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 SEPTEMBER 30, 2012
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
COMMISSION FILE NUMBER: 000-51233
GLADSTONE INVESTMENT CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE | 83-0423116 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
1521 WESTBRANCH DRIVE, SUITE 200
MCLEAN, VIRGINIA 22102
(Address of principal executive office)
(703) 287-5800
(Registrants 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 issuers classes of common stock, as of the latest practicable date. The number of shares of the issuers Common Stock, $0.001 par value per share, outstanding as of October 26, 2012, was 26,080,133.
GLADSTONE INVESTMENT CORPORATION
TABLE OF CONTENTS
PART I. |
FINANCIAL INFORMATION: |
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Item 1. |
Financial Statements (Unaudited) |
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3 | ||||||
4 | ||||||
5 | ||||||
Condensed Consolidated Statements of Cash Flows for the six months ended September 30, 2012 and 2011 |
6 | |||||
Condensed Consolidated Schedules of Investments as of September 30, 2012 and March 31, 2012 |
7 | |||||
12 | ||||||
Item 2. |
Managements Discussion and Analysis of Financial Condition and Results of Operations |
30 | ||||
30 | ||||||
35 | ||||||
45 | ||||||
Item 3. |
53 | |||||
Item 4. |
54 | |||||
PART II. |
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Item 1. |
54 | |||||
Item 1A. |
54 | |||||
Item 2. |
54 | |||||
Item 3. |
54 | |||||
Item 4. |
54 | |||||
Item 5. |
54 | |||||
Item 6. |
54 | |||||
55 |
2
GLADSTONE INVESTMENT CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
September 30, 2012 |
March 31, 2012 |
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ASSETS |
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Investments at fair value |
||||||||
Control investments (Cost of $245,475 and $186,743, respectively) |
$ | 208,922 | $ | 157,544 | ||||
Affiliate investments (Cost of $61,473 and $70,015, respectively) |
48,715 | 58,831 | ||||||
Non-Control/Non-Affiliate investments (Cost of $10,083 and $9,637, respectively) |
9,049 | 9,277 | ||||||
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|
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Total investments at fair value (Cost of $317,031 and $266,395, respectively) |
266,686 | 225,652 | ||||||
Cash and cash equivalents |
92,940 | 91,546 | ||||||
Restricted cash |
1,041 | 1,928 | ||||||
Interest receivable |
1,295 | 1,250 | ||||||
Due from custodian |
8,152 | 1,527 | ||||||
Deferred financing costs |
2,411 | 2,792 | ||||||
Other assets |
1,007 | 602 | ||||||
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|
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TOTAL ASSETS |
$ | 373,532 | $ | 325,297 | ||||
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|
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LIABILITIES |
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Borrowings: |
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Short-term loan at fair value (Cost of $71,525 and $76,005, respectively) |
$ | 71,525 | $ | 76,005 | ||||
Line of credit at fair value (Cost of $56,000 and $0, respectively) |
57,209 | | ||||||
Secured borrowing (Cost of $5,000 and $0, respectively) |
5,000 | | ||||||
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|
|
|
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Total borrowings (Cost of $132,525 and $76,005, respectively) |
133,734 | 76,005 | ||||||
Mandatorily redeemable preferred stock, $0.001 par value per share, $25 liquidation preference per share; 1,610,000 shares authorized, 1,600,000 shares issued and outstanding at September 30 and March 31, 2012 |
40,000 | 40,000 | ||||||
Accounts payable and accrued expenses |
1,311 | 506 | ||||||
Fees due to Adviser(A) |
595 | 496 | ||||||
Fee due to Administrator(A) |
189 | 218 | ||||||
Other liabilities |
480 | 856 | ||||||
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|
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TOTAL LIABILITIES |
176,309 | 118,081 | ||||||
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Commitments and contingencies(B) |
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NET ASSETS |
$ | 197,223 | $ | 207,216 | ||||
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ANALYSIS OF NET ASSETS |
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Common stock, $0.001 par value per share, 100,000,000 shares authorized and 22,080,133 shares issued and outstanding at September 30 and March 31, 2012 |
$ | 22 | $ | 22 | ||||
Capital in excess of par value |
257,131 | 257,131 | ||||||
Cumulative net unrealized depreciation of investments |
(50,345 | ) | (40,743 | ) | ||||
Cumulative net unrealized depreciation of other |
(1,236 | ) | (68 | ) | ||||
Net investment income in excess of distributions |
321 | 321 | ||||||
Accumulated net realized loss |
(8,670 | ) | (9,447 | ) | ||||
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|
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TOTAL NET ASSETS |
$ | 197,223 | $ | 207,216 | ||||
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NET ASSET VALUE PER COMMON SHARE AT END OF PERIOD |
$ | 8.93 | $ | 9.38 | ||||
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|
(A) | Refer to Note 4Related Party Transactions for additional information. |
(B) | Refer to Note 11Commitments and Contingencies for additional information. |
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
3
GLADSTONE INVESTMENT CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
Three Months Ended September 30, |
Six Months Ended September 30, |
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2012 | 2011 | 2012 | 2011 | |||||||||||||
INVESTMENT INCOME |
||||||||||||||||
Interest income |
||||||||||||||||
Control investments |
$ | 4,548 | $ | 2,926 | $ | 7,977 | $ | 5,560 | ||||||||
Affiliate investments |
1,573 | 1,363 | 3,344 | 2,732 | ||||||||||||
Non-Control/Non-Affiliate investments |
339 | 401 | 647 | 806 | ||||||||||||
Cash and cash equivalents |
1 | 2 | 3 | 6 | ||||||||||||
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|
|
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|
|
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Total interest income |
6,461 | 4,692 | 11,971 | 9,104 | ||||||||||||
Other income |
||||||||||||||||
Control investments |
112 | 341 | 506 | 1,176 | ||||||||||||
Affiliate investments |
401 | | 401 | | ||||||||||||
Non-Control/Non-Affiliate investments |
| 1 | | 17 | ||||||||||||
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|
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Total other income |
513 | 342 | 907 | 1,193 | ||||||||||||
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|
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Total investment income |
6,974 | 5,034 | 12,878 | 10,297 | ||||||||||||
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EXPENSES |
||||||||||||||||
Base management fee(A) |
1,308 | 1,063 | 2,499 | 2,071 | ||||||||||||
Incentive fee(A) |
541 | | 541 | 19 | ||||||||||||
Administration fee(A) |
189 | 135 | 372 | 286 | ||||||||||||
Interest expense on borrowings |
484 | 233 | 576 | 365 | ||||||||||||
Dividends on mandatorily redeemable preferred stock |
713 | | 1,425 | | ||||||||||||
Amortization of deferred financing fees |
203 | 108 | 403 | 215 | ||||||||||||
Professional fees |
177 | 105 | 371 | 315 | ||||||||||||
Other general and administrative expenses |
423 | 592 | 702 | 942 | ||||||||||||
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Expenses before credits from Adviser |
4,038 | 2,236 | 6,889 | 4,213 | ||||||||||||
Credits to fees(A) |
(515 | ) | (511 | ) | (700 | ) | (726 | ) | ||||||||
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Total expenses net of credits to fees |
3,523 | 1,725 | 6,189 | 3,487 | ||||||||||||
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NET INVESTMENT INCOME |
3,451 | 3,309 | 6,689 | 6,810 | ||||||||||||
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REALIZED AND UNREALIZED GAIN (LOSS) |
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Net realized gain (loss): |
||||||||||||||||
Control investments |
798 | (543 | ) | 753 | 5,192 | |||||||||||
Non-Control/Non-Affiliate investments |
| (1 | ) | | 4 | |||||||||||
Other |
| | (41 | ) | (39 | ) | ||||||||||
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|
|
|
|
|
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|
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Total net realized gain (loss) |
798 | (544 | ) | 712 | 5,157 | |||||||||||
Net unrealized (depreciation) appreciation: |
||||||||||||||||
Control investments |
(9,708 | ) | 8,886 | (7,354 | ) | 935 | ||||||||||
Affiliate investments |
6,139 | 1,662 | (1,573 | ) | 3,740 | |||||||||||
Non-Control/Non-Affiliate investments |
(315 | ) | (211 | ) | (674 | ) | 609 | |||||||||
Other |
(718 | ) | (407 | ) | (1,169 | ) | (368 | ) | ||||||||
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|
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Total net unrealized (depreciation) appreciation |
(4,602 | ) | 9,930 | (10,770 | ) | 4,916 | ||||||||||
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|
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Net realized and unrealized (loss) gain |
(3,804 | ) | 9,386 | (10,058 | ) | 10,073 | ||||||||||
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NET (DECREASE) INCREASE IN NET ASSETS RESULTING FROM OPERATIONS |
$ | (353 | ) | $ | 12,695 | $ | (3,369 | ) | $ | 16,883 | ||||||
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NET (DECREASE) INCREASE IN NET ASSETS RESULTING FROM OPERATIONS PER COMMON SHARE |
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Basic and diluted |
$ | (0.02 | ) | $ | 0.57 | $ | (0.15 | ) | $ | 0.76 | ||||||
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WEIGHTED AVERAGE SHARES OF COMMON STOCK OUTSTANDING: |
||||||||||||||||
Basic and diluted |
22,080,133 | 22,080,133 | 22,080,133 | 22,080,133 |
(A) | Refer to Note 4Related Party Transactions for additional information. |
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
4
GLADSTONE INVESTMENT CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS
(IN THOUSANDS)
(UNAUDITED)
Six Months Ended September 30, |
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2012 | 2011 | |||||||
Operations: |
||||||||
Net investment income |
$ | 6,689 | $ | 6,810 | ||||
Net realized gain on investments |
753 | 5,196 | ||||||
Net realized loss on other |
(41 | ) | (39 | ) | ||||
Net unrealized (depreciation) appreciation of investments |
(9,601 | ) | 5,284 | |||||
Net unrealized depreciation of other |
(1,169 | ) | (368 | ) | ||||
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|
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Net (decrease) increase in net assets from operations |
(3,369 | ) | 16,883 | |||||
Distributions to common stockholders: |
(6,624 | ) | (6,293 | ) | ||||
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|
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Total (decrease) increase in net assets |
(9,993 | ) | 10,590 | |||||
Net assets at beginning of period |
207,216 | 198,829 | ||||||
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|
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Net assets at end of period |
$ | 197,223 | $ | 209,419 | ||||
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|
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
5
GLADSTONE INVESTMENT CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
Six Months Ended September 30, |
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2012 | 2011 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES |
||||||||
Net (decrease) increase in net assets resulting from operations |
$ | (3,369 | ) | $ | 16,883 | |||
Adjustments to reconcile net (decrease) increase in net assets resulting from operations to net cash used in operating activities: |
||||||||
Purchase of investments |
(63,263 | ) | (67,378 | ) | ||||
Principal repayments of investments |
12,090 | 5,560 | ||||||
Proceeds from the sale of investments |
1,291 | 7,527 | ||||||
Net realized gain on investments |
(753 | ) | (5,196 | ) | ||||
Net realized loss on other |
41 | 39 | ||||||
Net unrealized depreciation (appreciation) of investments |
9,601 | (5,284 | ) | |||||
Net unrealized depreciation of other |
1,169 | 368 | ||||||
Amortization of deferred financing costs |
403 | 215 | ||||||
Decrease in restricted cash |
887 | 3,113 | ||||||
Increase in interest receivable |
(45 | ) | (628 | ) | ||||
(Increase) decrease in due from custodian |
(6,625 | ) | 134 | |||||
Increase in other assets |
(406 | ) | (86 | ) | ||||
Increase in accounts payable and accrued expenses |
912 | 675 | ||||||
Increase (decrease) in fees due to Adviser(A) |
99 | (458 | ) | |||||
Decrease in administration fee payable to Administrator(A) |
(29 | ) | (36 | ) | ||||
Decrease in other liabilities |
(376 | ) | (425 | ) | ||||
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|
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Net cash used in operating activities |
(48,373 | ) | (44,977 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES |
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Proceeds from borrowings |
243,535 | 124,001 | ||||||
Repayments on borrowings |
(187,015 | ) | (80,500 | ) | ||||
Deferred financing costs |
(129 | ) | (107 | ) | ||||
Distributions paid to common stockholders |
(6,624 | ) | (6,293 | ) | ||||
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Net cash provided by financing activities |
49,767 | 37,101 | ||||||
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NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS |
1,394 | (7,876 | ) | |||||
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD |
91,546 | 80,580 | ||||||
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CASH AND CASH EQUIVALENTS, END OF PERIOD |
$ | 92,940 | $ | 72,704 | ||||
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(A) | Refer to Note 4Related Party Transactions for additional information. |
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
6
GLADSTONE INVESTMENT CORPORATION
CONDENSED CONSOLIDATED SCHEDULE OF INVESTMENTS
SEPTEMBER 30, 2012
(DOLLAR AMOUNTS IN THOUSANDS)
(UNAUDITED)
Company(A) |
Industry |
Investment(B) |
Principal | Cost | Fair Value | |||||||||||
CONTROL INVESTMENTS: |
||||||||||||||||
Acme Cryogenics, Inc. |
Machinary |
Senior Subordinated Term Debt (11.5%, Due 3/2015) |
$ | 14,500 | $ | 14,500 | $ | 14,500 | ||||||||
Preferred Stock (898,814 shares)(C)(F) |
6,984 | 11,480 | ||||||||||||||
Common Stock (418,072 shares)(C)(F) |
1,045 | 194 | ||||||||||||||
Common Stock Warrants (452,683 shares)(C)(F) |
25 | 41 | ||||||||||||||
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|
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22,554 | 26,215 | |||||||||||||||
ASH Holdings Corp. |
Automobile |
Revolving Credit Facility, $350 available (3.0%, Due 3/2013)(G) |
7,150 | 7,093 | | |||||||||||
Senior Subordinated Term Debt (2.0%, Due 3/2013)(G) |
6,250 | 6,050 | | |||||||||||||
Preferred Stock (4,644 |
2,500 | | ||||||||||||||
Common Stock (1 share)(C)(F) |
| | ||||||||||||||
Common Stock Warrants (73,599 shares)(C)(F) |
4 | | ||||||||||||||
Guarantee ($500) |
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15,647 | | |||||||||||||||
Country Club Enterprises, LLC |
Automobile |
Senior Subordinated Term Debt (14.0%, Due |
4,000 | 4,000 | 4,000 | |||||||||||
Preferred Stock (7,304,792 shares)(C)(F) |
7,725 | 2,926 | ||||||||||||||
Guarantee ($2,000) |
||||||||||||||||
Guarantee ($1,437) |
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|
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11,725 | 6,926 | |||||||||||||||
Danco Acquisition Corp.(I) |
Diversified/Conglomerate Manufacturing |
Revolving Credit Facility, $0 available (10.0%, Due |
2,250 | 2,250 | 900 | |||||||||||
Senior Term Debt (10.0%, Due 4/2013)(D) |
2,575 | 2,575 | 1,030 | |||||||||||||
Senior Term Debt (6.3%, Due 4/2013)(D) |
8,795 | 8,795 | 3,518 | |||||||||||||
Senior Term Debt (5.0%, Due 8/2015)(D) |
700 | 700 | 245 | |||||||||||||
Senior Term Debt (5.0%, Due 8/2015)(D)(E) |
350 | 350 | 123 | |||||||||||||
Preferred Stock (25 |
2,500 | | ||||||||||||||
Common Stock Warrants (1,170 shares)(C)(F) |
3 | | ||||||||||||||
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|
|||||||||||||
17,173 | 5,816 | |||||||||||||||
Drew Foam Companies, inc. |
Chemicals, Plastics and Rubber |
Senior Subordinated Term Debt (13.5%, Due |
10,913 | 10,913 | 10,913 | |||||||||||
Preferred Stock (51,421 shares)(C)(F)(H) |
5,142 | 5,142 | ||||||||||||||
Common Stock (8,184 |
96 | 96 | ||||||||||||||
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|
|||||||||||||
16,151 | 16,151 | |||||||||||||||
Galaxy Tool Holding Corp. |
Aerospace and Defense |
Senior Subordinated Term Debt (13.5%, Due 8/2013) |
3,220 | 3,220 | 3,220 | |||||||||||
Preferred Stock (4,111,907 shares)(C)(F) |
19,658 | 6,090 | ||||||||||||||
Common Stock (48,093 shares)(C)(F) |
48 | | ||||||||||||||
|
|
|
|
|||||||||||||
22,926 | 9,310 | |||||||||||||||
Ginsey Holdings, Inc. |
Home and Office Furnishings, Housewares and Durable |
Senior Subordinated Term Debt (13.5%, Due |
13,050 | 13,050 | 13,050 | |||||||||||
Consumer Products |
Preferred Stock (18,898 shares)(C)(F)(H) |
9,394 | 9,394 | |||||||||||||
Common Stock (63,747 shares)(C)(F)(H) |
8 | 8 | ||||||||||||||
|
|
|
|
|||||||||||||
22,452 | 22,452 | |||||||||||||||
Mathey Investments, Inc. |
Machinary |
Senior Term Debt (10.0%, Due 3/2014) |
1,375 | 1,375 | 1,375 | |||||||||||
Senior Term Debt (12.0%, Due 3/2014) |
3,727 | 3,727 | 3,727 | |||||||||||||
Senior Term Debt (12.5%, Due 3/2014)(E) |
3,500 | 3,500 | 3,500 | |||||||||||||
Common Stock (29,102 shares)(C)(F) |
777 | 5,170 | ||||||||||||||
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|
|
|
|||||||||||||
9,379 | 13,772 | |||||||||||||||
Mitchell Rubber Products, Inc. |
Chemicals, Plastics and Rubber |
Subordinated Term Debt (13.0%, Due 10/2016)(D) |
13,560 | 13,560 | 13,526 | |||||||||||
Preferred Stock (27,900 shares)(C)(F) |
2,790 | 3,044 | ||||||||||||||
Common Stock (27,900 shares)(C)(F) |
28 | 820 | ||||||||||||||
|
|
|
|
|||||||||||||
16,378 | 17,390 | |||||||||||||||
Precision Southeast, Inc. |
Containers, Packaging and Glass |
Senior Term Debt (14.0%, Due 12/2015) |
7,775 | 7,775 | 7,775 | |||||||||||
Preferred Stock (19,091 shares)(C)(F) |
1,909 | 2,187 | ||||||||||||||
Common Stock (90,909 shares)(C)(F) |
91 | 354 | ||||||||||||||
|
|
|
|
|||||||||||||
9,775 | 10,316 | |||||||||||||||
SBS, Industries, LLC |
Machinary |
Senior Term Debt (14.0%, Due 8/2016) |
11,355 | 11,355 | 11,355 | |||||||||||
Preferred Stock (19,935 shares)(C)(F) |
1,994 | 2,167 | ||||||||||||||
Common Stock (221,500 shares)(C)(F) |
221 | 4,705 | ||||||||||||||
|
|
|
|
|||||||||||||
13,570 | 18,227 |
7
GLADSTONE INVESTMENT CORPORATION
CONDENSED CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)
SEPTEMBER 30, 2012
(DOLLAR AMOUNTS IN THOUSANDS)
(UNAUDITED)
Company(A) |
Industry |
Investment(B) |
Principal | Cost | Fair Value | |||||||||||
CONTROL INVESTMENTS (Continued): |
||||||||||||||||
SOG Specialty K&T, LLC |
Leisure, Amusement, Motion |
Senior Term Debt (13.3%, Due 8/2016) |
$ | 6,200 | $ | 6,200 | $ | 6,200 | ||||||||
Pictures, Entertainment |
Senior Term Debt (14.8%, Due 8/2016) |
12,199 | 12,199 | 12,199 | ||||||||||||
Preferred Stock (9,749 shares)(C)(F) |
9,749 | 11,332 | ||||||||||||||
|
|
|
|
|||||||||||||
28,148 | 29,731 | |||||||||||||||
Tread Corp. |
Oil and Gas |
Senior Subordinated Term Debt (12.5%, |
7,750 | 7,750 | 7,169 | |||||||||||
Senior Subordinated Term Debt (12.5%, |
3,010 | 3,010 | 2,784 | |||||||||||||
Preferred Stock (3,332,765 |
3,333 | | ||||||||||||||
Common Stock (7,716,320 shares)(C)(F) |
501 | | ||||||||||||||
Common Stock Warrants (2,372,727 |
3 | | ||||||||||||||
|
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|
|
|||||||||||||
14,597 | 9,953 | |||||||||||||||
Venyu Solutions, Inc. |
Electronics |
Senior Subordinated Term Debt (11.3%, |
7,000 | 7,000 | 7,000 | |||||||||||
Senior Subordinated Term Debt (14.0%, |
12,000 | 12,000 | 12,000 | |||||||||||||
Preferred Stock (5,400 shares)(C)(F) |
6,000 | 3,663 | ||||||||||||||
|
|
|
|
|||||||||||||
25,000 | 22,663 | |||||||||||||||
Total Control Investments (represents 78.3% of total investments at fair value) |
$ | 245,475 | $ | 208,922 | ||||||||||||
|
|
|
|
|||||||||||||
AFFILIATE INVESTMENTS: |
||||||||||||||||
Cavert II Holding Corp. |
Containers, Packaging and Glass |
Senior Subordinated Term Debt (11.8%, Due 4/2016)(D) |
$ | 4,700 | $ | 4,700 | $ | 4,788 | ||||||||
Subordinated Term Debt (13.0%, Due 4/2016)(D) |
4,671 | 4,671 | 4,764 | |||||||||||||
Preferred Stock (18,446 shares)(C)(F) |
1,844 | 2,699 | ||||||||||||||
|
|
|
|
|||||||||||||
11,215 | 12,251 | |||||||||||||||
Channel Technologies Group, LLC |
Diversified/Conglomerate Manufacturing |
Revolving Credit Facility, $850 available (7.0%, Due 12/2012)(D) |
400 | 400 | 398 | |||||||||||
Senior Term Debt (8.3%, Due 12/2014)(D) |
5,853 | 5,853 | 5,824 | |||||||||||||
Senior Term Debt (12.3%, Due 12/2016)(D) |
10,750 | 10,750 | 10,696 | |||||||||||||
Preferred Stock (1,599 shares)(C)(F) |
1,599 | 517 | ||||||||||||||
Common Stock (1,598,616 shares)(C)(F) |
| | ||||||||||||||
|
|
|
|
|||||||||||||
18,602 | 17,435 | |||||||||||||||
Noble Logistics, Inc. |
Cargo Transport |
Revolving Credit Facility, $0 available (10.5%, Due 1/2013)(D) |
800 | 800 | 440 | |||||||||||
Senior Term Debt (11.0%, Due 1/2013)(D) |
7,227 | 7,227 | 3,975 | |||||||||||||
Senior Term Debt (10.5%, Due 1/2013)(D) |
3,650 | 3,650 | 2,008 | |||||||||||||
Senior Term Debt (10.5%, Due 1/2013)(D)(E) |
3,650 | 3,650 | 2,007 | |||||||||||||
Preferred Stock (1,075,000 shares)(C)(F) |
1,750 | | ||||||||||||||
Common Stock (1,682,444 shares)(C)(F) |
1,682 | | ||||||||||||||
|
|
|
|
|||||||||||||
18,759 | 8,430 | |||||||||||||||
Packerland Whey Products, Inc. |
Beverage, Food and Tobacco |
Subordinated Term Debt (13.8%, Due 6/2018) (D) |
7,000 | 7,000 | 6,939 | |||||||||||
Preferred Stock (248 |
2,479 | 1,071 | ||||||||||||||
Common Stock (247 |
21 | | ||||||||||||||
|
|
|
|
|||||||||||||
9,500 | 8,010 | |||||||||||||||
Quench Holdings Corp. |
Home and Office Furnishings, |
Preferred Stock (388 |
2,950 | 2,589 | ||||||||||||
Housewares and Durable Consumer |
Common Stock (35,242 shares)(C)(F) |
447 | | |||||||||||||
|
|
|
|
|||||||||||||
Consumer Products |
3,397 | 2,589 | ||||||||||||||
|
|
|
|
|||||||||||||
Total Affiliate Investments (represents 18.3% of total investments at fair value) |
$ | 61,473 | $ | 48,715 | ||||||||||||
|
|
|
|
|||||||||||||
NON-CONTROL/NON-AFFILIATE INVESTMENTS: |
||||||||||||||||
B-Dry, LLC |
Buildings and Real Estate |
Revolving Credit Facility, $250 available (6.5%, |
$ | 500 | $ | 500 | $ | 462 | ||||||||
Senior Term Debt (14.0%, Due 5/2014)(D) |
6,443 | 6,443 | 5,960 | |||||||||||||
Senior Term Debt (14.0%, Due 5/2014)(D) |
2,840 | 2,840 | 2,627 | |||||||||||||
Common Stock Warrants (55 shares)(C)(F) |
300 | | ||||||||||||||
|
|
|
|
|||||||||||||
10,083 | 9,049 | |||||||||||||||
|
|
|
|
|||||||||||||
Total Non-Control/Non-Affiliate Investments (represents 3.4% of total investments at fair value) |
$ | 10,083 | $ | 9,049 | ||||||||||||
|
|
|
|
|||||||||||||
TOTAL INVESTMENTS |
$ | 317,031 | $ | 266,686 | ||||||||||||
|
|
|
|
8
GLADSTONE INVESTMENT CORPORATION
CONDENSED CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)
SEPTEMBER 30, 2012
(DOLLAR AMOUNTS IN THOUSANDS)
(UNAUDITED)
(A) | Certain of the securities listed above are issued by affiliate(s) of the indicated portfolio company. |
(B) | Percentages represent the weighted average cash interest rates in effect at September 30, 2012, and due date represents the contractual maturity date. If applicable, paid in kind (PIK) interest rates are noted separately from the cash interest rates. |
(C) | Security is non-income producing. |
(D) | Fair value based primarily on opinions of value submitted by Standard & Poors Securities Evaluations, Inc. as of September 30, 2012. |
(E) | Last Out Tranche (LOT) of senior debt, meaning if the portfolio company is liquidated, the holder of the LOT is paid after the other senior debt but before the senior subordinated debt. |
(F) | Aggregates all shares of such class of stock owned without regard to specific series owned within such class (some series of which may or may not be voting shares) or aggregates all warrants to purchase shares of such class of stock owned without regard to specific series of such class of stock such warrants allow us to purchase. |
(G) | Debt security is on non-accrual status. |
(H) | New proprietary portfolio investment valued at cost, as it was determined that the price paid during the three months ended September 30, 2012, best represents fair value as of September 30, 2012. |
(I) | In August 2012, we received warrants in connection with our senior term note C debt investment in Danco, which resulted in Danco being reclassified as a Control investment during the three months ended September 30, 2012. |
(J) | $5.0 million of the debt security participated to a third party but accounted for as collateral for a secured borrowing for GAAP purposes. |
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
9
GLADSTONE INVESTMENT CORPORATION
CONDENSED CONSOLIDATED SCHEDULES OF INVESTMENTS
MARCH 31, 2012
(DOLLAR AMOUNTS IN THOUSANDS)
(UNAUDITED)
Company(A) |
Industry |
Investment(B) |
Principal | Cost | Fair Value | |||||||||||
CONTROL INVESTMENTS: |
||||||||||||||||
Acme Cryogenics, Inc. |
Machinery |
Senior Subordinated Term Debt (11.5%, Due 3/2015) |
$ | 14,500 | $ | 14,500 | $ | 14,500 | ||||||||
Preferred Stock (898,814 shares)(C)(F) |
6,984 | 10,994 | ||||||||||||||
Common Stock (418,072 shares)(C)(F) |
1,045 | 2,132 | ||||||||||||||
Common Stock Warrants (452,683 shares)(C)(F) |
25 | 675 | ||||||||||||||
|
|
|
|
|||||||||||||
22,554 | 28,301 | |||||||||||||||
ASH Holdings Corp. |
Automobile |
Revolving Credit Facility, $570 available (3.0%, Due 3/2013)(G) |
6,430 | 6,388 | | |||||||||||
Senior Subordinated Term Debt (2.0%, Due 3/2013)(G) |
6,250 | 6,060 | | |||||||||||||
Preferred Stock (4,644 |
2,500 | | ||||||||||||||
Common Stock (1 share)(C)(F) |
| | ||||||||||||||
Common Stock Warrants (73,599 shares)(C)(F) |
4 | | ||||||||||||||
Guarantee ($750) |
||||||||||||||||
|
|
|
|
|||||||||||||
14,952 | | |||||||||||||||
Country Club Enterprises, LLC |
Automobile |
Senior Subordinated Term Debt (14.0%, Due |
4,000 | 4,000 | | |||||||||||
Preferred Stock (7,304,792 shares)(C)(F) |
7,725 | | ||||||||||||||
Guarantee ($2,000) |
||||||||||||||||
Guarantee ($1,998) |
||||||||||||||||
|
|
|
|
|||||||||||||
11,725 | | |||||||||||||||
Galaxy Tool Holding Corp. |
Aerospace and Defense |
Senior Subordinated Term Debt (13.5%, Due 8/2013) |
5,220 | 5,220 | 5,220 | |||||||||||
Preferred Stock (4,111,907 shares)(C)(F) |
19,658 | 1,493 | ||||||||||||||
Common Stock (48,093 shares)(C)(F) |
48 | | ||||||||||||||
|
|
|
|
|||||||||||||
24,926 | 6,713 | |||||||||||||||
Mathey Investments, Inc. |
Machinery |
Senior Term Debt (10.0%, Due 3/2013) |
2,375 | 2,375 | 2,375 | |||||||||||
Senior Term Debt (12.0%, Due 3/2014) |
3,727 | 3,727 | 3,727 | |||||||||||||
Senior Term Debt (2.5%, Due 3/2014)(E) |
3,500 | 3,500 | 3,500 | |||||||||||||
Common Stock (29,102 shares)(C)(F) |
777 | 4,164 | ||||||||||||||
|
|
|
|
|||||||||||||
10,379 | 13,766 | |||||||||||||||
Mitchell Rubber Products, Inc. |
Chemicals, Plastics and Rubber |
Subordinated Term Debt (13.0%, Due 10/2016)(D) |
13,560 | 13,560 | 13,679 | |||||||||||
Preferred Stock (27,900 shares)(C)(F) |
2,790 | 2,954 | ||||||||||||||
Common Stock (27,900 shares)(C)(F) |
28 | 1,858 | ||||||||||||||
|
|
|
|
|||||||||||||
16,378 | 18,491 | |||||||||||||||
Precision Southeast, Inc. |
Containers, Packaging and Glass |
Revolving Credit Facility, $251 available (7.5%, Due 9/2012) |
749 | 749 | 749 | |||||||||||
Senior Term Debt (14.0%, Due 12/2015) |
7,775 | 7,775 | 7,775 | |||||||||||||
Preferred Stock (19,091 shares)(C)(F) |
1,909 | 1,634 | ||||||||||||||
Common Stock (90,909 shares)(C)(F) |
91 | | ||||||||||||||
|
|
|
|
|||||||||||||
10,524 | 10,158 | |||||||||||||||
SBS, Industries, LLC |
Machinery |
Senior Term Debt (14.0%, Due 8/2016) |
11,355 | 11,355 | 11,355 | |||||||||||
Preferred Stock (19,935 shares)(C)(F) |
1,994 | 2,087 | ||||||||||||||
Common Stock (221,500 shares)(C)(F) |
221 | 3,563 | ||||||||||||||
|
|
|
|
|||||||||||||
13,570 | 17,005 | |||||||||||||||
SOG Specialty K&T, LLC |
Leisure, Amusement, Motion |
Senior Term Debt (13.3%, Due 8/2016) |
6,200 | 6,200 | 6,200 | |||||||||||
Pictures, Entertainment |
Senior Term Debt (14.8%, Due 8/2016) |
12,199 | 12,199 | 12,199 | ||||||||||||
Preferred Stock (9,749 |
9,749 | 11,697 | ||||||||||||||
|
|
|
|
|||||||||||||
28,148 | 30,096 | |||||||||||||||
Tread Corp. |
Oil and Gas |
Senior Subordinated Term Debt (12.5%, Due 5/2013) |
7,750 | 7,750 | 7,750 | |||||||||||
Preferred Stock (832,765 shares)(C)(F) |
833 | 1,080 | ||||||||||||||
Common Stock (129,067 shares)(C)(F) |
1 | 96 | ||||||||||||||
Common Stock Warrants (1,247,727 shares)(C)(F) |
3 | 758 | ||||||||||||||
|
|
|
|
|||||||||||||
8,587 | 9,684 | |||||||||||||||
Venyu Solutions, Inc. |
Electronics |
Senior Subordinated Term Debt (11.3%, Due 10/2015) |
7,000 | 7,000 | 7,000 | |||||||||||
Senior Subordinated Term Debt (14.0%, Due 10/2015) |
12,000 | 12,000 | 12,000 | |||||||||||||
Preferred Stock (5,400 |
6,000 | 4,330 | ||||||||||||||
|
|
|
|
|||||||||||||
25,000 | 23,330 | |||||||||||||||
|
|
|
|
|||||||||||||
Total Control Investments (represents 69.8% of total investments at fair value) |
$ | 186,743 | $ | 157,544 | ||||||||||||
|
|
|
|
10
GLADSTONE INVESTMENT CORPORATION
CONDENSED CONSOLIDATED SCHEDULES OF INVESTMENTS (Continued)
MARCH 31, 2012
(DOLLAR AMOUNTS IN THOUSANDS)
(UNAUDITED)
Company(A) |
Industry |
Investment(B) |
Principal | Cost | Fair Value | |||||||||||
AFFILIATE INVESTMENTS: |
||||||||||||||||
Cavert II Holding Corp. |
Containers, Packaging and Glass |
Senior Term Debt (10.0%, Due 4/2016)(D)(E) |
$ | 1,050 | $ | 1,050 | $ | 1,067 | ||||||||
Senior Subordinated Term Debt (11.8%, Due 4/2016)(D) |
5,700 | 5,700 | 5,771 | |||||||||||||
Subordinated Term Debt (13.0%, Due 4/2016)(D) |
4,671 | 4,671 | 4,741 | |||||||||||||
Preferred Stock (18,446 shares)(C)(F) |
1,844 | 2,596 | ||||||||||||||
|
|
|
|
|||||||||||||
13,265 | 14,175 | |||||||||||||||
Channel Technologies Group, LLC |
Diversified/Conglomerate Manufacturing |
Revolving Credit Facility, $400 available (7.0%, Due 12/2012)(D) |
850 | 850 | 843 | |||||||||||
Senior Term Debt (8.3%, Due 12/2014)(D) |
5,926 | 5,926 | 5,875 | |||||||||||||
Senior Term Debt (12.3%, Due 12/2016)(D) |
10,750 | 10,750 | 10,642 | |||||||||||||
Preferred Stock (1,599 shares)(C)(F) |
1,599 | 1,631 | ||||||||||||||
Common Stock (1,598,616 shares)(C)(F) |
| 75 | ||||||||||||||
|
|
|
|
|||||||||||||
19,125 | 19,066 | |||||||||||||||
Danco Acquisition Corp. |
Diversified/Conglomerate Manufacturing |
Revolving Credit Facility, $450 available (10.0%, Due 10/2012)(D) |
1,800 | 1,800 | 1,350 | |||||||||||
Senior Term Debt (10.0%, Due 10/2012)(D) |
2,575 | 2,575 | 1,931 | |||||||||||||
Senior Term Debt (12.5%, Due 4/2013)(D)(E) |
8,891 | 8,891 | 6,669 | |||||||||||||
Preferred Stock (25 |
2,500 | | ||||||||||||||
Common Stock Warrants (420 shares)(C)(F) |
3 | | ||||||||||||||
|
|
|
|
|||||||||||||
15,769 | 9,950 | |||||||||||||||
Noble Logistics, Inc. |
Cargo Transport |
Revolving Credit Facility, $0 available (10.5%, Due 1/2013)(D) |
500 | 500 | 315 | |||||||||||
Senior Term Debt (11.0%, Due 1/2013)(D) |
7,227 | 7,227 | 4,553 | |||||||||||||
Senior Term Debt (10.5%, Due 1/2013)(D) |
3,650 | 3,650 | 2,300 | |||||||||||||
Senior Term Debt (10.5%, Due 1/2013)(D)(E) |
3,650 | 3,650 | 2,299 | |||||||||||||
Preferred Stock (1,075,000 shares)(C)(F) |
1,750 | 3,550 | ||||||||||||||
Common Stock (1,682,444 shares)(C)(F) |
1,682 | | ||||||||||||||
|
|
|
|
|||||||||||||
18,459 | 13,017 | |||||||||||||||
Quench Holdings Corp. |
Home and Office Furnishings, |
Preferred Stock (388 |
2,950 | 2,623 | ||||||||||||
Housewares and Durable |
Common Stock (35,242 shares)(C)(F) |
447 | | |||||||||||||
|
|
|
|
|||||||||||||
Consumer Products |
3,397 | 2,623 | ||||||||||||||
|
|
|
|
|||||||||||||
Total Affiliate Investments (represents 26.1% of total investments at fair value) |
$ | 70,015 | $ | 58,831 | ||||||||||||
|
|
|
|
|||||||||||||
NON-CONTROL/NON-AFFILIATE INVESTMENTS: |
||||||||||||||||
B-Dry, LLC |
Buildings and Real Estate |
Senior Term Debt (12.3%, Due 5/2014)(D) |
6,477 | 6,477 | 6,356 | |||||||||||
Senior Term Debt (12.3%, Due 5/2014)(D) |
2,860 | 2,860 | 2,806 | |||||||||||||
Common Stock Warrants (55 shares)(C)(F) |
300 | 115 | ||||||||||||||
|
|
|
|
|||||||||||||
9,637 | 9,277 | |||||||||||||||
|
|
|
|
|||||||||||||
Total Non-Control/Non-Affiliate Investments (represents 4.1% of total investments at fair value) |
$ | 9,637 | $ | 9,277 | ||||||||||||
|
|
|
|
|||||||||||||
TOTAL INVESTMENTS |
$ | 266,395 | $ | 225,652 | ||||||||||||
|
|
|
|
(A) | Certain of the securities listed above are issued by affiliate(s) of the indicated portfolio company. |
(B) | Percentages represent the weighted average interest rates in effect at March 31, 2012, and due date represents the contractual maturity date. If applicable, PIK interest rates are noted separately from the cash interest rates. |
(C) | Security is non-income producing. |
(D) | Fair value based primarily on opinions of value submitted by Standard & Poors Securities Evaluations, Inc. as of March 31, 2012. |
(E) | LOT of senior debt, meaning if the portfolio company is liquidated, the holder of the LOT is paid after the other senior debt but before the senior subordinated debt. |
(F) | Aggregates all shares of such class of stock owned without regard to specific series owned within such class (some series of which may or may not be voting shares) or aggregates all warrants to purchase shares of such class of stock owned without regard to specific series of such class of stock such warrants allow us to purchase. |
(G) | Debt security is on non-accrual status. |
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
11
GLADSTONE INVESTMENT CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2012
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA AND AS OTHERWISE INDICATED)
NOTE 1. ORGANIZATION
Gladstone Investment Corporation (Gladstone Investment) was incorporated under the General Corporation Law of the State of Delaware on February 18, 2005 and completed an initial public offering on June 22, 2005. The terms the Company, we, our and us all refer to Gladstone Investment and its consolidated subsidiaries. We are 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). We were established for the purpose of investing in debt and equity securities of established private businesses in the United States (U.S.). These investments primarily come in the form of senior debt securities, senior subordinated debt securities, junior subordinated debt securities, preferred stock, common stock and warrants to purchase common stock of small and medium-sized companies in connection with buyouts and other recapitalizations. To a much lesser extent, we also invest in senior and subordinated syndicated loans. Our investment objective is to generate both current income and capital gains through these debt and equity instruments.
Gladstone Business Investment, LLC (Business Investment), a wholly-owned subsidiary of ours, was established on August 11, 2006 for the sole purpose of owning our portfolio of investments in connection with our line of credit. The financial statements of Business Investment are consolidated with those of Gladstone Investment.
We are externally managed by Gladstone Management Corporation (the Adviser), an affiliate of ours.
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, we have omitted certain disclosures accompanying annual financial statements prepared in accordance with GAAP. The accompanying condensed consolidated financial statements include our accounts and those of our wholly-owned subsidiaries. All 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 American Institute of CPAs (AICPA) Audit and Accounting Guide for Investment Companies, we are not permitted to consolidate any portfolio company investments, including those in which we have a controlling interest. In our opinion, all adjustments, consisting solely of normal recurring accruals, necessary for the fair statement of financial statements for the interim periods have been included. The results of operations for the three and six months ended September 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 March 31, 2012, as filed with the Securities and Exchange Commission (the SEC) on May 21, 2012.
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 periods financial statements have been reclassified to conform to the presentation for the three and six months ended September 30, 2012, with no effect to net (decrease) increase in net assets resulting from operations.
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.
12
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. At September 30 and March 31, 2012, 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 the 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 price in the range of the indicative bid price (IBP) offered by the respective originating syndication agents 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 entitys 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 and 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 apply the DCF methodology in illiquid markets until quoted prices are available or are deemed reliable based on trading activity. At September 30 and March 31, 2012, we had no syndicated investments.
Securities for which no market exists: The valuation methodology for securities for which no market exists falls into four categories: (A) investments comprised solely of debt securities; (B) investments in controlled companies comprised of a bundle of securities, which can include debt and equity securities; (C) investments in non-controlled companies comprised of a bundle of investments, which can include debt and equity securities; and (D) investments comprised of non-publicly traded non-control equity securities of other funds.
(A) | 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 & Poors 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) | 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 issuers ability to make payments; |
13
| 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 issuers equity or equity-like securities. If, in the Advisers 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) | 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, 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) | 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. At September 30 and March 31, 2012, we had no non-control equity securities of other funds. |
Due to the uncertainty inherent in the valuation process, such estimates of fair value may differ significantly and materially from the values that would have been obtained had a ready market for the securities existed. Additionally, changes in the market environment and other events that may occur over the life of the investments may cause the gains or losses ultimately realized on these investments to be different than the valuations currently assigned. There is no single standard for determining fair value in good faith, as fair value depends upon circumstances of each individual case. In general, fair value is the amount that we might reasonably expect to receive upon the current sale of the security in an orderly transaction between market participants at the measurement date.
Refer to Note 3Investments 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 managements judgment. Generally, non-accrual loans are restored to accrual status when past-due principal and interest are paid and, in managements judgment, are likely to remain current, or due to a restructuring such that the interest income is deemed to be collectible. At September 30, 2012, loans to two portfolio companies, ASH Holdings Corp. (ASH) and Country Club Enterprises, LLC (CCE), were on non-accrual. These non-accrual loans had an aggregate cost value of $17.1 million, or 7.7% of the cost basis of debt investments in our portfolio, and an aggregate fair value of $4.0 million, or 2.1% of the fair value of all debt investments in our portfolio. At March 31, 2012, ASH and CCE were on non-accrual with an aggregate debt cost basis of $16.4 million, or 8.6% of the cost basis of debt investments in our portfolio, and an aggregate fair value of $0.
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We did not hold any loans in our portfolio that contained a PIK provision at September 30, 2012, and no PIK income was recorded during the three and six months ended September 30, 2012. During the three and six months ended September 30, 2011, we recorded PIK income of $1 and $6, respectively. PIK interest, computed at the contractual rate specified in the loan agreement, is added to the principal balance of the loan and recorded as interest income. To maintain our status as a RIC, this non-cash source of income must be included in our calculation of distributable income for purposes of complying with our distribution requirements, even though we have not yet collected the cash. The sole loan with a PIK provision was paid off, at par, during the quarter ended September 30, 2011.
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 $0.4 million and $0.8 million of success fees during the three and six months ended September 30, 2012, respectively, representing prepayments received from Mathey Investments, Inc. (Mathey) and Cavert II Holding Corp. (Cavert). During the three and six months ended September, 30, 2011, we recorded success fees of $0.3 million and $0.4 million, respectively, representing prepayments received from Mathey and Cavert. As of September 30, 2012, we have an off-balance sheet success fee receivable of approximately $11.0 million.
We accrue dividend income on preferred equity securities to the extent that such amounts are expected to be collected and if we have the option to collect such amounts in cash, and it is recorded in Other income in our accompanying Condensed Consolidated Statements of Operations. We recorded $0.1 million in dividend income during the three and six months ended September 30, 2012, on accrued preferred shares of Drew Foam Companies, Inc. (Drew Foam). We did not record any dividend income during the three months ended September 30, 2011; however, during the six months ended September 30, 2011, we recorded and collected $0.7 million of dividends on accrued preferred shares in connection with the recapitalization of Cavert.
Recent Accounting Pronouncements
In May 2011, the FASB issued 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 IFRSs, (ASU 2011-04) which results in a consistent definition of fair value and common requirements for measurement of and disclosure about fair value between GAAP and IFRS. ASU 2011-04 is effective for interim and annual periods beginning after December 15, 2011. The adoption of ASU 2011-04 did not have a significant impact on our financial position or results of operations.
NOTE 3. INVESTMENTS
ASC 820 defines fair value, establishes a framework for measuring fair value and expands disclosures about assets and liabilities measured at fair value. ASC 820 provides a consistent definition of fair value that focuses on exit price in the principal, or most advantageous, market and prioritizes, within a measurement of fair value, the use of market-based inputs over entity-specific inputs. ASC also establishes the following three-level hierarchy for fair value measurements based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date.
| Level 1 inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets; |
| Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active or inactive markets and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument. Level 2 inputs are in those markets for which there are few transactions, the prices are not current, little public information exists or instances where prices vary substantially over time or among brokered market makers; and |
| Level 3 inputs to the valuation methodology are unobservable and 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 three months ended September 30, 2012 and 2011, there were no transfers in or out of Level 1, 2 and 3.
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The following table presents the financial assets carried at fair value as of September 30 and March 31, 2012, by caption on our accompanying Condensed Consolidated Statements of Assets and Liabilities and by security type for each of the three applicable levels of hierarchy established by ASC 820 that we used to value our financial assets:
As of September 30, 2012 | As of March 31, 2012 | |||||||||||||||||||||||
Level 1 | Level 3 | Total Recurring Fair Value Measurement Reported in Condensed Consolidated Statements of Assets and Liabilities |
Level 1 | Level 3 | Total Recurring Fair Value Measurement Reported in Condensed Consolidated Statements of Assets and Liabilities |
|||||||||||||||||||
Control Investments |
||||||||||||||||||||||||
Senior debt |
$ | | $ | 62,860 | $ | 62,860 | $ | | $ | 47,880 | $ | 47,880 | ||||||||||||
Senior subordinated debt |
| 77,249 | 77,249 | | 60,149 | 60,149 | ||||||||||||||||||
Preferred equity |
| 57,424 | 57,424 | | 36,269 | 36,269 | ||||||||||||||||||
Common equity/equivalents |
| 11,389 | 11,389 | | 13,246 | 13,246 | ||||||||||||||||||
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|
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Total Control investments |
| 208,922 | 208,922 | | 157,544 | 157,544 | ||||||||||||||||||
Affiliate Investments |
||||||||||||||||||||||||
Senior debt |
| 25,348 | 25,348 | | 37,844 | 37,844 | ||||||||||||||||||
Senior subordinated debt |
| 16,491 | 16,491 | | 10,512 | 10,512 | ||||||||||||||||||
Preferred equity |
| 6,876 | 6,876 | | 10,400 | 10,400 | ||||||||||||||||||
Common equity/equivalents |
| | | | 75 | 75 | ||||||||||||||||||
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Total Affiliate investments |
| 48,715 | 48,715 | | 58,831 | 58,831 | ||||||||||||||||||
Non-Control/Non-Affiliate Investments |
||||||||||||||||||||||||
Senior debt |
| 9,049 | 9,049 | | 9,162 | 9,162 | ||||||||||||||||||
Common equity/equivalents |
| | | | 115 | 115 | ||||||||||||||||||
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Total Non-Control/Non-Affiliate Investments |
| 9,049 | 9,049 | | 9,277 | 9,277 | ||||||||||||||||||
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Total Investments at fair value |
$ | | $ | 266,686 | $ | 266,686 | $ | | $ | 225,652 | $ | 225,652 | ||||||||||||
Cash Equivalents |
80,000 | | 80,000 | 85,000 | | 85,000 | ||||||||||||||||||
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Total Investments and Cash Equivalents |
$ | 80,000 | $ | 266,686 | $ | 346,686 | $ | 85,000 | $ | 225,652 | $ | 310,652 | ||||||||||||
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In accordance with ASU 2011-04, the following table provides quantitative information about our Level 3 fair value measurements of our investments as of September 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 September 30, 2012 |
Valuation Techniques/ Methodologies |
Unobservable Input | Range | Weighted Average |
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Investments in controlled companies |
$ | 191,531 | (A) | TEV | EBITDA multiples(C) | 4.9x 7.9x | 6.1x | |||||||
comprised of a bundle of investments |
EBITDA(C) | ($992) $6,615 | $ | 3,944 | ||||||||||
SPSE(B) | EBITDA(C) | ($197) $710 | $ | 187 | ||||||||||
Risk Ratings(D) | 2.0 5.3 | 3.9 | ||||||||||||
Investments in non-controlled companies |
72,566 | TEV | EBITDA multiples(C) | 4.0x 8.4x | 6.3x | |||||||||
comprised of a bundle of investments |
EBITDA(C) | $700 $6,023 | $ | 3,566 | ||||||||||
SPSE(B) | EBITDA(C) | $700 $6,023 | $ | 3,311 | ||||||||||
Risk Ratings(D) | 1.3 5.7 | 4.5 | ||||||||||||
Other investments |
2,589 | |||||||||||||
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Total Fair Value for Level 3 Investments |
$ | 266,686 | ||||||||||||
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(A) | Includes two new portfolio company investments which were valued at cost, as it was determined that the price paid during the three months ended September 30, 2012, best represents fair value as of September 30, 2012. |
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(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 of our securities. With regard to its work, SPSE has stated that the data submitted to us is proprietary in nature. |
(C) | Adjusted earnings before interest expense, taxes, depreciation and amortization (EBITDA) is an unobservable input which is generally based on the most recently available trailing twelve month financial statements submitted to us from the portfolio companies. EBITDA multiples, generally indexed in accordance with our valuation policy, represent our estimation of where market participants might price these investments. For our bundled debt and equity investments, the EBITDA and EBITDA multiples impact the TEV fair value determination and the value of the issuers 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 a proprietary risk rating system for all our proprietary debt securities. Our risk rating system uses a scale of 0 to 10, with 10 representing 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. |
Significant unobservable inputs generally included in our internally-assessed TEV models used to value our proprietary debt and equity investments are the portfolio companys EBITDA and EBITDA multiples. 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 six months ended September 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.
Fair Value Measurements of Investments Using Significant Unobservable Inputs (Level 3)
Periods Ended September 30, 2012:
Senior Debt |
Senior Subordinated Debt |
Preferred Equity |
Common Equity/ Equivalents |
Total | ||||||||||||||||
Three months ended September 30, 2012: |
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Fair value as of June 30, 2012 |
$ | 90,081 | $ | 80,398 | $ | 44,192 | $ | 15,099 | $ | 229,770 | ||||||||||
Total (losses) gains: |
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Net realized gains(A)(D) |
| | | 798 | 798 | |||||||||||||||
Net unrealized (depreciation) appreciation(B) |
(3,084 | ) | 442 | 3,073 | (4,315 | ) | (3,884 | ) | ||||||||||||
New investments, repayments and settlements(C): |
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Issuances / Originations |
17,820 | 17,500 | 15,074 | 105 | 50,499 | |||||||||||||||
Settlements / Repayments |
(7,560 | ) | (1,600 | ) | | | (9,160 | ) | ||||||||||||
Sales(D) |
| | (539 | ) | (798 | ) | (1,337 | ) | ||||||||||||
Transfers(E) |
| (3,000 | ) | 2,500 | 500 | | ||||||||||||||
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Fair value as of September 30, 2012 |
$ | 97,257 | $ | 93,740 | $ | 64,300 | $ | 11,389 | $ | 266,686 | ||||||||||
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Six months ended September 30, 2012: |
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Fair value as of March 31, 2012 |
$ | 94,886 | $ | 70,661 | $ | 46,669 | $ | 13,436 | $ | 225,652 | ||||||||||
Total (losses) gains: |
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Net realized gains(A)(D) |
| | | 753 | 753 | |||||||||||||||
Net unrealized (depreciation) appreciation(B) |
(8,075 | ) | 3,030 | (1,884 | ) | (2,672 | ) | (9,601 | ) | |||||||||||
New investments, repayments and settlements(C): |
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Issuances / Originations |
18,770 | 26,815 | 17,553 | 125 | 63,263 | |||||||||||||||
Settlements / Repayments |
(8,324 | ) | (3,766 | ) | | | (12,090 | ) | ||||||||||||
Sales(D) |
| | (538 | ) | (753 | ) | (1,291 | ) | ||||||||||||
Transfers(E) |
| (3,000 | ) | 2,500 | 500 | | ||||||||||||||
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Fair value as of September 30, 2012 |
$ | 97,257 | $ | 93,740 | $ | 64,300 | $ | 11,389 | $ | 266,686 | ||||||||||
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17
Periods Ended September 30, 2011:
Senior Debt |
Senior Subordinated Debt |
Preferred Equity |
Common Equity/ Equivalents |
Total | ||||||||||||||||
Three months ended September 30, 2011: |
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Fair value as of June 30, 2011 |
$ | 57,932 | $ | 75,862 | $ | 30,068 | $ | 1,433 | $ | 165,295 | ||||||||||
Total (losses) gains: |
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Net realized losses(A)(D) |
(1 | ) | | | (543 | ) | (544 | ) | ||||||||||||
Net unrealized (depreciation) appreciation(B) |
(569 | ) | 1,473 | 5,642 | 3,790 | 10,336 | ||||||||||||||
Reversal of previously-recorded depreciation upon realization(B) |
1 | | | | 1 | |||||||||||||||
New investments, repayments and settlements(C): |
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Issuances / Originations |
30,205 | 2,750 | 11,742 | 222 | 44,919 | |||||||||||||||
Settlements / Repayments |
(2,493 | ) | | | | (2,493 | ) | |||||||||||||
Sales(D) |
| | | 542 | 542 | |||||||||||||||
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Fair value as of September 30, 2011 |
$ | 85,075 | $ | 80,085 | $ | 47,452 | $ | 5,444 | $ | 218,056 | ||||||||||
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Six months ended September 30, 2011: |
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Fair value as of March 31, 2011 |
$ | 58,627 | $ | 62,806 | $ | 25,398 | $ | 6,454 | $ | 153,285 | ||||||||||
Total (losses) gains: |
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Net realized (losses) gains(A)(D) |
(1 | ) | 5 | | 5,192 | 5,196 | ||||||||||||||
Net unrealized appreciation (depreciation) (B) |
788 | (4,182 | ) | 10,474 | 4,317 | 11,397 | ||||||||||||||
Reversal of previously-recorded depreciation (appreciation) upon realization(B) |
95 | (14 | ) | (686 | ) | (5,508 | ) | (6,113 | ) | |||||||||||
New investments, repayments and settlements(C): |
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Issuances / Originations |
30,211 | 22,385 | 14,532 | 250 | 67,378 | |||||||||||||||
Settlements / Repayments |
(4,645 | ) | (915 | ) | | | (5,560 | ) | ||||||||||||
Sales(D) |
| | (2,266 | ) | (5,261 | ) | (7,527 | ) | ||||||||||||
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Fair value as of September 30, 2011 |
$ | 85,075 | $ | 80,085 | $ | 47,452 | $ | 5,444 | $ | 218,056 | ||||||||||
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(A) | Included in Net realized (loss) gain on our accompanying Condensed Consolidated Statements of Operations for the periods ended September 30, 2012 and 2011. |
(B) | Included in Net unrealized appreciation (depreciation) on our accompanying Condensed Consolidated Statements of Operations for the periods ended September 30, 2012 and 2011. |
(C) | Includes increases in the cost basis of investments resulting from new portfolio investments, the amortization of discounts, PIK and other non-cash disbursements to portfolio companies, as well as decreases in the cost basis of investments resulting from principal repayments or sales, the amortization of premiums and acquisition costs, and other cost-basis adjustments. |
(D) | Included in Net realized gains (losses) and Sales are post-closing adjustments recorded in the current period related to exits from prior periods. |
(E) | Transfers represent $3.0 million of senior subordinated term debt of Tread Corp., at cost as of June 30, 2012, that was converted into preferred and common equity during the quarter ended September 30, 2012. |
Investment Activity
During the six months ended September 30, 2012, the following significant transactions occurred:
| In May 2012, we invested $9.5 million in a new Affiliate investment, Packerland Whey Products, Inc. (Packerland), through a combination of debt and equity. Packerland, headquartered in Luxemburg, Wisconsin, is a processor of raw fluid whey, specializing in the production of protein supplements for dairy and beef cattle. |
| In July 2012, we invested $21.3 million in a new Control investment, Drew Foam, through a combination of debt and equity. Drew Foam, headquartered in Monticello, Arkansas, is an expanded polystyrene foam molder and fabricator for a variety of applications in construction and packaging. In September 2012, $4.0 million of the debt and the line of credit was refinanced with a third-party. |
| In July 2012, we invested $22.5 million in a new Control investment, Ginsey Holdings, Inc. (Ginsey), through a combination of debt and equity. Ginsey, headquartered in Bellmawr, New Jersey, designs and markets a broad line of branded juvenile and adult bath products. In August 2012, we participated out $5.0 million of the debt to a third-party. |
| In August 2012, we restructured our investment in Tread Corp. (Tread), converting $3.0 million of senior subordinated debt into preferred and common shares of Tread in a non-cash transaction. |
18
Investment Concentrations
As of September 30, 2012, we had investments in 20 portfolio companies located across a total of 15 states in 13 different industries with an aggregate fair value of $266.7 million, of which SOG Specialty K&T, LLC (SOG), Acme Cryogenics, Inc. (Acme), and Venyu Solutions, Inc. (Venyu), collectively, comprised approximately $78.6 million, or 29.5%, of our total investment portfolio at fair value. The following table outlines our investments by security type at September 30 and March 31, 2012:
September 30, 2012 | March 31, 2012 | |||||||||||||||||||||||||||||||
Cost | Fair Value | Cost | Fair Value | |||||||||||||||||||||||||||||
Senior debt |
$ | 120,921 | 38.1 | % | $ | 97,257 | 36.5 | % | $ | 110,475 | 41.5 | % | $ | 94,886 | 42.0 | % | ||||||||||||||||
Senior subordinated debt |
100,511 | 31.7 | 93,740 | 35.1 | 80,461 | 30.2 | 70,661 | 31.3 | ||||||||||||||||||||||||
Preferred equity |
90,299 | 28.5 | 64,300 | 24.1 | 71,084 | 26.6 | 46,669 | 20.7 | ||||||||||||||||||||||||
Common equity/equivalents |
5,300 | 1.7 | 11,389 | 4.3 | 4,375 | 1.7 | 13,436 | 6.0 | ||||||||||||||||||||||||
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Total investments |
$ | 317,031 | 100.0 | % | $ | 266,686 | 100.0 | % | $ | 266,395 | 100.0 | % | $ | 225,652 | 100.0 | % | ||||||||||||||||
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Investments at fair value consisted of the following industry classifications at September 30 and March 31, 2012:
September 30, 2012 | March 31, 2012 | |||||||||||||||
Fair Value | Percentage of Total Investments |
Fair Value | Percentage of Total Investments |
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Chemicals, Plastics, and Rubber |
$ | 59,756 | 22.4 | % | $ | 46,793 | 20.7 | % | ||||||||
Machinery (Nonagriculture, Nonconstruction, Nonelectronic) |
31,999 | 12.0 | 30,770 | 13.6 | ||||||||||||
Leisure, Amusement, Motion Pictures, Entertainment |
29,731 | 11.1 | 30,096 | 13.3 | ||||||||||||
Home and Office Furnishings, Housewares, and Durable Consumer Products |
25,040 | 9.4 | 2,623 | 1.2 | ||||||||||||
Diversified/Conglomerate Manufacturing |
23,251 | 8.7 | 29,017 | 12.9 | ||||||||||||
Electronics |
22,663 | 8.5 | 23,330 | 10.3 | ||||||||||||
Containers, Packaging, and Glass |
22,568 | 8.5 | 24,332 | 10.8 | ||||||||||||
Oil and Gas |
9,953 | 3.7 | 9,684 | 4.3 | ||||||||||||
Aerospace and Defense |
9,310 | 3.5 | 6,713 | 3.0 | ||||||||||||
Buildings and Real Estate |
9,049 | 3.4 | 9,277 | 4.1 | ||||||||||||
Cargo Transport |
8,430 | 3.2 | 13,017 | 5.8 | ||||||||||||
Beverage, Food and Tobacco |
8,010 | 3.0 | | | ||||||||||||
Automobile |
6,926 | 2.6 | | | ||||||||||||
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Total Investments |
$ | 266,686 | 100.0 | % | $ | 225,652 | 100.0 | % | ||||||||
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The investments, at fair value, were included in the following geographic regions of the U.S. as of September 30 and March 31, 2012:
September 30, 2012 | March 31, 2012 | |||||||||||||||
Fair Value | Percentage of Total Investments |
Fair Value | Percentage of Total Investments |
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South |
$ | 120,812 | 45.3 | % | $ | 128,902 | 57.1 | % | ||||||||
West |
70,373 | 26.4 | 59,112 | 26.2 | ||||||||||||
Northeast |
58,181 | 21.8 | 30,924 | 13.7 | ||||||||||||
Midwest |
17,320 | 6.5 | 6,714 | 3.0 | ||||||||||||
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Total Investments |
$ | 266,686 | 100.0 | % | $ | 225,652 | 100.0 | % | ||||||||
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The geographic region indicates the location of the headquarters for our portfolio companies. A portfolio company may have additional business locations in other geographic regions.
19
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 September 30, 2012:
Amount | ||||||
For the remaining six months ending March 31: |
2013 |
$ | 29,274 | |||
For the fiscal year ending March 31: |
2014 |
34,083 | ||||
2015 |
36,109 | |||||
2016 |
27,825 | |||||
2017 |
63,435 | |||||
Thereafter |
30,962 | |||||
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Total contractual repayments |
$ | 221,688 | ||||
Investments in equity securities |
95,599 | |||||
Adjustments to cost basis on debt securities |
(256 | ) | ||||
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Total cost basis of investments held at September 30, 2012: |
$ | 317,031 | ||||
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Receivables from Portfolio Companies
Receivables from portfolio companies represent non-recurring costs that we incurred on behalf of portfolio companies and are included in other assets on our 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 managements 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 September 30 and March 31, 2012, we had gross receivables from portfolio companies of $0.5 million and $0.3 million, respectively. The allowance for uncollectible receivables was $0 at both September 30 and March 31, 2012.
NOTE 4. RELATED PARTY TRANSACTIONS
Investment Advisory and Management Agreement
We have entered into an investment advisory and management agreement with the Adviser (the Advisory Agreement), which 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, the Board of Directors approved the renewal of the Advisory Agreement through August 31, 2013.
The following table summarizes the management fees, incentive fees and associated credits reflected in our accompanying Condensed Consolidated Statements of Operations:
Three Months Ended September 30, |
Six Months Ended September 30, |
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2012 | 2011 | 2012 | 2011 | |||||||||||||
Average total assets subject to base management fee |
$ | 261,600 | $ | 212,600 | $ | 249,900 | $ | 207,100 | ||||||||
Multiplied by prorated annual base management fee of 2% |
0.5 | % | 0.5 | % | 1.0 | % | 1.0 | % | ||||||||
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Base management fee(A) |
1,308 | 1,063 | 2,499 | 2,071 | ||||||||||||
Reduction for loan servicing fees |
(949 | ) | (715 | ) | (1,817 | ) | (1,392 | ) | ||||||||
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Adjusted base management fee |
$ | 359 | $ | 348 | $ | 682 | $ | 679 | ||||||||
Credit for fees received by Adviser from the portfolio companies(A) |
(515 | ) | (511 | ) | (700 | ) | (726 | ) | ||||||||
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Net base management fee |
$ | (156 | ) | $ | 163 | $ | (18 | ) | $ | (47 | ) | |||||
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Incentive fee(A) |
$ | 541 | $ | | $ | 541 | $ | 19 | ||||||||
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(A) | Reflected as a line item on our accompanying Condensed Consolidated Statement of Operations. |
Base Management Fee
The base management fee is payable quarterly and assessed at an annual rate of 2.0%, computed on the basis of the value of our average total assets at the end of the two most recently-completed quarters. Average total assets is defined as total assets, including investments made with proceeds of borrowings, less any uninvested cash or cash equivalents resulting from borrowings, valued at the end of the applicable quarters within the respective periods and adjusted appropriately for any share issuances or repurchases during the periods. In addition, the following three items are adjustments to the base management fee calculation:
| Loan Servicing Fees |
The Adviser also services the loans held by Business Investment, in return for which it receives a 2.0% annual fee based on the monthly aggregate outstanding balance of loans pledged under our line of credit. Since we own these loans, all loan servicing fees paid to the Adviser are treated as reductions directly against the 2.0% base management fee under the Advisory Agreement.
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| Portfolio Company Fees |
Under the Advisory Agreement, the Adviser has also provided, and continues to provide, managerial assistance and other services to our portfolio companies and may receive fees for services other than managerial assistance. 50% of certain of these fees and 100% of other fees are credited against the base management fee that we would otherwise be required to pay to the Adviser.
Incentive Fee
The incentive fee consists of two parts: an income-based incentive fee and a capital gains-based incentive fee. The income-based incentive fee rewards the Adviser if our quarterly net investment income (before giving effect to any incentive fee) exceeds 1.75% of our net assets (the hurdle rate). We will pay the Adviser an income-based incentive fee with respect to our pre-incentive fee net investment income in each calendar quarter as follows:
| no incentive fee in any calendar quarter in which our pre-incentive fee net investment income does not exceed the hurdle rate (7.0% annualized); |
| 100% of our pre-incentive fee net investment income with respect to that portion of such pre-incentive fee net investment income, if any, that exceeds the hurdle rate but is less than 2.1875% in any calendar quarter (8.75% annualized); and |
| 20% of the amount of our pre-incentive fee net investment income, if any, that exceeds 2.1875% in any calendar quarter (8.75% annualized). |
The second part of the incentive fee is a capital gains-based incentive fee that will be determined and payable in arrears as of the end of each fiscal year (or upon termination of the Advisory Agreement, as of the termination date) and equals 20% of our realized capital gains as of the end of the fiscal year. In determining the capital gains-based incentive fee payable to the Adviser, we will calculate the cumulative aggregate realized capital gains and cumulative aggregate realized capital losses since our inception, and the aggregate unrealized capital depreciation as of the date of the calculation, as applicable, with respect to each of the investments in our portfolio. For this purpose, cumulative aggregate realized capital gains, if any, equals the sum of the differences between the net sales price of each investment, when sold, and the original cost of such investment since our inception. Cumulative aggregate realized capital losses equals the sum of the amounts by which the net sales price of each investment, when sold, is less than the original cost of such investment since our inception. Aggregate unrealized capital depreciation equals the sum of the difference, if negative, between the valuation of each investment as of the applicable calculation date and the original cost of such investment. At the end of the applicable year, the amount of capital gains that serves as the basis for our calculation of the capital gains-based incentive fee equals the cumulative aggregate realized capital gains less cumulative aggregate realized capital losses, less aggregate unrealized capital depreciation, with respect to our portfolio of investments. If this number is positive at the end of such year, then the capital gains-based incentive fee for such year equals 20% of such amount, less the aggregate amount of any capital gains-based incentive fees paid in respect of our portfolio in all prior years. No capital gains-based incentive fee has been recorded since our inception through September 30, 2012, as cumulative unrealized capital depreciation has exceeded cumulative realized capital gains net of cumulative realized capital losses.
Additionally, in accordance with GAAP, a capital gains-based incentive fee accrual is calculated using the aggregate cumulative realized capital gains and losses and aggregate cumulative unrealized capital depreciation included in the calculation of the capital gains-based incentive fee plus the aggregate cumulative unrealized capital appreciation. If such amount is positive at the end of a period, then GAAP requires us to record a capital gains-based incentive fee equal to 20% of such amount, less the aggregate amount of actual capital gains-based incentive fees paid in all prior years. If such amount is negative, then there is no accrual for such year. GAAP requires that the capital gains-based incentive fee accrual consider the cumulative aggregate unrealized capital appreciation in the calculation, as a capital gains-based incentive fee would be payable if such unrealized capital appreciation were realized. There can be no assurance that such unrealized capital appreciation will be realized in the future. No GAAP accrual for a capital gains-based incentive fee has been recorded since our inception through September 30, 2012.
As a BDC, we make available significant managerial assistance to our portfolio companies and provide other services to such portfolio companies. Although neither we nor our Adviser receive fees in connection with managerial assistance, the Adviser provides other services to our portfolio companies and receives fees for these other services.
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Administration Agreement
We have entered into an administration agreement (the Administration Agreement) with Gladstone Administration, LLC (the Administrator), an affiliate of the Adviser, whereby we pay separately for administrative services. The Administration Agreement provides for payments equal to our allocable portion of the Administrators overhead expenses in performing its obligations under the Administration Agreement, including, but not limited to, rent and the salaries and benefits expenses of our chief financial officer and treasurer, chief compliance officer, internal counsel and their respective staffs. Our allocable portion of administrative expenses is generally derived by multiplying the Administrators total allocable expenses by the percentage of our total assets at the beginning of the quarter in comparison to the total assets at the beginning of the quarter of all companies managed by the Adviser under similar agreements. On July 10, 2012, our Board of Directors approved the renewal of the Administration Agreement through August 31, 2013.
Related Party Fees Due
Amounts due to related parties on our accompanying Condensed Consolidated Statements of Assets and Liabilities were as follows:
As of September 30, 2012 |
As of March 31, 2012 |
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Net base management fee due (from) to Adviser |
$ | (156 | ) | $ | 295 | |||
Loan servicing fee due to Adviser |
234 | 218 | ||||||
Incentive fee due to (from) Adviser |
541 | (54 | ) | |||||
Other due (from) to Adviser |
(24 | ) | 37 | |||||
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Total fees due to Adviser |
$ | 595 | $ | 496 | ||||
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Fee due to Administrator |
$ | 189 | $ | 218 | ||||
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Total related party fees due |
$ | 784 | $ | 714 | ||||
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NOTE 5. BORROWINGS
Line of Credit
On April 14, 2009, through our wholly-owned subsidiary, Business Investment, we entered into a second amended and restated credit agreement providing for a $50.0 million revolving line of credit (the Credit Facility) arranged by Branch Banking and Trust Company (BB&T) as administrative agent. Key Equipment Finance Inc. also joined the Credit Facility as a committed lender.
On April 13, 2010, we entered into a third amended and restated credit agreement, which extended the maturity date of the Credit Facility to April 13, 2012. Advances under the Credit Facility generally bear interest at the 30-day London Interbank Offered Rate (LIBOR) (subject to a minimum rate of 2.0%), plus 4.5% per annum, with a commitment fee of 0.50% per annum on undrawn amounts when advances outstanding are above 50.0% of the commitment and 1.0% on undrawn amounts if the advances outstanding are below 50.0% of the commitment.
On October 26, 2011, we entered into a fourth amended and restated credit agreement to increase the commitment amount under the Credit Facility to $60.0 million, reduce the interest rate and extend the maturity date. Subject to certain terms and conditions, the Credit Facility may be expanded up to a total of $175.0 million through the addition of other committed lenders to the facility. The Credit Facility matures on October 25, 2014 (the Maturity Date), and, if not renewed or extended by the Maturity Date, all principal and interest will be due and payable on or before October 25, 2015 (one year after the Maturity Date). Advances under the Credit Facility will generally bear interest at 30-day LIBOR, plus 3.75% per annum, with an unused fee of 0.50% on undrawn amounts. There are two one-year extension options, to be agreed upon by all parties, which may be exercised, subject to compliance with the covenants set forth in the credit agreement, on or before October 26, 2012 and October 26, 2013, as applicable.
Refer to Note 13, Subsequent Events, for a description of the first of the one-year extension options, which was exercised subsequent to September 30, 2012.
The following tables summarize noteworthy information related to our Credit Facility:
As of September 30, 2012 |
As of March 31, 2012 |
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Commitment amount |
$ | 60,000 | $ | 60,000 | ||||
Borrowings outstanding at cost |
56,000 | | ||||||
Availability |
2,900 | 58,399 |
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For the Three Months Ended September 30, |
For the Six Months Ended September 30, |
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2012 | 2011 | 2012 | 2011 | |||||||||||||
Weighted average borrowings outstanding |
$ | 39,022 | $ | 6,913 | $ | 20,011 | $ | 3,475 | ||||||||
Effective interest rate(A) |
4.4 | % | 13.0 | % | 5.1 | % | 20.2 | % | ||||||||
Commitment (unused) fees incurred |
$ | 27 | $ | 110 | $ | 102 | $ | 237 |
(A) | Excludes the impact of deferred financing fees. |
Interest is payable monthly during the term of the Credit Facility. Available borrowings are subject to various constraints imposed under the Credit Facility, based on the aggregate loan balance pledged by Business Investment, which varies as loans are added and repaid, regardless of whether such repayments are prepayments or made as contractually required.
The administrative agent also requires that any interest or principal payments on pledged loans be remitted directly by the borrower into a lockbox account with The Bank of New York Mellon Trust Company, N.A as custodian. BB&T is the trustee of the account and remits the collected funds to us once a month.
The Credit Facility contains covenants that require Business Investment to, among other things, maintain its status as a separate legal entity, prohibit certain significant corporate transactions (such as mergers, consolidations, liquidations or dissolutions) and restrict certain material changes to our credit and collection policies without the lenders consent. The Credit Facility also limits payments on distributions to the aggregate net investment income for each of the twelve-month periods ending March 31, 2012, 2013, 2014 and 2015. Business Investment is also subject to certain limitations on the type of loan investments it can apply toward availability credit in the borrowing base, including restrictions on geographic concentrations, sector concentrations, loan size, dividend payout, payment frequency and status, average life and lien property. The Credit Facility further requires Business Investment to comply with other financial and operational covenants, which obligate Business Investment to, among other things, maintain certain financial ratios, including asset and interest coverage and a minimum number of obligors required in the borrowing base of the credit agreement. Additionally, we are subject to a performance guaranty that requires us to maintain (i) a minimum net worth (defined in the Credit Facility to include our Term Preferred Stock) of $155.0 million plus 50% of all equity and subordinated debt raised after October 26, 2011, (ii) asset coverage with respect to senior securities representing indebtedness of at least 200%, in accordance with Section 18 of the 1940 Act and (iii) our status as a BDC under the 1940 Act and as a RIC under the Code. As of September 30, 2012, and as defined in the performance guaranty of our Credit Facility, we had a minimum net worth of $237.2 million, an asset coverage of 210% and an active status as a BDC and RIC. Our Credit Facility requires a minimum of 12 obligors in the borrowing base, and, as of September 30, 2012, Business Investment had 17 obligors. As of September 30, 2012, we were in compliance with all of the Credit Facility covenants.
Short-Term Loan
Similar to previous quarter ends, to maintain our status as a RIC, we purchased $80.0 million of short-term U.S. Treasury Bills (T-Bills) through Jefferies & Company, Inc. (Jefferies) on September 25, 2012. As these T-Bills have a maturity of less than three months, we consider them to be cash equivalents and include them in cash and cash equivalents on our accompanying Condensed Consolidated Statement of Assets and Liabilities as of September 30, 2012. The T-Bills were purchased on margin using $8.5 million in cash and the proceeds from a $71.5 million short-term loan from Jefferies with an effective annual interest rate of approximately 1.42%. On October 4, 2012, when the T-Bills matured, we repaid the $71.5 million loan from Jefferies and we received back the $8.5 million margin payment sent to Jefferies to complete the transaction.
Secured Borrowing
In August 2012, we entered into a participation agreement with a third-party related to $5.0 million of our senior subordinated term debt investment in Ginsey. We evaluated whether the transaction should be accounted for as a sale or a financing-type transaction under the applicable guidance of ASC 860. Based on the terms of the participation agreement, we are required to treat the participation as a financing-type transaction. Specifically, the third-party has a senior claim to our remaining investment in the event of default by Ginsey which, in part, resulted in the loan participation bearing a rate of interest lower than the contractual rate established at origination. Therefore, our accompanying Condensed Consolidated Statements of Assists and Liabilities reflects the entire senior subordinated term debt investment in Ginsey and a corresponding $5.0 million secured borrowing liability. The secured borrowing has an effective interest rate of 7% and a maturity date of January 3, 2018.
Fair Value
We elected to apply ASC 825, Financial Instruments, specifically for our Credit Facility and short-term loan, which was consistent with the application of ASC 820 to our investments. Generally, we estimate the fair value of our Credit Facility using estimates of value provided by an independent third party and our own assumptions in the absence of observable market data, including estimated remaining life, counterparty credit risk, current market yield and interest rate spreads of similar securities as of the measurement date. Additionally, due to the eight-day duration of the short-term loan, cost was deemed to approximate fair value. At each of September 30 and March 31, 2012, all of our borrowings were valued using Level 3 inputs. The following tables present the short-term loan and
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Credit Facility carried at fair value as of September 30 and March 31, 2012, by caption on our accompanying Condensed Consolidated Statements of Assets and Liabilities for Level 3 of the hierarchy established by ASC 820 and a roll-forward of the changes in fair value during the three and six months ended September 30, 2012 and 2011:
Level 3 Borrowings | ||||||||
Total Recurring Fair Value Measurement Reported in Condensed Consolidated Statements of Assets and Liabilities |
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September 30, 2012 | March 31, 2012 | |||||||
Short-Term Loan |
$ | 71,525 | $ | 76,005 | ||||
Credit Facility |
57,209 | | ||||||
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Total |
$ | 128,734 | $ | 76,005 | ||||
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Fair Value Measurements of Borrowings Using Significant Unobservable Inputs (Level 3)
Short-Term Loan |
Credit Facility |
Total | ||||||||||
Three months ended September 30, 2012: |
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Fair value at June 30, 2012 |
$ | 76,010 | $ | 31,492 | $ | 107,502 | ||||||
Borrowings |
71,525 | 60,000 | 131,525 | |||||||||
Repayments |
(76,010 | ) | (35,000 | ) | (111,010 | ) | ||||||
Net unrealized appreciation(A) |
| 717 | 717 | |||||||||
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Fair value at September 30, 2012 |
$ | 71,525 | $ | 57,209 | $ | 128,734 | ||||||
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Six months ended September 30, 2012: |
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Fair value at March 31, 2012 |
$ | 76,005 | $ | | $ | 76,005 | ||||||
Borrowings |
147,535 | 91,000 | 238,535 | |||||||||
Repayments |
(152,015 | ) | (35,000 | ) | (187,015 | ) | ||||||
Net unrealized appreciation(A) |
| 1,209 | 1,209 | |||||||||
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Fair value at September 30, 2012 |
$ | 71,525 | $ | 57,209 | $ | 128,734 | ||||||
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Short-Term Loan |
Credit Facility |
Total | ||||||||||
Three months ended September 30, 2011: |
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Fair value at June 30, 2011 |
$ | 40,000 | $ | | $ | 40,000 | ||||||
Borrowings |
62,501 | 21,500 | 84,001 | |||||||||
Repayments |
(40,000 | ) | (500 | ) | (40,500 | ) | ||||||
Net unrealized appreciation(A) |
| 405 | 405 | |||||||||
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Fair value at September 30, 2011 |
$ | 62,501 | $ | 21,405 | $ | 83,906 | ||||||
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Six months ended September 30, 2011: |
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Fair value at March 31, 2011 |
$ | 40,000 | $ | | $ | 40,000 | ||||||
Borrowings |
102,501 | 21,500 | 124,001 | |||||||||
Repayments |
(80,000 | ) | (500 | ) | (80,500 | ) | ||||||
Net unrealized appreciation(A) |
| 405 | 405 | |||||||||
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Fair value at September 30, 2011 |
$ | 62,501 | $ | 21,405 | $ | 83,906 | ||||||
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(A) | Included in net unrealized (depreciation) appreciation on our accompanying Condensed Consolidated Statement of Operations for periods ended September 30, 2012. |
The fair value of the collateral under our Credit Facility was approximately $254.4 million and $228.3 million at September 30 and March 31, 2012, respectively. The fair value of the collateral under the short-term loan was approximately $80.0 million and $85.0 million at September 30 and March 31, 2012, respectively.
NOTE 6. INTEREST RATE CAP AGREEMENTS
We have entered into multiple interest rate cap agreements with BB&T that effectively limit the interest rate on a portion of our borrowings under the line of credit pursuant to the terms of our Credit Facility. The agreements provide that the interest rate on a portion of our borrowings is capped at a certain interest rate when 30-day LIBOR is in excess of that certain interest rate. The fair value of the interest rate cap agreements is recorded in other assets on our accompanying Condensed Consolidated Statements of Assets and Liabilities. We record changes in the fair value of the interest rate cap agreements quarterly based on the current market valuations at quarter end as net unrealized appreciation (depreciation) of other on our accompanying Condensed Consolidated Statements of Operations. Generally, we will estimate the fair value of our interest rate caps using estimates of value provided by the
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counterparty and our own assumptions in the absence of observable market data, including estimated remaining life, counterparty credit risk, current market yield and interest rate spreads of similar securities as of the measurement date. At both September 30 and March 31, 2012, our interest rate cap agreement(s) were valued using Level 3 inputs. The following table summarizes the key terms of each interest rate cap agreement:
Interest Rate Cap(A) |
Notional Amount |
LIBOR Cap |
Effective Date |
Maturity Date |
As of September 30, 2012 |
As of March 31, 2012 |
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Cost | Fair Value |
Cost | Fair Value |
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April 2010 | $ | 45,000 | 6.0 | % | May 2011 | May 2012 | $ | | (B) | $ | | $ | 41 | $ | | |||||||||||||
December 2011 | 50,000 | 6.0 | May 2012 | October 2013 | 29 | 1 | 29 | 2 |
(A) | Indicates date we entered into the interest rate cap agreement with BB&T. |
(B) | In May 2012, upon expiration of the April 2010 cap, we recognized a realized loss of $41. |
The use of a cap agreement involves risks that are different from those associated with ordinary portfolio securities transactions. Cap agreements may be considered to be illiquid. Although we will not enter into any such agreements unless we believe that the other party to the transaction is creditworthy, we do bear the risk of loss of the amount expected to be received under such agreements in the event of default or bankruptcy of the agreement counterparty.
NOTE 7. MANDATORILY REDEEMABLE PREFERRED STOCK
On March 6, 2012, we completed a public offering of 1,400,000 shares of 7.125% Series A Cumulative Term Preferred Stock (our Term Preferred Stock) at a public offering price of $25.00 per share. Gross proceeds totaled $35.0 million and net proceeds, after deducting underwriting discounts and offering expenses borne by us, were $33.2 million, a portion of which was used to repay borrowings under our Credit Facility, with the remaining proceeds being held to make additional investments and for general corporate purposes. In connection with the offering, the underwriters exercised their option to purchase an additional 200,000 shares of our Term Preferred Stock to cover over-allotments, which resulted in gross proceeds of $5.0 million and net proceeds, after deducting underwriting discounts, of $4.8 million. These proceeds are also being held to make additional investments and for general corporate purposes. We incurred $2.0 million in total offering costs related to these transactions, which have been recorded as deferred financing costs on our accompanying Condensed Consolidated Statements of Assets and Liabilities and will be amortized over the redemption period ending February 28, 2017.
The shares have a redemption date of February 28, 2017, and are traded under the ticker symbol GAINP on the NASDAQ Global Select Market. The Term Preferred Stock is not convertible into our common stock or any other security. The Term Preferred Stock provides for a fixed dividend equal to 7.125% per year, payable monthly (which equates to approximately $2.9 million per year). We are required to redeem all of the outstanding Term Preferred Stock on February 28, 2017, for cash at a redemption price equal to $25.00 per share, plus an amount equal to accumulated but unpaid dividends, if any, to, but excluding, the date of redemption. In addition, there are three other potential redemption triggers: 1) upon the occurrence of certain events that would constitute a change in control of us, we would be required to redeem all of the outstanding Term Preferred Stock, 2) if we fail to maintain an asset coverage ratio of at least 200%, we are required to redeem a portion of the outstanding Term Preferred Stock or otherwise cure the ratio redemption trigger and 3) at our sole option, at any time on or after February 28, 2016, we may redeem some or all of the Term Preferred Stock.
Our Board of Directors declared the following monthly distributions to preferred stockholders for the six months ended September 30, 2012:
Fiscal |
Time Period | Declaration Date |
Record Date | Payment Date | Distribution per Term Preferred Share |
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2013 | April 1 30 | April 11, 2012 | April 20, 2012 | April 30, 2012 | $ | 0.1484375 | ||||||
May 1 31 | April 11, 2012 | May 18, 2012 | May 31, 2012 | 0.1484375 | ||||||||
June 1 30 | April 11, 2012 | June 20, 2012 | June 29, 2012 | 0.1484375 | ||||||||
July 1 31 | July 10, 2012 | July 20, 2012 | July 31, 2012 | 0.1484375 | ||||||||
August 1 31 | July 10, 2012 | August 22, 2012 | August 31, 2012 | 0.1484375 | ||||||||
September 1 30 | July 10, 2012 | September 19, 2012 | September 28, 2012 | 0.1484375 | ||||||||
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Six months ended September 30, 2012: |
$ | 0.8906250 | ||||||||||
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In accordance with ASC 480, Distinguishing Liabilities from Equity, mandatorily redeemable financial instruments should be classified as liabilities on the balance sheet and, therefore, the related dividend payments are treated as dividend expense on our accompanying Condensed Consolidated Statements of Operations at the ex-dividend date.
Aggregate Term Preferred Stock distributions declared and paid for the three and six months ended September 30, 2012 were approximately $0.7 million and $1.4 million, respectively. The tax character of distributions paid by us to preferred stockholders is from ordinary income.
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NOTE 8. COMMON STOCK
We filed a registration statement on Form N-2 (File No. 333-181879) with the SEC on June 4, 2012, and subsequently filed a Pre-effective Amendment No. 1 to the registration statement on July 17, 2012, which the SEC declared effective on July 26, 2012. The registration statement permits us to issue, through one or more transactions, up to an aggregate of $300.0 million in securities, consisting of common stock, preferred stock, subscription rights, debt securities and warrants to purchase common stock, including through a combined offering of two or more of such securities.
Refer to Note 13, Subsequent Events, for a description of our common stock offering which occurred subsequent to September 30, 2012.
NOTE 9. NET (DECREASE) INCREASE IN NET ASSETS RESULTING FROM OPERATIONS PER COMMON SHARE
The following table sets forth the computation of basic and diluted net (decrease) increase in net assets resulting from operations per weighted average common share for the three and six months ended September 30, 2012 and 2011:
Three Months Ended September 30, |
Six Months
Ended September 30, |
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2012 | 2011 | 2012 | 2011 | |||||||||||||
Numerator for basic and diluted net (decrease) increase in net assets resulting from operations per common share |
$ | (353 | ) | $ | 12,695 | $ | (3,369 | ) | $ | 16,883 | ||||||
Denominator for basic and diluted weighted average common shares |
22,080,133 | 22,080,133 | 22,080,133 | 22,080,133 | ||||||||||||
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Basic and diluted net (decrease) increase in net assets resulting from operations per average common share |
$ | (0.02 | ) | $ | 0.57 | $ | (0.15 | ) | $ | 0.76 | ||||||
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NOTE 10. DISTRIBUTIONS TO COMMON STOCKHOLDERS
We are required to pay out as distributions 90% of our ordinary income and short-term capital gains for each taxable year to maintain our status as a RIC under Subtitle A, Chapter 1 of Subchapter M of the Code. The amount to be paid out as a distribution is determined by our Board of Directors each quarter and is based on our estimated taxable income by management. Based on that estimate, three monthly distributions are declared each quarter.
Our Board of Directors declared the following monthly distributions to common stockholders for the six months ended September 30, 2012 and 2011:
Fiscal Year |
Declaration Date | Record Date | Payment Date | Distribution per Common Share |
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2013 | April 11, 2012 | April 20, 2012 | April 30, 2012 | $ | 0.050 | |||||
April 11, 2012 | May 18, 2012 | May 31, 2012 | 0.050 | |||||||
April 11, 2012 | June 20, 2012 | June 29, 2012 | 0.050 | |||||||
July 10, 2012 | July 20, 2012 | July 31, 2012 | 0.050 | |||||||
July 10, 2012 | August 22, 2012 | August 31, 2012 | 0.050 | |||||||
July 10, 2012 | September 19, 2012 | September 28, 2012 | 0.050 | |||||||
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Six months ended September 30, 2012: |
$ | 0.300 | ||||||||
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2012 | April 12, 2011 | April 22, 2011 | April 29, 2011 | $ | 0.045 | |||||
April 12, 2011 | May 20, 2011 | May 31, 2011 | 0.045 | |||||||
April 12, 2011 | June 20, 2011 | June 30, 2011 | 0.045 | |||||||
July 12, 2012 | July 22, 2012 | July 29, 2012 | 0.050 | |||||||
July 12, 2012 | August 19, 2012 | August 31, 2012 | 0.050 | |||||||
July 12, 2012 | September 22, 2012 | September 30, 2012 | 0.050 | |||||||
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Six months ended September 30, 2011: |
$ | 0.285 | ||||||||
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Aggregate common distributions declared quarterly and paid for the six months ended September 30, 2012 and 2011 were approximately $6.6 million and $6.3 million, respectively, which were declared based on estimates of net investment income for the respective fiscal years. For the fiscal year ended March 31, 2012, taxable income available for common distributions exceeded distributions declared and paid, and, in accordance with Section 855(a) of the Code, we elected to treat $0.7 million of the first common distribution paid in fiscal year 2013 as having been paid in the prior year.
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NOTE 11. COMMITMENTS AND CONTINGENCIES
At September 30, 2012, we have lines of credit commitments to certain of our portfolio companies that have not been fully drawn. Since these lines of credit have expiration dates and we expect many will never be fully drawn, the total line of credit commitment amounts do not necessarily represent future cash requirements.
In addition to the lines of credit to certain portfolio companies, we have also extended certain guarantees on behalf of some of our portfolio companies. As of September 30, 2012, we have not been required to make any payments on the guarantees discussed below, and we consider the credit risk to be remote and the fair values of the guarantees to be minimal.
| In October 2008, we executed a guarantee of a vehicle finance facility agreement (the Finance Facility) between Ford Motor Credit Company (Ford) and ASH. The Finance Facility provides ASH with a line of credit of up to $0.5 million for component Ford parts used by ASH to build truck bodies under a separate contract. Ford retains title and ownership of the parts. The guarantee of the Finance Facility will expire upon termination of the separate parts supply contract with Ford or upon replacement of us as guarantor. |
| In February 2010, we executed a guarantee of a wholesale financing facility agreement (the Floor Plan Facility) between Agricredit Acceptance, LLC (Agricredit) and CCE. The Floor Plan Facility provides CCE with financing of up to $2.0 million to bridge the time and cash flow gap between the order and delivery of golf carts to customers. The guarantee was renewed in February 2011 and again in February 2012 and expires in February 2013, unless it is renewed again by us, CCE and Agricredit. In connection with this guarantee and its subsequent renewals, we recorded aggregate premiums of $0.2 million from CCE. |
| In April 2010, we executed a guarantee of vendor recourse for up to $2.0 million in individual customer transactions (the Recourse Facility) between Wells Fargo Financial Leasing, Inc. and CCE. The Recourse Facility provides CCE with the ability to provide vendor recourse up to a limit of $2.0 million on transactions with long-time customers who lack the financial history to qualify for third-party financing. The terms to maturity of these individual transactions range from October 2014 to October 2016. In connection with this guarantee, we received aggregate premiums of $0.1 million from CCE. |
The following table summarizes the dollar balance of unused line of credit commitments and guarantees as of September 30 and March 31, 2012:
As of September 30, | As of March 31, | |||||||
2012 | 2012 | |||||||
Unused line of credit commitments |
$ | 1,450 | $ | 1,671 | ||||
Guarantees |
3,937 | 4,748 | ||||||
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Total |
$ | 5,387 | $ | 6,419 | ||||
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Escrow Holdbacks
From time to time, we will enter into arrangements relating to exits of certain investments whereby specific amounts of the proceeds are held in escrow to be used to satisfy potential obligations, as stipulated in the sales agreements. We record escrow amounts in restricted cash on our accompanying Condensed Consolidated Statements of Assets and Liabilities. We establish a contingent liability against the escrow amounts if we determine that it is probable and estimable that a portion of the escrow amounts will not be ultimately received at the end of the escrow period. The aggregate contingent liability recorded against the escrow amounts was $0.1 million and $0.3 million as of September 30 and March 31, 2012, respectively, and is included in other liabilities on our accompanying Condensed Consolidated Statements of Assets and Liabilities.
NOTE 12. FINANCIAL HIGHLIGHTS
Three Months
Ended September 30, |
Six Months
Ended September 30, |
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2012 | 2011 | 2012 | 2011 | |||||||||||||
Per Common Share Data |
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Net asset value at beginning of period(A) |
$ | 9.10 | $ | 9.06 | $ | 9.38 | $ | 9.00 | ||||||||
Net investment income(B) |
0.16 | 0.15 | 0.31 | 0.31 | ||||||||||||
Realized gain (loss) on sale of investments and other(B) |
0.03 | (0.03 | ) | 0.03 | 0.23 | |||||||||||
Net unrealized (depreciation) appreciation of investments and other(B) |
(0.21 | ) | 0.45 | (0.49 | ) | 0.22 | ||||||||||
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Total from investment operations(B) |
(0.02 | ) | 0.57 | (0.15 | ) | 0.76 | ||||||||||
Cash distributions from net investment income(B)(C) |
(0.15 | ) | (0.15 | ) | (0.30 | ) | (0.28 | ) | ||||||||
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Net asset value at end of period(A) |
$ | 8.93 | $ | 9.48 | $ | 8.93 | $ | 9.48 | ||||||||
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Three Months
Ended September 30, |
Six Months
Ended September 30, |
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2012 | 2011 | 2012 | 2011 | |||||||||||||
Per share market value at beginning of period |
$ | 7.40 | $ | 7.18 | $ | 7.57 | $ | 7.79 | ||||||||
Per share market value at end of period |
7.82 | 6.80 | 7.82 | 6.80 | ||||||||||||
Total return(D) |
7.79 | % | (3.21 | )% | 7.53 | % | (9.16 | )% | ||||||||
Shares outstanding at end of period |
22,080,133 | 22,080,133 | 22,080,133 | 22,080,133 | ||||||||||||
Statement of Assets and Liabilities Data: |
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Net assets at end of period |
$ | 197,223 | $ | 209,419 | $ | 197,223 | $ | 209,419 | ||||||||
Average net assets(E) |
200,182 | 202,101 | 202,520 | 200,213 | ||||||||||||
Senior Securities Data(F): |
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Total borrowings, at cost |
$ | 132,525 | $ | 83,501 | $ | 132,525 | $ | 83,501 | ||||||||
Mandatorily redeemable preferred stock |
40,000 | | 40,000 | | ||||||||||||
Asset coverage ratio(G) |
210 | % | 332 | % | 210 | % | 332 | % | ||||||||
Average coverage per unit(H) |
$ | 2,101 | $ |