2012)(F) (H)    $ 1,359       $ 1,359       $ —     
      Common Stock (100 shares) (F) (G)         424         —     
           

 

 

    

 

 

 
              1,783         —     
Defiance Integrated Technologies, Inc.    Manufacturing-trucking parts   

Senior Term Debt (11.0%,

Due 4/2013) (C) (F)

     7,265         7,265         7,265   
      Common Stock (15,500 shares) (F) (G)         1         7,099   
           

 

 

    

 

 

 
              7,266         14,364   
Kansas Cable Holdings, Inc.    Service - cable, internet, voice provider    Line of Credit, $155 available (10.0%, Due 10/2012) (D) (H)      820         811         4   
      Senior Term Debt (10.0%, Due 10/2012) (D) (H)      1,500         1,444         8   
      Senior Term Debt (10.0%, Due 10/2012) (D) (H)      1,039         1,000         5   
      Common Stock (100 shares) (F) (G)         —           —     
           

 

 

    

 

 

 
              3,255         17   
Lindmark Acquisition, LLC    Service-advertising    Senior Subordinated Term Debt (11.0%, Due 10/2012) (D) (H)      10,000         10,000         1,000   
      Senior Subordinated Term Debt (13.0%, Due 10/2012) (D) (H)      2,000         2,000         200   
      Senior Subordinated Term Debt (13.0%, Due Upon Demand) (D) (H)      1,909         1,909         191   
      Common Stock (100 shares) (F) (G)         317         —     
           

 

 

    

 

 

 
              14,226         1,391   
LocalTel, LLC    Service-yellow pages publishing    Line of credit, $435 available (10.0%, Due 6/2013) (F) (H)      2,415         2,415         559   
      Line of Credit, $1,830 available (4.7%, Due 6/2013) (F) (H)      1,170         1,170         —     
     

Senior Term Debt (12.5%,

Due 6/2013) (F) (H)

     325         325         —     
     

Senior Term Debt (8.5%,

Due 6/2013) (F) (H)

     2,688         2,687         —     
     

Senior Term Debt (10.5%,

Due 6/2013) (C) (F) (H)

     2,750         2,750         —     
     

Common Stock Warrants

(4,000 shares) (F) (G)

        —           —     
           

 

 

    

 

 

 
              9,347         559   
Midwest Metal Distribution, Inc.    Distribution-aluminum sheets and stainless steel    Senior Subordinated Term Debt (12.0%, Due 7/2013) (D)      18,281         18,269         17,595   
      Common Stock (501 shares) (F) (G)         138         —     
           

 

 

    

 

 

 
              18,407         17,595   
Sunshine Media Holdings    Service-publisher regional B2B trade magazines    Line of credit, $351 available (4.8%, Due 8/2014) (D) (H)      1,649         1,649         165   
     

Senior Term Debt (4.8%,

Due 5/2016) (D) (H)

     16,948         16,948         1,695   
     

Senior Term Debt (5.5%,

Due 5/2016) (C) (D) (H)

     10,700         10,700         1,070   
      Junior Preferred Equity (14,2573 shares) (F) (G)         5,275         —     
      Common Stock (934 shares) (F) (G)         740         —     
           

 

 

    

 

 

 
              35,312         2,930   
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         —     

 

9


Table of Contents

GLADSTONE CAPITAL CORPORATION

CONDENSED CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

AS OF JUNE 30, 2012

(DOLLAR AMOUNTS IN THOUSANDS)

(UNAUDITED)

 

Company(A)

  

Industry

  

Investment(B)

   Principal      Cost      Fair Value  

CONTROL INVESTMENTS (Continued):

           
Viapack, Inc.    Manufacturing-polyethylene film    Line of Credit, $187 available (6.5%, Due 3/2013) (D)    $ 3,613       $ 3,613       $ 433   
      Senior Real Estate Term Debt (5.0%, Due 3/2014) (D)      600         600         72   
     

Senior Term Debt (6.2%,

Due 3/2014) (C) (D) (H)

     3,925         3,925         471   
      Preferred Equity (100 shares) (F) (G)         —           —     
      Guarantee ($300)         
           

 

 

    

 

 

 
              8,138         976   
           

 

 

    

 

 

 

Total Control Investments (represented 12.7% of total investments at fair value)

  

   $ 100,923       $ 37,832   
           

 

 

    

 

 

 

Total Investments

            $ 394,502       $ 298,587   
           

 

 

    

 

 

 

 

(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 June 30, 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 June 30, 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) 

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

(J) 

Security was paid off, at par, subsequent to June 30, 2012, and was valued based on the payoff.

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

            $ 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.

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)

JUNE 30, 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. We also seek to provide our stockholders with long-term capital growth through the appreciation in the value of warrants or other equity instruments that we may receive when we make loans.

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 nine months ended June 30, 2012 are not necessarily indicative of results that ultimately may be achieved for the year. The interim financial statements and notes thereto should be read in conjunction with the financial statements and notes thereto included in our annual report on Form 10-K for the fiscal year ended 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 nine month periods ended June 30, 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, our Adviser has established an investment valuation policy (the “Policy”). The Policy has been approved by our Board of Directors, and each quarter our Board of Directors reviews whether our Adviser has applied the Policy consistently and votes whether to accept the recommended valuation of our investment portfolio. Such determination of fair values may involve subjective judgments and estimates.

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. As of June 30, 2012 and September 30, 2011, we did not have any investments in publicly traded securities.

Securities for which a limited market exists: We value securities that are not traded on an established secondary securities market, but for which a limited market for the security exists, such as certain participations in, or assignments of, syndicated loans, at the quoted bid price, which are non-binding. In valuing these assets, we assess trading activity in 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, including but not limited to reviewing a range of indicative bids to the extent the Adviser has ready access to such qualified information.

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

 

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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 June 30, 2012, eight portfolio companies were either fully or partially on non-accrual with an aggregate debt cost basis of $62.4 million, or 16.3% of the cost basis of all debt investments in our portfolio, and an aggregate fair value of $5.3 million, or 1.9% 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 June 30, 2012 and September 30, 2011, we had 25 and 27 original issue discount (“OID”) loans, respectively, primarily from the syndicated loans in our portfolio. We recorded OID income of $0.1 million and $0.3 million for the three and nine months ended June 30, 2012, respectively, as compared to $64 and $117 for the three and nine months ended June 30, 2011, respectively. The unamortized balance of OID investments as of June 30, 2012 and September 30, 2011 totaled $1.3 million and $1.5 million, respectively.

As of June 30, 2012, we had one investment that bore PIK interest and as of 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 $6 of PIK income during the three and nine months ended June 30, 2012, as compared to $4 and $12 for the three and nine months ended June 30, 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 nine months ended June 30, 2012. We transferred past due interest to the principal balance of $0 and $0.2 million for the three and nine months ended June 30, 2011, respectively.

Other Income Recognition

We generally record success fees upon receipt of cash. Success fees are contractually due upon a change of control in a portfolio company and are recorded in other income in our accompanying Condensed Consolidated Statements of Operations. We recorded $2.8 million of success fess during the nine months ended June 30, 2012, which resulted mainly from our exits of Global Materials Technologies, Inc, RCS Management Holding Co, and Northern Contours, Inc. We recorded $0.6 million of success fees during the nine months ended June 30, 2011, which resulted from our exits of Pinnacle Treatment Centers, Inc. and Interfilm Holdings, Inc.

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;

 

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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 nine months ended June 30, 2012 and 2011, there were no transfers in or out of Level 1, 2 and 3.

The following table presents the investments carried at fair value as of June 30, 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)
 
     June 30, 2012      September 30, 2011  

Non-Control/Non-Affiliate Investments

     

Senior term debt

   $ 164,662       $ 182,002   

Senior subordinated term debt

     91,218         72,182   

Preferred equity

     609         566   

Common equity/equivalents

     4,266         2,552   
  

 

 

    

 

 

 

Total Non-Control/Non-Affiliate Investments

   $ 260,755       $ 257,302   
  

 

 

    

 

 

 

Control Investments

     

Senior term debt

   $ 11,746       $ 18,143   

Senior subordinated term debt

     18,987         19,966   

Common equity/equivalents

     7,099         7,536   
  

 

 

    

 

 

 

Total Control Investments

   $ 37,832       $ 45,645   
  

 

 

    

 

 

 

Total Investments at Fair Value

   $ 298,587       $ 302,947   
  

 

 

    

 

 

 

 

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In accordance with ASU 2011-04, which was effective for us beginning January 1, 2012, the following table provides quantitative information about our Level 3 fair value measurements of our investments as of June 30, 2012. In addition to the techniques and inputs noted in the table below, according to our valuation policy, we may also use other valuation techniques and methodologies when determining our fair value measurements. The below table is not intended to be all-inclusive, but rather provides information on the significant Level 3 inputs as they relate to our fair value measurements. The weighted average calculations in the table below are based on the principal balances for all debt related calculations and on the cost basis for all equity related calculations for the particular input.

 

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

Methodologies
  Unobservable Input  

Range /Weighted Average

Non-syndicated debt only investments

   $ 105,567 (A)    SPSE (B)   EBITDA (C)

Risk Ratings (D)

 

($310) - $15,332 / $5,168

2.0 - 10.0 / 6.0

Syndicated debt only investments

     89,412      Market Quotes   IBP (E)   87.0% - 100.5% / 98.4%

Bundled debt and equity investments

     101,445      SPSE (B)   EBITDA (C)

Risk Ratings (D)

 

($1,141) - $4,840 / $2,383

3.0 - 7.0 / 4.9

     TEV   EBITDA multiples  (C)

EBITDA  (C)

 

4.5 - 9.5 / 5.7

($1,141) - $13,166 / $6,705

Other investments

     2,163         
  

 

 

       

Total Fair Value for Level 3 Investments

   $ 298,587         
  

 

 

       

 

(A)

Includes a new non-syndicated debt only investment which was valued at cost, as it was determined that the price paid during the three months ended June 30, 2012, best represents fair value as of June 30, 2012.

(B) 

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

(C) 

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

(D) 

As part of our valuation procedures, we risk rate all of our investments in debt securities. We use 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.

(E) 

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.

Portfolio company’s EBITDA and EBITDA multiples are the significant unobservable inputs generally included in our internally assessed TEV models used to value our proprietary debt and equity investments. Holding all other factors constant, increases (decreases) in the EBITDA and/or the EBITDA multiples inputs would result in a higher (lower) fair value measurement. Per our valuation policy, 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 nine-month periods ended June 30, 2012 and 2011 for all investments for which we determine fair value using unobservable (Level 3) factors. When a determination is made to classify a financial instrument within Level 3 of the valuation hierarchy, such determination is based upon the significance of the unobservable factors to the overall fair value measurement. However, Level 3 financial instruments typically include, in addition to the unobservable, or Level 3, inputs, observable inputs (that is, components that are actively quoted and can be validated to external sources). In these cases, we categorize all of the inputs as the lowest level input within the hierarchy. Accordingly, the gains and losses in the tables below include changes in fair value, due in part to observable factors that are part of the valuation methodology.

 

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Fair Value Measurements Using Significant Unobservable Inputs (Level 3)

Periods ended June 30, 2012:

 

Three months ended June 30, 2012:    Senior
Term
Debt
    Senior
Subordinated
Term Debt
    Preferred
Equity
    Common
Equity/
Equivalents
    Total  

Fair value as of March 31, 2012

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

Total gains or losses

          

Net realized gain (a)

     87        34        —          —          121   

Net unrealized depreciation (b)

     (6,411     (2,003     (1,186     (1,510     (11,110

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

     (108     96        —          —          (12

New investments, repayments and settlements (c)

          

Issuances/originations

     13,945        20,500        1,200        1,000        36,645   

Settlements/repayments

     (11,105     (4,119     —          —          (15,224
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Fair value as of June 30, 2012

   $ 176,408      $ 110,205      $ 609      $ 11,365      $ 298,587   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

Nine months ended June 30, 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) gain (a)

     (8,276     34        —          —           (8,242

Net unrealized (depreciation) appreciation (b)

     (21,539     (4,032     (2,758     277         (28,052

Reversal of prior period net depreciation on
realization
(b)

     11,463        541        —          —           12,004   

New investments, repayments and settlements (c)

           

Issuances/originations

     30,633        31,820        2,801        1,000         66,254   

Settlements/repayments

     (29,559     (10,306     —          —           (39,865

Sales

     (6,459     —          —          —           (6,459
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Fair value as of June 30, 2012

   $ 176,408      $ 110,205      $ 609      $ 11,365       $ 298,587   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Periods ended June 30, 2011:

 

Three months ended June 30, 2011:    Senior
Term
Debt
    Senior
Subordinated
Term Debt
    Preferred
Equity
     Common
Equity/
Equivalents
    Total  

Fair value as of March 31, 2011

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

Total gains or losses

           

Net unrealized (depreciation) appreciation (b)

     (16,849     (1,053     14         (901     (18,789

New investments, repayments and settlements (c)

           

Issuances/originations

     52,691        12,785        —           750        66,226   

Settlements/repayments

     (5,163     (108     —           —          (5,271
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Fair value as of June 30, 2011

   $ 204,281      $ 88,223      $ 551       $ 6,224      $ 299,279   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

 

Nine months ended June 30, 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)

     (34,067     (2,892     (210     2,073        (35,096

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

     (191     731        —          (247     293   

New investments, repayments and settlements (c)

          

Issuances/originations

     99,633        15,907        375        2,947        118,862   

Settlements/repayments

     (33,867     (7,408     —          —          (41,275

Sales

     —          —          —          (777     (777
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Fair value as of June 30, 2011

   $ 204,281      $ 88,223      $ 551      $ 6,224      $ 299,279   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(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 nine months ended June 30, 2012 and 2011.

 

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(b) 

Included in net unrealized (depreciation) appreciation on Non-Control/Non-Affiliate and Control investments on our accompanying Condensed Consolidated Statements of Operations for the three and nine months ended June 30, 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-Syndicated Investments

As of June 30, 2012 and September 30, 2011, we held 33 and 35 non-syndicated investments with an aggregate fair value of $207.9 million and $212.3 million, respectively. During the nine months ended June 30, 2012, we added three new non-syndicated investments, with an aggregate fair value of $29.4 million at June 30, 2012, we sold two non-syndicated investments for combined gross proceeds of $6.5 million and three non-syndicated investments paid off early, for which we received aggregate principal payments of $12.9 million. Additionally, during the nine months ended June 30, 2012, we funded $19.2 million to existing non-syndicated portfolio companies through revolver draws, add-on investments, or new securities, while scheduled and unscheduled principal payments totaled $22.6 from existing non-syndicated portfolio companies . The following significant non-syndicated investment transactions occurred during the nine months ended June 30, 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 $2.8 million through additional preferred equity investments and $3.6 million through additional line of credit draws to Sunshine for the nine months ended June 30, 2012. We placed our investment in Sunshine’s LOT senior term debt on non-accrual status effective January 1, 2012 and the remaining senior term debt and revolver investments on non-accrual status effective April 1, 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.

 

   

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 $2.1 million to Viapack through additional draws on its line of credit for the nine months ended June 30, 2012. We placed our investment in Viapack’s LOT senior term debt on non-accrual status effective January 1, 2012.

 

   

Francis Drilling Fluids, Ltd.—In May 2012, we invested $16.0 million in Francis Drilling Fluids, Ltd. (“Francis”) through a combination of debt and equity. Francis, headquartered in Crowley, Louisiana, is a logistics network provider of warehousing, transportation and energy field services for oil and natural gas drilling to oilfields and exploration and production customers.

 

   

POP Radio, L.P. —In May 2012, we invested $12.0 million in POP Radio, L.P. (“POP”) through senior and senior subordinated term debt. POP, headquartered in Salt Lake City, Utah, is an advertiser-supported in-store radio network provider to retailers.

Syndicated Investments

We had a total of 22 and 24 syndicate loans with an aggregate fair value of $90.7 million as of June 30, 2012 and September 30, 2011, respectively. During the nine months ended June 30, 2012, we had four early payoffs of syndicated investments for a combined total of $10.3 million and added two new syndicated investments for a combined total of $15.5 million. In addition, we had one add-on investment to an existing syndicate investment during the nine months ended June 30, 2012 for $2.0 million.

 

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Investment Concentrations

As of June 30, 2012, our investment portfolio consisted of loans to 55 companies located in 28 states across 21 different industries with an aggregate fair value of $298.6 million. As of June 30, 2012, there were 22 syndicated investments totaling $90.4 million at cost and $90.7 million at fair value, or 22.9% and 30.4% of the total aggregate portfolio, respectively.

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

 

     June 30, 2012     September 30, 2011  
     Cost     Fair Value     Cost     Fair Value  

Senior term debt

   $ 252,831         64.1   $ 176,408         59.1   $ 266,491         69.6    $ 200,145         66.1

Senior subordinated term debt

     128,688         32.6        110,205         36.9        107,140         28.0        92,148         30.4   

Common equity/equivalents

     11,799         3.0        11,365         3.8        7,999         2.1        10,088         3.3   

Preferred equity

     1,184         0.3        609         0.2        1,185         0.3        566         0.2   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total Investments

   $ 394,502         100.0   $ 298,587         100.0   $ 382,815         100.0   $ 302,947         100.0
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

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

 

     June 30, 2012     September 30, 2011  

Industry Classification

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

Electronics

   $ 53,661         18.0   $ 45,752         15.1

Healthcare, education & childcare

     32,948         11.0        34,106         11.3   

Mining, steel, iron & non-precious metals

     31,147         10.4        33,734         11.1   

Broadcast (TV & radio)

     25,323         8.5        22,146         7.3   

Automobile

     24,911         8.3        25,768         8.5   

Retail stores

     19,260         6.5        19,340         6.4   

Oil and Gas

     17,892         6.0        1,916         0.6   

Aerospace & defense

     15,998         5.4        10,003         3.3   

Printing & publishing

     11,183         3.7        17,623         5.8   

Textiles & leather

     9,801         3.3        9,626         3.2   

Personal & non-durable consumer products

     8,356         2.8        6,962         2.3   

Machinery

     7,526         2.5        8,696         2.9   

Beverage, food & tobacco

     7,276         2.4        7,332         2.4   

Personal, food and miscellaneous services

     7,275         2.4        7,635         2.5   

Diversified/conglomerate manufacturing

     6,901         2.3        8,790         2.9   

Buildings & real estate

     5,911         2.0        10,275         3.4   

Leisure, amusement, movies & entertainment

     5,564         1.9        6,607         2.2   

Home & office furnishings

     3,608         1.2        9,715         3.2   

Telecommunications

     2,079         0.7        7,842         2.6   

Other (A)

     1,967         0.7        2,215         0.7   

Diversified/conglomerate service

     —           —          3,810         1.3   

Diversified natural resources, precious metals & minerals

     —           —          3,054         1.0   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total Investments

   $ 298,587         100.0   $ 302,947         100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

 

(A)

No individual industry within this category exceeds 1%.

The investments at fair value were included in the following geographic regions of the U.S. at June 30, 2012 and September 30, 2011:

 

     June 30, 2012     September 30, 2011  

Geographic Region

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

Midwest

   $ 128,409         43.0   $ 144,292         47.6

West

     80,766         27.0        70,862         23.4   

South

     57,900         19.4        52,265         17.3   

Northeast

     23,752         8.0        28,158         9.3   

Other—non U.S.

     7,760         2.6        7,370         2.4   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total Investments

   $ 298,587         100.0   $ 302,947         100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

 

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Table of Contents

The geographic region reflects the location of the headquarters of our portfolio companies. A portfolio company may have a number of other business locations in other geographic regions.

Investment Principal Repayments

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

 

         Amount  

For the remaining three months ending September 30:

 

2012

   $ 13,819   

For the fiscal year ending
September 30:

 

2013

     116,114   
 

2014

     57,649   
 

2015

     28,538   
 

2016

     75,452   
 

Thereafter

     91,207   
    

 

 

 
 

Total contractual repayments

   $ 382,779   
 

Investments in equity securities

     12,983   
 

Adjustments to cost basis on debt securities

     (1,260
    

 

 

 
 

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

   $ 394,502   
    

 

 

 

Receivables from Portfolio Companies

Receivables from portfolio companies represent non-recurring costs that we incurred on behalf of portfolio companies and are included in other assets on our accompanying Condensed Consolidated Statements of Assets and Liabilities. We maintain an allowance for uncollectible receivables from portfolio companies, which is determined based on historical experience and management’s expectations of future losses. We charge the accounts receivable to the established provision when collection efforts have been exhausted and the receivables are deemed uncollectible. As of June 30, 2012 and September 30, 2011, we had gross receivables from portfolio companies of $0.7 million and $0.8 million, respectively. The allowance for uncollectible receivables was $0.4 million as of June 30, 2012 and September 30, 2011. In addition, we recorded an allowance for uncollectible interest receivable of $21and $65 as of June 30, 2012 and September 30, 2011, respectively.

NOTE 4. RELATED PARTY TRANSACTIONS

Loans to Former Employees

We have outstanding loans to certain employees of the Adviser, each of whom was a joint employee of the Adviser (or our previous adviser, Gladstone Capital Advisers, Inc.) and us at the time the loans were originally provided. The loans were extended to such employees to allow them to exercise options granted under the Amended and Restated 2001 Equity Incentive Plan, which has since been terminated. The loans require the quarterly payment of interest at the market rate in effect at the date of issuance, have varying terms not exceeding ten years and have been recorded as a reduction of net assets. The loans are evidenced by full recourse notes that are due upon maturity or 60 days following termination of employment, and the shares of common stock purchased with the proceeds of the loans are posted as collateral. We received $0.3 million and $2.1 million of principal repayments during the nine months ended June 30, 2012 and 2011, respectively. Additionally, one employee redeemed 39,082 common shares (20,000 in December 2011 and 19,082 in January 2012) to pay off $0.3 million of principal on his outstanding loans during the six months ended March 31, 2012. There were no redemptions of common shares held by employees during the quarter ended June 30, 2012. We recognized interest income from all employee loans of $62 and $0.2 million for the three and nine months ended June 30, 2012, respectively, and $0.1 million and $0.3 million for the three and nine months ended June 30, 2011, respectively. Refer to Note 7–Common Stock for additional information related to these transactions.

Investment Advisory and Management Agreement

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

 

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Table of Contents

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

 

     Three Months Ended June 30,     Nine Months Ended June 30  
     2012     2011     2012     2011  

Average total assets subject to base management fee

   $ 312,200      $ 290,200      $ 310,300      $ 277,600   

Multiplied by prorated annual base management fee of 2.0%

     0.5     0.5     1.5