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,
2009
o
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
o
.
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
o
No
o
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
o
|
|
Accelerated filer
x
|
|
|
|
Non-accelerated filer
o
|
|
Smaller reporting company
o
.
|
Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act). Yes
o
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, outstanding as of November 2,
2009 was 22,080,133.
GLADSTONE INVESTMENT CORPORATION
TABLE OF CONTENTS
GLADSTONE INVESTMENT CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF
ASSETS AND LIABILITIES
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
(UNAUDITED)
|
|
September 30,
|
|
March 31,
|
|
|
|
2009
|
|
2009
|
|
ASSETS
|
|
|
|
|
|
Non-Control/Non-Affiliate investments (Cost 9/30/09:
$29,886; Cost 3/31/09: $134,836)
|
|
$
|
25,004
|
|
$
|
94,740
|
|
Control investments (Cost 9/30/09: $142,698; Cost
3/31/09: $150,081)
|
|
132,399
|
|
166,163
|
|
Affiliate investments (Cost 9/30/09: $64,019; Cost
3/31/09: $64,028)
|
|
46,900
|
|
53,027
|
|
Total investments at fair value (Cost 9/30/09:
$236,603; Cost 3/31/09: $348,945)
|
|
204,303
|
|
313,930
|
|
Cash and cash equivalents
|
|
86,311
|
|
7,236
|
|
Interest receivable
|
|
1,212
|
|
1,500
|
|
Due from Custodian
|
|
932
|
|
2,706
|
|
Deferred financing fees
|
|
963
|
|
1,167
|
|
Prepaid assets
|
|
445
|
|
172
|
|
Other assets
|
|
184
|
|
132
|
|
TOTAL ASSETS
|
|
$
|
294,350
|
|
$
|
326,843
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
$
|
460
|
|
$
|
1,283
|
|
Fee due to Administrator (Refer to Note 4)
|
|
198
|
|
179
|
|
Fee due to Adviser (Refer to Note 4)
|
|
221
|
|
187
|
|
Short-term loan
|
|
75,000
|
|
|
|
Borrowings under line of credit (Cost 9/30/09: $36,100;
Cost 3/31/09: $110,265)
|
|
36,278
|
|
110,265
|
|
Other liabilities
|
|
148
|
|
127
|
|
TOTAL LIABILITIES
|
|
112,305
|
|
112,041
|
|
NET ASSETS
|
|
$
|
182,045
|
|
$
|
214,802
|
|
|
|
|
|
|
|
ANALYSIS OF NET ASSETS:
|
|
|
|
|
|
Common stock, $0.001 par value, 100,000,000 shares
authorized, 22,080,133 shares issued and outstanding at September 30,
2009 and March 31, 2009
|
|
$
|
22
|
|
$
|
22
|
|
Capital in excess of par value
|
|
264,551
|
|
257,361
|
|
Net unrealized depreciation of investment portfolio
|
|
(32,301
|
)
|
(35,015
|
)
|
Net unrealized depreciation of derivative
|
|
(27
|
)
|
(53
|
)
|
Net unrealized appreciation of borrowings under line
of credit
|
|
(178
|
)
|
|
|
Accumulated net investment loss
|
|
(50,022
|
)
|
(7,513
|
)
|
TOTAL NET ASSETS
|
|
$
|
182,045
|
|
$
|
214,802
|
|
NET ASSETS PER SHARE
|
|
$
|
8.24
|
|
$
|
9.73
|
|
THE
ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
3
GLADSTONE INVESTMENT CORPORATION
CONDENSED CONSOLIDATED SCHEDULES OF
INVESTMENTS
AS OF SEPTEMBER 30, 2009
(DOLLAR AMOUNTS IN THOUSANDS)
(UNAUDITED)
Company (1)
|
|
Industry
|
|
Investment (2)
|
|
Cost
|
|
Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
NON-CONTROL/NON-AFFILIATE
INVESTMENTS:
|
|
|
|
|
|
|
|
Senior Syndicated
Loans:
|
|
|
|
|
|
|
|
|
|
HMTBP Acquisition II Corp.
|
|
Service aboveground storage tanks
|
|
Senior Term Debt (2.6%, Due 5/2014) (7), (8)
|
|
$
|
3,819
|
|
$
|
3,064
|
|
Interstate Fibernet, Inc.
|
|
Service provider of voice and data
telecommunications services
|
|
Senior Term Debt (4.3%, Due 7/2013) (7), (9)
|
|
9,758
|
|
7,929
|
|
Survey Sampling, LLC
|
|
Service telecommunications-based sampling
|
|
Senior Term Debt (9.5%, Due 5/2011) (3)
|
|
2,409
|
|
958
|
|
Subtotal - Syndicated Loans
|
|
|
|
|
|
$
|
15,986
|
|
$
|
11,951
|
|
|
|
|
|
|
|
|
|
|
|
Non-syndicated
Loans:
|
|
|
|
|
|
|
|
|
|
American Greetings Corporation
|
|
Manufacturing and design greeting cards
|
|
Senior Notes (7.4%, Due 6/2016) (3)
|
|
$
|
3,043
|
|
$
|
2,588
|
|
|
|
|
|
|
|
|
|
|
|
B-Dry, LLC
|
|
Service basement waterproofer
|
|
Senior Term Debt (13.0%, Due 5/2014) (5)
|
|
6,647
|
|
6,589
|
|
|
|
|
|
Senior Term Debt (13.0%, Due 5/2014) (5)
|
|
3,910
|
|
3,876
|
|
|
|
|
|
Common Stock Warrants (4)
|
|
300
|
|
|
|
|
|
|
|
|
|
10,857
|
|
10,465
|
|
|
|
|
|
|
|
|
|
|
|
Total
Non-Control/Non-Affiliate Investments
|
|
|
|
$
|
29,886
|
|
$
|
25,004
|
|
|
|
|
|
|
|
|
|
|
|
CONTROL
INVESTMENTS:
|
|
|
|
|
|
|
|
|
|
A. Stucki Holding Corp.
|
|
Manufacturing railroad freight car products
|
|
Senior Term Debt (4.8%, Due 3/2012)
|
|
$
|
9,101
|
|
$
|
9,101
|
|
|
|
|
|
Senior Term Debt (7.0%, Due 3/2012) (6)
|
|
9,900
|
|
9,900
|
|
|
|
|
|
Senior Subordinated Term Debt (13.0%, Due 3/2014)
|
|
8,586
|
|
8,586
|
|
|
|
|
|
Preferred Stock (4)
|
|
4,387
|
|
5,333
|
|
|
|
|
|
Common Stock (4)
|
|
130
|
|
3,511
|
|
|
|
|
|
|
|
32,104
|
|
36,431
|
|
|
|
|
|
|
|
|
|
|
|
Acme
Cryogenics, Inc.
|
|
Manufacturing
manifolds and pipes for industrial gasses
|
|
Senior Subordinated Term Debt (11.5%, Due 3/2012)
|
|
14,500
|
|
14,500
|
|
|
|
|
|
Preferred Stock (4)
|
|
6,984
|
|
3,828
|
|
|
|
|
|
Common Stock (4)
|
|
1,045
|
|
|
|
|
|
|
|
Common Stock Warrants (4)
|
|
24
|
|
|
|
|
|
|
|
|
|
22,553
|
|
18,328
|
|
|
|
|
|
|
|
|
|
|
|
ASH Holdings Corp.
|
|
Retail and Service
school buses and parts
|
|
Revolver, $1,500 available (non-accrual, Due 3/2010)
(5)
|
|
500
|
|
150
|
|
|
|
|
|
Senior Subordinated Term Debt (non-accrual, Due
1/2012) (5)
|
|
5,937
|
|
1,484
|
|
|
|
|
|
Preferred Stock (4)
|
|
2,500
|
|
|
|
|
|
|
|
Common Stock Warrants (4)
|
|
4
|
|
|
|
|
|
|
|
|
|
8,941
|
|
1,634
|
|
|
|
|
|
|
|
|
|
|
|
Cavert II Holdings Corp.
|
|
Manufacturing bailing
wire
|
|
Senior Term Debt (8.3%, Due 10/2012)
|
|
2,875
|
|
2,875
|
|
|
|
|
|
Senior Term Debt (10.0%, Due 10/2012) (6)
|
|
2,700
|
|
2,700
|
|
|
|
|
|
Senior Subordinated Term Debt (13.0%, Due 10/2014)
|
|
4,671
|
|
4,671
|
|
|
|
|
|
Preferred Stock (4)
|
|
4,110
|
|
4,769
|
|
|
|
|
|
Common Stock (4)
|
|
69
|
|
1,334
|
|
|
|
|
|
|
|
14,425
|
|
16,349
|
|
|
|
|
|
|
|
|
|
|
|
Chase II Holdings Corp.
|
|
Manufacturing traffic
doors
|
|
Revolving Credit Facility, $0 available (4.3%, Due
7/2010) (10)
|
|
3,500
|
|
3,500
|
|
|
|
|
|
Senior Term Debt (8.8%, Due 3/2011)
|
|
8,250
|
|
8,250
|
|
|
|
|
|
Senior Term Debt (12.0%, Due 3/2011) (6)
|
|
7,600
|
|
7,600
|
|
|
|
|
|
Senior Subordinated Term Debt (13.0%, Due 3/2013)
|
|
6,168
|
|
6,168
|
|
|
|
|
|
Preferred Stock (4)
|
|
6,961
|
|
9,765
|
|
|
|
|
|
Common Stock (4)
|
|
61
|
|
670
|
|
|
|
|
|
|
|
32,540
|
|
35,953
|
|
4
GLADSTONE INVESTMENT CORPORATION
CONDENSED CONSOLIDATED SCHEDULES OF
INVESTMENTS (Continued)
AS OF SEPTEMBER 30, 2009
(DOLLAR AMOUNTS IN THOUSANDS)
(UNAUDITED)
Company (1)
|
|
Industry
|
|
Investment (2)
|
|
Cost
|
|
Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
CONTROL
INVESTMENTS
(Continued)
:
|
|
|
|
|
|
|
|
Country Club Enterprises, LLC
|
|
Service golf cart distribution
|
|
Subordinated Term Debt (14.0%, Due 11/2014) (5)
|
|
$
|
7,000
|
|
$
|
6,842
|
|
|
|
|
|
Preferred Stock (4)
|
|
3,725
|
|
|
|
|
|
|
|
|
|
10,725
|
|
6,842
|
|
|
|
|
|
|
|
|
|
|
|
Galaxy Tool Holding Corp.
|
|
Manufacturing aerospace and plastics
|
|
Senior Subordinated Term Debt (13.5%, Due 8/2013) (5)
|
|
17,250
|
|
16,862
|
|
|
|
|
|
Preferred Stock (4)
|
|
4,112
|
|
|
|
|
|
|
|
Common Stock (4)
|
|
48
|
|
|
|
|
|
|
|
|
|
21,410
|
|
16,862
|
|
|
|
|
|
|
|
|
|
|
|
Total Control Investments
|
|
|
|
|
|
$
|
142,698
|
|
$
|
132,399
|
|
|
|
|
|
|
|
|
|
|
|
AFFILIATE
INVESTMENTS:
|
|
|
|
|
|
|
|
|
|
Danco Acquisition Corp.
|
|
Manufacturing machining and sheet metal work
|
|
Revolving Credit Facility, $2,100 available (9.3%,
Due 10/2010) (5)
|
|
$
|
900
|
|
$
|
878
|
|
|
|
|
|
Senior Term Debt (9.3%, Due 10/2012) (5)
|
|
4,312
|
|
4,215
|
|
|
|
|
|
Senior Term Debt (11.5%, Due 4/2013) (5)
|
|
9,067
|
|
8,727
|
|
|
|
|
|
Preferred Stock (4)
|
|
2,500
|
|
|
|
|
|
|
|
Common Stock Warrants (4)
|
|
2
|
|
|
|
|
|
|
|
|
|
16,781
|
|
13,820
|
|
|
|
|
|
|
|
|
|
|
|
Mathey Investments, Inc.
|
|
Manufacturing pipe-cutting and pipe-fitting
equipment
|
|
Revolving Credit Facility, $250 available (10.0%, Due
3/2011) (5)
|
|
750
|
|
747
|
|
|
|
|
|
Senior Term Debt (10.0%, Due 3/2013) (5)
|
|
2,375
|
|
2,366
|
|
|
|
|
|
Senior Term Debt (13.5%, Due 3/2014) (5), (6)
|
|
7,227
|
|
7,137
|
|
|
|
|
|
Common Stock (4)
|
|
500
|
|
|
|
|
|
|
|
Common Stock Warrants (4)
|
|
277
|
|
|
|
|
|
|
|
|
|
11,129
|
|
10,250
|
|
|
|
|
|
|
|
|
|
|
|
Noble Logistics, Inc.
|
|
Service aftermarket auto parts delivery
|
|
Revolving Credit Facility, $0 available (4.3%, Due
12/2009) (5)
|
|
2,000
|
|
1,300
|
|
|
|
|
|
Senior Term Debt (9.3%, Due 12/2011) (5)
|
|
6,227
|
|
4,048
|
|
|
|
|
|
Senior Term Debt (10.5%, Due 12/2011) (5) (6)
|
|
7,300
|
|
4,745
|
|
|
|
|
|
Preferred Stock (4)
|
|
1,750
|
|
|
|
|
|
|
|
Common Stock (4)
|
|
1,682
|
|
|
|
|
|
|
|
|
|
18,959
|
|
10,093
|
|
|
|
|
|
|
|
|
|
|
|
Quench Holdings Corp.
|
|
Service sales, installation and service of water
coolers
|
|
Senior Subordinated Term Debt (10.0%, Due 8/2013) (5)
|
|
8,000
|
|
6,240
|
|
|
|
|
|
Preferred Stock (4)
|
|
2,950
|
|
1,378
|
|
|
|
|
|
Common Stock (4)
|
|
447
|
|
|
|
|
|
|
|
|
|
11,397
|
|
7,618
|
|
|
|
|
|
|
|
|
|
|
|
Tread Corp.
|
|
Manufacturing storage and transport equipment
|
|
Senior Term Debt (12.5%, Due 5/2013) (5)
|
|
5,000
|
|
4,962
|
|
|
|
|
|
Preferred Stock (4)
|
|
750
|
|
157
|
|
|
|
|
|
Common Stock & Debt Warrants (4)
|
|
3
|
|
|
|
|
|
|
|
|
|
5,753
|
|
5,119
|
|
|
|
|
|
|
|
|
|
|
|
Total Affiliate Investments
|
|
|
|
|
|
$
|
64,019
|
|
$
|
46,900
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL INVESTMENTS
|
|
|
|
|
|
$
|
236,603
|
|
$
|
204,303
|
|
5
(1)
|
Certain of the listed securities are issued by affiliate(s) of
the indicated portfolio company.
|
(2)
|
Percentage represents the weighted average interest rates in effect at
September 30, 2009, and due date represents the contractual maturity
date.
|
(3)
|
Valued based on the indicative bid price on or near September 30,
2009, offered by the respective syndication agents trading desk or secondary
desk.
|
(4)
|
Security is non-income producing.
|
(5)
|
Fair value based on opinions of value submitted by Standard &
Poors Securities Evaluations, Inc. at September 30, 2009.
|
(6)
|
Last Out Tranche of senior debt, meaning if the portfolio company is
liquidated, the holder of the Last Out Tranche is paid after the senior debt.
|
(7)
|
Security valued based on the sale price obtained at or subsequent to
September 30, 2009, as the security, or a portion of it, was sold.
|
(8)
|
Security was sold subsequent to quarter-end; approximately $3.1
million of cash proceeds was received, and a realized loss of $757 was
recorded.
|
(9)
|
A portion of this security, approximately $3.0 million in principal,
was sold subsequent to quarter-end. Approximately $2.4 million of cash
proceeds was received, and a realized loss of $561 was recorded.
|
(10)
|
Revolving credit facility was repaid in full and sold to a third party
subsequent to quarter-end.
|
THE ACCOMPANYING NOTES ARE AN
INTEGRAL PART OF THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
6
GLADSTONE INVESTMENT CORPORATION
CONDENSED CONSOLIDATED SCHEDULES OF
INVESTMENTS
AS OF MARCH 31, 2009
(DOLLAR AMOUNTS IN THOUSANDS)
Company (1)
|
|
Industry
|
|
Investment (2)
|
|
Cost
|
|
Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
NON-CONTROL/NON-AFFILIATE
INVESTMENTS:
|
|
|
|
|
|
|
|
Senior Syndicated
Loans:
|
|
|
|
|
|
|
|
|
|
Activant Solutions, Inc.
|
|
Service - enterprise software and services
|
|
Senior Term Debt (3.4%, Due 5/2013) (7)
|
|
$
|
1,658
|
|
$
|
904
|
|
Advanced Homecare Holdings, Inc.
|
|
Service - home health nursing services
|
|
Senior Term Debt (4.3%, Due 8/2014) (7)
|
|
2,947
|
|
2,019
|
|
Aeroflex, Inc.
|
|
Service - provider of highly specialized electronic
equipment
|
|
Senior Term Debt (4.5%, Due 8/2014) (7)
|
|
1,892
|
|
1,083
|
|
Compsych Investments Corp.
|
|
Service - employee assistance programs
|
|
Senior Term Debt (3.8%, Due 2/2012) (7)
|
|
3,083
|
|
2,405
|
|
CRC Health Group, Inc.
|
|
Service - substance abuse treatment
|
|
Senior Term Debt (3.5%, Due 2/2012) (7)
|
|
7,772
|
|
5,026
|
|
Critical Homecare Solutions, Inc.
|
|
Service - home therapy and respiratory treatment
|
|
Senior Term Debt (3.8%, Due 1/2012) (7)
|
|
4,359
|
|
3,632
|
|
Generac Acquisition Corp.
|
|
Manufacturing - standby power products
|
|
Senior Term Debt (3.0%, Due 11/2013) (7)
|
|
6,799
|
|
3,820
|
|
Graham Packaging Holdings Company
|
|
Manufacturing - plastic containers
|
|
Senior Term Debt (3.6%, Due 10/2011) (7)
|
|
3,348
|
|
2,813
|
|
HMTBP Acquisition II Corp.
|
|
Service - aboveground storage tanks
|
|
Senior Term Debt (3.5%, Due 5/2014) (3)
|
|
3,838
|
|
2,942
|
|
Huish Detergents, Inc.
|
|
Manufacturing - household cleaning products
|
|
Senior Term Debt (2.3%, Due 4/2014) (7)
|
|
1,966
|
|
1,690
|
|
Hyland Software, Inc.
|
|
Service - provider of enterprise content management
software
|
|
Senior Term Debt (3.6%, Due 7/2013) (7)
|
|
3,912
|
|
2,990
|
|
Interstate Fibernet, Inc.
|
|
Service - provider of voice and data
telecommunications services
|
|
Senior Term Debt (5.2%, Due 7/2013) (3)
|
|
9,804
|
|
6,698
|
|
KIK Custom Products, Inc.
|
|
Manufacturing - consumer products
|
|
Senior Term Debt (2.8%, Due 5/2014) (7)
|
|
3,941
|
|
1,862
|
|
Kronos, Inc.
|
|
Service - workforce management solutions
|
|
Senior Term Debt (3.5%, Due 6/2014) (7)
|
|
1,899
|
|
1,291
|
|
Local TV Finance, LLC
|
|
Service - television station operator
|
|
Senior Term Debt (2.5%, Due 5/2013) (7)
|
|
985
|
|
359
|
|
LVI Services, Inc.
|
|
Service - asbestos and mold remediation
|
|
Senior Term Debt (4.5%, Due 11/2010) (7)
|
|
5,916
|
|
2,673
|
|
MedAssets, Inc.
|
|
Service - pharmaceuticals and healthcare GPO
|
|
Senior Term Debt (5.1%, Due 10/2013) (7)
|
|
3,517
|
|
3,129
|
|
Network Solutions, LLC
|
|
Service - internet domain solutions
|
|
Senior Term Debt (3.2%, Due 3/2014) (7)
|
|
8,672
|
|
5,506
|
|
Open Solutions, Inc.
|
|
Service - software outsourcing for financial
institutions
|
|
Senior Term Debt (3.3%, Due 1/2014) (7)
|
|
2,648
|
|
1,206
|
|
Ozburn-Hessey Holding Co. LLC
|
|
Service third party logistics
|
|
Senior Term Debt (4.4%, Due 8/2012) (7)
|
|
7,523
|
|
5,975
|
|
Pinnacle Foods Finance, LLC
|
|
Manufacturing - branded food products
|
|
Senior Term Debt (3.2%, Due 4/2014) (7)
|
|
1,950
|
|
1,570
|
|
PTS Acquisition Corp.
|
|
Manufacturing - drug delivery and packaging
technologies
|
|
Senior Term Debt (2.8%, Due 4/2014) (7)
|
|
6,877
|
|
4,264
|
|
QTC Acquisition, Inc.
|
|
Service - outsourced disability evaluations
|
|
Senior Term Debt (2.8%, Due 11/2012) (7)
|
|
1,763
|
|
1,356
|
|
Radio Systems Corporation
|
|
Service - design electronic pet containment products
|
|
Senior Term Debt (3.3%, Due 9/2013) (7)
|
|
1,644
|
|
1,308
|
|
Rally Parts, Inc.
|
|
Manufacturing - aftermarket motorcycle parts and
accessories
|
|
Senior Term Debt (3.5%, Due 11/2013) (7)
|
|
2,458
|
|
1,073
|
|
SafeNet, Inc.
|
|
Service chip encryption products
|
|
Senior Term Debt (4.2%, Due 4/2014) (7)
|
|
2,949
|
|
2,008
|
|
SGS International, Inc.
|
|
Service - digital imaging and graphics
|
|
Senior Term Debt (4.0%, Due 12/2011) (7)
|
|
1,475
|
|
978
|
|
Survey Sampling, LLC
|
|
Service - telecommunications-based sampling
|
|
Senior Term Debt (9.5%, Due 5/2011) (3)
|
|
2,596
|
|
2,441
|
|
Triad Laboratory Alliance, LLC
|
|
Service - regional medical laboratories
|
|
Senior Term Debt (4.5%, Due 12/2011) (7)
|
|
4,120
|
|
3,432
|
|
Wastequip, Inc.
|
|
Service - process and transport waste materials
|
|
Senior Term Debt (2.8%, Due 2/2013) (7)
|
|
2,893
|
|
1,530
|
|
WaveDivision Holdings, LLC
|
|
Service - cable
|
|
Senior Term Debt (3.5%, Due 6/2014) (7)
|
|
1,905
|
|
1,575
|
|
West Corporation
|
|
Service - business process outsourcing
|
|
Senior Term Debt (2.9%, Due 10/2013) (7)
|
|
3,323
|
|
2,293
|
|
Subtotal - Senior
Syndicated Loans
|
|
|
|
|
|
$
|
120,432
|
|
$
|
81,851
|
|
|
|
|
|
|
|
|
|
|
|
Non-Syndicated
Loans
|
|
|
|
|
|
|
|
|
|
American Greetings Corporation
|
|
Manufacturing and design - greeting cards
|
|
Senior Notes (7.4%, Due 6/2016) (3) (10)
|
|
$
|
3,043
|
|
$
|
2,180
|
|
|
|
|
|
|
|
|
|
|
|
B-Dry, LLC
|
|
Service - basement waterproofer
|
|
Revolving Credit Facility, $300 available (10.5%, Due
10/2009) (5)
|
|
450
|
|
443
|
|
|
|
|
|
Senior Term Debt (10.0%, Due 5/2014) (5)
|
|
6,681
|
|
6,464
|
|
|
|
|
|
Senior Term Debt (10.0%, Due 5/2014) (5)
|
|
3,930
|
|
3,802
|
|
|
|
|
|
Common Stock Warrants (4)
|
|
300
|
|
|
|
|
|
|
|
|
|
11,361
|
|
10,709
|
|
|
|
|
|
|
|
|
|
|
|
Total Non-Control/Non-Affiliate
Investments
|
|
|
|
$
|
134,836
|
|
$
|
94,740
|
|
7
GLADSTONE INVESTMENT CORPORATION
CONDENSED CONSOLIDATED SCHEDULES OF
INVESTMENTS (Continued)
AS OF MARCH 31, 2009
(DOLLAR AMOUNTS IN THOUSANDS)
Company (1)
|
|
Industry
|
|
Investment (2)
|
|
Cost
|
|
Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
CONTROL INVESTMENTS:
|
|
|
|
|
|
|
|
|
|
A. Stucki Holding Corp.
|
|
Manufacturing - railroad freight car products
|
|
Senior Term Debt (5.0%, Due 3/2012)
|
|
$
|
11,246
|
|
$
|
11,246
|
|
|
|
|
|
Senior Term Debt (7.2%, Due 3/2012) (6)
|
|
10,450
|
|
10,450
|
|
|
|
|
|
Senior Subordinated Term Debt (13%, Due 3/2014)
|
|
8,586
|
|
8,586
|
|
|
|
|
|
Preferred Stock (4)
|
|
4,387
|
|
5,128
|
|
|
|
|
|
Common Stock (4)
|
|
130
|
|
14,021
|
|
|
|
|
|
|
|
34,799
|
|
49,431
|
|
|
|
|
|
|
|
|
|
|
|
Acme Cryogenics, Inc.
|
|
Manufacturing - manifolds and pipes for industrial
gasses
|
|
Senior Subordinated Term Debt (11.5%, Due 3/2012)
|
|
14,500
|
|
14,500
|
|
|
|
|
|
Redeemable Preferred Stock (4)
|
|
6,984
|
|
6,920
|
|
|
|
|
|
Common Stock (4)
|
|
1,045
|
|
|
|
|
|
|
|
Common Stock Warrants (4)
|
|
25
|
|
|
|
|
|
|
|
|
|
22,554
|
|
21,420
|
|
|
|
|
|
|
|
|
|
|
|
ASH Holdings Corp.
|
|
Retail and Service - school buses and parts
|
|
Revolver, $400 available (nonaccrual, Due 3/2010)
(5)
|
|
1,600
|
|
560
|
|
|
|
|
|
Senior Subordinated Term Debt (nonaccrual, Due
1/2012) (5)
|
|
5,937
|
|
2,078
|
|
|
|
|
|
Preferred Stock (4)
|
|
2,500
|
|
|
|
|
|
|
|
Common Stock Warrants (4)
|
|
4
|
|
|
|
|
|
|
|
|
|
10,041
|
|
2,638
|
|
|
|
|
|
|
|
|
|
|
|
Cavert II Holding Corp.
|
|
Manufacturing - bailing wire
|
|
Revolving Credit Facility, $3,000 available (8.0%,
Due 10/2010) (8)
|
|
|
|
|
|
|
|
|
|
Senior Term Debt (8.3%, Due 10/2012)
|
|
5,687
|
|
5,687
|
|
|
|
|
|
Senior Term Debt (10.0%, Due 10/2012) (6)
|
|
2,950
|
|
2,950
|
|
|
|
|
|
Senior Subordinated Term Debt (13.0%, Due 10/2014)
|
|
4,671
|
|
4,671
|
|
|
|
|
|
Preferred Stock (4)
|
|
4,110
|
|
4,591
|
|
|
|
|
|
Common Stock (4)
|
|
69
|
|
733
|
|
|
|
|
|
|
|
17,487
|
|
18,632
|
|
|
|
|
|
|
|
|
|
|
|
Chase II Holdings Corp.
|
|
Manufacturing - traffic doors
|
|
Revolving Credit Facility, $1,105 available (4.5%,
Due 7/2010)
|
|
3,395
|
|
3,395
|
|
|
|
|
|
Senior Term Debt (8.8%, Due 3/2011)
|
|
8,800
|
|
8,800
|
|
|
|
|
|
Senior Term Debt (12.0%, Due 3/2011) (6)
|
|
7,680
|
|
7,680
|
|
|
|
|
|
Senior Subordinated Term Debt (13.0%, Due 3/2013)
|
|
6,168
|
|
6,168
|
|
|
|
|
|
Redeemable Preferred Stock (4)
|
|
6,961
|
|
9,300
|
|
|
|
|
|
Common Stock (4)
|
|
61
|
|
5,537
|
|
|
|
|
|
|
|
33,065
|
|
40,880
|
|
|
|
|
|
|
|
|
|
|
|
Country Club Enterprises, LLC
|
|
Service - golf cart distribution
|
|
Subordinated Term Debt (14.0% Due 11/2014)
|
|
7,000
|
|
7,000
|
|
|
|
|
|
Preferred Stock (4)
|
|
3,725
|
|
3,725
|
|
|
|
|
|
|
|
10,725
|
|
10,725
|
|
|
|
|
|
|
|
|
|
|
|
Galaxy Tool Holding Corp.
|
|
Manufacturing - aerospace and plastics
|
|
Senior Subordinated Term Debt (13.5%, Due 8/2013)
|
|
17,250
|
|
17,250
|
|
|
|
|
|
Preferred Stock (4)
|
|
4,112
|
|
4,486
|
|
|
|
|
|
Common Stock (4)
|
|
48
|
|
701
|
|
|
|
|
|
|
|
21,410
|
|
22,437
|
|
|
|
|
|
|
|
|
|
|
|
Total Control Investments
|
|
|
|
|
|
$
|
150,081
|
|
$
|
166,163
|
|
8
GLADSTONE INVESTMENT CORPORATION
CONDENSED CONSOLIDATED SCHEDULES OF
INVESTMENTS (Continued)
AS OF MARCH 31, 2009
(DOLLAR AMOUNTS IN THOUSANDS)
Company (1)
|
|
Industry
|
|
Investment (2)
|
|
Cost
|
|
Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
AFFILIATE INVESTMENTS:
|
|
|
|
|
|
|
|
|
|
Danco Acquisition Corp.
|
|
Manufacturing - machining and sheet metal work
|
|
Revolving Credit Facility, $2,600 available (9.3%,
Due 10/2010) (5) (9)
|
|
$
|
400
|
|
$
|
378
|
|
|
|
|
|
Senior Term Debt (9.3%, Due 10/2012) (5)
|
|
4,837
|
|
4,584
|
|
|
|
|
|
Senior Term Debt (11.5%, Due 4/2013) (5)
|
|
9,113
|
|
8,544
|
|
|
|
|
|
Redeemable Preferred Stock (4)
|
|
2,500
|
|
2,558
|
|
|
|
|
|
Common Stock Warrants (4)
|
|
3
|
|
|
|
|
|
|
|
|
|
16,853
|
|
16,064
|
|
|
|
|
|
|
|
|
|
|
|
Mathey Investments, Inc.
|
|
Manufacturing - pipe-cutting and pipe-fitting
equipment
|
|
Revolving Credit Facility, $1,463 available (9.0%,
Due 3/2011) (5) (9)
|
|
537
|
|
529
|
|
|
|
|
|
Senior Term Debt (9.0%, Due 3/2013) (5)
|
|
2,375
|
|
2,339
|
|
|
|
|
|
Senior Term Debt (12.0%, Due 3/2014) (5)(6)
|
|
7,227
|
|
7,082
|
|
|
|
|
|
Common Stock (4)
|
|
500
|
|
446
|
|
|
|
|
|
Common Stock Warrants (4)
|
|
277
|
|
260
|
|
|
|
|
|
|
|
10,916
|
|
10,656
|
|
|
|
|
|
|
|
|
|
|
|
Noble Logistics, Inc.
|
|
Service - aftermarket auto parts delivery
|
|
Revolving Credit Facility, $-0- available (6.5%, Due
12/2009) (5)
|
|
2,000
|
|
1,500
|
|
|
|
|
|
Senior Term Debt (10.5%, Due 12/2011) (5)
|
|
5,727
|
|
4,295
|
|
|
|
|
|
Senior Term Debt (12.5%, Due 12/2011) (5)(6)
|
|
7,300
|
|
5,475
|
|
|
|
|
|
Senior Subordinated Term Debt (18.0%, Due 12/2011)
|
|
500
|
|
375
|
|
|
|
|
|
Senior Subordinated Term Debt (14.0%, Due 5/2009)
|
|
150
|
|
149
|
|
|
|
|
|
Preferred Stock (4)
|
|
1,750
|
|
|
|
|
|
|
|
Common Stock (4)
|
|
1,682
|
|
|
|
|
|
|
|
|
|
19,109
|
|
11,794
|
|
|
|
|
|
|
|
|
|
|
|
Quench Holdings Corp.
|
|
Service - sales, installation and service of water
coolers
|
|
Senior Subordinated Term Debt (10.0%, Due 8/2013) (5)
|
|
8,000
|
|
5,800
|
|
|
|
|
|
Preferred Stock (4)
|
|
2,950
|
|
2,542
|
|
|
|
|
|
Common Stock Warrants (4)
|
|
447
|
|
|
|
|
|
|
|
|
|
11,397
|
|
8,342
|
|
|
|
|
|
|
|
|
|
|
|
Tread Corp.
|
|
Manufacturing - storage and transport equipment
|
|
Senior Term Debt (12.5%, Due 5/2013) (5)
|
|
5,000
|
|
4,925
|
|
|
|
|
|
Preferred Stock (4)
|
|
750
|
|
793
|
|
|
|
|
|
Common Stock Warrants (4)
|
|
3
|
|
453
|
|
|
|
|
|
|
|
5,753
|
|
6,171
|
|
|
|
|
|
|
|
|
|
|
|
Total Affiliate Investments
|
|
|
|
|
|
$
|
64,028
|
|
$
|
53,027
|
|
|
|
|
|
|
|
|
|
|
|
Total Investments
|
|
|
|
|
|
$
|
348,945
|
|
$
|
313,930
|
|
(1)
|
Certain of the listed securities are issued by affiliate(s) of
the indicated portfolio company.
|
(2)
|
Percentage represents the weighted average interest rates in effect at
March 31, 2009, and due date represents the contractual maturity date.
|
(3)
|
Security valued using internally-developed, risk-adjusted discounted
cash flow methodologies as of March 31, 2009.
|
(4)
|
Security is non-income producing.
|
(5)
|
Fair value based on opinions of value submitted by Standard &
Poors Securities Evaluations, Inc. at March 31, 2009.
|
(6)
|
Last Out Tranche of senior debt, meaning if the portfolio company is
liquidated, the holder of the Last Out Tranche is paid after the senior debt.
|
(7)
|
Security valued based on the sale price obtained at or subsequent to
March 31, 2009, since the security was sold.
|
(8)
|
Revolver was sold to third party subsequent to March 31, 2009.
|
(9)
|
Terms of agreement were refinanced and revolver limit was reduced.
|
(10)
|
The Company received non-cash assumption of $3,043 worth of senior
notes received from American Greetings Corporation for the Companys
agreement to the RPG bankruptcy settlement in which the Company received the
aforementioned notes and $909 in cash and recognized a loss on the settlement
of approximately $601.
|
THE ACCOMPANYING NOTES ARE AN
INTEGRAL PART OF THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
9
GLADSTONE INVESTMENT CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
|
September 30,
|
|
September 30,
|
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
INVESTMENT INCOME
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
|
|
|
|
|
|
|
Non-Control/Non-Affiliate investments
|
|
$
|
615
|
|
$
|
2,134
|
|
$
|
1,351
|
|
$
|
4,458
|
|
Control investments
|
|
2,868
|
|
2,735
|
|
5,736
|
|
5,304
|
|
Affiliate investments
|
|
1,448
|
|
1,349
|
|
2,928
|
|
2,460
|
|
Cash and cash equivalents
|
|
1
|
|
22
|
|
1
|
|
46
|
|
Total interest income
|
|
4,932
|
|
6,240
|
|
10,016
|
|
12,268
|
|
Other income
|
|
11
|
|
576
|
|
96
|
|
586
|
|
Total investment income
|
|
4,943
|
|
6,816
|
|
10,112
|
|
12,854
|
|
|
|
|
|
|
|
|
|
|
|
EXPENSES
|
|
|
|
|
|
|
|
|
|
Loan servicing fee (Refer to Note 4)
|
|
938
|
|
1,258
|
|
2,006
|
|
2,511
|
|
Base management fee (Refer to Note 4)
|
|
164
|
|
435
|
|
477
|
|
861
|
|
Administration fee (Refer to Note 4)
|
|
198
|
|
212
|
|
371
|
|
447
|
|
Interest expense
|
|
552
|
|
1,084
|
|
1,255
|
|
2,186
|
|
Amortization of deferred finance costs
|
|
438
|
|
140
|
|
751
|
|
278
|
|
Professional fees
|
|
118
|
|
183
|
|
320
|
|
314
|
|
Stockholder related costs
|
|
146
|
|
200
|
|
227
|
|
301
|
|
Insurance expense
|
|
62
|
|
55
|
|
119
|
|
108
|
|
Directors fees
|
|
48
|
|
48
|
|
99
|
|
95
|
|
Other
|
|
73
|
|
114
|
|
137
|
|
189
|
|
Expenses before credit from Adviser
|
|
2,737
|
|
3,729
|
|
5,762
|
|
7,290
|
|
Credits to base management fee (Refer to Note 4)
|
|
(165
|
)
|
(696
|
)
|
(466
|
)
|
(1,270
|
)
|
Total expenses net of credit to base management fee
|
|
2,572
|
|
3,033
|
|
5,296
|
|
6,020
|
|
NET INVESTMENT INCOME
|
|
2,371
|
|
3,783
|
|
4,816
|
|
6,834
|
|
|
|
|
|
|
|
|
|
|
|
REALIZED AND UNREALIZED (LOSS) GAIN ON:
|
|
|
|
|
|
|
|
|
|
Realized loss on sale of Non-Control/Non-Affiliate
investments
|
|
|
|
(2,498
|
)
|
(34,605
|
)
|
(4,215
|
)
|
Realized loss on termination of derivative
|
|
|
|
|
|
(53
|
)
|
|
|
Net unrealized (depreciation) appreciation of
Non-Control/Non-Affiliate investments
|
|
(1,514
|
)
|
(5,191
|
)
|
35,214
|
|
(726
|
)
|
Net unrealized (depreciation) appreciation of Control
investments
|
|
(14,900
|
)
|
10,840
|
|
(26,381
|
)
|
5,973
|
|
Net unrealized depreciation of Affiliate
investments
|
|
(3,853
|
)
|
(5,978
|
)
|
(6,119
|
)
|
(11,393
|
)
|
Net unrealized (depreciation) appreciation of
derivative
|
|
(16
|
)
|
|
|
26
|
|
|
|
Net unrealized appreciation of borrowings under
line of credit
|
|
(178
|
)
|
|
|
(178
|
)
|
|
|
Net loss on investments and borrowings under line
of credit
|
|
(20,461
|
)
|
(2,827
|
)
|
(32,096
|
)
|
(10,361
|
)
|
|
|
|
|
|
|
|
|
|
|
NET (DECREASE) INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS
|
|
$
|
(18,090
|
)
|
$
|
956
|
|
$
|
(27,280
|
)
|
$
|
(3,527
|
)
|
|
|
|
|
|
|
|
|
|
|
NET (DECREASE) INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS PER COMMON SHARE:
|
|
|
|
|
|
|
|
|
|
Basic and Diluted
|
|
$
|
(0.82
|
)
|
$
|
0.04
|
|
$
|
(1.24
|
)
|
$
|
(0.17
|
)
|
|
|
|
|
|
|
|
|
|
|
SHARES OF COMMON STOCK OUTSTANDING:
|
|
|
|
|
|
|
|
|
|
Basic and diluted weighted average shares
|
|
22,080,133
|
|
22,080,133
|
|
22,080,133
|
|
21,011,740
|
|
THE ACCOMPANYING NOTES ARE AN
INTEGRAL PART OF THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
10
GLADSTONE INVESTMENT CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF
CHANGES IN NET ASSETS
(DOLLAR AMOUNTS IN THOUSANDS)
(UNAUDITED)
|
|
Six Months Ended September 30,
|
|
|
|
2009
|
|
2008
|
|
Operations:
|
|
|
|
|
|
Net investment income
|
|
$
|
4,816
|
|
$
|
6,834
|
|
Realized loss on sale of investments
|
|
(34,605
|
)
|
(4,215
|
)
|
Realized loss on termination of derivative
|
|
(53
|
)
|
|
|
Net unrealized appreciation (depreciation) of
portfolio
|
|
2,714
|
|
(6,146
|
)
|
Net unrealized appreciation of derivative
|
|
26
|
|
|
|
Net unrealized appreciation of borrowings under line
of credit
|
|
(178
|
)
|
|
|
Net decrease in net assets from operations
|
|
(27,280
|
)
|
(3,527
|
)
|
|
|
|
|
|
|
Capital transactions:
|
|
|
|
|
|
Issuance of common stock
|
|
|
|
41,290
|
|
Shelf offering registration costs
|
|
(178
|
)
|
(643
|
)
|
Distributions to stockholders
|
|
(5,299
|
)
|
(10,157
|
)
|
Net (decrease) increase in net assets from capital
transactions
|
|
(5,477
|
)
|
30,490
|
|
|
|
|
|
|
|
Total (decrease) increase in net assets
|
|
(32,757
|
)
|
26,963
|
|
Net assets at beginning of period
|
|
214,802
|
|
206,445
|
|
|
|
|
|
|
|
Net assets at end of period
|
|
$
|
182,045
|
|
$
|
233,408
|
|
THE ACCOMPANYING NOTES ARE AN
INTEGRAL PART OF THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
11
GLADSTONE INVESTMENT CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF
CASH FLOWS
(DOLLAR AMOUNTS IN THOUSANDS)
(UNAUDITED)
|
|
Six Months Ended September 30,
|
|
|
|
2009
|
|
2008
|
|
CASH FLOWS FROM OPERATING
ACTIVITIES
|
|
|
|
|
|
Net decrease in net assets resulting from operations
|
|
$
|
(27,280
|
)
|
$
|
(3,527
|
)
|
Adjustments to reconcile net decrease in net assets
resulting from operations to net cash provided by operating activities:
|
|
|
|
|
|
Purchase of investments
|
|
(968
|
)
|
(36,612
|
)
|
Principal repayments of investments
|
|
9,482
|
|
22,284
|
|
Proceeds from sales of investments
|
|
69,222
|
|
13,296
|
|
Proceeds from short-term borrowings
|
|
75,000
|
|
|
|
Net realized loss on sales of investments
|
|
34,605
|
|
4,215
|
|
Net realized loss on termination of derivative
|
|
53
|
|
|
|
Net unrealized (appreciation) depreciation of
investment portfolio
|
|
(2,714
|
)
|
6,146
|
|
Net unrealized appreciation of derivative
|
|
(26
|
)
|
|
|
Net unrealized appreciation of borrowings under line
of credit
|
|
178
|
|
|
|
Net amortization of premiums and discounts
|
|
|
|
19
|
|
Amortization of deferred financing costs
|
|
751
|
|
278
|
|
Decrease in interest receivable
|
|
288
|
|
309
|
|
Decrease in due from custodian
|
|
1,774
|
|
1,351
|
|
Increase in prepaid assets
|
|
(273
|
)
|
(114
|
)
|
(Increase) decrease in other assets
|
|
(40
|
)
|
309
|
|
Decrease in accounts payable and accrued liabilities
|
|
(823
|
)
|
(167
|
)
|
Increase in administration fee payable to
Administrator (See Note 4)
|
|
19
|
|
4
|
|
Increase in base management fee payable to Adviser
(See Note 4)
|
|
113
|
|
123
|
|
Decrease in loan servicing fee payable to Adviser
(See Note 4)
|
|
(79
|
)
|
(7
|
)
|
Increase in other liabilities
|
|
21
|
|
13
|
|
Net cash provided by operating activities
|
|
159,303
|
|
7,920
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING
ACTIVITIES
|
|
|
|
|
|
Net proceeds from the issuance of common stock
|
|
(178
|
)
|
40,647
|
|
Borrowings from line of credit
|
|
79,000
|
|
129,000
|
|
Repayments of line of credit
|
|
(153,165
|
)
|
(142,870
|
)
|
Purchase of derivative
|
|
(39
|
)
|
|
|
Deferred financing costs
|
|
(547
|
)
|
|
|
Distributions paid
|
|
(5,299
|
)
|
(10,157
|
)
|
Net cash (used in) provided by financing activities
|
|
(80,228
|
)
|
16,620
|
|
|
|
|
|
|
|
NET INCREASE IN CASH AND CASH
EQUIVALENTS
|
|
79,075
|
|
24,540
|
|
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD
|
|
7,236
|
|
9,360
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, END OF
PERIOD
|
|
$
|
86,311
|
|
$
|
33,900
|
|
|
|
|
|
|
|
CASH PAID DURING PERIOD FOR
INTEREST
|
|
$
|
1,418
|
|
$
|
2,134
|
|
|
|
|
|
|
|
NON-CASH ACTIVITIES
(1)
|
|
$
|
850
|
|
|
|
(1)
|
|
On April 10, 2009, the Company made an investment disbursement to
Cavert II Holding Corp. for approximately $850 on their revolving line of
credit, and the proceeds were used to make the next four quarterly payments
due under normal amortization for both their senior term A and senior term B
loans in a non-cash transaction.
|
THE ACCOMPANYING NOTES ARE AN
INTEGRAL PART OF THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
12
GLADSTONE INVESTMENT CORPORATION
FINANCIAL HIGHLIGHTS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
|
|
Three Months Ended September 30,
|
|
Six Months Ended September 30,
|
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
Per Share Data (1)
|
|
|
|
|
|
|
|
|
|
Net asset value at beginning of period
|
|
$
|
9.19
|
|
$
|
10.77
|
|
$
|
9.73
|
|
$
|
12.47
|
|
|
|
|
|
|
|
|
|
|
|
Income from investment
operations:
|
|
|
|
|
|
|
|
|
|
Net investment income (2)
|
|
0.11
|
|
0.17
|
|
0.22
|
|
0.33
|
|
Realized loss on sale of investments (2)
|
|
|
|
(0.11
|
)
|
(1.57
|
)
|
(0.20
|
)
|
Net unrealized depreciation of investments (2)
|
|
(0.92
|
)
|
(0.02
|
)
|
0.12
|
|
(0.30
|
)
|
Net unrealized appreciation of borrowings on line
of credit (2)
|
|
(0.01
|
)
|
|
|
(0.01
|
)
|
|
|
Total from investment operations
|
|
(0.82
|
)
|
0.04
|
|
(1.24
|
)
|
(0.17
|
)
|
|
|
|
|
|
|
|
|
|
|
Distributions from:
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
(0.12
|
)
|
(0.24
|
)
|
(0.24
|
)
|
(0.48
|
)
|
Total distributions (3)
|
|
(0.12
|
)
|
(0.24
|
)
|
(0.24
|
)
|
(0.48
|
)
|
|
|
|
|
|
|
|
|
|
|
Effect of shelf offering:
|
|
|
|
|
|
|
|
|
|
Shelf registration offering costs
|
|
(0.01
|
)
|
|
|
(0.01
|
)
|
(0.03
|
)
|
Effect of distribution of stock rights offering
after record date (4)
|
|
|
|
|
|
|
|
(1.22
|
)
|
Total effect of shelf offering
|
|
(0.01
|
)
|
|
|
(0.01
|
)
|
(1.25
|
)
|
|
|
|
|
|
|
|
|
|
|
Net asset value at end of period
|
|
$
|
8.24
|
|
$
|
10.57
|
|
$
|
8.24
|
|
$
|
10.57
|
|
|
|
|
|
|
|
|
|
|
|
Per share market value at beginning of period
|
|
$
|
4.88
|
|
$
|
6.38
|
|
$
|
3.67
|
|
$
|
9.32
|
|
Per share market value at end of period
|
|
4.85
|
|
6.88
|
|
4.85
|
|
6.88
|
|
Total Return (5)
|
|
1.75
|
%
|
14.79
|
%
|
39.03
|
%
|
(21.39
|
)%
|
Shares outstanding at end of period
|
|
22,080,133
|
|
22,080,133
|
|
22,080,133
|
|
22,080,133
|
|
|
|
|
|
|
|
|
|
|
|
Statement of Assets and Liabilities Data:
|
|
|
|
|
|
|
|
|
|
Net assets at end of period
|
|
$
|
182,045
|
|
$
|
233,408
|
|
$
|
182,045
|
|
$
|
233,408
|
|
Average net assets (6)
|
|
195,005
|
|
234,165
|
|
202,596
|
|
238,410
|
|
|
|
|
|
|
|
|
|
|
|
Senior Securities Data:
|
|
|
|
|
|
|
|
|
|
Borrowings under line of credit
|
|
$
|
36,278
|
|
$
|
130,965
|
|
$
|
36,278
|
|
$
|
130,965
|
|
Asset coverage ratio (7)
|
|
602
|
%
|
278
|
%
|
602
|
%
|
278
|
%
|
Asset coverage per unit (8)
|
|
$
|
6,018
|
|
$
|
2,782
|
|
$
|
6,018
|
|
$
|
2,782
|
|
|
|
|
|
|
|
|
|
|
|
Ratios/Supplemental Data:
|
|
|
|
|
|
|
|
|
|
Ratio of expenses to average net assets (9), (10)
|
|
5.61
|
%
|
6.37
|
%
|
5.69
|
%
|
6.11
|
%
|
Ratio of net expenses to average net assets (9),
(11)
|
|
5.28
|
%
|
5.18
|
%
|
5.23
|
%
|
5.05
|
%
|
Ratio of net investment income to average net
assets (9)
|
|
4.86
|
%
|
6.46
|
%
|
4.75
|
%
|
5.73
|
%
|
(1)
|
|
Based on actual shares outstanding at the end of the corresponding
period.
|
(2)
|
|
Based on weighted average basic per share data.
|
(3)
|
|
Distributions are determined based on taxable income calculated in
accordance with income tax regulations which may differ from amounts
determined under accounting principles generally accepted in the United States
of America.
|
(4)
|
|
The effect of distributions from the stock rights offering after the
record date represents the effect on net asset value of issuing additional
shares after the record date of a distribution.
|
(5)
|
|
Total return equals the change in the market value of the Companys
common stock from the beginning of the period, taking into account dividends
reinvested in accordance with the terms of our dividend reinvestment plan.
|
(6)
|
|
Calculated using the average of the balance of net assets at the end
of each month of the reporting period.
|
(7)
|
|
As a business development company, the Company is generally required
to maintain a ratio of at least 200% of total assets, less all liabilities
and indebtedness not represented by senior securities, to total borrowings.
|
(8)
|
|
Asset coverage per unit is the ratio of the carrying value of the
Companys total consolidated assets, less all liabilities and indebtedness
not represented by senior securities, to the aggregate amount of senior
securities representing indebtedness. Asset coverage per unit is expressed in
terms of dollar amounts per $1,000 of indebtedness.
|
(9)
|
|
Amounts are annualized.
|
(10)
|
|
Ratio of expenses to average net assets is computed using expenses
before credits from the Adviser.
|
(11)
|
|
Ratio of net expenses to average net assets is computed using total
expenses net of credits to the management fee.
|
THE ACCOMPANYING NOTES ARE AN
INTEGRAL PART OF THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
13
GLADSTONE INVESTMENT CORPORATION
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA AND AS
OTHERWISE INDICATED)
SEPTEMBER 30, 2009
(UNAUDITED)
NOTE
1. ORGANIZATION
Gladstone Investment Corporation (the Company) was incorporated under
the General Corporation Laws of the State of Delaware on February 18, 2005
and completed an initial public offering on June 22, 2005. The Company is
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, the Company has
elected to be treated for tax purposes as a regulated investment company (RIC)
under the Internal Revenue Code of 1986, as amended (the Code). The Companys
investment objectives are to achieve a high level of current income and capital
gains by investing in debt and equity securities of established private
businesses.
Gladstone Business Investment, LLC (Business Investment) a
wholly-owned subsidiary of the Company, was established on August 11, 2006
for the sole purpose of owning the Companys portfolio of investments in
connection with its line of credit. The financial statements of Business
Investment are consolidated with those of the Company.
The Company is externally managed by Gladstone Management Corporation
(the Adviser), an unconsolidated affiliate of the Company.
NOTE
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Unaudited
Interim Financial Statements
Interim financial
statements of the Company are prepared in accordance with accounting principles
generally accepted in the United States of America (GAAP) for interim
financial information and pursuant to the requirements for reporting on Form 10-Q
and Article 10 of Regulation S-X. Accordingly, certain disclosures
accompanying annual financial statements prepared in accordance with GAAP are
omitted. In the opinion of management, all adjustments, consisting solely of
normal recurring accruals, necessary for the fair statement of financial
statements for the interim periods have been included. The current periods
results of operations are not necessarily indicative of results that ultimately
may be achieved for the year. The interim financial statements and notes
thereto should be read in conjunction with the financial statements and notes
thereto included in the Companys Form 10-K for the fiscal year ended March 31,
2009, as filed with the Securities and Exchange Commission (the SEC) on June 2,
2009.
The year-end
condensed consolidated balance sheet data was derived from audited financial
statements, but does not include all of the disclosures required by GAAP.
Reclassifications
Certain amounts in
the prior years financial statements have been reclassified to conform to the
current year presentation with no effect to net increase (decrease) in net
assets resulting from operations.
Cash
and Cash Equivalents
The Company considers all short-term, highly liquid investments that
are both readily convertible to cash and have a maturity of three months or
less at the time of purchase to be cash equivalents. Items classified as cash
equivalents include temporary investments in commercial paper, United States
Treasury securities and money-market funds. Cash and cash equivalents are
carried at cost, which approximates fair value.
Recent
Accounting Pronouncements
On July 1,
2009, the Financial Accounting Standards Board (the FASB) issued FASB
Statement The FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting Principles, also known as FASB Accounting
Standards Codification (ASC) 105-10, Generally
Accepted Accounting Principles
or (the Codification). ASC 105-10 establishes the exclusive authoritative
reference for U.S. GAAP for use in financial statements, except for SEC rules and
interpretive releases, which are also authoritative GAAP for SEC registrants.
The Codification does not change current U.S. GAAP but is intended to simplify
user access to all authoritative U.S. GAAP by providing all the authoritative
literature related to a particular topic in one place. All existing
accounting standard documents have been superseded and all other accounting
literature not included in the Codification is considered
non-authoritative. The Codification was effective for the Company
during its interim period ended September 30, 2009 and did not have
an impact on its financial condition or results of
operations. The Company has included the references to the
Codification, as appropriate, in these condensed consolidated financial
statements.
14
In
June 2009, the FASB issued an amendment to the accounting and disclosure
requirements for the consolidation of variable interest entities (VIEs) within
ASC 845, Variable Interest Entities. The elimination of the concept of a
QSPE, as discussed below, removes the exception from applying the consolidation
guidance within this amendment. This amendment requires an enterprise to
perform a qualitative analysis when determining whether or not it must
consolidate a VIE. The amendment also requires an enterprise to continuously
reassess whether it must consolidate a VIE. Additionally, the amendment
requires enhanced disclosures about an enterprises involvement with VIEs and
any significant change in risk exposure due to that involvement, as well as how
its involvement with VIEs impacts the enterprises financial statements.
Finally, an enterprise will be required to disclose significant judgments and
assumptions used to determine whether or not to consolidate a VIE. This
amendment is effective for financial statements issued for fiscal years
beginning after November 15, 2009. This amendment will not have a material
impact on the Companys financial position, results of operations or liquidity.
ASC
860, Transfers and Servicing
removes the
concept of a qualifying special-purpose entity (QSPE) from ASC 860-10 and
removes the exception from ASC 810, Consolidation. This statement also
clarifies the requirements for isolation and limitations on portions of
financial assets that are eligible for sale accounting. This statement is
effective for fiscal years beginning after November 15, 2009. ASC 860 is effective for the Companys fiscal
year beginning April 1, 2010. The Company is currently evaluating the
impact of adopting this standard on the condensed consolidated financial
statements.
ASC
855-10-50, Subsequent Events
was initiated
in an effort to incorporate accounting guidance that originated as auditing
standards into the body of authoritative literature issued by the FASB. Moving the accounting requirements out of the
auditing literature and into the accounting literature is consistent with the
FASBs objective to codify all authoritative U.S. accounting guidance related
to a particular topic in one place. It
also provided an opportunity to consider international convergence issues. The FASB has established general standards of
accounting for and disclosure of events that occur after the balance sheet date
but before financial statements are issued or are available to be issued. Although there is new terminology, the
standard is based on the same principles as those that previously existed in
the auditing standards. The new
standard, which includes a required disclosure of the date through which an
entity has evaluated subsequent events, is effective for interim or annual
periods ending after June 15, 2009.
The Companys adoption of this pronouncement did not have a material
impact on the condensed consolidated financial statements.
ASC
320, Investments-Debt and Equity Securities was issued to make the guidance
on other-than-temporary impairment more operational and to improve the
presentation and disclosure of other-than-temporary impairments on debt and
equity securities in the financial statements.
ASC 320-10 requires significant
additional disclosures for both annual and interim periods, including the
amortized cost basis of available-for-sale and held-to-maturity debt, the
methodology and key imports used to measure the credit portion of
other-than-temporary impairment, and a roll forward of amounts recognized in
earnings for securities by major security type.
ASC 320-10 requires that entities identify major security classes
consistent with how the securities are managed based on the nature and risks of
the security, and also expands, for disclosure purposes, the list of major
security types identified in ASC 320. ASC 320-10 is effective for interim and
annual reporting periods ending after June 15, 2009. The Companys adoption of this pronouncement
did not have a material impact on the condensed consolidated financial
statements.
ASC
820-10-35, Determining the Fair Value When the Volume and Level of Activity
for the Asset or Liability Have Significantly Decreased and Identifying
Transactions That Are Not Orderly
provides
additional guidance for estimating fair value in accordance with ASC 820-10, Fair
Value Measurements and Disclosures
when the
volume and level of activity for an asset or liability has significantly
decreased and also provides guidance on identifying circumstances that indicate
a transaction is not orderly. ASC
820-10-35 amends ASC 820-10 to require entities to disclose in interim and
annual periods the inputs and valuation techniques used to measure fair value
together with any changes in valuation techniques and related inputs during the
period. ASC 820-10-35 also requires
reporting entities to define major categories
for both debt and equity securities to be major security types as
described in paragraph 19 of ASC 320.
This requires entities to provide disclosures on a more disaggregated
basis than previously had been required under ASC 820-10. ASC 820-10-35 is effective for interim and
annual reporting periods ending after September 15, 2009, and shall be
applied prospectively. The Companys
adoption of this pronouncement did not have a material impact on its condensed
consolidated financial statements.
Investment
Valuation Policy
The Company
carries its investments at market value to the extent that market quotations
are readily available and reliable, and otherwise at fair value, as determined
in good faith by its Board of Directors.
In determining the fair value of the Companys investments, the Adviser
has established an investment valuation policy (the Policy). The Policy is approved by the Companys Board
of Directors and each quarter the Board of Directors reviews whether the
Adviser has applied the Policy consistently and votes whether or not to accept
the recommended valuation of the Companys investment portfolio.
The Company uses generally accepted valuation techniques to value its
portfolio unless the Company has specific information about the value of an investment
to determine otherwise. From time to time the Company may accept an appraisal
of a business in which the Company holds securities. These appraisals are
expensive and occur infrequently but provide a third-party valuation opinion
that may
15
differ in results, techniques and scopes used to value the Companys
investments. When these specific
third-party appraisals are engaged or accepted, the Company uses such
appraisals to value the investment the Company has in that business if it is
determined that the appraisals are the best estimate of fair value.
The Policy, which
is summarized below, applies to publicly-traded securities, securities for
which a limited market exists, and securities for which no market exists.
Publicly-traded
securities:
The
Company determines 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 the Company owns
restricted securities that are not freely tradable, but for which a public
market otherwise exists, the Company will use the market value of that security
adjusted for any decrease in value resulting from the restrictive feature.
Securities
for which a limited market exists:
The Company values securities that are not traded on
an established secondary securities market, but for which a limited market for
the security exists, such as certain participations in, or assignments of,
syndicated loans, at the quoted price.
In valuing these assets, the Company assesses trading activity in an
asset class and evaluates variances in prices and other market insights to
determine if any available quote prices are reliable. If the Company concludes that quotes based on
active markets or trading activity may be relied upon, firm bid prices are
requested; however, if a firm bid price is unavailable, the Company bases the
value of the security upon the indicative bid price offered by the respective
originating syndication agents trading desk, or secondary desk, on or near the
valuation date. To the extent that the Company uses the indicative bid price as
a basis for valuing the security, the Adviser may take further steps to
consider additional information to validate that price in accordance with the
Policy.
In the event these limited markets become illiquid
such that market prices are no longer readily available, the Company will value
its syndicated loans using estimated net present values of the future cash
flows or discounted cash flows (DCF). The use of a DCF methodology follows
that prescribed by ASC 820-10-35-15A, Determining
the Fair Value of a Financial Asset When the Market for That Asset Is Not
Active,
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, the alternative outlined in the ASC 820-10-35-15A is the use of valuing investments based on
DCF. For the purposes of using DCF to
provide fair value estimates, the Company considers multiple inputs such as a
risk-adjusted discount rate that incorporates adjustments that market
participants would make both for nonperformance and liquidity risks. As such, the Company develops a modified
discount rate approach that incorporates risk premiums including, among others,
increased probability of default, or higher loss given default, or increased
liquidity risk. The DCF valuations are applied to the syndicated loans to
provide an estimate of what the Company believes a market participant would pay
to purchase a syndicated loan in an active market, thereby establishing a fair
value. The Company will apply the DCF
methodology in illiquid markets until quoted prices are available or are deemed
reliable based on trading activity.
As of September 30, 2009, the Company assessed
trading activity in its syndicated loan assets and determined that there had
been a return to market liquidity and a better functioning secondary market for
these assets. Thus, firm bid prices or
indicative bids were used to fair value the Companys remaining syndicated
loans at September 30, 2009.
However, for those syndicated loans which were sold but not yet settled
as of September 30, 2009, the Company used the respective sales prices to
value those syndicated loans.
Securities
for which no market exists:
The valuation methodology for securities for which no
market exists falls into three categories: (1) portfolio investments
comprised solely of debt securities; (2) portfolio investments in
controlled companies comprised of a bundle of securities, which can include
debt and equity securities; and (3) portfolio investments in
non-controlled companies comprised of a bundle of securities, which can include
debt and equity securities.
(1)
Portfolio investments
comprised solely of debt securities:
Debt securities that are not publicly traded on an
established securities market, or for which a limited market does not exist (Non-Public
Debt Securities), and that are issued by portfolio companies where the Company
has no equity, or equity-like securities, are fair valued in accordance with
the terms of the Policy, which utilizes opinions of value submitted to the
Company by Standard & Poors Securities Evaluations, Inc. (SPSE).
The Company may also submit paid in kind (PIK) interest to SPSE for their
evaluation when it is determined that PIK interest is likely to be received.
(2)
Portfolio investments in controlled
companies comprised of a bundle of investments, which can include debt and
equity securities:
The fair value of these investments is determined based on the total enterprise
value of the portfolio company, or issuer, utilizing a liquidity waterfall
approach under ASC 820-10, Fair Value Measurements and Disclosures
for the Companys Non-Public Debt Securities and equity or
equity-like securities (e.g. preferred equity, equity, or other equity-like
securities) that are purchased together as part of a package, where the Company
has 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 acquisition market as the principal market, generally through a
sale or recapitalization of the portfolio company. In accordance with ASC
820-10, the Company applies the in-use premise of value which assumes the debt
and equity securities are sold
16
together. Under this liquidity waterfall approach, the Company first
calculates the total enterprise value of the issuer by incorporating some or
all of the following factors to determine the total enterprise value of the
issuer:
·
the issuers ability to make payments;
·
the earnings of the issuer;
·
recent sales to third parties of similar
securities;
·
the comparison to publicly traded
securities; and
·
DCF or other pertinent factors.
In gathering the sales to third parties of similar securities, the
Company may reference industry statistics and use outside experts. Once the
Company has estimated the total enterprise value of the issuer, the Company
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 total enterprise value over the
total debt outstanding for the issuer. Once the values for all outstanding
senior securities (which include the debt securities) have been subtracted from
the total enterprise value 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 the Company use a valuation by SPSE, or if that
is unavailable, a DCF valuation technique.
(3)
Portfolio investments in
non-controlled companies comprised of a bundle of investments, which can
include debt and equity securities:
The Company values Non-Public Debt Securities that are
purchased together with equity or equity-like securities from the same
portfolio company, or issuer, for which the Company does not control or cannot
gain control as of the measurement date, using a hypothetical secondary market
as the Companys principal market. In accordance with ASC 820-10, the Company
determines its fair value of these debt securities of non-control investments
assuming the sale of an individual debt security using the in-exchange premise
of value (as defined in ASC 820-10). As such, the Company estimates the fair
value of the debt component using estimates of value provided by SPSE and its
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. Subsequent to June 30,
2009, for equity or equity-like securities of investments for which the Company
does not control or cannot gain control as of the measurement date, the Company
estimates the fair value of the equity using the in-exchange premise of value
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 also is given to capital structure and other
contractual obligations that may impact the fair value of the equity. Further,
the Company may utilize comparable values of similar companies, recent
investments and indices with similar structures and risk characteristics or its
own assumptions in the absence of other observable market data and may also
employ DCF valuation techniques.
Due to the uncertainty inherent in the valuation process, such
estimates of fair value may differ significantly from the values that would
have been obtained had a ready market for the securities existed, and the
differences could be material. 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 the Company might
reasonably expect to receive upon the current sale of the security in an
arms-length transaction in the securitys principal market.
Refer to Note 3
for additional information regarding fair value measurements and the Companys
adoption of ASC 820-10.
Interest
and Dividend Income Recognition
Interest income,
adjusted for amortization of premiums and acquisition costs and for the
accretion of discounts, is recorded on the accrual basis to the extent that
such amounts are expected to be collected. Generally, when a loan becomes 90
days or more past due or if the Companys qualitative assessment indicates that
the debtor is unable to service its debt or other obligations, the Company 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, the
Company remains contractually entitled to this interest. At September 30, 2009, one Control
investment was on non-accrual with a fair value of approximately $1.6 million,
or 0.8% of the fair value of all loans held in the Companys portfolio at September 30,
2009. At March 31, 2009, one
Control investment was on non-accrual with a fair value of approximately $2.6
million, or 0.8% of the fair value of all loans held in the Companys portfolio
at March 31, 2009.
Conditional
interest, or a success fee, is recorded upon full repayment of a loan
investment. To date, the Company has not recorded any conditional interest.
Dividend income on preferred equity securities is accrued to the extent that
such amounts are expected to be collected and that the Company has the option
to collect such amounts in cash. To date, the Company has not accrued any
dividend income.
17
NOTE
3. INVESTMENTS
The Company
adopted ASC 820-10 on April 1, 2008. In part, ASC 820-10 defines fair
value, establishes a framework for measuring fair value and expands disclosures
about assets and liabilities measured at fair value. The new standard 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. The
standard 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 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 the Companys own assumptions that market
participants would use to price the asset or liability based upon the best
available information.
As of September 30,
2009, all of the Companys assets were valued using Level 3 inputs.
The following
table presents the financial instruments carried at fair value as of September 30,
2009 and March 31, 2009, by caption on the accompanying condensed
consolidated statements of assets and liabilities for each of the three levels
of hierarchy established by ASC 820-10:
|
|
As of September 30, 2009
|
|
|
|
|
|
|
|
|
|
Total Fair Value
|
|
|
|
|
|
|
|
|
|
Reported in Condensed
|
|
|
|
|
|
|
|
|
|
Consolidated Statement of
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Assets and Liabilities
|
|
Non-Control/Non-Affiliate investments
|
|
$
|
|
|
$
|
|
|
$
|
25,004
|
|
$
|
25,004
|
|
Control investments
|
|
|
|
|
|
132,399
|
|
132,399
|
|
Affiliate investments
|
|
|
|
|
|
46,900
|
|
46,900
|
|
Total investments at fair value
|
|
$
|
|
|
$
|
|
|
$
|
204,303
|
|
$
|
204,303
|
|
|
|
As of March
31, 2009
|
|
|
|
|
|
|
|
|
|
Total Fair Value
|
|
|
|
|
|
|
|
|
|
Reported in Condensed
|
|
|
|
|
|
|
|
|
|
Consolidated Statement of
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Assets and Liabilities
|
|
Non-Control/Non-Affiliate
investments
|
|
$
|
|
|
$
|
|
|
$
|
94,740
|
|
$
|
94,740
|
|
Control
investments
|
|
|
|
|
|
166,163
|
|
166,163
|
|
Affiliate
investments
|
|
|
|
|
|
53,027
|
|
53,027
|
|
Total
investments at fair value
|
|
$
|
|
|
$
|
|
|
$
|
313,930
|
|
$
|
313,930
|
|
Changes
in Level 3 Fair Value Measurements of Investments
The following
tables provide a roll-forward in the changes in fair value during the three and
six months ended September 30, 2009 and 2008 for all investments for which
the Company determines fair value using unobservable (Level 3) factors. When a
determination is made to classify a financial instrument within Level 3 of the
valuation hierarchy, the 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 components, observable components (that is, components that are
actively quoted and can be validated to external sources). Accordingly, the
gains and losses in the table below include changes in fair value due in part
to observable factors that are part of the valuation methodology.
Fair value measurements using
unobservable data inputs (Level 3)
|
|
Non-Control/
|
|
|
|
|
|
|
|
|
|
Non-Affiliate
|
|
Control
|
|
Affiliate
|
|
|
|
|
|
Investments
|
|
Investments
|
|
Investments
|
|
Total
|
|
Six months ended September 30, 2009:
|
|
|
|
|
|
|
|
|
|
Fair value as of March 31, 2009
|
|
$
|
94,740
|
|
$
|
166,163
|
|
$
|
53,027
|
|
$
|
313,930
|
|
Total realized/unrealized gains (losses) (a)
|
|
609
|
|
(26,381
|
)
|
(6,119
|
)
|
(31,891
|
)
|
New investments, repayments, and settlements, net
|
|
(70,345
|
)
|
(7,383
|
)
|
(8
|
)
|
(77,736
|
)
|
Transfers in (out) of Level 3
|
|
|
|
|
|
|
|
|
|
Fair value as of September 30, 2009
|
|
$
|
25,004
|
|
$
|
132,399
|
|
$
|
46,900
|
|
$
|
204,303
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, 2009:
|
|
|
|
|
|
|
|
|
|
Fair value as of June 30, 2009
|
|
$
|
26,961
|
|
$
|
149,509
|
|
$
|
50,539
|
|
$
|
227,009
|
|
Total realized/unrealized (losses) gains (a)
|
|
(1,514
|
)
|
(14,900
|
)
|
(3,853
|
)
|
(20,267
|
)
|
New investments, repayments, and settlements, net
|
|
(443
|
)
|
(2,210
|
)
|
214
|
|
(2,439
|
)
|
Transfers in (out) of Level 3
|
|
|
|
|
|
|
|
|
|
Fair value as of September 30, 2009
|
|
$
|
25,004
|
|
$
|
132,399
|
|
$
|
46,900
|
|
$
|
204,303
|
|
(a)
Realized/unrealized gains and losses are reported on
the accompanying condensed consolidated statements of operations for the three
and six months ended September 30, 2009.
Fair value measurements using
unobservable data inputs (Level 3)
|
|
Non-Control/
|
|
|
|
|
|
|
|
|
|
Non-Affiliate
|
|
Control
|
|
Affiliate
|
|
|
|
|
|
Investments
|
|
Investments
|
|
Investments
|
|
Total
|
|
Six months ended September 30, 2008:
|
|
|
|
|
|
|
|
|
|
Fair value at March 31, 2008
|
|
$
|
142,739
|
|
$
|
145,407
|
|
$
|
47,458
|
|
$
|
335,604
|
|
Total realized/unrealized (losses) gains (a)
|
|
(4,941
|
)
|
5,973
|
|
(11,393
|
)
|
(10,361
|
)
|
New investments, repayments, and settlements, net
|
|
(22,665
|
)
|
5,866
|
|
17,812
|
|
1,013
|
|
Transfers in (out) of Level 3
|
|
|
|
|
|
|
|
|
|
Fair value as of September 30, 2008
|
|
$
|
115,133
|
|
$
|
157,246
|
|
$
|
53,877
|
|
$
|
326,256
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
September 30, 2008:
|
|
|
|
|
|
|
|
|
|
Fair value at June 30, 2008
|
|
$
|
130,764
|
|
$
|
141,042
|
|
$
|
48,493
|
|
$
|
320,299
|
|
Total realized/unrealized (losses) gains (a)
|
|
(7,689
|
)
|
10,840
|
|
(5,978
|
)
|
(2,827
|
)
|
New investments, repayments, and settlements, net
|
|
(7,942
|
)
|
5,364
|
|
11,362
|
|
8,784
|
|
Transfers in (out) of Level 3
|
|
|
|
|
|
|
|
|
|
Fair value as of September 30, 2008
|
|
$
|
115,133
|
|
$
|
157,246
|
|
$
|
53,877
|
|
$
|
326,256
|
|
(a) Realized/unrealized gains and losses are reported on the
accompanying condensed consolidated statements of operations for the three and
six months ended September 30, 2008.
18
Non-Control/Non-Affiliate
Investments
At September 30,
2009 and March 31, 2009, the Company held investments in
Non-Control/Non-Affiliates of approximately $25.0 million and $94.7 million,
respectively, at fair value. These investments were comprised primarily of
syndicated loan participations of senior notes of private companies and a
non-syndicated loan investment where the Company does not have a significant
ownership interest in the portfolio company. Included in
Non-Control/Non-Affiliate investments, at both September 30, 2009 and March 31,
2009, were common stock warrants of one Non-Control/Non-Affiliate company,
which carried a nominal fair value. At September 30,
2009 and March 31, 2009, the Companys investments, at fair value, in
Non-Control/Non-Affiliates represented approximately 14% and 44%, respectively,
of the Companys net assets.
During April and
May 2009, the Company sold 29 of its 32 senior syndicated loans held at March 31,
2009 (collectively, the Syndicated Loan Sales) for an aggregate of
approximately $69.2 million in cash proceeds and recorded a realized loss of
approximately $34.6 million in connection with these sales. These loans were
sold to pay down all unpaid principal and interest owed to Deutsche Bank AG (Deutsche
Bank) under the Companys prior credit agreement.
On September 29,
2009, the Company agreed to an early termination of its revolving line of
credit to B-Dry, LLC, which had an original maturity date of October 16,
2009. The revolving line of credit was
fully repaid at the time of the agreement.
During September 2009,
the Company finalized its sale of certain senior syndicated loans (HMTBP
Acquisition II Corp. and a portion of Interstate Fibernet, Inc.) that were
held in its portfolio of investments to various investors in the syndicated
loan market. These loans, in aggregate, had a cost value of approximately
$6.8 million, or 2.9% of the cost value of the Companys total investments, and
an aggregate fair market value of approximately $5.5 million, or 2.7% of the
fair market value of the Companys total investments, at September 30,
2009. The Company settled these loans in October 2009 and received
approximately $5.5 million in net cash proceeds and recorded a realized loss of
approximately $1.3 million which will be reflected in the results of operations
for the three months ended December 31, 2009. (See Note 12,
Subsequent Events
). These loans are included in
the Companys condensed consolidated assets as of September 30, 2009 and
were valued at their respective sale prices.
Control
and Affiliate Investments
At September 30, 2009 and March 31, 2009, the Company had
investments of approximately $148.6 million and $157.0 million, respectively,
at fair value, in revolving credit facilities, senior debt and subordinated
debt of 12 portfolio companies. In addition, at September 30 and March 31,
2009, the Company had invested approximately $30.7 million and $62.2 million,
respectively, at fair value, in preferred and common equity of those
companies. At September 30, 2009
and March 31, 2009, the Companys investments in Control investments, at
fair value, represented approximately 73% and 77%, respectively, of the Companys
net assets. Also, at both September 30, 2009 and March 31, 2009, the
Companys investments, at fair value, in Affiliate investments represented
approximately 26% and 25%, respectively, of the Companys net assets.
On April 9, 2009, A. Stucki Holding Corp. refinanced a portion of
its senior term debt by making principal repayments of approximately $2.0
million, which represented the next three quarterly payments due under normal
amortization on both their senior term A ($1.6 million) and senior term B
($412) loans. Normal amortization is
expected to resume on April 1, 2010.
On April 9, 2009, ASH Holdings Corp. made a repayment of
approximately $1.1 million on its revolving line of credit, which reduced the
outstanding balance to $500.
On April 10, 2009, the Company entered into an agreement to reduce
the available credit limit on Mathey Investment, Inc.s revolving line of
credit from $2.0 million to $1.0 million.
This was a non-cash transaction.
On April 10, 2009, the Company made an investment disbursement to
Cavert II Holding Corp. (Cavert) for approximately $850 on its revolving line
of credit, and the proceeds were used to make the next four quarterly payments
due under normal amortization for both its senior term A and senior term B
loans in a non-cash transaction. Normal
amortization on both of these loans is expected to resume on July 1,
2010. Subsequently, on April 17,
2009, Cavert repaid the outstanding $850 in principal plus accrued interest on
its revolving line of credit. The
revolving line of credit was then sold to a third party for a nominal fee.
On April 13, 2009, the Company entered into an agreement to reduce
the available credit limit on Chase II Holdings Corp.s revolving line of
credit from $4.5 million to $3.5 million.
This was a non-cash transaction.
Investment
Concentrations
Approximately 53%
of the aggregate fair value of the Companys investment portfolio at September 30,
2009 was comprised of senior debt, approximately 32% was senior subordinated
debt, and approximately 15% was preferred and common equity securities. At September 30,
2009, the Company had investments in 17 portfolio companies with an aggregate
fair value of $204.3 million, of which A. Stucki Holding Corp., Chase II
Holdings Corp. and Acme Cryogenics, Inc. collectively comprised
approximately $90.7 million, or 44% of the Companys total investment
portfolio, at fair value. The following
table outlines the Companys investments by type at September 30, 2009 and
March 31, 2009:
19
|
|
September 30, 2009
|
|
March 31, 2009
|
|
|
|
Cost
|
|
Fair Value
|
|
Cost
|
|
Fair Value
|
|
Senior Term Debt
|
|
$
|
119,170
|
|
$
|
108,205
|
|
$
|
230,861
|
|
$
|
185,161
|
|
Senior Subordinated Term Debt
|
|
72,111
|
|
65,353
|
|
72,762
|
|
66,576
|
|
Preferred & Common Equity Securities
|
|
45,322
|
|
30,745
|
|
45,322
|
|
62,193
|
|
Total Investments
|
|
$
|
236,603
|
|
$
|
204,303
|
|
$
|
348,945
|
|
$
|
313,930
|
|
Investments at
fair value consisted of the following industry classifications at September 30,
2009 and March 31, 2009:
|
|
September 30, 2009
|
|
March 31, 2009
|
|
|
|
|
|
Percentage of
|
|
|
|
Percentage of
|
|
|
|
Fair Value
|
|
Total Investments
|
|
Net Assets
|
|
Fair Value
|
|
Total Investments
|
|
Net Assets
|
|
Aerospace and Defense
|
|
$
|
16,862
|
|
8.3
|
%
|
9.3
|
%
|
$
|
22,436
|
|
7.2
|
%
|
10.4
|
%
|
Automobile
|
|
8,476
|
|
4.1
|
%
|
4.7
|
%
|
14,436
|
|
4.6
|
%
|
6.7
|
%
|
Beverage, Food and Tobacco
|
|
|
|
|
|
|
|
1,570
|
|
0.5
|
%
|
0.7
|
%
|
Broadcasting and Entertainment
|
|
|
|
|
|
|
|
1,934
|
|
0.6
|
%
|
0.9
|
%
|
Buildings and Real Estate
|
|
10,465
|
|
5.1
|
%
|
5.7
|
%
|
10,709
|
|
3.4
|
%
|
5.0
|
%
|
Cargo Transport
|
|
10,093
|
|
4.9
|
%
|
5.5
|
%
|
13,324
|
|
4.3
|
%
|
6.2
|
%
|
Chemicals, Plastics and Rubber
|
|
18,328
|
|
9.0
|
%
|
10.1
|
%
|
21,420
|
|
6.8
|
%
|
10.0
|
%
|
Containers, Packaging and Glass
|
|
16,349
|
|
8.0
|
%
|
9.0
|
%
|
21,446
|
|
6.8
|
%
|
10.0
|
%
|
Diversified/Conglomerate Manufacturing
|
|
49,773
|
|
24.4
|
%
|
27.3
|
%
|
56,944
|
|
18.1
|
%
|
26.5
|
%
|
Diversified/Conglomerate Service
|
|
3,064
|
|
1.5
|
%
|
1.7
|
%
|
23,585
|
|
7.5
|
%
|
11.0
|
%
|
Electronics
|
|
|
|
|
|
|
|
6,594
|
|
2.1
|
%
|
3.1
|
%
|
Healthcare, Education and Childcare
|
|
7,618
|
|
3.7
|
%
|
4.2
|
%
|
33,605
|
|
10.7
|
%
|
15.6
|
%
|
Machinery
|
|
46,681
|
|
22.8
|
%
|
25.6
|
%
|
63,907
|
|
20.4
|
%
|
29.8
|
%
|
Oil and Gas
|
|
5,119
|
|
2.5
|
%
|
2.8
|
%
|
6,171
|
|
2.0
|
%
|
2.9
|
%
|
Personal, Food, and Miscellaneous Services
|
|
|
|
|
|
|
|
3,552
|
|
1.1
|
%
|
1.7
|
%
|
Printing and Publishing
|
|
2,588
|
|
1.3
|
%
|
1.4
|
%
|
3,158
|
|
1.0
|
%
|
1.5
|
%
|
Telecommunications
|
|
8,887
|
|
4.4
|
%
|
4.9
|
%
|
9,139
|
|
2.9
|
%
|
4.3
|
%
|
Total Investments
|
|
$
|
204,303
|
|
100.0
|
%
|
|
|
$
|
313,930
|
|
100.0
|
%
|
|
|
The investments at
fair value were included in the following geographic regions of the United
States at September 30, 2009 and March 31, 2009:
|
|
September 30, 2009
|
|
March 31, 2009
|
|
|
|
|
|
Percentage of
|
|
|
|
Percentage of
|
|
|
|
Fair Value
|
|
Total Investments
|
|
Net Assets
|
|
Fair Value
|
|
Total Investments
|
|
Net Assets
|
|
Mid-Atlantic
|
|
$
|
77,961
|
|
38.1
|
%
|
42.8
|
%
|
$
|
119,622
|
|
38.1
|
%
|
55.7
|
%
|
Midwest
|
|
78,810
|
|
38.6
|
%
|
43.3
|
%
|
105,945
|
|
33.7
|
%
|
49.3
|
%
|
Northeast
|
|
7,800
|
|
3.8
|
%
|
4.3
|
%
|
17,525
|
|
5.6
|
%
|
8.2
|
%
|
Southeast
|
|
24,278
|
|
11.9
|
%
|
13.3
|
%
|
40,512
|
|
12.9
|
%
|
18.9
|
%
|
West
|
|
15,454
|
|
7.6
|
%
|
8.5
|
%
|
30,326
|
|
9.7
|
%
|
14.1
|
%
|
Total Investments
|
|
$
|
204,303
|
|
100.0
|
%
|
|
|
$
|
313,930
|
|
100.0
|
%
|
|
|
The geographic
region indicates the location of the headquarters for the Companys portfolio
companies. A portfolio company may have a number of other business locations in
other geographic regions.
Investment
Principal Repayments
The following
table summarizes the contractual principal repayment and maturity of the
Companys investment portfolio by fiscal year, assuming no voluntary
prepayments:
|
|
|
|
Amount
|
|
For the remaining six months ending March 31:
|
|
2010
|
|
$
|
13,710
|
|
For the fiscal year ending March 31:
|
|
2011
|
|
23,421
|
|
|
|
2012
|
|
54,833
|
|
|
|
2013
|
|
13,256
|
|
|
|
2014
|
|
61,293
|
|
|
|
2015
|
|
21,742
|
|
|
|
Thereafter
|
|
3,043
|
|
|
|
Total
contractual repayments
|
|
$
|
191,298
|
|
|
|
Investments in
equity securities
|
|
45,322
|
|
|
|
Unamortized
premiums on debt securities
|
|
(17
|
)
|
|
|
Total
investments held at September 30, 2009:
|
|
$
|
236,603
|
|
20
NOTE
4. RELATED PARTY TRANSACTIONS
Investment
Advisory and Management Agreement
The Company has entered into an investment advisory and management
agreement with the Adviser (the Advisory Agreement), which is controlled by
the Companys chairman and chief executive officer. In accordance with the
Advisory Agreement, the Company pays the Adviser fees as compensation for its
services, consisting of a base management fee and an incentive fee. On July 8,
2009, the Companys Board of Directors approved the renewal of its Advisory
Agreement with the Adviser through August 31, 2010.
The Company pays the Adviser an annual base management fee of 2% of its
average gross assets, which is defined as total assets less uninvested cash and
cash equivalents resulting from borrowings calculated as of the end of the two
most recently completed quarters.
The
following tables summarize the management fees and associated credits reflected
in the accompanying condensed consolidated statements of operations:
|
|
Three months ended
September 30,
|
|
Six months ended September 30,
|
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
Base management fee
|
|
$
|
164
|
|
$
|
435
|
|
$
|
477
|
|
$
|
861
|
|
|
|
|
|
|
|
|
|
|
|
Credits to base
management fee from Adviser:
|
|
|
|
|
|
|
|
|
|
Fee reduction for the waiver of 2% fee on senior
syndicated loans to 0.5% (1)
|
|
(48
|
)
|
(383
|
)
|
(231
|
)
|
(807
|
)
|
Credit for fees received by Adviser from the
portfolio companies
|
|
(117
|
)
|
(313
|
)
|
(235
|
)
|
(463
|
)
|
Credit to base management fee from
Adviser
|
|
(165
|
)
|
(696
|
)
|
(466
|
)
|
(1,270
|
)
|
|
|
|
|
|
|
|
|
|
|
Net base management fee
|
|
$
|
(1
|
)
|
$
|
(261
|
)
|
$
|
11
|
|
$
|
(409
|
)
|
(1)
The
Adviser voluntarily and irrevocably waived the annual 2.0% base management fee
to 0.5% for senior syndicated loan participations on a quarterly basis to the
extent that proceeds resulting from borrowings were used to purchase such
syndicated loan participation. Fees waived cannot be recouped by the Adviser in
the future.
Overall, the base management fee due to
the Adviser cannot exceed 2.0% of total assets (as reduced by cash and cash
equivalents pledged to creditors) during any given fiscal year. Amounts
included in Fee due to Adviser in the accompanying condensed consolidated
statements of assets and liabilities were as follows:
|
|
September 30,
2009
|
|
March 31,
2009
|
|
Unpaid base management fee
due to Adviser
|
|
$
|
(1
|
)
|
$
|
(114
|
)
|
Unpaid loan servicing fee
due to Adviser
|
|
222
|
|
301
|
|
Total Fee due to Adviser
|
|
$
|
221
|
|
$
|
187
|
|
From
inception through September 30, 2009, the Company has not recorded any
income-based incentive fee.
Loan
Servicing and Portfolio Company 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 the Companys line of credit. Since the Company owns these loans,
all loan servicing fees paid to the Adviser are treated as reductions against
the 2.0% base management fee under the Advisory Agreement. For the three and six months ended September 30,
2009, the Company recorded loan servicing fees due to the Adviser of $938 and
$2,006, respectively, as compared to $1,258 and $2,511 for the three and six
months ended September 30, 2008, respectively, all of which were deducted
against the 2.0% base management fee in order to derive the Base management fee
line item in the accompanying condensed consolidated statements of
operations. Under the Advisory Agreement,
the Adviser has also provided and continues to provide managerial assistance
and other services to the Companys portfolio companies and may receive fees
for services other than managerial assistance.
Administration
Agreement
The Company has entered
into an administration agreement (the Administration Agreement) with
Gladstone Administration, LLC (the Administrator), a wholly-owned subsidiary
of the Adviser. Under the Administration
Agreement, the Company pays separately for administrative services. The
Administration Agreement provides for payments equal to the Companys allocable
portion of its Administrators overhead expenses in performing its obligations
under the Administration Agreement including, but not limited to, rent for
employees of the Administrator, and its allocable portion of the salaries and
benefits expenses of the Companys chief financial officer, chief compliance
officer, treasurer and their respective staffs. The Companys allocable portion
of expenses is derived by multiplying the Administrators total allocable
expenses by the percentage of the Companys average total assets (the total
assets at the beginning of each quarter) in comparison to the average total
assets of all companies managed by the Adviser under similar agreements. On July 8,
2009, the Companys Board of Directors approved the renewal of its
Administration Agreement with the Administrator through August 31, 2010.
21
The Company recorded fees to the Administrator on the condensed
consolidated statements of operations of $198 and $371 for the three and six
months ended September 30, 2009, respectively, as compared to
administration fees of $212 and $447 for the three and six months ended September 30,
2008, respectively. As of September 30,
2009 and March 31, 2009, $198 and $179, respectively, was unpaid and
included in Fee due to Administrator in the accompanying condensed consolidated
statements of assets and liabilities.
NOTE
5. LINE OF CREDIT
On April 14,
2009, the Company, through its wholly-owned subsidiary, Business Investment,
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. In connection with entering into
the Credit Facility, the Company borrowed $43.8 million under the Credit Facility
to make a final payment in satisfaction of all unpaid principal and interest
owed to Deutsche Bank under the prior credit agreement. The Credit Facility may be expanded up to
$125.0 million through the addition of other committed lenders to the
facility. The Credit Facility matures on
April 14, 2010, and, if the facility is not renewed or extended by this
date, all unpaid principal and interest will be due and payable within one year
of the maturity date. Advances under the
Credit Facility generally bear interest at the 30-day LIBOR rate (subject to a
minimum rate of 2%), plus 5% per annum, with a commitment fee of 0.75% per
annum on undrawn amounts. As of September 30,
2009, the Company has approximately $36.1 million of principal outstanding with
approximately $11.6 million of availability under the line of credit.
Interest is
payable monthly during the term of the Credit Facility. After April 14,
2010, if the Credit Facility is not renewed, all principal collections from the
Companys loans are required to be used to pay outstanding principal under 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.
The Credit
Facility contains covenants that require Business Investment to maintain its
status as a separate entity; prohibit certain significant transactions (such as
mergers, consolidations, liquidations or dissolutions); and restrict material
changes to the Companys credit and collection policies without lenders
consent. The facility also limits payments on distributions to the aggregate
net investment income for the prior twelve months preceding April 2010. As
of September 30, 2009, Business Investment was in compliance with all of
the facility covenants. The Company is
also subject to certain limitations on the type of loan investments it can
make, including restrictions on geographic concentrations, sector
concentrations, loan size, dividend payout, payment frequency and status,
average life and lien property. The
Credit Facility also requires the Company to comply with other financial and
operational covenants, which require the Company to, among other things,
maintain certain financial ratios, including asset and interest coverage a minimum
net worth, and a minimum number of obligors required in the borrowing base of
the credit agreement.
In conjunction
with entering into the Credit Facility, the Company amended a performance
guaranty which remains substantially similar to the form under the previous
credit facility. The performance guaranty requires the Company to maintain a
minimum net worth of $169 million plus 50% of all equity and subordinated debt
raised after April 14, 2009, to maintain asset coverage with respect to senior
securities representing indebtedness of at least 200%, in accordance with Section 18
of the 1940 Act, and to maintain its status as a BDC under the 1940 Act and as
a RIC under the Code. As of September 30, 2009, the Company was in
compliance with the covenants under the performance guaranty.
The Company has
adopted ASC 825,
Financial Instruments
specifically for the Credit
Facility. ASC 825 requires that the Company apply a fair value methodology
to the Credit Facility. The Credit Facility has been fair valued by an
independent third party. The following table presents the Credit Facility
carried at fair value as of September 30, 2009, by caption on the
accompanying condensed consolidated statement of assets and liabilities for
each of the three levels of hierarchy established by ASC 820-10:
|
|
As of September 30, 2009
|
|
|
|
|
|
|
|
|
|
Total Fair Value
|
|
|
|
|
|
|
|
|
|
Reported in Condensed
|
|
|
|
|
|
|
|
|
|
Consolidated Statement of
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Assets and Liabilities
|
|
Borrowings under line of credit(a)
|
|
$
|
|
|
$
|
|
|
$
|
36,278
|
|
$
|
36,278
|
|
Total
|
|
$
|
|
|
$
|
|
|
$
|
36,278
|
|
$
|
36,278
|
|
(a) Unrealized appreciation of $178 is reported on
the accompanying condensed consolidated statement of operations for the three
months ended September 30, 2009.
NOTE
6. INTEREST RATE CAP AGREEMENT
In May 2009, the Company cancelled its interest rate cap agreement
with Deutsche Bank and entered into an interest rate cap agreement with
BB&T that effectively limits the interest rate on a portion of the
borrowings under the line of credit pursuant to the terms of the Credit
Facility. The interest rate cap has a notional amount of $45 million at a cost
of approximately $39. At September
22
30, 2009, the interest rate cap agreement had a fair market value of
approximately $12. The Company records changes in the fair market value of the
interest rate cap agreement quarterly based on the current market valuation at
quarter end as unrealized depreciation or appreciation on derivative on the
Companys consolidated statement of operations. The interest rate cap agreement
expires in April 2010. The agreement provides that the Companys floating
interest rate or cost of funds on a portion of the portfolios borrowings will
be capped at 9% when the LIBOR rate is in excess of 9%.
The use of a cap involves risks that are different from those
associated with ordinary portfolio securities transactions. Cap agreements may
be considered to be illiquid. Although the Company will not enter into any such
agreements unless it believes that the other party to the transaction is
creditworthy, the Company does 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. SHORT-TERM LOAN
On June 30,
2009, the Company purchased $83.0 million of short-term United States Treasury
securities through Jefferies & Company, Inc. (Jefferies). The securities were purchased with $18.0
million in funds drawn on the Credit Facility and the proceeds from a $65.0
million short-term loan from Jefferies, with an effective annual interest rate
of approximately 2.5%. On July 2,
2009, when the securities matured, the Company repaid the $65.0 million loan
from Jefferies in full, and repaid all but $1.0 million of the amount drawn on
the Credit Facility for the transaction, which was retained for working capital
purposes.
On September 29,
2009, the Company purchased $85.0 million of short-term United States Treasury
securities through Jefferies. The
securities were purchased with $10.0 million in funds drawn on the Credit
Facility and the proceeds from a $75.0 million short-term loan from Jefferies,
with an effective annual interest rate of approximately 0.65%. On October 2, 2009, when the securities
matured, the Company repaid the $75.0 million loan from Jefferies in full and
repaid the $10.0 million drawn on the Credit Facility.
NOTE
8. COMMON STOCK
As of both September 30,
2009 and March 31, 2009, 100,000,000 shares of common stock, $0.001 par
value per share, were authorized and 22,080,133 shares of common stock were
outstanding.
NOTE
9. NET (DECREASE) INCREASE IN NET ASSETS PER SHARE RESULTING FROM OPERATIONS
The following
table sets forth the computation of basic and diluted net (decrease) increase
in net assets per share resulting from operations:
|
|
Three months ended September 30,
|
|
Six months ended September 30,
|
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
Numerator
for basic and diluted net (decrease) increase in net assets resulting from
operations per share
|
|
$
|
(18,090
|
)
|
$
|
956
|
|
$
|
(27,280
|
)
|
$
|
(3,527
|
)
|
Denominator
for basic and diluted shares
|
|
22,080
|
|
22,080
|
|
22,080
|
|
21,012
|
|
Basic
and diluted net (decrease) increase in net assets resulting from operations
per share
|
|
$
|
(0.82
|
)
|
$
|
0.04
|
|
$
|
(1.24
|
)
|
$
|
(0.17
|
)
|
NOTE
10. DISTRIBUTIONS
The
following table lists the per common share distributions paid for the six
months ended September 30, 2009 and 2008:
|
|
|
|
|
|
Distribution
|
|
Declaration
Date
|
|
Record
Date
|
|
Payment
Date
|
|
Per Share
|
|
April 16, 2009
|
|
April 27,
2009
|
|
May 8, 2009
|
|
$
|
0.04
|
|
April 16, 2009
|
|
May 20,
2009
|
|
May 29,
2009
|
|
0.04
|
|
April 16, 2009
|
|
June 22,
2009
|
|
June 30,
2009
|
|
0.04
|
|
July 8, 2009
|
|
July 23,
2009
|
|
July 31,
2009
|
|
0.04
|
|
July 8, 2009
|
|
August 21,
2009
|
|
August 31,
2009
|
|
0.04
|
|
July 8, 2009
|
|
September 22,
2009
|
|
September 30,
2009
|
|
0.04
|
|
|
|
|
|
Total
|
|
$
|
0.24
|
|
|
|
|
|
|
|
Distribution
|
|
Declaration Date
|
|
Record Date
|
|
Payment Date
|
|
Per Share
|
|
April 8, 2008
|
|
April 22,
2008
|
|
April 30,
2008
|
|
$
|
0.08
|
|
April 8, 2008
|
|
May 21,
2008
|
|
May 30,
2008
|
|
0.08
|
|
April 8, 2008
|
|
June 20,
2008
|
|
June 30,
2008
|
|
0.08
|
|
July 9, 2008
|
|
July 23,
2008
|
|
July 31,
2008
|
|
0.08
|
|
July 9, 2008
|
|
August 21,
2008
|
|
August 29,
2008
|
|
0.08
|
|
July 9, 2008
|
|
September 22,
2008
|
|
September 30,
2008
|
|
0.08
|
|
|
|
|
|
Total
|
|
$
|
0.48
|
|
23
Aggregate distributions declared and paid for the three months ended September 30,
2009 and 2008 were approximately $2.6 million and $5.3 million,
respectively. Aggregate distributions
declared for the six months ended September 30, 2009 and 2008 were
approximately $5.3 million and $10.2 million, respectively. All distributions were declared based on
estimates of net investment income, and some of the distributions included a
return of capital.
The timing and characterization of certain income and capital gains
distributions are determined annually in accordance with federal tax
regulations which may differ from GAAP. These differences primarily relate to
items recognized as income for financial statement purposes and realized gains
for tax purposes. As a result, net investment income and net realized gain
(loss) on investment transactions for a reporting period may differ
significantly from distributions during such period. Accordingly, the Company
may periodically make reclassifications among certain of its capital accounts
without impacting the net asset value of the Company.
Section 19(a) Disclosure
The Companys Board of Directors estimates the source of the
distributions at the time of their declaration as required by Section 19(a) of
the 1940 Act. On a monthly basis, if required under Section 19(a), the
Company posts a Section 19(a) notice through the Depository Trust
Companys Legal Notice System (LENS) and also sends to its registered
stockholders a written Section 19(a) notice along with the payment of
distributions for any payment which includes a distribution estimated to be
paid from any other source other than net investment income. The estimates of
the source of the distribution are interim estimates based on GAAP that are
subject to revision, and the exact character of the distributions for tax
purposes cannot be determined until the final books and records of the Company
are finalized for the calendar year. Following the calendar year end, after
definitive information has been determined by the Company, if the Company has
made distributions of taxable income (or return of capital), the Company will
deliver a Form 1099-DIV to its stockholders specifying such amount and the
tax characterization of such amount. Therefore, these estimates are made solely
in order to comply with the requirements of Section 19(a) of the 1940
Act and should not be relied upon for tax reporting or any other purposes and
could differ significantly from the actual character of distributions for tax
purposes.
The following GAAP estimates were made by the Board of Directors during
the quarter ended September 30, 2009:
Payment Date
|
|
Ordinary Income
|
|
Return of Capital
|
|
Total Distribution
|
|
July 31, 2009
|
|
$
|
0.042
|
|
$
|
(0.002
|
)
|
$
|
0.040
|
|
August 31, 2009
|
|
0.039
|
|
0.001
|
|
0.040
|
|
September 30, 2009
|
|
0.039
|
|
0.001
|
|
0.040
|
|
|
|
|
|
|
|
|
|
|
|
|
Because the Board of Directors declares distributions at the beginning
of a quarter, it is difficult to estimate how much of the Companys monthly
distributions, based on GAAP, will come from ordinary income, capital gains and
returns of capital. Subsequent to the quarter ended September 30, 2009,
the following corrections were made to the above listed estimates for that
quarter:
Payment Date
|
|
Ordinary Income
|
|
Return of Capital
|
|
Total Distribution
|
|
July 31, 2009
|
|
$
|
0.038
|
|
$
|
0.002
|
|
$
|
0.040
|
|
August 31, 2009
|
|
0.034
|
|
0.006
|
|
0.040
|
|
September 30, 2009
|
|
0.036
|
|
0.004
|
|
0.040
|
|
|
|
|
|
|
|
|
|
|
|
|
For distributions declared subsequent to quarter end, the following
estimates, based on GAAP, have been made pursuant to Section 19(a) of
the 1940 Act:
Payment Date
|
|
Ordinary Income
|
|
Return of Capital
|
|
Total Distribution
|
|
October 30, 2009
|
|
$
|
0.037
|
|
$
|
0.003
|
|
$
|
0.040
|
|
November 30, 2009
|
|
0.040
|
|
|
|
0.040
|
|
December 31, 2009
|
|
0.042
|
|
(0.002
|
)
|
0.040
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE
11. COMMITMENTS AND CONTINGENCIES
At
September 30, 2009, the Company was not party to any signed term sheets
for potential investments.
In October 2008,
the Company executed a guaranty of a vehicle finance facility agreement between
Ford Motor Credit Company (FMC) and Auto Safety House, LLC (ASH), one of
its Control investments (the Finance Facility). The Finance Facility provides ASH with a line
of credit of up to $500 for component Ford parts used by ASH to build truck
bodies under a separate contract. Title
and ownership of the parts is retained by Ford. The guaranty of the Finance
Facility will expire upon termination of the
24
separate parts
supply contract with Ford or upon our replacement as guarantor. The Finance Facility is secured by all of the
assets of Business Investment. As of September 30,
2009, the Company has not been required to make any payments on the guaranty of
the Finance Facility.
NOTE
12. SUBSEQUENT EVENTS
The Company
evaluated all events that have occurred subsequent to September 30, 2009
through the date of the filing of this Form 10-Q on November 3, 2009.
Short-Term
Loan Repayment
On October 2,
2009, when the securities purchased on September 29, 2009 through
Jefferies matured, the Company repaid the $75.0 million loan from Jefferies in
full, and repaid the $10.0 million drawn on the Credit Facility for the
transaction. Please refer to Note 7,
Short-Term Loan
for more information.
Senior
Syndicated Loan Sales
The Company settled
certain senior syndicated loans (HMTBP Acquisition II Corp. and a portion of
Interstate Fibernet, Inc.) in October 2009 which were sold in September 2009. Upon the settlement of these senior
syndicated loans, the Company received approximately $5.5 million in net cash
proceeds and recorded a realized loss of approximately $1.3 million which
will be reflected in the results of operations for the three months ended
December 31, 2009. These loans are included in the Companys condensed
consolidated assets as of September 30, 2009 and were valued at their
respective sale prices. See Note 3,
Investments
, for more information.
Distributions
On October 6,
2009, the Companys Board of Directors declared the following monthly cash
distributions:
|
|
|
|
|
|
Distribution
|
|
Declaration Date
|
|
Record Date
|
|
Payment Date
|
|
Per Share
|
|
October 6, 2009
|
|
October 22,
2009
|
|
October 30,
2009
|
|
$
|
0.040
|
|
October 6, 2009
|
|
November 19,
2009
|
|
November 30,
2009
|
|
0.040
|
|
October 6, 2009
|
|
December 22,
2009
|
|
December 31,
2009
|
|
0.040
|
|
|
|
|
|
|
|
|
|
|
Registration
Statement
On July 21,
2009, the Company filed a registration statement on Form N-2 (Registration
No. 333-160720) that was amended on October 2, 2009. The SEC declared
the registration statement effective on October 8, 2009 and such registration
statement will permit the Company to issue, through one or more transactions,
up to an aggregate of $300.0 million in securities, consisting of common stock,
senior common stock, preferred stock, subscription rights, debt securities and
warrants to purchase common stock, or a combination of these securities.
Sale
of Chase II Holdings Corp. Revolving Line of Credit
On October 13, 2009, the Company refinanced its revolving line of
credit with Chase II Holdings Corp. to a third party, and the outstanding
balance of $3.5 million, plus accrued interest, was repaid in full. The proceeds were used to make a repayment on
the outstanding amount under the Companys Credit Facility.
Portfolio
Company Investment Activity
During October 2009, one of the Companys portfolio companies
entered into an agreement with a third party to act as an advisor in looking at
strategic investment alternatives.
It is premature in the process to speculate on what
these strategic alternatives might be or what impact, if any, such activities
may have on the Company's investment in the subject portfolio company.
During October 2009, A. Stucki Holding Corp. declared and paid accrued
cash dividends on its preferred stock of which the Company received
approximately $953,000.
25
ITEM 2. MANAGEMENTS DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (dollar amounts
in thousands, except per share data or as otherwise indicated).
All statements contained herein, other than historical facts,
may constitute forward-looking statements. These statements may relate to,
among other things, future events or our future performance or financial
condition. In some cases, you can identify forward-looking statements by
terminology such as may, might, believe, will, provided, anticipate,
future, could, growth, plan, intend, expect, should, would, if,
seek, possible, potential, likely or the negative of such terms or
comparable terminology. These forward-looking statements involve known and
unknown risks, uncertainties and other factors that may cause our actual
results, levels of activity, performance or achievements to be materially
different from any future results, levels of activity, performance or
achievements expressed or implied by such forward-looking statements. We
caution readers not to place undue reliance on any such forward-looking
statements. We undertake no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise, after the date of this Form 10-Q
.
The
following analysis of our financial condition and results of operations should
be read in conjunction with our condensed consolidated financial statements and
the notes thereto contained elsewhere in this report and our annual report on Form 10-K
for the fiscal year ended March 31, 2009.
OVERVIEW
We were incorporated under the General Corporation Laws of the State of
Delaware on February 18, 2005. We were primarily established for the
purpose of investing in subordinated loans, mezzanine debt, preferred stock and
warrants to purchase common stock of small and medium-sized companies in
connection with buyouts and other recapitalizations. We also invest in senior
secured loans, common stock and, to a much lesser extent, senior and
subordinated syndicated loans. Our investment objective is to generate both
current income and capital gains through these debt and equity instruments. We
operate as a closed-end, non-diversified management investment company and have
elected to be treated as a business development company under the Investment
Company Act of 1940 (the 1940 Act). In
addition, for tax purposes, we have elected to be treated as a regulated investment
company (RIC) under the Internal Revenue Code of 1986, as amended (the Code).
Business
Environment
The current
economic conditions generally and the disruptions in the capital markets in
particular have decreased liquidity and increased our cost of debt and equity
capital, where available. The longer these conditions persist, the greater the
probability that these factors could continue to increase our cost of and
significantly limit our access to debt and equity capital, and thus have an
adverse effect on our operations and financial results. Many of the companies
in which we have made or will make investments are also susceptible to the
economic downturn, which may affect the ability of one or more of our portfolio
companies to repay our loans or engage in a liquidity event, such as a sale,
recapitalization or initial public offering. The recession could also
disproportionately impact some of the industries in which we invest, causing us
to be more vulnerable to losses in our portfolio. Therefore, the fair market
value of our aggregate portfolio is likely to continue to decrease during these
periods.
The recession has
affected the availability of credit generally and, as a result, subsequent to
our fiscal year end, we sold 29 senior syndicated loans that were held in our
portfolio of investments at March 31, 2009 to various investors in the
syndicated loan market (collectively, the Syndicated Loan Sales) in order to
repay amounts outstanding under our prior credit facility, which matured in April 2009.
These loans, in aggregate, had a cost value of approximately $104.2 million, or
29.9% of the cost value of our total investments, and an aggregate fair market
value of approximately $69.8 million, or 22.2% of the fair market value of our
total investments, at March 31, 2009.
Additionally, during September 2009, we sold certain senior
syndicated loans (see Recent DevelopmentsSenior Syndicated Sales section
below) to various investors in the syndicated loan market. Upon the settlement
of these loans in October 2009, we have two remaining senior syndicated
loans which we plan to exit in the long-term future. These sales, in aggregate,
have changed our asset composition in a manner that has affected our ability to
satisfy certain elements of the Codes rules for maintenance of our RIC
status. In order to maintain our status as a RIC, in addition to other
requirements, as of the close of each quarter of our taxable year, we must meet
the asset diversification test, which requires that at least 50% of the value
of our assets consist of cash, cash items, U.S. government securities or
certain other qualified securities. During the quarter ended September 30,
2009, we fell below the required 50% asset diversification threshold.
Failure to meet
the asset diversification test alone will not result in our loss of RIC status.
In circumstances where the failure to meet the quarterly 50% asset
diversification threshold is the result of fluctuations in the value of assets,
including as a result of the sale of assets, we will still be deemed under the
Codes rules to satisfy the asset diversification test and, therefore,
maintain our RIC status, as long as we have not made any new investments,
including additional investments in our portfolio companies (such as advances
under outstanding lines of credit), since the time that we fell below the 50%
threshold. At September 30, 2009, the second quarterly measurement date
following the sales, we satisfied the 50% asset diversification threshold
through the purchase of short-term qualified securities, which was funded
primarily through a short-term loan agreement. Subsequent to the September 30th
measurement date, these securities matured and we repaid the short-term loan,
at which time we again fell below the 50% threshold. See Recent
26
DevelopmentsShort-Term
Loan for more information regarding this transaction. As of the date of this
filing, we remain below the 50% threshold. Thus, although we currently qualify
as a RIC despite our current, and potential future, inability to meet the 50%
asset diversification requirement, if we make any additional investments before
regaining compliance with the asset diversification test, our RIC status will
be threatened. If we make a new or additional investment and fail to regain
compliance with the 50% threshold on the next quarterly measurement date
following such investment, we will be in non-compliance with the RIC rules and
will have thirty days to cure our failure of the asset diversification test
to avoid our loss of RIC status. Potential cures for failure of the asset
diversification test include raising additional equity or debt capital, or
changing the composition of our assets, which could include full or partial divestitures
of investments, such that we would once again exceed the 50% threshold.
Until the
composition of our assets is above the required 50% asset diversification
threshold, we will continue to seek to deploy similar purchases of qualified
securities using short-term loans that would allow us to satisfy the asset
diversification test, thereby allowing us to make additional investments. There
can be no assurance, however, that we will be able to enter into such a
transaction on reasonable terms, if at all. We also continue to explore a
number of other strategies, including changing the composition of our assets,
which could include full or partial divestitures of investments, and raising
additional equity or debt capital, such that we would once again exceed the 50%
threshold. Our ability to implement any of these strategies will be subject to
market conditions and a number of risks and uncertainties that are, in part,
beyond our control.
On April 14,
2009, through our wholly-owned subsidiary, Gladstone Business Investment, LLC (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 Company Inc. also joined the Credit Facility as a
committed lender. Under the terms of the
Credit Facility, committed funding was reduced from $125.0 million under our
prior facility to $50.0 million. See Liquidity and Capital Resources section
below for further information. As of the date of this filing, approximately $16.1
million was outstanding under the Credit Facility and $32.1 million was
available for borrowing due to certain limitations on our borrowing base. As a
result of this limited availability under our credit facility, and the
restraints upon our investing activities required in order to maintain RIC
status under the Code as described above, we are unsure when we will once again
be in a position to make any new investments. The Credit Facility also limits
our distributions to stockholders and, as a result, we recently decreased our
monthly cash distribution rate by 50% as compared to the prior year period. We
do not know when market conditions will stabilize, if adverse conditions will
intensify or the full extent to which the disruptions will continue to affect
us. If market instability persists or intensifies, we may experience increasing
difficulty in raising capital.
Challenges in the
current market are intensified for us by certain regulatory limitations under
the Code and the 1940 Act, as well as contractual restrictions under the
agreement governing the Credit Facility that further constrain our ability to
access the capital markets. To maintain our qualification as a RIC, we must
satisfy, among other requirements, an annual distribution requirement to pay
out at least 90% of our ordinary income and short-term capital gains to our
stockholders on an annual basis. Because we are required to distribute our
income in this manner, and because the illiquidity of many of our investments
makes it difficult for us to finance new investments through the sale of
current investments, our ability to make new investments is highly dependent
upon external financing. Our external financing sources include the issuance of
equity securities, debt securities or other leverage such as borrowings under
our line of credit. Our ability to seek external debt financing, to the extent
that it is available under current market conditions, is further subject to the
asset coverage limitations of the 1940 Act, which require us to have at least a
200% asset coverage ratio, meaning generally that for every dollar of debt, we
must have two dollars of assets.
Recent market
conditions have also affected the trading price of our common stock and thus
our ability to finance new investments through the issuance of equity. On November 2,
2009, the closing market price of our common stock was $5.04 which price
represented a 38.8% discount to our September 30, 2009 net asset value, or
NAV, per share. When our stock is trading below NAV, as it has consistently
traded subsequent to September 30, 2008, our ability to issue equity is
constrained by provisions of the 1940 Act which generally prohibit the issuance
and sale of our common stock below NAV per share without stockholder approval
other than through sales to our then-existing stockholders pursuant to a rights
offering. At our annual meeting of stockholders held on August 13, 2009,
our stockholders approved a proposal which authorizes us to sell shares of our
common stock at a price below our then current NAV per share for a period of
one year from the date of approval, provided that our Board of Directors makes
certain determinations prior to any such sale.
The recession may
also continue to decrease the value of collateral securing some of our loans,
as well as the value of our equity investments, which has impacted and may
continue to impact our ability to borrow under the Credit Facility. Additionally,
the Credit Facility contains covenants regarding the maintenance of certain
minimum loan concentrations which are affected by the decrease in value of our
portfolio. Failure to meet these requirements would result in a default which,
if we are unable to obtain a waiver from our lenders, would result in the
acceleration of our repayment obligations under the Credit Facility.
We expect that,
given these regulatory and contractual constraints in combination with current
market conditions, debt and equity capital may be costly or difficult for us to
access for some time. For so long as this is the case, our near-term strategy
depends on retaining capital and building the value of our existing portfolio
companies to increase the likelihood of maintaining potential future returns.
We will also, where prudent and possible, consider the sale of lower-yielding
investments. This has resulted, and may
27
continue to
result, in significantly reduced investment activity, as our ability to make
new investments under these conditions is largely dependent on availability of
proceeds from the sale or exit of existing portfolio investments, which events
may be beyond our control. As capital constraints improve, we intend to
continue our strategy of making conservative investments in businesses that we
believe will weather the economy and that are likely to produce attractive
long-term returns for our stockholders.
Senior
Syndicated Loan Valuations
Due to the illiquidity in the market for syndicated loans during the
three quarters prior to and including June 30, 2009, a discounted cash
flow (DCF) methodology was used to value these investments during those
periods, following guidance provided under
ASC 820-10-35-15A,
Determining the Fair Value of a Financial Asset When the Market for That Asset
is Not Active. However, in monitoring the market activity
during the quarter ended September 30, 2009, we noted changing market
conditions indicating a return to liquidity and a better functioning secondary
market for syndicated loans. Therefore,
in accordance with ASC 820-10-35-15A, and following our valuation
procedures, which specify the use of third-party indicative bid quotes for
valuing syndicated loans where there is a liquid public market for those loans
and market pricing quotes are readily available, a third-party bid quote was
used to value the remaining senior syndicated loan not sold during the quarter
ended September 30, 2009. We
settled certain senior syndicated loans (HMTBP Acquisition II Corp. and a
portion of Interstate Fibernet, Inc.) in October 2009 which sales
were finalized in September 2009 as previously described elsewhere in this
filing. Those loans are included in our
condensed consolidated assets as of September 30, 2009 and were valued at
their respective sale prices.
Recent
Developments
Short-Term
Loan
On September 29,
2009, we purchased $85.0 million of short-term United States Treasury
securities through Jefferies & Company, Inc. (Jefferies). The securities were purchased with $10.0
million in funds drawn on the Credit Facility and the proceeds from a $75.0
million short-term loan from Jefferies with an effective annual interest rate
of approximately 0.65%. On October 2,
2009, when the securities matured, we repaid the $75.0 million loan from
Jefferies in full, and repaid the $10.0 million drawn on the Credit Facility
for the transaction.
Senior
Syndicated Sales
During September 2009,
we finalized the sale of certain senior syndicated loans (HMTBP Acquisition II
Corp. and a portion of Interstate Fibernet, Inc.) to various investors in
the syndicated loan market. These loans, in aggregate, had a cost value
of approximately $6.8 million, or 2.9% of the cost value of our total investments,
and an aggregate fair market value of approximately $5.5 million, or 2.7% of
the fair market value of our total investments, at September 30,
2009. Upon the settlement of these loans in October 2009, we
received approximately $5.5 million in net cash proceeds and recorded a
realized loss of approximately $1.3 million (See Note 12,
Subsequent
Events
). These loans are included in our condensed
consolidated assets as of September 30, 2009 and were valued at their
respective sale prices.
Registration
Statement
On July 21,
2009, we filed a registration statement on From N-2 (Registration No. 333-160720)
that was amended on October 2, 2009. The SEC declared the registration
statement effective on October 8, 2009 and such registration statement
will permit us to issue, through one or more transactions, up to an aggregate
of $300.0 million in securities, consisting of common stock, senior common
stock, preferred stock, subscription rights, debt securities and warrants to
purchase common stock, or a combination of these securities.
Sale
of Chase II Holdings Corp. Revolving Line of Credit
On October 13, 2009, we refinanced our revolving line of credit
with Chase II Holdings Corp. to a third party, and the outstanding balance of
$3.5 million, plus accrued interest, was repaid in full. The proceeds were used
to make a repayment on the outstanding amount under our Credit Facility.
Portfolio
Company Investment Activity
During October 2009,
one of our portfolio companies entered
into an agreement with an investment banker to act as an advisor in assessing
strategic investment alternatives. It
is premature in the process to speculate on what these strategic alternatives
might be or what impact, if any, such activities may have on our investment in
the subject portfolio company.
During October 2009,
A. Stucki Holding Corp. declared and paid accrued cash dividends on its
preferred stock of which we received approximately $953,000.
28
RESULTS OF OPERATIONS
Comparison of the Three Months Ended September 30,
2009 to the Three Months Ended September 30, 2008
A comparison of our operating
results for the three months ended September 30, 2009 and 2008 is below:
|
|
For the three months ended September 30,
|
|
|
|
2009
|
|
2008
|
|
$ Change
|
|
% Change
|
|
INVESTMENT INCOME
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
|
|
|
|
|
|
|
Non-Control/Non-Affiliate investments
|
|
$
|
615
|
|
$
|
2,134
|
|
$
|
(1,519
|
)
|
(71.2
|
)%
|
Control investments
|
|
2,868
|
|
2,735
|
|
133
|
|
4.9
|
%
|
Affiliate investments
|
|
1,448
|
|
1,349
|
|
99
|
|
7.3
|
%
|
Cash and cash equivalents
|
|
1
|
|
22
|
|
(21
|
)
|
(95.5
|
)%
|
Total interest income
|
|
4,932
|
|
6,240
|
|
(1,308
|
)
|
(21.0
|
)%
|
Other income
|
|
11
|
|
576
|
|
(565
|
)
|
(98.1
|
)%
|
Total investment income
|
|
4,943
|
|
6,816
|
|
(1,873
|
)
|
(27.5
|
)%
|
|
|
|
|
|
|
|
|
|
|
EXPENSES
|
|
|
|
|
|
|
|
|
|
Loan servicing fee
|
|
938
|
|
1,258
|
|
320
|
|
25.4
|
%
|
Base management fee
|
|
164
|
|
435
|
|
271
|
|
(2.3
|
%
|
Administration fee
|
|
198
|
|
212
|
|
14
|
|
6.6
|
%
|
Interest expense
|
|
552
|
|
1,084
|
|
532
|
|
49.1
|
%
|
Amortization of deferred finance costs
|
|
438
|
|
140
|
|
(298
|
)
|
(212.9
|
)%
|
Professional fees
|
|
118
|
|
183
|
|
65
|
|
35.5
|
%
|
Stockholder related costs
|
|
146
|
|
200
|
|
54
|
|
27.0
|
%
|
Insurance expense
|
|
62
|
|
55
|
|
(7
|
)
|
(12.7
|
)%
|
Directors fees
|
|
48
|
|
48
|
|
|
|
|
|
Other
|
|
73
|
|
114
|
|
41
|
|
36.0
|
%
|
Expenses before credit from Adviser
|
|
2,737
|
|
3,729
|
|
992
|
|
26.6
|
%
|
Credits to base management fee
|
|
(165
|
)
|
(696
|
)
|
(531
|
)
|
(76.3
|
)%
|
Total expenses net of credit to base management fee
|
|
2,572
|
|
3,033
|
|
461
|
|
15.2
|
%
|
NET INVESTMENT INCOME
|
|
2,371
|
|
3,783
|
|
(1,412
|
)
|
(37.3
|
)%
|
|
|
|
|
|
|
|
|
|
|
REALIZED AND UNREALIZED (LOSS) GAIN ON:
|
|
|
|
|
|
|
|
|
|
Realized loss on sale of Non-Control/Non-Affiliate
investments
|
|
|
|
(2,498
|
)
|
2,498
|
|
100.0
|
%
|
Realized loss on termination of derivative
|
|
|
|
|
|
|
|
|
|
Net unrealized (depreciation) appreciation of
Non-Control/Non-Affiliate investments
|
|
(1,514
|
)
|
(5,191
|
)
|
3,677
|
|
70.8
|
%
|
Net unrealized (depreciation) appreciation of
Control investments
|
|
(14,900
|
)
|
10,840
|
|
(25,740
|
)
|
(237.5
|
)%
|
Net unrealized depreciation of Affiliate
investments
|
|
(3,853
|
)
|
(5,978
|
)
|
2,125
|
|
35.5
|
%
|
Net unrealized (depreciation) appreciation of
derivative
|
|
(16
|
)
|
|
|
(16
|
)
|
|
|
Net unrealized appreciation of borrowings under
line of credit
|
|
(178
|
)
|
|
|
(178
|
)
|
|
|
Net loss on investments and borrowings under line
of credit
|
|
(20,461
|
)
|
(2,827
|
)
|
(17,634
|
)
|
(623.8
|
)%
|
|
|
|
|
|
|
|
|
|
|
NET (DECREASE) INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS
|
|
$
|
(18,090
|
)
|
$
|
956
|
|
$
|
(19,046
|
)
|
(1992.3
|
)%
|
Investment Income
Total investment
income decreased for the three months ended September 30, 2009 as compared
to the prior year period. This decrease was due mainly to a decrease in the
size of our loan portfolio, specifically the senior syndicated loans, as well
as continuing decreases in LIBOR, as compared to the prior year period.
Interest income
from our investments in debt securities of private companies decreased for the
three months ended September 30, 2009, as compared to the prior year
period for multiple reasons. The level of interest income from investments is
directly related to the balance, at cost, of the interest-bearing investment
portfolio outstanding during the period multiplied by the weighted average
yield. The weighted average yield varies from period to period based on the
current stated interest rate on interest-bearing investments and the amounts of
loans for which interest is not accruing. The average cost basis of our
interest-bearing investment portfolio during the three months ended September 30,
2009 was approximately $186.1 million, compared to approximately $294.4 million
for the prior year period, due primarily to the aggregate senior syndicated
loan sales. Also contributing to the
decrease in our interest income from
29
investments in
debt securities was a decrease in the average LIBOR between periods, which was
approximately 0.27% for the three months ended September 30, 2009, as
compared to 2.62% for the prior year period.
Interest income
from Non-Control/Non-Affiliate investments decreased for the three months ended
September 30, 2009 due to an overall decrease in the size and number of
Non-Control/Non-Affiliate investments held at September 30, 2009, as
compared to the prior year period. At September 30,
2008, we held investments in 35 different Non-Control/Non-Affiliate
investments; however, as a result of the Syndicated Loan Sales, only five
different Non-Control/Non-Affiliate investments were held at September 30,
2009. The decrease in interest income
from Non-Control/Non-Affiliate investments was further accentuated by the
continued drops in LIBOR between the two periods, due to the instability and continued
tightening of the credit markets.
Interest income
from Control investments increased slightly for the three months ended September 30,
2009, as compared to the prior year period. The increase was attributable to
two additional Control investments, Galaxy Tool, which was acquired mid-quarter
in the prior year period, and Country Club Enterprises, which was purchased in
the third quarter of fiscal year 2009, being held for the full quarter ended September 30,
2009 as compared to the prior year period.
Decreases in LIBOR played a minimal role in interest income from our
proprietary deals during the current quarter, as the majority of them include
interest rate floors to protect against such circumstances.
Interest income
from Affiliate investments increased slightly for the three months ended September 30,
2009, as compared to the prior year period. This increase was due mainly to the
reclassification of Quench from a Control investment to an Affiliate
investment, which took place during the prior year quarter, as opposed to the
current quarter, where it was accruing income for the full quarter.
The following
table lists the interest income from investments for the five largest portfolio
company investments during the respective periods:
Three months
ended September 30, 2009
|
|
|
Interest
|
|
|
|
Company
|
|
Income
|
|
%
|
|
Chase II Holdings Corp.
|
|
$
|
661
|
|
13.4
|
%
|
Galaxy Tools Holding Corp.
|
|
595
|
|
12.1
|
%
|
A. Stucki Holding Corp.
|
|
575
|
|
11.7
|
%
|
Acme Cryogenics, Inc.
|
|
426
|
|
8.6
|
%
|
Danco Acquisition Corp.
|
|
392
|
|
7.9
|
%
|
Subtotal
|
|
$
|
2,649
|
|
53.7
|
%
|
Other companies
|
|
2,282
|
|
46.3
|
%
|
Total
portfolio interest income
|
|
$
|
4,931
|
|
100.0
|
%
|
Three
months ended September 30, 2008
|
|
|
Interest
|
|
|
|
Company
|
|
Income
|
|
%
|
|
Chase II Holdings Corp.
|
|
$
|
719
|
|
11.6
|
%
|
A. Stucki Holding Corp.
|
|
677
|
|
10.9
|
%
|
Noble Logistics, Inc.
|
|
435
|
|
7.0
|
%
|
Acme Cryogenics, Inc.
|
|
426
|
|
6.8
|
%
|
Cavert II Holding Corp.
|
|
414
|
|
6.7
|
%
|
Subtotal
|
|
$
|
2,671
|
|
43.0
|
%
|
Other companies
|
|
3,547
|
|
57.0
|
%
|
Total portfolio interest income
|
|
$
|
6,218
|
|
100.0
|
%
|
The annualized
weighted average yield on our portfolio, excluding cash and cash equivalents,
for the three months ended September 30, 2009 was 10.01%, compared to
7.98% for the prior year period. The
weighted average yield varies from period to period based on the current stated
interest rate on interest-bearing investments and the amounts of loans for
which interest is not accruing. The
increase in the weighted average yield for the current quarter resulted
primarily from our sale of lower interest-bearing senior syndicated loans subsequent
to September 30, 2008.
Interest income
from invested cash and cash equivalents decreased for the three months ended September 30,
2009, as compared to the prior year period.
This decrease is a result of lower interest rates offered by banks, as
this income is derived mainly from interest earned on overnight sweeps of cash
held at financial institutions, in addition to us using the proceeds from
repayments on outstanding loans during the year to pay down our line of credit.
Other income
decreased for the three months ended September 30, 2009, as compared the
prior year period, due to the recognition of dividends received on the
restructuring of one of our Affiliate investments (Quench) as income during the
prior year quarter. The current period
balance in other income is comprised mainly of loan amendment fees that are
amortized over the remaining lives of the respective loans, as well as other
miscellaneous income amounts.
Operating Expenses
Total operating
expenses, excluding any voluntary and irrevocable credits to the base
management fee, decreased for the three months ended September 30,
2009, primarily due to a decrease in
interest expense associated with the Credit Facility, as well as decreases in
the amount of fees due to our Adviser, as compared to the three months ended September 30,
2008.
Loan servicing
fees decreased for the three months ended September 30, 2009, as compared
to the prior year period. These fees were incurred in connection with a loan
servicing agreement between Business Investment and our Adviser, which is based
on the value of the aggregate outstanding balance of eligible loans in our
portfolio. These fees were directly credited against the amount of the base
30
management fee due
to our Adviser. The decrease in fees is a result of the reduced size of our
pledged loan portfolio, caused by the Syndicated Loan Sales.
The base
management fee decreased for the three months ended September 30, 2009, as
compared to the prior year period, which is reflective of fewer total assets
held during the quarter ended September 30, 2009 when compared to the
prior year quarter. Furthermore, due to the liquidation of the majority of our
syndicated loans, the credit received against the gross base management fee for
investments in syndicated loans has also been reduced. The base management fee
is computed quarterly as described under
Investment Advisory and Management Agreement
in Note 4 of the notes to the
consolidated financial statements in our Annual Report on Form 10-K as
filed with the SEC on June 2, 2009 and is summarized in the table below:
|
|
Three months ended
September 30,
|
|
|
|
2009
|
|
2008
|
|
Base management fee
|
|
$
|
164
|
|
$
|
435
|
|
|
|
|
|
|
|
Credits to base management fee
from Adviser:
|
|
|
|
|
|
Fee reduction for the waiver of 2% fee on senior
syndicated loans to 0.5% (1)
|
|
(48
|
)
|
(383
|
)
|
Credit for fees received by Adviser from the
portfolio companies
|
|
(117
|
)
|
(313
|
)
|
Credit to base management fee from
Adviser
|
|
(165
|
)
|
(696
|
)
|
|
|
|
|
|
|
Net base management fee
|
|
$
|
(1
|
)
|
$
|
(261
|
)
|
(1)
Our Adviser voluntarily and irrevocably
waived the annual 2.0% base management fee to 0.5% for senior syndicated loan
participations on a quarterly basis to the extent that proceeds resulting from
borrowings were used to purchase such syndicated loan participations. Fees
waived cannot be recouped by the Adviser in the future.
The administration
fee remained relatively constant for the three months ended September 30,
2009, as compared the prior year period. The calculation of the administrative
fee is described in detail above under
Investment
Advisory and Management Agreement
in Note 4 of the notes to the
consolidated financial statements in our Annual Report on Form 10-K as
filed with the SEC on June 2, 2009.
Interest expense
decreased for the three months ended September 30, 2009, as compared to
the prior year period as a direct result of decreased borrowings under the
Credit Facility during the current quarter.
The weighted average balance outstanding on our line of credit during
the quarter ended September 30, 2009 was approximately $28.3 million, as
compared to $101.3 million in the comparable prior year period.
Other operating
expenses (including amortization of deferred financing fees, professional fees,
stockholder related costs, insurance expense, directors fees and other direct
expenses) increased over the comparable prior year period, driven primarily by
increases in deferred financing fees related to the Credit Facility entered
into in April 2009. Slightly
offsetting the overall increase were decreases in professional fees, such as
audit and general legal costs, and stockholder related costs, from lower annual
meeting solicitation fees.
Realized and Unrealized (Loss) Gain
on Investments
Realized
Losses
During the three
months ended September 30, 2009, no investments were sold or written off.
However, subsequent to September 30, 2009, we entered into agreements to
sell one senior syndicated loan and a portion of another, both of which settled
in October 2009 for aggregate proceeds of $5.5 million, and recorded a
realized loss of $1.3 million, which will be reflected in the results of
operations for the three months ending December 31, 2009. For the three
months ended September 30, 2008, we exited two senior syndicated loans and
realized a net loss of $2.5 million, which was mostly attributable to the
settlement of Lexicon. We sold the
majority of our senior syndicated loans during the quarter ended June 30,
2009, and we expect to sell the remaining two senior syndicated loans in the
long-term future as we attempt to remove ourselves from the senior syndicated
loan market.
Unrealized
Gains and Losses
Net unrealized
appreciation (depreciation) of investments is the net change in the fair value
of our investment portfolio during the reporting period, including the reversal
of previously recorded unrealized appreciation or depreciation when gains and
losses are actually realized. During the three months ended September 30,
2009, we recorded net unrealized depreciation of investments in the aggregate
amount of $20.3 million, compared to $300 in the prior year period. The unrealized appreciation (depreciation)
across our investment classes for the three months ended September 30,
2009 was as follows:
Investment
Category
|
|
Net
Unrealized Loss
|
|
Non-Control/Non-Affiliate
|
|
$
|
(1,514
|
)
|
Control
|
|
(14,900
|
)
|
Affiliate
|
|
(3,853
|
)
|
Total
|
|
$
|
(20,267
|
)
|
31
We recorded
approximately $1.5 million of unrealized depreciation on our
Non-Control/Non-Affiliate investments for the quarter ended September 30, 2009,
driven primarily by a $1.4 million unrealized loss on Survey Sampling. For the three months ended September 30,
2008, we recorded approximately $5.2 million of unrealized depreciation on our
Non-Control/Non-Affiliate investments.
Our Control
investments experienced the most significant devaluation in our total
portfolio, particularly in our equity holdings, which alone depreciated in
value by an aggregate of $14.0 million during the quarter ended September 30,
2009, mainly in A. Stucki, Acme, Chase, and Galaxy Tools, offset by a modest
increase in Caverts equity holdings.
The debt portion of our Control investments depreciated in value by an
aggregate of approximately $900 during the current quarter. For the three months ended September 30,
2008, we recorded approximately $10.8 million of unrealized appreciation on our
Control investments.
Our Affiliate
investments also experienced unrealized depreciation during the current
quarter, particularly in our equity holdings of Danco and Tread, as well as in
the debt portion of Noble. Overall, our Affiliate investments experienced
approximately $1.5 million of depreciation related to the debt and $2.4 million
of depreciation in the equity of these companies. For the three months ended September 30,
2008, we recorded approximately $6.0 million of unrealized depreciation on our
Affiliate investments.
Over our entire
investment portfolio, we recorded an aggregate of approximately $3.9 million of
unrealized depreciation on our debt positions for the quarter ended September 30,
2009, while our equity holdings experienced an aggregate devaluation of
approximately $16.4 million. At September 30,
2009, the fair value of our investment portfolio was less than the cost basis
of our portfolio by approximately $32.3 million, as compared to $12.0 million
at June 30, 2009, representing an increase in net unrealized depreciation
of $20.3 million for the quarter. We
believe that our aggregate investment portfolio was valued at a depreciated
value due primarily to the general instability of the loan markets even though
we saw some return of market liquidity within the senior syndicated loan
markets. Although our investment
portfolio has depreciated, our entire portfolio was fair valued at 86.3% of
cost as of September 30, 2009. The
unrealized depreciation of our investments does not have an impact on our
current ability to pay distributions to stockholders; however, it may be an
indication of future realized losses, which could ultimately reduce our income
available for distribution. During the
first quarter of fiscal year 2010, we reduced our monthly distribution from
$0.08 to $0.04 per common share.
Net Unrealized Appreciation of
Borrowings Under Line of Credit
During
the quarter ended September 30, 2009, we recorded unrealized appreciation
of $178 for the line of credit that was fair valued by an independent third
party in accordance with ASC 825. ASC
825 was not applicable for the three months ended September 30, 2008.
Derivatives
During the quarter
ended June 30, 2009, we cancelled our prior interest rate cap agreements
and entered into a new interest rate cap agreement with BB&T for a notional
amount of $45.0 million that will effectively limit the interest rate on a
portion of the borrowings under the Credit Facility. We incurred a premium fee of approximately
$39 in conjunction with this agreement.
As of September 30, 2009, the derivative had a fair value of
approximately $12, and unrealized depreciation of $16 was recorded for the
three months ended September 30, 2009.
For the comparable prior year period, the fair market value of our prior
interest rate cap agreements remained flat.
Net (Decrease) Increase in Net Assets
Resulting from Operations
For the three
months ended September 30, 2009, we recorded a net decrease in net assets
resulting from operations of $18.1 million as a result of the factors discussed
above. For the three months ended September 30, 2008, we recorded a net
increase in net assets resulting from operations of $956. Our net (decrease) increase in net assets
resulting from operations per basic and diluted weighted average common share
for the quarters ended September 30, 2009 and 2008 were $(0.82) and $0.04,
respectively.
Comparison of the Six Months Ended September 30,
2009 to the Six Months Ended September 30, 2008
A comparison of our operating
results for the six months ended September 30, 2009 and 2008 is below:
32
|
|
For the six months ended September 30,
|
|
|
|
2009
|
|
2008
|
|
$ Change
|
|
% Change
|
|
INVESTMENT INCOME
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
|
|
|
|
|
|
|
Non-Control/Non-Affiliate investments
|
|
$
|
1,351
|
|
$
|
4,458
|
|
$
|
(3,107
|
)
|
(69.7
|
)%
|
Control investments
|
|
5,736
|
|
5,304
|
|
432
|
|
8.1
|
%
|
Affiliate investments
|
|
2,928
|
|
2,460
|
|
468
|
|
19.0
|
%
|
Cash and cash equivalents
|
|
1
|
|
46
|
|
(45
|
)
|
(97.8
|
)%
|
Total interest income
|
|
10,016
|
|
12,268
|
|
(2,252
|
)
|
(18.4
|
)%
|
Other income
|
|
96
|
|
586
|
|
(490
|
)
|
(83.6
|
)%
|
Total investment income
|
|
10,112
|
|
12,854
|
|
(2,742
|
)
|
(21.3
|
)%
|
|
|
|
|
|
|
|
|
|
|
EXPENSES
|
|
|
|
|
|
|
|
|
|
Loan servicing fee
|
|
2,006
|
|
2,511
|
|
505
|
|
20.1
|
%
|
Base management fee
|
|
477
|
|
861
|
|
384
|
|
44.6
|
%
|
Administration fee
|
|
371
|
|
447
|
|
76
|
|
17.0
|
%
|
Interest expense
|
|
1,255
|
|
2,186
|
|
931
|
|
42.6
|
%
|
Amortization of deferred finance costs
|
|
751
|
|
278
|
|
(473
|
)
|
(170.1
|
)%
|
Professional fees
|
|
320
|
|
314
|
|
(6
|
)
|
(1.9
|
)%
|
Stockholder related costs
|
|
227
|
|
301
|
|
74
|
|
24.6
|
%
|
Insurance expense
|
|
119
|
|
108
|
|
(11
|
)
|
(10.2
|
)%
|
Directors fees
|
|
99
|
|
95
|
|
(4
|
)
|
(4.2
|
)%
|
Other
|
|
137
|
|
189
|
|
52
|
|
27.5
|
%
|
Expenses before credit from Adviser
|
|
5,762
|
|
7,290
|
|
1,528
|
|
21.0
|
%
|
Credits to base management fee
|
|
(466
|
)
|
(1,270
|
)
|
(804
|
)
|
(63.3
|
)%
|
Total expenses net of credit to base management fee
|
|
5,296
|
|
6,020
|
|
724
|
|
12.0
|
%
|
NET INVESTMENT INCOME
|
|
4,816
|
|
6,834
|
|
(2,018
|
)
|
(29.5
|
)%
|
|
|
|
|
|
|
|
|
|
|
REALIZED AND UNREALIZED (LOSS) GAIN ON:
|
|
|
|
|
|
|
|
|
|
Realized loss on sale of Non-Control/Non-Affiliate
investments
|
|
(34,605
|
)
|
(4,215
|
)
|
(30,390
|
)
|
(721.0
|
)%
|
Realized loss on termination of derivative
|
|
(53
|
)
|
|
|
(53
|
)
|
|
|
Net unrealized (depreciation) appreciation of
Non-Control/Non-Affiliate investments
|
|
35,214
|
|
(726
|
)
|
35,940
|
|
4,950.4
|
%
|
Net unrealized (depreciation) appreciation of
Control investments
|
|
(26,381
|
)
|
5,973
|
|
(32,354
|
)
|
(541.7
|
)%
|
Net unrealized depreciation of Affiliate
investments
|
|
(6,119
|
)
|
(11,393
|
)
|
5,274
|
|
46.3
|
%
|
Net unrealized (depreciation) appreciation of
derivative
|
|
26
|
|
|
|
26
|
|
|
|
Net unrealized appreciation of borrowings under
line of credit
|
|
(178
|
)
|
|
|
(178
|
)
|
|
|
Net loss on investments and borrowings under line
of credit
|
|
(32,096
|
)
|
(10,361
|
)
|
(21,735
|
)
|
(209.8
|
)%
|
|
|
|
|
|
|
|
|
|
|
NET (DECREASE) INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS
|
|
$
|
(27,280
|
)
|
$
|
(3,527
|
)
|
$
|
(23,753
|
)
|
(673.5
|
)%
|
Investment Income
Investment income
decreased for the six months ended September 30, 2009, as compared to the
six months ended September 30, 2008, due mainly to a decrease in the size
of our loan portfolio, as well as decreases in LIBOR over the respective
periods.
Interest income
from our investments in debt securities of private companies decreased for the
six months ended September 30, 2009, as compared to the prior year period
for several reasons. The level of interest income from investments is directly
related to the balance, at cost, of the interest-bearing investment portfolio
outstanding during the period multiplied by the weighted average yield. The
weighted average yield varies from period to period based on the current stated
interest rate on interest-bearing investments and the amounts of loans for
which interest is not accruing. The average cost basis of our interest-bearing
investment portfolio during the six months ended September 30, 2009 was
approximately $222.7 million, compared to approximately $298.0 million for the
prior year period. This decrease was
primarily due to the Syndicated Loan Sales.
Also contributing to the decrease in our interest income from
investments in debt securities was a decrease in the average LIBOR between the
two periods, which was approximately 0.32% for the six months ended September 30,
2009, as compared to 2.60% for the prior year period.
Interest income
from Non-Control/Non-Affiliate investments decreased for the six months ended September 30,
2009, as compared to the prior year period, due to an overall decrease in the
size and number of Non-Control/Non-Affiliate investments held between the two
periods. At September 30, 2008, we held investments in 35 different
Non-Control/Non-Affiliate investments; however, as a result of the Syndicated
Loan Sales, only five different Non-Control/Non-Affiliate investments were held
at September 30, 2009. The decrease in interest income from
Non-Control/Non-Affiliate investments was further accentuated by the continued
drops in LIBOR between the two periods, due to the instability and tightening
of the credit markets.
Interest income
from Control investments increased slightly for the six months ended September 30,
2009, as compared to the prior year period. The increase is attributable to two
additional Control investments, Galaxy Tool, which was acquired during the
second quarter of the prior fiscal year, and Country Club Enterprises, which
was purchased in the third quarter of the prior fiscal year, being
33
held for the full
six months ended September 30, 2009, as opposed to the prior year period.
However, this increase was partially offset by the reclassification of Quench
from a Control investment to an Affiliate investment, which took place during
the second quarter of the prior fiscal year. Continuing decreases in LIBOR
played a minimal role in interest income from our proprietary deals during the
current year period, as the majority of them include interest rate floors to
protect against such circumstances.
Interest income
from Affiliate investments also increased for the six months ended September 30,
2009, as compared to the prior year period. This increase was due mainly to the
reclassification of Quench as an Affiliate investment, as noted above, and the
additional interest income accrued under the Affiliate investments
classification as a result.
The following
table lists the interest income from investments for the five largest portfolio
company investments during the respective periods:
Six
months ended September 30, 2009
|
|
|
Interest
|
|
|
|
Company
|
|
Income
|
|
%
|
|
Chase II Holdings Corp.
|
|
$
|
1,321
|
|
13.2
|
%
|
Galaxy Tools Holding Corp.
|
|
1,184
|
|
11.8
|
%
|
A. Stucki Holding Corp.
|
|
1,151
|
|
11.5
|
%
|
Acme Cryogenics, Inc.
|
|
848
|
|
8.5
|
%
|
Danco Acquisition Corp.
|
|
787
|
|
7.8
|
%
|
Subtotal
|
|
$
|
5,291
|
|
52.8
|
%
|
Other companies
|
|
4,724
|
|
47.2
|
%
|
Total
portfolio interest income
|
|
$
|
10,015
|
|
100.0
|
%
|
Six months ended September 30,
2008
|
|
|
Interest
|
|
|
|
Company
|
|
Income
|
|
%
|
|
Chase II Holdings Corp.
|
|
$
|
1,429
|
|
11.7
|
%
|
A. Stucki Holding Corp.
|
|
1,346
|
|
11.0
|
%
|
Acme Cryogenics, Inc.
|
|
848
|
|
6.9
|
%
|
Cavert II Holding Corp.
|
|
825
|
|
6.8
|
%
|
Danco Acquisition Corp.
|
|
809
|
|
6.6
|
%
|
Subtotal
|
|
$
|
5,257
|
|
43.0
|
%
|
Other companies
|
|
6,965
|
|
57.0
|
%
|
Total portfolio interest income
|
|
$
|
12,222
|
|
100.0
|
%
|
The annualized
weighted average yield on our portfolio, excluding cash and cash equivalents,
for the six months ended September 30, 2009 was 9.93%, compared to 7.81%
for the prior year period. The weighted
average yield varies from period to period based on the current stated interest
rate on interest-bearing investments and the amounts of loans for which
interest is not accruing. The increase
in the weighted average yield for the current period results primarily from our
sale of lower interest-bearing senior syndicated loans subsequent to September 30,
2008.
Interest income
from invested cash and cash equivalents decreased for the six months ended September 30,
2009, as compared to the prior year period.
This decrease is a result of lower interest rates offered by banks, as
this income is derived mainly from interest earned on overnight sweeps of cash
held at financial institutions, in addition to us using the proceeds from
repayments on outstanding loans during the year to pay down our line of credit.
Other income
decreased for the six months ended September 30, 2009, as compared to the
prior year period. The decrease from the
prior year is due to the recognition of dividends received on the restructuring
of one of our Affiliate investments (Quench) as income in the prior year
period. The current year balance of
other income is comprised of loan amendment fees that are amortized over the
remaining lives of the respective loans or recognized into income once the
investment is disposed of, as well as other miscellaneous income amounts.
Operating Expenses
Total operating
expenses, excluding any voluntary and irrevocable credits to the base
management fee, decreased for the six months ended September 30, 2009,
primarily due to a decrease in interest expense associated with the Credit
Facility, offset by increased amortization of deferred financing costs, as well
as decreases in the amount of fees to our Adviser, as compared to the six
months ended September 30, 2008.
Loan servicing
fees decreased for the six months ended September 30, 2009, as compared to
the prior year period. These fees were incurred in connection with a loan
servicing agreement between Business Investment and our Adviser, which is based
on the value of the aggregate outstanding portfolio pledged against the Credit
Facility. These fees were directly credited against the amount of the base
management fee due to our Adviser. The decrease in fees is a direct result of
the reduced size of our pledged loan portfolio, caused by the Syndicated Loan
Sales.
The base
management fee decreased for the six months ended September 30, 2009, as
compared to the prior year period, which is reflective of fewer total assets
held during the six months ended September 30, 2009 when compared to the
prior year period. Furthermore, due to the liquidation of the majority of our
syndicated loans, the credit received against the gross base management fee for
investments in syndicated loans has also been reduced. The base management fee
is computed quarterly as described under
Investment
Advisory and Management Agreement
in Note 4 of the notes to the
consolidated financial statements in the Companys Annual Report on Form 10-K
as filed on June 2, 2009, and is summarized in the table below:
34
|
|
Six months ended September 30,
|
|
|
|
2009
|
|
2008
|
|
Base management fee
|
|
$
|
477
|
|
$
|
861
|
|
|
|
|
|
|
|
Credits to base
management fee from Adviser:
|
|
|
|
|
|
Fee reduction for the waiver of 2% fee on senior
syndicated loans to 0.5% (1)
|
|
(231
|
)
|
(807
|
)
|
Credit for fees received by Adviser from the
portfolio companies
|
|
(235
|
)
|
(463
|
)
|
Credit to base management fee from
Adviser
|
|
(466
|
)
|
(1,270
|
)
|
|
|
|
|
|
|
Net base management fee
|
|
$
|
11
|
|
$
|
(409
|
)
|
(1)
Our Adviser voluntarily and irrevocably
waived the annual 2.0% base management fee to 0.5% for senior syndicated loan
participations on a quarterly basis to the extent that proceeds resulting from
borrowings were used to purchase such syndicated loan participations. Fees
waived cannot be recouped by the Adviser in the future.
The administration
fee decreased for the six months ended September 30, 2009, as compared to
the prior year period. The decrease in the current year period was due to an
overall reduction of administration staff and related expenses incurred by our
Administrator, while our total assets in comparison to the total assets of all
companies managed by our Adviser under similar agreements remained relatively
constant. The calculation of the administrative fee is described in detail
above under
Investment Advisory and
Management Agreement
in Note 4 of the notes to the consolidated
financial statements in the Companys Annual Report on Form 10-K as filed
on June 2, 2009.
Interest expense
decreased for the six months ended September 30, 2009, as compared to the
prior year period, a direct result of decreased borrowings under the Credit
Facility during the current period. The
weighted average balance outstanding on our line of credit during the six
months ended September 30, 2009 was approximately $35.1 million, as
compared to $100.5 million in the prior year period.
Other operating
expenses (including amortization of deferred financing fees, professional fees,
stockholder related costs, insurance expense, directors fees and other direct
expenses) increased over the comparable prior year period, driven primarily by
increases in deferred financing fees related to the Credit Facility entered
into in April 2009. Partially
offsetting this increase were decreases in stockholder related costs, such as
lower annual meeting costs, and other direct expenses, including decreased
backup servicer fees and fewer travel expenses incurred during the prior year
period.
Realized and Unrealized (Loss) Gain
on Investments
Realized
Losses
During the six
months ended September 30, 2009, we exited 29 senior syndicated loans for
aggregate proceeds of approximately $69.2 million in cash and recorded a
realized loss of approximately $34.6 million. For the six months ended September 30,
2008, we received approximately $13.2 million in cash proceeds and recognized a
net loss on the sale of nine syndicated loans and the write-off of another
syndicated loan in the aggregate amount of $4.2 million. The increase in
realized losses is attributable to liquidity needs from the Senior Syndicated
Loan sales associated with the repayment of amounts outstanding under our prior
credit facility with Deutsche Bank, which matured in April 2009.
Unrealized
Gains and Losses
Net unrealized
appreciation (depreciation) of investments is the net change in the fair value
of our investment portfolio during the reporting period, including the reversal
of previously recorded unrealized appreciation or depreciation when gains and
losses are actually realized. During the six months ended September 30,
2009, we recorded net unrealized appreciation of investments in the aggregate amount
of $2.7 million, compared to net unrealized depreciation of investments in the
aggregate amount of $6.1 million for the prior year period. The unrealized appreciation (depreciation)
across our investment classes for the six months ended September 30, 2009
was as follows:
Investment
Category
|
|
Net
Unrealized Gain (Loss)
|
|
Non-Control/Non-Affiliate
|
|
$
|
35,214
|
*
|
Control
|
|
(26,381
|
)
|
Affiliate
|
|
(6,119
|
)
|
Total
|
|
$
|
2,714
|
|
*
Includes the reversal of approximately
$34.4 million of previously recorded unrealized depreciation related to the
sale of syndicated loans, which resulted in a $34.6 million of realized loss
for the current period.
35
We recorded
approximately $35.2 million of unrealized appreciation of our
Non-Control/Non-Affiliate investments for the six months ended September 30,
2009, due primarily to the reversal of $34.4 million of previously recorded
unrealized depreciation noted in the table above, and appreciation in value in
the aggregate amount of approximately $800 on our remaining
Non-Control/Non-Affiliate investments. Survey Sampling experienced the most
significant devaluation; however, this was partially offset by an increase in
value of ITC DeltaCom. American
Greetings Corp., B-Dry and HMT also experienced modest increases in value. For
the six months ended September 30, 2008, we recorded approximately $700 of
unrealized depreciation on our Non-Control/Non-Affiliate investments.
Our Control
investments experienced the most significant devaluation in our total
portfolio, most notably in our equity holdings, which alone depreciated in
value by an aggregate of approximately $25.9 million during the six months
ended September 30, 2009, particularly in A. Stucki, Galaxy Tools, Chase
Industries, Country Club Enterprises and Acme Cryogenics. Cavert Wire and Auto Safety House both
experienced moderate increases in value over the current six months. The debt portion of our Control investments
depreciated in value by an aggregate of approximately $500 during the current
period. For the six months ended September 30, 2008, we recorded
approximately $6.0 of unrealized appreciation on our Control investments.
Our Affiliate
investments also experienced unrealized depreciation during the six month period
ended September 30, 2009, particularly in the equity components of Danco,
Quench, and Tread, as well as in the debt portion of Noble. Partially offsetting the net decrease were
increases in value in the debt components of both Danco and Quench. Overall, our Affiliate investments
experienced approximately $600 of depreciation in the debt and $5.5 million of
depreciation in the equity of these companies. For the six months ended September 30,
2008, we recorded approximately $11.4 million of unrealized depreciation on our
Affiliate investments.
Over our entire
investment portfolio, we recorded an aggregate of approximately $34.2 million
of unrealized appreciation on our debt positions for the six months ended September 30,
2009, while our equity holdings experienced an aggregate devaluation of
approximately $31.4 million. At September 30,
2009, the fair value of our investment portfolio was less than the cost basis
of our portfolio by approximately $32.3 million, as compared to $35.0 million
at March 31, 2009, representing net unrealized appreciation of $2.7
million for the period. We believe that
our aggregate investment portfolio was valued at a depreciated value due
primarily to the general instability of the loan markets even though we saw
some return of market liquidity within the senior syndicated loan markets. Although our investment portfolio has
depreciated, our entire portfolio was fair valued at 86.3% of cost as of September 30,
2009. The unrealized depreciation of our
investments does not have an impact on our current ability to pay distributions
to stockholders; however, it may be an indication of future realized losses,
which could ultimately reduce our income available for distribution. During the
first quarter of fiscal year 2010, we reduced our monthly distribution from
$0.08 to $0.04 per common share.
Net Unrealized Appreciation of
Borrowings Under Line of Credit
During
the six months ended September 30, 2009, we recorded unrealized
appreciation of $178 for the line of credit that was fair valued by an
independent third party in accordance with ASC 825. We adopted ASC 825 during June 2009 and
the Credit Facility was valued as its cost basis for that period. ASC 825 was
not applicable for the six months ended September 30, 2008.
Derivatives
During the six
months ended September 30, 2009, we cancelled our prior interest rate cap
agreements, recorded a realized loss of $53, and entered into a new interest
rate cap agreement with BB&T for a notional amount of $45.0 million that
will effectively limit the interest rate on a portion of the borrowings under
the Credit Facility. We incurred a
premium fee of approximately $39 in conjunction with this agreement. As of September 30, 2009, the derivative
had a fair value of approximately $12, representing an unrealized depreciation
of $27 for the six months ended September 30, 2009 on our current interest
rate cap agreement. For the prior year
period, the fair market value of our prior interest rate cap agreements
remained flat.
Net Decrease in Net Assets Resulting
from Operations
For the six months
ended September 30, 2009, we recorded a net decrease in net assets
resulting from operations of $27.3 million as a result of the factors discussed
above. For the six months ended September 30, 2008, we recorded a net
decrease in net assets resulting from operations of $3.5 million. Our net decrease in net assets resulting from
operations per basic and diluted weighted average common share for the six
months ended September 30, 2009 and 2008 were $1.24 and $0.17,
respectively.
LIQUIDITY AND CAPITAL RESOURCES
Operating
Activities
Net cash provided
by operating activities for the six months ended September 30, 2009 was
approximately $159.3 million and consisted primarily of proceeds from
borrowings under the short-term loan, as discussed in Note 7,
Short-Term Loan
, in the accompanying notes to the condensed
consolidated financial statements, proceeds received from the syndicated loan
sales and the net
36
loss realized on
those sales, and principal payments received from existing investments. For the
six months ended September 30, 2008, net cash provided by operating
activities was approximately $7.9 million and consisted primarily of principal
loan repayments, proceeds from the sale of existing portfolio investments, and
net unrealized depreciation of our investments, partially offset by the
purchase of one new Control investment and one new Affiliate investment.
At September 30,
2009, we had investments in equity of, loans to, or syndicated participations
in 17 private companies with a cost basis totaling approximately $236.6
million. At September 30, 2008, we
had investments in equity of, loans to, or syndicated participations in 46
private companies with an aggregate cost basis of approximately $347.6
million. A summary of our investment
activity for the six months ended September 30, 2009 and 2008 is as
follows:
Quarter
Ended
|
|
Loan
Disbursements (1)
|
|
Principal
Repayments (2)
|
|
Proceeds
from
Sales/Exits (3)
|
|
Net Loss
on
Disposal (3)
|
|
June 30, 2009
|
|
$
|
1,500
|
(a)
|
$
|
7,575
|
(a)
|
$
|
69,222
|
|
$
|
(34,605
|
)
|
September 30, 2009
|
|
318
|
|
2,757
|
|
|
|
|
|
Total
|
|
$
|
1,818
|
|
$
|
10,332
|
|
$
|
69,222
|
|
$
|
(34,605
|
)
|
Quarter Ended
|
|
Loan
Disbursements (1)
|
|
Principal
Repayments (2)
|
|
Proceeds from
Sales/Exits (3)
|
|
Net Loss on
Disposal (3)
|
|
June 30, 2008
|
|
$
|
8,980
|
|
$
|
3,493
|
|
$
|
13,246
|
|
$
|
(1,717
|
)
|
September 30, 2008
|
|
27,632
|
|
18,791
|
|
50
|
|
(2,498
|
)
|
Total
|
|
$
|
36,612
|
|
$
|
22,284
|
|
$
|
13,296
|
|
$
|
(4,215
|
)
|
(a) Includes an $850
non-cash transaction whereby a portfolio company, Cavert Wire, drew $850 on its
revolving line of credit and immediately used the proceeds to pay down its
senior term A and senior term B loans.
No cash was disbursed in this transaction, as it was simply a transfer
of balance. The $850 drawn on the credit
line was subsequently paid off in full, and the line of credit was sold to a
third party for a nominal fee.
(1) Loan
Disbursements:
|
|
New Investments
|
|
Disbursements to Existing
|
|
Total
|
|
Quarter Ended
|
|
Companies
|
|
Investments
|
|
Portfolio Companies
|
|
Disbursements
|
|
June 30, 2009
|
|
0
|
|
$
|
0
|
|
$
|
1,500
|
(a)
|
$
|
1,500
|
(a)
|
September 30, 2009
|
|
0
|
|
0
|
|
318
|
|
318
|
|
Total
|
|
0
|
|
$
|
0
|
|
$
|
1,818
|
(a)
|
$
|
1,818
|
(a)
|
|
|
New Investments
|
|
Disbursements to Existing
|
|
Total
|
|
Quarter Ended
|
|
Companies
|
|
Investments
|
|
Portfolio Companies
|
|
Disbursements
|
|
June 30, 2008
|
|
1
|
(b)
|
$
|
5,753
|
|
$
|
3,227
|
|
$
|
8,980
|
|
September 30, 2008
|
|
2
|
(c)
|
25,210
|
|
2,422
|
|
27,632
|
|
Total
|
|
3
|
|
$
|
30,963
|
|
$
|
5,649
|
|
$
|
36,612
|
|
(a) See note (a) above
(b) Tread Corporation
(c) Galaxy Tool Corp. ($21.4
million) and A. Stucki add-on for AlcoSprings acquisition ($3.8 million)
(2) Principal
Repayments:
Quarter
Ended
|
|
Scheduled
Principal
Repayments
|
|
Unscheduled
Principal
Repayments (*)
|
|
Total
Principal Repayments
|
|
June 30, 2009
|
|
$
|
2,004
|
|
$
|
5,571
|
(a)
|
$
|
7,575
|
|
September 30, 2009
|
|
387
|
|
2,370
|
(b)
|
2,757
|
|
Total
|
|
$
|
2,391
|
|
$
|
7,941
|
|
$
|
10,332
|
|
Quarter
Ended
|
|
Scheduled
Principal
Repayments
|
|
Unscheduled
Principal
Repayments (*)
|
|
Total
Principal
Repayments
|
|
June 30, 2008
|
|
$
|
2,516
|
|
$
|
977
|
|
$
|
3,493
|
|
September 30, 2008
|
|
3,294
|
|
15,497
|
(c)
|
18,791
|
|
Total
|
|
$
|
5,810
|
|
$
|
16,474
|
|
$
|
22,284
|
|
(*) Includes principal
repayments due to excess cash flows, covenant trips, exits, refinancings, etc.
37
(a) Includes principal
payments received in connection with the refinancings of A. Stucki and Cavert
(b)
Includes $2.0million voluntary prepayment
from Cavert on their Senior Term Debt
(c)
Includes early payoff of Hudson ($6.0
million) and principal proceeds received with the Quench restructuring ($7.0
million)
(3) Loan
Sales / Exits:
Quarter
Ended
|
|
Number of
Loans Exited
|
|
Proceeds
Received
|
|
Position
(Principal) Exited
|
|
Unamortized
Loan Costs (#)
|
|
Net Loss
on
Exit
|
|
June 30, 2009
|
|
29
|
(a)
|
$
|
69,222
|
|
$
|
103,772
|
|
$
|
55
|
|
$
|
(34,605
|
)
|
September 30, 2009
|
|
0
|
|
|
|
|
|
|
|
|
|
Total
|
|
29
|
|
$
|
69,222
|
|
$
|
103,772
|
|
$
|
55
|
|
$
|
(34,605
|
)
|
Quarter Ended
|
|
Number of
Loans Exited
|
|
Proceeds
Received
|
|
Position
(Principal) Exited
|
|
Unamortized
Loan Costs (#)
|
|
Net Loss on
Exit
|
|
June 30, 2008
|
|
9
|
(b)
|
$
|
13,246
|
|
$
|
14,926
|
|
$
|
37
|
|
$
|
(1,717
|
)
|
September 30, 2008
|
|
2
|
(c)
|
50
|
(d)
|
2,530
|
|
18
|
|
(2,498
|
)
|
Total
|
|
11
|
|
$
|
13,296
|
|
$
|
17,456
|
|
$
|
55
|
|
$
|
(4,215
|
)
|
(#) Includes balance of
premiums, discounts, acquisition costs, and deferred compensation unamortized
at time of exit.
(a) One syndicated loan
(Critical Homecare Solutions) was sold in two separate installments.
(b)
Includes the partial sale of three syndicated loans still held
subsequent to September 30, 2008 (CRC Health Group, Graham Packaging and
Pinnacle Foods). One syndicated loan
(NPC International) was sold in two separate installments.
(c)
Includes write-off of Lexicon and early
payoff of Hudson.
(d)
Dividends received in excess of gain
realized on restructuring of Quench, which reduced our equity basis in the
investment.
As discussed elsewhere in
this report, during April and May of 2009, we sold 29 of our senior
syndicated loans held at March 31, 2009 for an aggregate of approximately
$69.2 million in cash proceeds and recorded a realized loss of approximately
$34.6 million in connection with these sales. These loans were sold to pay down
all unpaid principal and interest owed to Deutsche Bank under our prior credit
facility. During September 2009, we finalized the sale of certain senior
syndicated loans (HMTBP Acquisition II Corp. and a portion of Interstate
Fibernet, Inc.) that were held in our portfolio of investments to various
investors in the syndicated loan market. We settled these loans in October 2009
and received approximately $5.5 million in net cash proceeds and recorded a
realized loss of approximately $1.3 million, which will be reflected in the
results of operations for the three and nine months ending December 31,
2009. These loans are included in our condensed consolidated assets
as of September 30, 2009 and were valued at their respective sale prices.
Our last
investment in a new portfolio company was in November 2008. In light of current economic conditions,
limited borrowings available under the Credit Facility, constraints on our ability
to access the capital markets and the restraints upon our investing activities
required in order to maintain our RIC status, our near-term strategy will be
focused on retaining capital and building the value of our existing portfolio
companies. We will also, where prudent
and possible, consider the sale of lower-yielding investments. This strategy
has resulted, and may continue to result, in significantly reduced investment
activity, as our ability to make new investments under these conditions is largely
dependent on availability of proceeds from the sale or exit of existing
portfolio investments, events which may be beyond our control, and our ability
to satisfy the asset diversification test under the Code. As our capital constraints and asset diversification
improve, we intend to continue our strategy of making conservative investments
in businesses that we believe will weather the current economic condition and
that are likely to produce attractive long-term returns for our stockholders.
Short-term
Loan Agreement
On September 29,
2009, we purchased $85.0 million of short-term United States Treasury
securities through Jefferies. The
securities were purchased with $10.0 million in funds drawn on the Credit
Facility and the proceeds from a $75.0 million short-term loan from Jefferies
with an effective annual interest rate of approximately 0.65%. On October 2, 2009, the securities
matured, and we repaid the $75.0 million loan from Jefferies in full and repaid
the $10.0 million drawn on the Credit Facility for purposes of this
transaction. If necessary and available
to us, we may use a similar form of loan agreement in future quarters as a
financing option in order to satisfy certain quarterly asset diversification
requirements and maintain our status as a RIC under Subchapter M of the Code.
Portfolio
Company Investment Activity
During October 2009,
one of our portfolio companies entered
into an agreement with an investment banker to act as an advisor in assessing
strategic investment alternatives. It
is premature in the process to speculate on what these strategic alternatives might
be or what impact, if any, such activities may have on our investment in the
subject portfolio company.
38
During October 2009,
A. Stucki Holding Corp. declared and paid accrued cash dividends on its
preferred stock of which the Company received approximately $953,000.
Financing
Activities
Net cash used in
financing activities during the six months ended September 30, 2009 was
approximately $80.2 million, which consisted primarily of net repayments made
on the line of credit, in connection with the termination of our prior credit
facility, and distributions paid to our stockholders. During the six months ended September 30,
2008, net cash provided by financing activities was approximately $16.6
million, due mainly to the Rights Offering (as defined below), which accounted
for cash proceeds of $40.6 million. The
majority of the cash outflows consisted of net repayments made on the credit
facility and distributions paid.
Distributions
In order to
qualify as a RIC and to avoid corporate level tax on the income we distribute
to our stockholders, we are required, under Subchapter M of the Code, to
distribute at least 90% of our ordinary income and short-term capital gains to
our stockholders on an annual basis. In accordance with these requirements, we
declared and paid monthly cash distributions of $0.04 per common share during
each month of the quarter ended September 30, 2009. For the six months ended September 30,
2009, our distribution payments of approximately $5.3 million exceeded our net
investment income by approximately $0.5 million. We declared these
distributions based on our estimates of net investment income for the fiscal
year. Our investment pace continued to be slower than expected in our fourth
full year of operations and, consequently, our net investment income was lower
than our original estimates. During the
first quarter of fiscal year 2010, we reduced our monthly distribution from
$0.08 to $0.04.
Issuance
of Equity
On July 21,
2009, we filed a registration statement (the Registration Statement) with the
SEC that was amended on October 2, 2009.
The Registration Statement was declared effective on October 8,
2009, and it will permit us to issue, through one or more transactions, up to
an aggregate of $300.0 million in securities, consisting of common stock,
senior common stock, preferred stock, subscription rights, debt securities and
warrants to purchase common stock, or a combination of these securities. To
date, we have incurred approximately $60 of costs in connection with the
Registration Statement.
We anticipate
issuing equity securities to obtain additional capital in the future. However,
we cannot determine the terms of any future equity issuances or whether we will
be able to issue equity on terms favorable to us, or at all. Additionally, when
our common stock is trading below net asset value, we will have regulatory
constraints under the 1940 Act on our ability to obtain additional capital in
this manner. At September 30, 2009, our stock closed trading at $4.85,
representing a 41.1% discount to our net asset value of $8.24 per share.
Generally, the 1940 Act provides that we may not issue stock for a price below
net asset value per share, without first obtaining the approval of our
stockholders and our independent directors or through a rights offering.
We raised
additional capital within these regulatory constraints in April 2008
through an offering of transferable subscription rights to purchase additional
shares of common stock (the Rights Offering). Pursuant to the Rights
Offering, we sold 5,520,033 shares of our common stock at a subscription price
of $7.48 per share, which represented a purchase price equal to 93% of the
weighted average closing price of our stock in the last five trading days of
the subscription period. Net proceeds of the offering, after offering expenses
borne by us, were approximately $40.5 million and were used to repay
outstanding borrowings under our line of credit. Should our common stock
continue to trade below its net asset value per share, we may seek to conduct
similar offerings in the future in order to raise additional capital, although
there can be no assurance that we will be successful in our efforts to raise
capital.
Future
Capital Resources
During our 2009
annual stockholders meeting, our stockholders approved a proposal that allows
us to issue long-term rights, including warrants to purchase shares of our
common stock at an exercise price per share that will not be less than the
greater of the market value or net asset value of our common stock at a time
such rights may be issued. This proposal
is in effect until our next annual stockholders meeting, which is currently
scheduled for August 2010, when our stockholders will again be asked to
vote in favor of renewing this proposal for another year.
Revolving
Credit Facility
On April 14,
2009, we entered into the Credit Facility, which provides for a $50.0 million
revolving line of credit arranged by BB&T as administrative agent,
replacing Deutsche Bank who served as administrative agent under our prior
credit facility. Key Equipment Finance, Inc. also joined the Credit
Facility as a committed lender. In
connection with our entry into the Credit Facility, we borrowed $43.8 million
under the Credit Facility to repay Deutsche Bank in full all amounts
outstanding under the prior credit agreement.
The Credit Facility may be expanded up to $125.0 million through the
addition of other committed lenders to the facility. The Credit Facility matures on April 14,
2010 and, if the facility is not renewed or extended by this date, all unpaid
principal and interest will be
39
due and payable
within one year of maturity. Advances
under the Credit Facility will generally bear interest at the 30 day LIBOR rate
(subject to a minimum rate of 2%), plus 5% per annum, with a commitment fee of
0.75% per annum on undrawn amounts.
Interest is
payable monthly during the term of the Credit Facility. After April 14, 2010, if the Credit
Facility is not renewed, all collections of principal from our loans are
required to be used to pay outstanding principal under 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.
The Credit
Facility contains covenants that require Business Investment to maintain its
status as a separate entity, prohibit certain significant transactions (such as
mergers, consolidations, liquidations or dissolutions) and restrict material
changes to our credit and collection policies without lenders consent. The
Credit Facility also limits the borrower and industry concentrations of loans
that are eligible to secure advances as well as limits on payments of
distributions limited to the aggregate net investment income for the prior
twelve months preceding April 2010. As of September 30, 2009, Business
Investment was in compliance with all of the facility covenants. We are also
subject to certain limitations on the type of loan investments we make,
including restrictions on geographic concentrations, sector concentrations,
loan size, dividend payout, payment frequency and status, average life and lien
property. The Credit Facility also
requires us to comply with other financial and operational covenants, which
require us to, among other things, maintain certain financial ratios, including
asset and interest coverage a minimum net worth, and a minimum number of
obligors required in the borrowing base of the credit agreement.
We adopted ASC 825
Financial
Instruments specifically for the Credit Facility. ASC
825 requires that we apply a fair value methodology to the Credit
Facility. The Credit Facility has been fair valued by an independent third
party. The following table presents the Credit Facility carried at fair value
as of September 30, 2009, by caption on the accompanying condensed consolidated
statement of assets and liabilities for each of the three levels of hierarchy
established by ASC 820-10:
|
|
As of September 30, 2009
|
|
|
|
|
|
|
|
|
|
Total Fair Value
|
|
|
|
|
|
|
|
|
|
Reported in Condensed
|
|
|
|
|
|
|
|
|
|
Consolidated Statement of
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Assets and Liabilities
|
|
Borrowings under line of credit(a)
|
|
$
|
|
|
$
|
|
|
$
|
36,278
|
|
$
|
36,278
|
|
Total
|
|
$
|
|
|
$
|
|
|
$
|
36,278
|
|
$
|
36,278
|
|
(a)
An unrealized appreciation of $178 is
reported on the accompanying condensed consolidated statement of operations for
the three months ended September 30, 2009.
As of October 31,
2009, there was $16.1 million of borrowings outstanding on the Credit Facility
at an interest rate of approximately 7.0%, and the remaining borrowing capacity
under the Credit Facility was approximately $32.1 million.
During May 2009,
we cancelled our interest rate cap agreement with Deutsche Bank and entered
into a new interest rate cap agreement with BB&T for a notional amount of
$45 million that will effectively limit the interest rate on a portion of the
borrowings under the Credit Facility. We
incurred a premium fee of approximately $39 in conjunction with this
agreement. As of September 30,
2009, the interest rate cap agreement had depreciated by approximately $27 and
had a fair value of $12.
In conjunction
with entering into the Credit Facility, we amended a performance guaranty which
remains substantially similar to the form under the previous credit facility.
The performance guaranty requires us to maintain a minimum net worth of $169
million plus 50% of all equity and subordinated debt raised after April 14,
2009, to maintain asset coverage with respect to senior securities
representing indebtedness of at least 200%, in accordance with Section 18
of the 1940 Act, and to maintain our status as a BDC under the 1940 Act and as
a RIC under the Code. As of September 30, 2009, we were in compliance with
the covenants under the performance guaranty.
Our continued
compliance with these covenants, however, depends on many factors, some of
which are beyond our control. In particular, depreciation in the valuation of
our assets, which valuation is subject to changing market conditions that are
presently very volatile, affects our ability to comply with these covenants.
During the six months ended September 30, 2009, net unrealized
appreciation on our investments was approximately $2.7 million, primarily
brought about by the reversal of $34.4 million of previously unrealized
depreciation on our syndicated loans that were sold during the period, compared
to an unrealized depreciation of approximately $6.1 million during the prior
year period. Given the continued deterioration in the capital markets, net
unrealized depreciation in our portfolio may continue to threaten our ability
to comply with the covenants under the Credit Facility. Accordingly, there are
no assurances that we will continue to comply with these covenants. Failure to
comply with these covenants would result in a default, which, if we were unable
to obtain a waiver from the lenders, could accelerate our repayment obligations
under the Credit Facility and thereby have a material adverse impact on our
liquidity, financial condition, results of operations and ability to pay
distributions as more fully described below.
The Credit
Facility matures on April 14, 2010, and, if the facility is not renewed or
extended by this date, all unpaid principal and interest will be due and
payable within one year of maturity and all collections of principal from our
loans will be required to be used
40
to pay outstanding
principal under the Credit Facility. There can be no guarantee that we will be
able to renew, extend or replace the Credit Facility on terms that are
favorable to us, or at all. Our ability
to obtain replacement financing will be constrained by current economic
conditions affecting the credit markets, which have significantly deteriorated
over the last several months and may decline further. Consequently, any renewal, extension or
refinancing of the Credit Facility will likely result in significantly higher
interest rates and related charges and may impose significant restrictions on
the use of borrowed funds with regard to our ability to fund investments or
maintain distributions. For instance, in
connection with the recent establishment of the Credit Facility, the size of
the line was reduced from $125.0 million under our prior facility to $50.0
million under the Credit Facility and Deutsche Bank, who was a committed lender
our prior credit facility elected not to participate in the new facility and
withdrew its commitment. If we are not
able to renew, extend or refinance the Credit Facility, this would likely have
a material adverse effect on our liquidity and ability to fund new investments
or pay distributions to our stockholders.
Our inability to pay distributions could result in us failing to qualify
as a RIC. Consequently, any income or
gains could become taxable at corporate rates. If we are unable to secure
replacement financing, we may be forced to sell certain assets on
disadvantageous terms, which may result in realized losses such as those
recently recorded in connection with the Syndicated Loan Sales, which resulted
in a realized loss of approximately $34.6 million during the six months ended September 30,
2009. Such realized losses could
materially exceed the amount of any unrealized depreciation on these assets as
of our most recent balance sheet date, which would have a material adverse
effect on our results of operations. In
addition to selling assets, or as an alternative, we may issue equity in order
to repay amounts outstanding under the Credit Facility. Based on the recent trading prices of our
stock, such an equity offering may have a substantial dilutive impact on our
existing stockholders interest in our earnings and assets and voting interest
in us.
Contractual
Obligations and Off-Balance Sheet Arrangements
We were not a
party to any signed term sheets for potential investments as of September 30,
2009. In October 2008, we executed
a guaranty of a vehicle finance facility agreement between Ford Motor Credit
Company (FMC) and Auto Safety House, LLC (ASH), one of our Control
investments (the Finance Facility).
The Finance Facility provides ASH with a line of credit of up to $500
for component Ford parts used by ASH to build truck bodies under a separate
contract. Title and ownership of the
parts is retained by Ford. The guaranty of the Finance Facility will expire
upon termination of the separate parts supply contract with Ford or upon our
replacement as guarantor. The Finance
Facility is secured by all of the assets of Business Investment. As of September 30, 2009, we have not
been required to make any payments on the guaranty of the Finance Facility.
Critical
Accounting Policies
The preparation of
financial statements and related disclosures in conformity with accounting
principles generally accepted in the United States (GAAP) requires management
to make estimates and assumptions that affect the reported amounts of assets
and liabilities, and disclosure of contingent assets and liabilities at the
date of the financial statements, and revenues and expenses during the period
reported. Actual results could differ materially from those estimates. We have
identified our investment valuation process, which was modified during the
quarter ended September 30, 2009, as our most critical accounting policy.
Investment Valuation
The most
significant estimate inherent in the preparation of our condensed consolidated
financial statements is the valuation of investments and the related amounts of
unrealized appreciation and depreciation of investments recorded.
General
Valuation Policy:
We value our investments in accordance with
the requirements of the 1940 Act. As
discussed more fully below, we value securities for which market quotations are
readily available and reliable at their market value. We value all other securities and assets at
fair value as determined in good faith by our Board of Directors.
We adopted ASC
820-10 on April 1, 2008. In part, ASC 820-10 defines fair value and
establishes a framework for measuring fair value, and expands disclosures about
assets and liabilities measured at fair value. The new standard 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. The
standard 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 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 our own assumptions that market participants
would use to price the asset or liability based upon the best available
information.
41
See Note 3,
Investments
in our notes to the condensed consolidated
financial statements for additional information regarding fair value
measurements and our adoption of ASC 820-10.
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 scopes used to
value our investments. When these
specific third-party appraisals are engaged or accepted, we would use such
appraisals to value the investment we have in that business if we determine
that the appraisals are the best estimate of fair value.
In determining the
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 the Board of
Directors reviews whether our Adviser has applied the Policy consistently, and
votes whether or not to accept the recommended valuation of our investment
portfolio.
The Policy, which
is summarized below, applies to the following categories of securities:
·
Publicly-traded securities;
·
Securities for which a limited market
exists; and
·
Securities for which no market exists.
Valuation
Methods:
Publicly-traded
securities:
We
determine the value of publicly-traded securities based on the closing price
for the security on the exchange or securities market on which it is listed and
primarily traded on the valuation date. To the extent that we own restricted
securities that are not freely tradable, but for which a public market
otherwise exists, we will use the market value of that security adjusted for
any decrease in value resulting from the restrictive feature.
Securities
for which a limited market exists:
We value securities that are not traded on an
established secondary securities market, but for which a limited market for the
security exists, such as certain participations in, or assignments of,
syndicated loans, at the quoted bid price.
In valuing these assets, we assess trading activity in an asset class,
evaluate variances in prices and other market insights to determine if any
available quote prices are reliable. If
we conclude that quotes based on active markets or trading activity may be
relied upon, firm bid prices are requested; however, if a firm bid price is
unavailable, we base the value of the security upon the indicative bid price
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 indicative bid price as a basis for
valuing the security, our Adviser may take further steps to consider additional
information to validate that price in accordance with the Policy.
In the event these limited markets become illiquid
such that market prices are no longer readily available, we will value our
syndicated loans using estimated net present values of the future cash flows or
discounted cash flows. The use of a DCF methodology follows that prescribed by
ASC 820-10-35-15A, Determining the Fair Value of a Financial Asset When the Market
for The Asset Is Not Active, 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, the
alternative outlined in ASC 820-10-35-15A is the use of valuing 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 developed a modified discount
rate approach that incorporates risk premiums including, among others,
increased probability of default, or higher loss given default, or increased
liquidity risk. The DCF valuations applied to the syndicated loans provide an
estimate of what we believe a market participant would pay to purchase a
syndicated loan in an active market, thereby establishing a fair value. We apply the DCF methodology in illiquid
markets until quoted prices are available or are deemed reliable based on
trading activity.
As of September 30, 2009, we assessed trading
activity in syndicated loan assets and determined that there had been a return
to market liquidity and a better functioning secondary market for these
assets. Thus, firm bid prices or
indicative bids were used to fair value our remaining syndicated loans at September 30,
2009. However, for those syndicated
loans which were sold but not yet settled as of September 30, 2009, we
used the respective sales prices to value those syndicated loans.
Securities
for which no market exists:
The valuation methodology for securities for which no
market exists falls into three categories: (1) portfolio investments
comprised solely of debt securities; (2) portfolio investments in
controlled companies comprised of a bundle of securities, which can include
debt and equity securities; and (3) portfolio investments in
non-controlled companies comprised of a bundle of securities, which can include
debt and equity securities.
(1)
Portfolio investments
comprised solely of debt securities:
Debt securities that are not publicly traded on an
established securities market, or for which a limited market does not exist (Non-Public
Debt Securities), and that are issued by portfolio companies where we have no
equity, or equity-like securities, and are fair valued in accordance with the
terms of the policy,
42
which utilizes 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 their evaluation when it is determined that
PIK interest is likely to be received.
In the case of Non-Public Debt Securities, we have engaged SPSE to
submit opinions of value for our debt securities that are issued by portfolio
companies in which we own no equity, or equity-like securities. SPSEs opinions of value are based on the
valuations prepared by our portfolio management team as described below. We request that SPSE also evaluate and assign
values to success fees (conditional interest included in some loan securities)
when we determine that the probability of receiving a success fee on a given
loan is above 6-8%, a threshold of significance. SPSE will only evaluate the
debt portion of our investments for which we specifically request evaluation,
and may decline to make requested evaluations for any reason at its sole discretion.
Upon completing our collection of data with respect to the investments (which
may include the information described below under Credit Information, the
risk ratings of the loans described below under Loan Grading and Risk Rating
and the factors described hereunder), this valuation data is forwarded to SPSE
for review and analysis. SPSE makes its independent assessment of the data that
we have assembled and assesses its independent data to form an opinion as to
what they consider to be the market values for the securities. With regard to
its work, SPSE has issued the following paragraph:
SPSE provides evaluated price opinions which are reflective of what
SPSE believes the bid side of the market would be for each loan after careful
review and analysis of descriptive, market and credit information. Each price
reflects SPSEs best judgment based upon careful examination of a variety of
market factors. Because of fluctuation in the market and in other factors
beyond its control, SPSE cannot guarantee these evaluations. The evaluations
reflect the market prices, or estimates thereof, on the date specified. The
prices are based on comparable market prices for similar securities. Market
information has been obtained from reputable secondary market sources. Although
these sources are considered reliable, SPSE cannot guarantee their accuracy.
SPSE opinions of value of our debt securities that are issued by
portfolio companies where we have no equity, or equity-like securities are
submitted to our Board of Directors along with our Advisers supplemental
assessment and recommendation regarding valuation of each of these investments.
Our Adviser generally accepts the opinion of value given by SPSE, however, in
certain limited circumstances, such as when our Adviser may learn new
information regarding an investment between the time of submission to SPSE and
the date of the assessment by our Board of Directors, our Advisers conclusions
as to value may differ from the opinion of value delivered by SPSE. Our Board of
Directors then reviews whether our Adviser has followed its established
procedures for determinations of fair value, and votes to accept or reject the
recommended valuation of our investment portfolio. Our Adviser and our
management recommended, and our Board of Directors voted to accept, the
opinions of value delivered by SPSE on the loans in our portfolio as denoted on
the Schedule of Investments included in our accompanying condensed consolidated
financial statements.
Because there is a delay between when we close an investment and when
the investment can be evaluated by SPSE, new loans are not valued immediately
by SPSE; rather, management makes its own determination about the value of
these investments in accordance with our valuation policy using the methods
described herein.
(2)
Portfolio investments in
controlled companies comprised of a bundle of investments, which can include
debt and equity securities:
The fair value of these investments is determined
based on the total enterprise value of the portfolio company, or issuer,
utilizing a liquidity waterfall approach under ASC 820-10. For Non-Public Debt Securities and equity or
equity-like securities (e.g. preferred equity, 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 or recapitalization of the portfolio company. In accordance with ASC
820-10, we apply the in-use premise of value which assumes the debt and equity
securities are sold together. Under this liquidity waterfall approach, we
continue to use the enterprise value methodology utilizing a liquidity
waterfall approach to determine the fair value of these investments under ASC
820-10 if we have the ability to initiate a sale of a portfolio company as of
the measurement date. Under this approach, we first calculate the total
enterprise value of the issuer by incorporating some or all of the following
factors:
·
the issuers ability to make payments;
·
the earnings of the issuer;
·
recent sales to third parties of similar
securities;
·
the comparison to publicly traded
securities; and
·
DCF or other pertinent factors.
In gathering the sales to third parties of similar securities, we may
reference industry statistics and use outside experts. Once we have estimated
the total enterprise value of the issuer, we 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 total enterprise value over the total debt outstanding for the issuer. Once
the values for all outstanding senior securities (which include the debt
securities) have been subtracted from the total enterprise value of the issuer,
the remaining amount, if any, is used to determine the value of the issuers
equity or equity like securities. If, in
our Advisers judgment, the liquidity waterfall approach does not
43
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.
(3)
Portfolio investments in
non-controlled companies comprised of a bundle of investments, which can
include debt and equity securities:
We value Non-Public Debt Securities that are purchased
together with equity or equity-like securities from the same portfolio company,
or issuer, for which we do not control or cannot gain control as of the
measurement date, using a hypothetical secondary market as our principal
market. In accordance with ASC 820-10, we determine the fair value of these
debt securities of non-control investments assuming the sale of an individual
debt security using the in-exchange premise of value (as defined in ASC
820-10). 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. Subsequent to June 30, 2009, 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 using the in-exchange premise of value 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 also is given
to capital structure and other contractual obligations that may impact the fair
value of the equity. Further, we may utilize comparable values of similar
companies, recent investments and indices with similar structures and risk
characteristics or our own assumptions in the absence of other observable
market data and may also employ DCF valuation techniques.
Due to the uncertainty inherent in the valuation process, such
estimates of fair value may differ significantly from the values that would
have been obtained had a ready market for the securities existed, and the
differences could be material. 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 arms-length
transaction in the securitys principal market.
Valuation
Considerations:
From time to time, depending on certain
circumstances, the Adviser may use the following valuation considerations,
including but not limited to:
·
the nature and realizable value of the collateral;
·
the portfolio companys earnings and cash flows and
its ability to make payments on its obligations;
·
the markets in which the portfolio company does
business;
·
the comparison to publicly traded companies; and
·
DCF and other relevant factors.
Because such valuations,
particularly valuations of private securities and private companies, are not
susceptible to precise determination, may fluctuate over short periods of time,
and may be based on estimates, our determinations of fair value may differ from
the values that might have actually resulted had a readily available market for
these securities been available.
Credit
Information:
Our Adviser monitors a wide variety of key
credit statistics that provide information regarding our portfolio companies to
help us assess credit quality and portfolio performance. We and our Adviser
participate in the periodic board meetings of our portfolio companies in which
we hold Control and Affiliate investments and also require them to provide
annual audited and monthly unaudited financial statements. Using these
statements or comparable information and board discussions, our Adviser
calculates and evaluates the credit statistics.
Loan
Grading and Risk Rating:
As part of our valuation
procedures above, we risk rate all of our investments in debt securities. For
syndicated loans that have been rated by an NRSRO (as defined in Rule 2a-7
under the 1940 Act), we use the NRSROs risk rating for such security. For all
other debt securities, we use a proprietary risk rating system. Our risk rating
system uses a scale of 0 to 10, with 10 being the lowest probability of
default. This system is used to estimate the probability of default on debt
securities and the probability of loss if there is a default. These types of
systems are referred to as risk rating systems and are used by banks and rating
agencies. The risk rating system covers both qualitative and quantitative
aspects of the business and the securities we hold.
For the debt
securities for which we do not use a third-party NRSRO risk rating, we seek to
have our risk rating system mirror the risk rating systems of major risk rating
organizations, such as those provided by an NRSRO. While we seek to mirror the
NRSRO systems, we cannot provide any assurance that our risk rating system will
provide the same risk rating as an NRSRO for these securities. The following
chart is an estimate of the relationship of our risk rating system to the
designations used by two NRSROs as they risk rate debt securities of major
companies. Because our system rates debt securities of companies that are unrated
by any NRSRO, there can be no assurance that the correlation to the NRSRO set
out below is accurate. We believe our risk rating would be significantly higher
than a typical NRSRO risk rating because the risk rating of the typical NRSRO
is designed for larger businesses. However, our risk rating has been designed
to risk rate the securities of smaller businesses that are not rated by a
typical NRSRO. Therefore, when we use our risk rating on larger business
securities, the risk rating is higher than a typical NRSRO rating. The primary
difference between
44
our risk rating
and the rating of a typical NRSRO is that our risk rating uses more
quantitative determinants and includes qualitative determinants that we believe
are not used in the NRSRO rating. It is our understanding that most debt
securities of medium-sized companies do not exceed the grade of BBB on an NRSRO
scale, so there would be no debt securities in the middle market that would
meet the definition of AAA, AA or A. Therefore, our scale begins with the
designation 10 as the best risk rating which may be equivalent to a BBB from an
NRSRO, however, no assurance can be given that a 10 on our scale is equal to a
BBB on an NRSRO scale.
Companys
System
|
|
First
NRSRO
|
|
Second
NRSRO
|
|
Gladstone Investments
Description(a)
|
>10
|
|
Baa2
|
|
BBB
|
|
Probability of
Default (PD) during the next ten years is 4% and the Expected Loss (EL) is 1%
or less
|
10
|
|
Baa3
|
|
BBB-
|
|
PD is 5% and the
EL is 1% to 2%
|
9
|
|
Ba1
|
|
BB+
|
|
PD is 10% and
the EL is 2% to 3%
|
8
|
|
Ba2
|
|
BB
|
|
PD is 16% and
the EL is 3% to 4%
|
7
|
|
Ba3
|
|
BB-
|
|
PD is 17.8% and the
EL is 4% to 5%
|
6
|
|
B1
|
|
B+
|
|
PD is 22% and
the EL is 5% to 6.5%
|
5
|
|
B2
|
|
B
|
|
PD is 25% and
the EL is 6.5% to 8%
|
4
|
|
B3
|
|
B-
|
|
PD is 27% and
the EL is 8% to 10%
|
3
|
|
Caa1
|
|
CCC+
|
|
PD is 30% and
the EL is 10% to 13.3%
|
2
|
|
Caa2
|
|
CCC
|
|
PD is 35% and
the EL is 13.3% to 16.7%
|
1
|
|
Caa3
|
|
CC
|
|
PD is 65% and
the EL is 16.7% to 20%
|
0
|
|
N/A
|
|
D
|
|
PD is 85% or
there is a payment of default and the EL is greater than 20%
|
(a)
The default rates set
forth are for a ten year term debt security. If a debt security is less than
ten years, then the PD is adjusted to a lower percentage for the shorter period,
which may move the security higher on our risk rating scale
The above scale
gives an indication of the probability of default and the magnitude of the loss
if there is a default. Our policy is to stop accruing interest on an investment
if we determine that interest is no longer collectible. At September 30, 2009, one investment
was on non-accrual for approximately $1.6 million at fair value, or 0.8% of the
aggregate fair value of our investment portfolio. Additionally, we do not risk rate our equity
securities.
The following
table lists the risk ratings for all non-syndicated loans in our portfolio at September 30,
2009 and March 31, 2009, representing approximately 90% and 59%,
respectively, of all loans in our portfolio at the end of each period:
Rating
|
|
September 30, 2009
|
|
March 31, 2009
|
|
Highest
|
|
8.0
|
|
7.0
|
|
Average
|
|
5.6
|
|
5.5
|
|
Weighted Average
|
|
5.5
|
|
5.1
|
|
Lowest
|
|
3.0
|
|
2.0
|
|
The following
table lists the risk ratings for syndicated loans in our portfolio that were
not rated by an NRSRO at September 30, 2009 and March 31, 2009,
representing approximately 3% and 12%, respectively, of all loans in our
portfolio at the end of each period:
Rating
|
|
September 30, 2009
|
|
March 31, 2009
|
|
Highest
|
|
8.0
|
|
9.0
|
|
Average
|
|
7.0
|
|
8.0
|
|
Weighted Average
|
|
7.2
|
|
8.0
|
|
Lowest
|
|
6.0
|
|
7.0
|
|
For syndicated
loans that are currently rated by an NRSRO, we risk rate such loans in
accordance with the risk rating systems of major risk rating organizations,
such as those provided by an NRSRO. The following table lists the risk ratings
for all syndicated loans in our portfolio that were rated by an NRSRO at September 30,
2009 and March 31, 2009, representing approximately 7% and 29%,
respectively, of all loans in our portfolio at the end of each period:
Rating
|
|
September 30, 2009
|
|
March 31, 2009
|
|
Highest
|
|
B+/B1
|
|
BB/Ba2
|
|
Average
|
|
B/B2
|
|
B/B2
|
|
Weighted Average
|
|
B-/B3
|
|
B/B2
|
|
Lowest
|
|
CCC+/B2
|
|
CCC+/B3
|
|
45
Tax
Status
Federal
Income Taxes
We intend to continue to qualify for treatment as a
RIC under Subtitle A, Chapter 1 of Subchapter M of the Code. As a RIC, we are
not subject to federal income tax on the portion of our taxable income and
gains distributed to stockholders. To qualify as a RIC, we are required to
distribute to stockholders at least 90% of investment company taxable income,
as defined by the Code. It is our policy to pay out as a distribution up to
100% of those amounts.
In an effort to
avoid certain excise taxes imposed on RICs, we currently intend to distribute
during each calendar year, an amount at least equal to the sum of (1) 98%
of our ordinary income for the calendar year, (2) 98% of our capital gains
in excess of capital losses for the one-year period ending on October 31
of the calendar year, and (3) any ordinary income and net capital gains
for preceding years that were not distributed during such years.
Revenue Recognition
Interest and Dividend Income
Recognition
Interest income,
adjusted for amortization of premiums and acquisition costs and for the
accretion of discounts, is recorded on the accrual basis to the extent that
such amounts are expected to be collected.
Generally, when a loan becomes 90 days or more past due or if our
qualitative assessment indicates that the debtor is unable to service its debt
or other obligations, we will place the loan on non-accrual status and cease
recognizing interest income on that loan until the borrower has demonstrated
the ability and intent to pay contractual amounts due. However, we remain contractually entitled to
this interest. At September 30,
2009, one Control investment was on non-accrual with a fair value of
approximately $1.6 million, or 0.8% of the fair value of all loans held in our
portfolio at September 30, 2009. At
March 31, 2009, one Control investment was on non-accrual with a fair
value of approximately $2.6 million, or 0.8% of the fair value of all loans
held in our portfolio at March 31, 2009. Conditional interest, or a
success fee, is recorded when earned upon full repayment of a loan investment.
To date we have not recorded any conditional interest. Dividend income on
preferred equity securities is accrued to the extent that such amounts are
expected to be collected and that we have the option to collect such amounts in
cash. To date, we have not accrued any dividend income.
Services Provided to Portfolio
Companies
As a business
development company under the 1940 Act, we are required to make available
significant managerial assistance to our portfolio companies. We provide these
services through our Adviser, who provides these services on our behalf through
its officers who are also our officers. Currently, neither we nor our Adviser
charges a fee for managerial assistance, however, if our Adviser does receive
fees for such managerial assistance, our Adviser will credit the managerial
assistance fees to the base management fee due from us to our Adviser.
Our Adviser
receives fees for the other services it provides to our portfolio companies.
These other fees are typically non-recurring, are recognized as revenue when
earned and are generally paid directly to our Adviser by the borrower or
potential borrower upon the closing of the investment. The services our Adviser
provides to our portfolio companies vary by investment, but generally include a
broad array of services such as investment banking services, arranging bank and
equity financing, structuring financing from multiple lenders and investors,
reviewing existing credit facilities, restructuring existing investments,
raising equity and debt capital, turnaround management, merger and acquisition
services and recruiting new management personnel. When our Adviser receives
fees for these services, 50% of certain of those fees are voluntarily credited
against the base management fee that we pay to our Adviser. Any services of
this nature subsequent to the closing would typically generate a separate fee
at the time of completion.
Our Adviser also
receives fees for monitoring and reviewing portfolio company investments. These
fees are recurring and are generally paid annually or quarterly in advance to
our Adviser throughout the life of the investment. Fees of this nature are
recorded as revenue by our Adviser when earned and are not credited against the
base management fee.
We may receive
fees for the origination and closing services we provide to portfolio companies
through our Adviser. These fees are paid directly to us and are recognized as
revenue upon closing of the originated investment and are reported as Fee
income in the accompanying condensed consolidated statements of operations.
Recent
Accounting Pronouncements
Refer to Note 2
Summary of Significant Accounting Policies
in the notes to
our condensed consolidated financial statements included elsewhere in this
report.
ITEM 3. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK.
We are subject to
financial market risks, including changes in interest rates. We estimate that ultimately approximately 20%
of the loans in our portfolio will be made at fixed rates and approximately 80%
will be made at variable rates. As of September 30,
2009, our portfolio consisted of the following breakdown in relation to all
outstanding debt:
46
23
|
%
|
variable rates
|
46
|
%
|
variable rates
with a floor
|
31
|
%
|
fixed rates
|
100
|
%
|
Total
|
There have been no material changes in the quantitative and qualitative
market risk disclosures for the three months ended September 30, 2009 from
those disclosed in our Annual Report on Form 10-K for the fiscal year
ended March 31, 2009, as filed with the SEC on June 2, 2009.
ITEM 4. CONTROLS AND PROCEDURES.
As of September 30,
2009, we, including our Chief Executive Officer and Chief Financial Officer,
evaluated the effectiveness of the design and operation of our disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)). Based on that evaluation, our management, including the Chief
Executive Officer and Chief Financial Officer, concluded that our disclosure
controls and procedures were effective in timely alerting management, including
the Chief Executive Officer and Chief Financial Officer, of material
information about us required to be included in periodic Securities and
Exchange Commission filings. However, in evaluating the disclosure controls and
procedures, management recognized that any controls and procedures, no matter
how well designed and operated, can provide only reasonable assurance of achieving
the desired control objectives, and management necessarily was required to
apply its judgment in evaluating the cost-benefit relationship of possible
controls and procedures.
There have been no
changes in our internal control over financial reporting that occurred during
the quarter ended September 30, 2009 that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
47
PART IIOTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Neither
we, nor any of our subsidiaries, are currently subject to any material legal
proceeding, nor, to our knowledge, is any material legal proceeding threatened
against us or any of our subsidiaries.
ITEM 1A. RISK FACTORS.
Our business is
subject to certain risks and events that, if they occur, could adversely affect
our financial condition and results of operations and the trading price of our
common stock. In connection with our preparation of this quarterly report,
management has reviewed and considered this modified risk factor and has
determined that the following modified risk factor should be read in connection
with the existing risk factors in our final prospectus as filed with the SEC on
October 14, 2009.
Our credit facility imposes certain restrictions on us
which, if not complied with, could accelerate our repayment obligations under
the facility, thereby materially and adversely affecting our liquidity,
financial condition, results of operations and ability to pay distributions.
We
will have a continuing need for capital to finance our loans. In order to
maintain RIC status, we will be required to distribute to our stockholders at
least 90% of our ordinary income and short-term capital gains on an annual basis.
Accordingly, such earnings will not be available to fund additional loans.
Therefore, we are party to the Credit Facility, which provides us with a
revolving credit line facility of $50.0 million, of which approximately $32.1
million was available for borrowings as of October 31, 2009. The Credit
Facility permits us to fund additional loans and investments as long as we are
within the conditions set out in the credit agreement. Current market
conditions have forced us to write down the value of a portion of our assets as
required by fair value accounting rules. These are not realized losses, but
constitute adjustment in asset values for purposes of financial reporting and
for collateral value for the Credit Facility. As assets are marked down in
value, the amount we can borrow on the Credit Facility decreases.
As a result of the Credit
Facility, we are subject to certain limitations on the type of loan investments
we make, including restrictions on geographic concentrations, sector
concentrations, loan size, dividend payout, payment frequency and status, and
average life. The Credit Facility also
requires us to comply with other financial and operational covenants, which
require us to, among other things, maintain certain financial ratios, including
asset and interest coverage a minimum net worth, and a minimum number of
obligors required in the borrowing base of the credit agreement. As of September 30,
2009, we were in compliance with these covenants; however, our continued
compliance with these covenants depends on many factors, some of which are
beyond our control. In particular, depreciation in the valuation of our assets,
which valuation is subject to changing market conditions that remain very
volatile, affects our ability to comply with these covenants. Given the
continued deterioration in the capital markets, net unrealized depreciation in
our portfolio may continue to increase in future periods and threaten our
ability to comply with the covenants under the Credit Facility. Accordingly, there are no assurances that we
will continue to comply with these covenants.
Under the Credit Facility, we are also required to maintain our status
as a BDC under the 1940 Act and as a RIC under the Code. Because
of recent changes in our asset portfolio, due to significant sales of
Non-Control/Non-Affiliate investments over the last six months, there is a
significant possibility that we may not meet the asset diversification
threshold under the Codes rules applicable to a RIC as of our next
quarterly testing date, December 31, 2009.
Although this failure alone, in our current situation, will not cause us
to lose our RIC status, if we make any new investments, including additional
investments in our portfolio companies (such as advances under our outstanding
lines of credit) our RIC status will be jeopardized. Our failure to satisfy these covenants
could result in foreclosure by our lenders, which would accelerate our
repayment obligations under the facility and thereby have a material adverse
effect on our business, liquidity, financial condition, results of operations
and ability to pay distributions to our stockholders.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND
USE OF PROCEEDS.
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS.
On August 13, 2009,
we held our Annual Meeting of Stockholders in Mclean, Virginia. Stockholders
voted and approved the following matters:
1. Election of Directors: Stockholders elected
directors, each of whom will serve for a three year term expiring at the 2012
Annual Meeting of Stockholders, or until his successor is elected and
qualified. Votes were cast as follows:
48
|
|
FOR
|
|
WITHHELD
|
|
Maurice
W. Colon
|
|
20,656,105
|
|
561,256
|
|
Terry
Lee Brubaker
|
|
19,300,322
|
|
1,917,039
|
|
David
A.R. Dullum
|
|
20,710,283
|
|
507,079
|
|
The following directors
are continuing directors of the Company for their respective terms Michela A.
English, Anthony W. Parker, Gerard Mead, Paul W. Adelgren, John H. Outland,
George Stelljes III and David Gladstone.
2.
Approval to authorize us to sell shares of our common stock at a price below
our then current net asset value per share for a period of one year. Votes were
cast as follows:
FOR
|
|
AGAINST
|
|
ABSTAIN
|
|
BROKER NON-VOTES
|
|
11,917,041
|
|
3,389,824
|
|
254,795
|
|
5,655,701
|
|
3.
Ratification of the selection of PricewaterhouseCoopers LLP to serve as our
independent registered public accounting firm for the fiscal year ending March 31,
2010. Votes were cast as follows:
FOR
|
|
AGAINST
|
|
ABSTAIN
|
|
20,867,514
|
|
114,356
|
|
235,491
|
|
ITEM 5. OTHER INFORMATION.
Not applicable.
ITEM 6. EXHIBITS
See the exhibit index.
49
SIGNATURE
Pursuant to the
requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.
|
GLADSTONE
INVESTMENT CORPORATION
|
|
|
|
|
By:
|
/s/ Mark Perrigo
|
|
|
Mark Perrigo
|
|
|
Chief
Financial Officer
|
Date: November 3,
2009
50
EXHIBIT
INDEX
Exhibit
|
|
Description
|
3.1
|
|
Amended and
Restated Certificate of Incorporation, incorporated by reference to
Exhibit a.2 to Pre-Effective Amendment No. 1 to the Registration
Statement on Form N-2 (File No. 333-123699), filed May 13,
2005.
|
3.2
|
|
Amended and
Restated Bylaws, incorporated by reference to Exhibit b.2 to
Pre-Effective Amendment No. 3 to the Registration Statement on
Form N-2 (File No. 333-123699), filed June 21, 2005.
|
3.3
|
|
First Amendment
to Amended and Restated Bylaws, incorporated by reference to
Exhibit 99.1 to the Companys Current Report on Form 8-K (File
No. 814-00704), filed on July 10, 2007.
|
4.1
|
|
Specimen Stock
Certificate, incorporated by reference to Exhibit 99.1 to Pre-Effective
Amendment No. 3 to the Registration Statement on Form N-2 (File
No. 333-123699), filed June 21, 2005.
|
10.1
|
|
Investment
Advisory and Management Agreement between the Company and Gladstone
Management Corporation, dated June 22, 2005 and incorporated by
reference to Exhibit 10.1 to the Companys Annual Report on
Form 10-K, filed on June 14, 2006 (renewed on July 8, 2009).
|
10.2
|
|
Administration
Agreement between the Company and Gladstone Administration, LLC, dated
June 22, 2005 and incorporated by reference to Exhibit 10.2 to the
Companys Annual Report on Form 10-K, filed June 14, 2006 (renewed
on July 8, 2009).
|
11
|
|
Computation of
Per Share Earnings (included in the notes to the unaudited condensed
consolidated financial statements contained in this report).
|
31.1
|
|
Certification of
Chief Executive Officer pursuant to section 302 of The Sarbanes-Oxley Act of
2002.
|
31.2
|
|
Certification of
Chief Financial Officer pursuant to section 302 of The Sarbanes-Oxley Act of
2002.
|
32.1
|
|
Certification of
Chief Executive Officer pursuant to section 906 of The Sarbanes-Oxley Act of
2002.
|
32.2
|
|
Certification of
Chief Financial Officer pursuant to section 906 of The Sarbanes-Oxley Act of
2002.
|
All other exhibits
for which provision is made in the applicable regulations of the Securities and
Exchange Commission are not required under the related instruction or are
inapplicable and therefore have been omitted.
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