Table of
Contents
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED DECEMBER 31, 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 February 8, 2010 was 22,080,133.
Table of Contents
GLADSTONE INVESTMENT CORPORATION
CONDENSED
CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
|
|
December 31,
|
|
March 31,
|
|
|
|
2009
|
|
2009
|
|
|
|
(Unaudited)
|
|
|
|
ASSETS
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
87,872
|
|
$
|
7,236
|
|
Investments at fair value
|
|
|
|
|
|
Non-Control/Non-Affiliate investments (Cost of
$22,902
and $134,836, respectively)
|
|
19,404
|
|
94,740
|
|
Control investments (Cost of
$150,107
and $150,081, respectively)
|
|
130,955
|
|
166,163
|
|
Affiliate investments (Cost of
$52,891
and $64,028, respectively)
|
|
37,027
|
|
53,027
|
|
Total investments (Cost of
$225,900
and $348,945, respectively)
|
|
187,386
|
|
313,930
|
|
Interest receivable
|
|
1,373
|
|
1,500
|
|
Due from Custodian
|
|
766
|
|
2,706
|
|
Deferred financing fees
|
|
512
|
|
1,167
|
|
Prepaid assets
|
|
300
|
|
172
|
|
Other assets
|
|
70
|
|
132
|
|
TOTAL ASSETS
|
|
$
|
278,279
|
|
$
|
326,843
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
$
|
200
|
|
$
|
1,283
|
|
Fee due to Administrator (Refer to Note 4)
|
|
156
|
|
179
|
|
Fees due to Adviser (Refer to Note 4)
|
|
793
|
|
187
|
|
Short-term loan
|
|
75,000
|
|
|
|
Borrowings under line of credit at fair value
(Cost of
$26,750
and $110,265, respectively)
|
|
26,883
|
|
110,265
|
|
Other liabilities
|
|
246
|
|
127
|
|
TOTAL LIABILITIES
|
|
103,278
|
|
112,041
|
|
NET ASSETS
|
|
$
|
175,001
|
|
$
|
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 December 31,
2009 and March 31, 2009
|
|
$
|
22
|
|
$
|
22
|
|
Capital in excess of par value
|
|
264,576
|
|
257,361
|
|
Net unrealized depreciation of investment
portfolio
|
|
(38,514
|
)
|
(35,015
|
)
|
Net unrealized depreciation of derivative
|
|
(34
|
)
|
(53
|
)
|
Net unrealized appreciation of borrowings under
line of credit
|
|
(133
|
)
|
|
|
Accumulated net investment loss
|
|
(50,916
|
)
|
(7,513
|
)
|
TOTAL NET ASSETS
|
|
$
|
175,001
|
|
$
|
214,802
|
|
NET ASSETS PER SHARE
|
|
$
|
7.93
|
|
$
|
9.73
|
|
THE
ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS.
1
Table of Contents
GLADSTONE INVESTMENT CORPORATION
CONDENSED
CONSOLIDATED SCHEDULES OF INVESTMENTS
AS OF DECEMBER 31, 2009
(DOLLAR AMOUNTS IN THOUSANDS)
(UNAUDITED)
Company
(1)
|
|
Industry
|
|
Investment
(2)
|
|
Cost
|
|
Fair
Value
|
|
|
|
|
|
|
|
|
|
|
|
NON-CONTROL/NON-AFFILIATE
INVESTMENTS:
|
Senior Syndicated Loans:
|
|
|
|
|
|
|
|
|
|
Interstate
FiberNet, Inc.
|
|
Service
provider of voice and data telecommunications services
|
|
Senior
Term Debt (4.3%, Due 7/2013) (3)
|
|
$
|
6,759
|
|
$
|
5,085
|
|
Survey
Sampling, LLC
|
|
Service
telecommunications-based sampling
|
|
Senior
Term Debt (9.5%, Due 5/2011) (3)
|
|
2,397
|
|
1,073
|
|
Subtotal - Syndicated Loans
|
|
|
|
|
|
$
|
9,156
|
|
$
|
6,158
|
|
|
|
|
|
|
|
|
|
|
|
Non-syndicated Loans:
|
|
|
|
|
|
|
|
|
|
American
Greetings Corporation
|
|
Manufacturing
and design greeting cards
|
|
Senior
Notes (7.4%, Due 6/2016) (3)
|
|
$
|
3,043
|
|
$
|
2,895
|
|
|
|
|
|
|
|
|
|
|
|
B-Dry,
LLC
|
|
Service
basement waterproofer
|
|
Senior
Term Debt (11.0%, Due 5/2014) (5)
|
|
6,613
|
|
6,580
|
|
|
|
|
|
Senior
Term Debt (11.5%, Due 5/2014) (5)
|
|
3,790
|
|
3,771
|
|
|
|
|
|
Common Stock Warrants
(4)
|
|
300
|
|
|
|
|
|
|
|
|
|
10,703
|
|
10,351
|
|
|
|
|
|
|
|
|
|
|
|
Total Non-Control/Non-Affiliate
Investments
|
|
|
|
|
|
$
|
22,902
|
|
$
|
19,404
|
|
|
|
|
|
|
|
|
|
|
|
CONTROL INVESTMENTS:
|
A.
Stucki Holding Corp.
|
|
Manufacturing
railroad freight car products
|
|
Senior
Term Debt (4.7%, 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
|
|
4,387
|
|
4,448
|
|
|
|
|
|
Common
Stock (4)
|
|
130
|
|
1,566
|
|
|
|
|
|
|
|
32,104
|
|
33,601
|
|
|
|
|
|
|
|
|
|
|
|
Acme Cryogenics, Inc.
|
|
Manufacturing manifolds and pipes for
industrial gasses
|
|
Senior
Subordinated Term Debt (11.5%, Due 3/2012)
|
|
14,500
|
|
14,479
|
|
|
|
|
|
Preferred
Stock (4)
|
|
6,984
|
|
|
|
|
|
|
|
Common
Stock (4)
|
|
1,045
|
|
|
|
|
|
|
|
Common
Stock Warrants (4)
|
|
24
|
|
|
|
|
|
|
|
|
|
22,553
|
|
14,479
|
|
|
|
|
|
|
|
|
|
|
|
ASH Holdings Corp.
|
|
Retail and Service school buses and parts
|
|
Revolver,
$2,000 available (non-accrual, Due 3/2010) (5), (4)
|
|
|
|
|
|
|
|
|
|
Senior
Subordinated Term Debt (non-accrual, Due 1/2012) (5), (4)
|
|
6,250
|
|
1,719
|
|
|
|
|
|
Preferred
Stock (4)
|
|
2,500
|
|
|
|
|
|
|
|
Common
Stock Warrants (4)
|
|
4
|
|
|
|
|
|
|
|
Guaranty
($500)
|
|
|
|
|
|
|
|
|
|
|
|
8,754
|
|
1,719
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
4,863
|
|
|
|
|
|
Common
Stock (4)
|
|
69
|
|
2,926
|
|
|
|
|
|
|
|
14,425
|
|
18,035
|
|
|
|
|
|
|
|
|
|
|
|
Chase II Holdings Corp.
|
|
Manufacturing traffic doors
|
|
Senior
Term Debt (8.8%, Due 3/2011)
|
|
7,975
|
|
7,975
|
|
|
|
|
|
Senior
Term Debt (12.0%, Due 3/2011) (6)
|
|
7,560
|
|
7,560
|
|
|
|
|
|
Senior
Subordinated Term Debt (13.0%, Due 3/2013)
|
|
6,168
|
|
6,168
|
|
|
|
|
|
Preferred
Stock (4)
|
|
6,961
|
|
7,214
|
|
|
|
|
|
Common
Stock (4)
|
|
61
|
|
|
|
|
|
|
|
|
|
28,725
|
|
28,917
|
|
|
|
|
|
|
|
|
|
|
|
Country
Club Enterprises, LLC
|
|
Service
golf cart distribution
|
|
Subordinated
Term Debt (14.0%, Due 11/2014) (5)
|
|
7,000
|
|
6,851
|
|
|
|
|
|
Preferred Stock (4)
|
|
3,725
|
|
|
|
|
|
|
|
|
|
10,725
|
|
6,851
|
|
2
Table of Contents
GLADSTONE INVESTMENT CORPORATION
CONDENSED CONSOLIDATED SCHEDULES OF INVESTMENTS
(Continued)
AS OF DECEMBER 31, 2009
(DOLLAR AMOUNTS IN THOUSANDS)
(UNAUDITED)
Company
(1)
|
|
Industry
|
|
Investment
(2)
|
|
Cost
|
|
Fair
Value
|
|
|
|
|
|
|
|
|
|
|
|
CONTROL INVESTMENTS
(Continued)
:
|
Galaxy
Tool Holding Corp.
|
|
Manufacturing
aerospace and plastics
|
|
Senior
Subordinated Term Debt (13.5%, Due 8/2013) (5)
|
|
$
|
17,250
|
|
$
|
16,991
|
|
|
|
|
|
Preferred
Stock (4)
|
|
4,112
|
|
|
|
|
|
|
|
Common
Stock (4)
|
|
48
|
|
|
|
|
|
|
|
|
|
21,410
|
|
16,991
|
|
|
|
|
|
|
|
|
|
|
|
Mathey
Investments, Inc. (7)
|
|
Manufacturing
pipe-cutting and pipe-fitting equipment
|
|
Revolving
Credit Facility, $0 available (10.0%, Due 3/2011) (5), (8)
|
|
1,032
|
|
1,015
|
|
|
|
|
|
Senior
Term Debt (10.0%, Due 3/2013) (5)
|
|
2,375
|
|
2,337
|
|
|
|
|
|
Senior
Term Debt (17.0%, Due 3/2014) (5), (6)
|
|
7,227
|
|
7,010
|
|
|
|
|
|
Common
Stock (4)
|
|
500
|
|
|
|
|
|
|
|
Common
Stock Warrants (4)
|
|
277
|
|
|
|
|
|
|
|
|
|
11,411
|
|
10,362
|
|
|
|
|
|
|
|
|
|
|
|
Total Control Investments
|
|
|
|
|
|
$
|
150,107
|
|
$
|
130,955
|
|
|
|
|
|
|
|
|
|
|
|
AFFILIATE INVESTMENTS:
|
Danco
Acquisition Corp.
|
|
Manufacturing
machining and sheet metal work
|
|
Revolving
Credit Facility, $600 available (10.0%, Due 10/2010) (5)
|
|
$
|
900
|
|
$
|
885
|
|
|
|
|
|
Senior
Term Debt (10.0%, Due 10/2012) (5)
|
|
4,313
|
|
4,243
|
|
|
|
|
|
Senior
Term Debt (12.5%, Due 4/2013) (5)
|
|
9,067
|
|
8,840
|
|
|
|
|
|
Preferred
Stock (4)
|
|
2,500
|
|
|
|
|
|
|
|
Common
Stock Warrants (4)
|
|
2
|
|
|
|
|
|
|
|
|
|
16,782
|
|
13,968
|
|
|
|
|
|
|
|
|
|
|
|
Noble
Logistics, Inc.
|
|
Service
aftermarket auto parts delivery
|
|
Revolving
Credit Facility, $0 available (4.2%, Due 2/2010) (5), (9)
|
|
2,000
|
|
1,200
|
|
|
|
|
|
Senior
Term Debt (9.3%, Due 12/2011) (5)
|
|
6,227
|
|
3,736
|
|
|
|
|
|
Senior
Term Debt (10.5%, Due 12/2011) (5) (6)
|
|
7,300
|
|
4,380
|
|
|
|
|
|
Preferred
Stock (4)
|
|
1,750
|
|
|
|
|
|
|
|
Common
Stock (4)
|
|
1,682
|
|
|
|
|
|
|
|
|
|
18,959
|
|
9,316
|
|
|
|
|
|
|
|
|
|
|
|
Quench
Holdings Corp.
|
|
Service
sales, installation and service of water coolers
|
|
Senior
Subordinated Term Debt (10.0%, Due 8/2013) (5)
|
|
8,000
|
|
6,040
|
|
|
|
|
|
Preferred
Stock (4)
|
|
2,950
|
|
2,728
|
|
|
|
|
|
Common
Stock (4)
|
|
447
|
|
|
|
|
|
|
|
|
|
11,397
|
|
8,768
|
|
|
|
|
|
|
|
|
|
|
|
Tread
Corp.
|
|
Manufacturing
storage and transport equipment
|
|
Senior
Subordinated Term Debt (12.5%, Due 5/2013) (5)
|
|
5,000
|
|
4,975
|
|
|
|
|
|
Preferred
Stock (4)
|
|
750
|
|
|
|
|
|
|
|
Common
Stock & Debt Warrants (4)
|
|
3
|
|
|
|
|
|
|
|
|
|
5,753
|
|
4,975
|
|
|
|
|
|
|
|
|
|
|
|
Total Affiliate Investments
|
|
|
|
|
|
$
|
52,891
|
|
$
|
37,027
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL INVESTMENTS
|
|
|
|
|
|
$
|
225,900
|
|
$
|
187,386
|
|
3
Table of Contents
(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 December 31,
2009, and due date represents the contractual maturity date.
|
(3)
|
Valued
based on the indicative bid price on or near December 31, 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 December 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)
|
Investment
was restructured in December 2009, resulting in the Company owning 100%
of Mathey Investments, Inc. and thus reclassifying it as a Control
Investment.
|
(8)
|
Credit
facility had a limit of $1.0 million at December 31, 2009; the overdraft
of approximately $32 represented a protective disbursement of the Companys
collateral. The credit facility was increased to $1.75 million subsequent to
December 31, 2009.
|
(9)
|
Revolving
credit facility was extended to May, 2010 subsequent to December 31,
2009.
|
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF
THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
4
Table of
Contents
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
|
|
5
Table of
Contents
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
|
|
|
|
|
|
|
|
Guaranty
($500)
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
6
Table of
Contents
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
Subordinated 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
|
|
7
Table of Contents
(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.
8
Table of
Contents
GLADSTONE INVESTMENT CORPORATION
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
|
December 31,
|
|
December 31,
|
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
INVESTMENT INCOME
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
|
|
|
|
|
|
|
Non-Control/Non-Affiliate investments
|
|
$
|
489
|
|
$
|
2,339
|
|
$
|
1,840
|
|
$
|
6,797
|
|
Control investments
|
|
2,856
|
|
3,068
|
|
8,593
|
|
8,372
|
|
Affiliate investments
|
|
1,605
|
|
1,478
|
|
4,533
|
|
3,938
|
|
Cash and cash equivalents
|
|
1
|
|
21
|
|
1
|
|
67
|
|
Total interest income
|
|
4,951
|
|
6,906
|
|
14,967
|
|
19,174
|
|
Other income
|
|
970
|
|
96
|
|
1,066
|
|
682
|
|
Total investment income
|
|
5,921
|
|
7,002
|
|
16,033
|
|
19,856
|
|
|
|
|
|
|
|
|
|
|
|
EXPENSES
|
|
|
|
|
|
|
|
|
|
Loan servicing fee (Refer to Note 4)
|
|
886
|
|
1,258
|
|
2,892
|
|
3,769
|
|
Base management fee (Refer to Note 4)
|
|
113
|
|
442
|
|
588
|
|
1,303
|
|
Incentive fee (Refer to Note 4)
|
|
588
|
|
|
|
588
|
|
|
|
Administration fee (Refer to Note 4)
|
|
156
|
|
195
|
|
527
|
|
642
|
|
Interest expense
|
|
385
|
|
1,823
|
|
1,640
|
|
4,009
|
|
Amortization of deferred finance costs
|
|
436
|
|
46
|
|
1,187
|
|
324
|
|
Professional fees
|
|
182
|
|
69
|
|
502
|
|
383
|
|
Stockholder related costs
|
|
49
|
|
112
|
|
276
|
|
413
|
|
Insurance expense
|
|
71
|
|
57
|
|
190
|
|
165
|
|
Directors fees
|
|
48
|
|
50
|
|
147
|
|
145
|
|
Other
|
|
61
|
|
57
|
|
198
|
|
246
|
|
Expenses before credit from Adviser
|
|
2,975
|
|
4,109
|
|
8,735
|
|
11,399
|
|
Credit to base management fee (Refer to Note 4)
|
|
(127
|
)
|
(694
|
)
|
(591
|
)
|
(1,964
|
)
|
Total expenses net of credit to base management fee
|
|
2,848
|
|
3,415
|
|
8,144
|
|
9,435
|
|
NET INVESTMENT INCOME
|
|
3,073
|
|
3,587
|
|
7,889
|
|
10,421
|
|
|
|
|
|
|
|
|
|
|
|
REALIZED AND UNREALIZED (LOSS) GAIN ON:
|
|
|
|
|
|
|
|
|
|
Realized loss on sale of Non-Control/Non-Affiliate
investments
|
|
(1,318
|
)
|
|
|
(35,922
|
)
|
(4,215
|
)
|
Realized loss on termination of derivative
|
|
|
|
|
|
(53
|
)
|
|
|
Net unrealized appreciation (depreciation) of
Non-Control/Non-Affiliate investments
|
|
1,383
|
|
(6,988
|
)
|
36,597
|
|
(7,714
|
)
|
Net unrealized (depreciation) appreciation of
Control investments
|
|
(8,853
|
)
|
1,755
|
|
(35,234
|
)
|
7,728
|
|
Net unrealized appreciation (depreciation) of
Affiliate investments
|
|
1,257
|
|
(2,294
|
)
|
(4,862
|
)
|
(13,687
|
)
|
Net unrealized (depreciation) appreciation of
derivative
|
|
(7
|
)
|
|
|
19
|
|
|
|
Net unrealized depreciation (appreciation) of
borrowings under line of credit
|
|
45
|
|
|
|
(133
|
)
|
|
|
Net loss on investments and borrowings under line
of credit
|
|
(7,493
|
)
|
(7,527
|
)
|
(39,588
|
)
|
(17,888
|
)
|
|
|
|
|
|
|
|
|
|
|
NET DECREASE IN NET ASSETS RESULTING FROM
OPERATIONS
|
|
$
|
(4,420
|
)
|
$
|
(3,940
|
)
|
$
|
(31,699
|
)
|
$
|
(7,467
|
)
|
|
|
|
|
|
|
|
|
|
|
NET DECREASE IN NET ASSETS RESULTING FROM
OPERATIONS PER COMMON SHARE:
|
|
|
|
|
|
|
|
|
|
Basic and Diluted
|
|
$
|
(0.20
|
)
|
$
|
(0.18
|
)
|
$
|
(1.44
|
)
|
$
|
(0.35
|
)
|
|
|
|
|
|
|
|
|
|
|
SHARES OF COMMON STOCK OUTSTANDING:
|
|
|
|
|
|
|
|
|
|
Basic and diluted weighted average shares
|
|
22,080,133
|
|
22,080,133
|
|
22,080,133
|
|
21,367,871
|
|
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF
THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
9
Table of
Contents
GLADSTONE INVESTMENT CORPORATION
CONDENSED
CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS
(DOLLAR AMOUNTS IN THOUSANDS)
(UNAUDITED)
|
|
Nine
Months Ended December 31,
|
|
|
|
2009
|
|
2008
|
|
Operations:
|
|
|
|
|
|
Net investment income
|
|
$
|
7,889
|
|
$
|
10,421
|
|
Realized loss on sale of investments
|
|
(35,922
|
)
|
(4,215
|
)
|
Realized loss on termination of derivative
|
|
(53
|
)
|
|
|
Net unrealized depreciation of portfolio
|
|
(3,499
|
)
|
(13,673
|
)
|
Net unrealized appreciation of derivative
|
|
19
|
|
|
|
Net unrealized appreciation of borrowings under
line of credit
|
|
(133
|
)
|
|
|
Net decrease in net assets from operations
|
|
(31,699
|
)
|
(7,467
|
)
|
|
|
|
|
|
|
Capital transactions:
|
|
|
|
|
|
Issuance of common stock
|
|
|
|
41,290
|
|
Shelf offering registration costs
|
|
(153
|
)
|
(695
|
)
|
Distributions to stockholders
|
|
(7,949
|
)
|
(15,456
|
)
|
Net (decrease) increase in net assets from capital
transactions
|
|
(8,102
|
)
|
25,139
|
|
|
|
|
|
|
|
Total (decrease) increase in net assets
|
|
(39,801
|
)
|
17,672
|
|
Net assets at beginning of period
|
|
214,802
|
|
206,445
|
|
|
|
|
|
|
|
Net assets at end of period
|
|
$
|
175,001
|
|
$
|
224,117
|
|
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF
THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
10
Table of
Contents
GLADSTONE INVESTMENT CORPORATION
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLAR AMOUNTS IN THOUSANDS)
(UNAUDITED)
|
|
Nine
Months Ended December 31,
|
|
|
|
2009
|
|
2008
|
|
CASH FLOWS FROM OPERATING
ACTIVITIES
|
|
|
|
|
|
Net decrease in net assets resulting from
operations
|
|
$
|
(31,699
|
)
|
$
|
(7,467
|
)
|
Adjustments to reconcile net decrease in net
assets resulting from operations to net cash provided by operating
activities:
|
|
|
|
|
|
Purchase of investments
|
|
(2,413
|
)
|
(47,655
|
)
|
Principal repayments of investments
|
|
14,828
|
|
26,753
|
|
Proceeds from sales of investments
|
|
74,706
|
|
13,296
|
|
Proceeds from short-term borrowings
|
|
75,000
|
|
|
|
Net realized loss on sales of investments
|
|
35,922
|
|
4,215
|
|
Net realized loss on termination of derivative
|
|
53
|
|
|
|
Net unrealized depreciation of investment
portfolio
|
|
3,499
|
|
13,673
|
|
Net unrealized appreciation of derivative
|
|
(19
|
)
|
|
|
Net unrealized appreciation of borrowings under
line of credit
|
|
133
|
|
|
|
Net amortization of premiums and discounts
|
|
2
|
|
27
|
|
Amortization of deferred financing costs
|
|
1,187
|
|
324
|
|
Decrease in interest receivable
|
|
127
|
|
46
|
|
Decrease in due from custodian
|
|
1,940
|
|
1,969
|
|
Increase in prepaid assets
|
|
(128
|
)
|
(63
|
)
|
Decrease in other assets
|
|
67
|
|
295
|
|
(Decrease) increase in accounts payable and
accrued liabilities
|
|
(1,083
|
)
|
1
|
|
Decrease in administration fee payable to
Administrator (See Note 4)
|
|
(23
|
)
|
(13
|
)
|
Increase in base management fee payable to Adviser
(See Note 4)
|
|
100
|
|
137
|
|
Increase in incentive fee payable to Adviser (See
Note 4)
|
|
588
|
|
|
|
(Decrease) increase in loan servicing fee payable
to Adviser (See Note 4)
|
|
(82
|
)
|
7
|
|
Increase in other liabilities
|
|
119
|
|
50
|
|
Net cash provided by operating activities
|
|
172,824
|
|
5,595
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING
ACTIVITIES
|
|
|
|
|
|
Net proceeds from the issuance of common stock
|
|
(153
|
)
|
40,595
|
|
Borrowings from line of credit
|
|
93,000
|
|
133,000
|
|
Repayments of line of credit
|
|
(176,515
|
)
|
(159,971
|
)
|
Purchase of derivative
|
|
(39
|
)
|
|
|
Deferred financing costs
|
|
(532
|
)
|
|
|
Distributions paid
|
|
(7,949
|
)
|
(15,456
|
)
|
Net cash used in financing activities
|
|
(92,188
|
)
|
(1,832
|
)
|
|
|
|
|
|
|
NET INCREASE IN CASH AND CASH
EQUIVALENTS
|
|
80,636
|
|
3,763
|
|
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD
|
|
7,236
|
|
9,360
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, END OF
PERIOD
|
|
$
|
87,872
|
|
$
|
13,123
|
|
|
|
|
|
|
|
CASH PAID DURING PERIOD FOR
INTEREST
|
|
$
|
1,824
|
|
$
|
3,959
|
|
|
|
|
|
|
|
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.
11
Table of Contents
GLADSTONE INVESTMENT CORPORATION
FINANCIAL
HIGHLIGHTS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AND PER UNIT
AMOUNTS)
(UNAUDITED)
|
|
Three Months Ended December 31,
|
|
Nine Months Ended December 31,
|
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
Per Share Data (1)
|
|
|
|
|
|
|
|
|
|
Net asset value at beginning of period
|
|
$
|
8.24
|
|
$
|
10.57
|
|
$
|
9.73
|
|
$
|
12.47
|
|
|
|
|
|
|
|
|
|
|
|
Income from investment
operations:
|
|
|
|
|
|
|
|
|
|
Net investment income (2)
|
|
0.14
|
|
0.16
|
|
0.36
|
|
0.49
|
|
Realized loss on sale of investments (2)
|
|
(0.06
|
)
|
|
|
(1.63
|
)
|
(0.20
|
)
|
Net unrealized depreciation of investments (2)
|
|
(0.28
|
)
|
(0.34
|
)
|
(0.16
|
)
|
(0.64
|
)
|
Net unrealized appreciation of borrowings on line
of credit (2)
|
|
|
|
|
|
(0.01
|
)
|
|
|
Total from investment operations
|
|
(0.20
|
)
|
(0.18
|
)
|
(1.44
|
)
|
(0.35
|
)
|
|
|
|
|
|
|
|
|
|
|
Distributions from:
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
(0.12
|
)
|
(0.24
|
)
|
(0.36
|
)
|
(0.72
|
)
|
Total distributions (3)
|
|
(0.12
|
)
|
(0.24
|
)
|
(0.36
|
)
|
(0.72
|
)
|
|
|
|
|
|
|
|
|
|
|
Effect of shelf offering:
|
|
|
|
|
|
|
|
|
|
Shelf registration offering costs
|
|
0.01
|
|
|
|
|
|
(0.03
|
)
|
Effect of distribution of stock rights offering
after record date (4)
|
|
|
|
|
|
|
|
(1.22
|
)
|
Total effect of shelf offering
|
|
0.01
|
|
|
|
|
|
(1.25
|
)
|
|
|
|
|
|
|
|
|
|
|
Net asset value at end of period
|
|
$
|
7.93
|
|
$
|
10.15
|
|
$
|
7.93
|
|
$
|
10.15
|
|
|
|
|
|
|
|
|
|
|
|
Per share market value at beginning of period
|
|
$
|
4.83
|
|
$
|
6.81
|
|
$
|
3.67
|
|
$
|
9.32
|
|
Per share market value at end of period
|
|
4.56
|
|
4.91
|
|
4.56
|
|
4.91
|
|
Total Return (5)
|
|
(3.18
|
)%
|
(19.59
|
)%
|
34.06
|
%
|
(41.23
|
)%
|
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
|
|
$
|
175,001
|
|
$
|
224,117
|
|
$
|
175,001
|
|
$
|
224,117
|
|
Average net assets (6)
|
|
179,155
|
|
229,256
|
|
194,783
|
|
232,053
|
|
|
|
|
|
|
|
|
|
|
|
Senior Securities Data:
|
|
|
|
|
|
|
|
|
|
Borrowings under line of credit and short-term loan
|
|
$
|
101,883
|
|
$
|
117,864
|
|
$
|
101,883
|
|
$
|
117,864
|
|
Asset coverage ratio (7)
|
|
270
|
%
|
290
|
%
|
270
|
%
|
290
|
%
|
Asset coverage per unit (8)
|
|
$
|
2,704
|
|
$
|
2,901
|
|
$
|
2,704
|
|
$
|
2,901
|
|
|
|
|
|
|
|
|
|
|
|
Ratios/Supplemental Data:
|
|
|
|
|
|
|
|
|
|
Ratio of expenses to average net assets (9), (10)
|
|
6.64
|
%
|
7.17
|
%
|
5.98
|
%
|
6.55
|
%
|
Ratio of net expenses to average net assets (9),
(11)
|
|
6.36
|
%
|
5.96
|
%
|
5.57
|
%
|
5.42
|
%
|
Ratio of net investment income to average net
assets (9)
|
|
6.86
|
%
|
6.26
|
%
|
5.40
|
%
|
5.99
|
%
|
(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.
|
12
Table of
Contents
(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 thousand 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
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Contents
GLADSTONE INVESTMENT CORPORATION
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA AND AS
OTHERWISE INDICATED)
DECEMBER 31, 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 the Companys 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 balance sheet data was derived from audited financial statements but
does not include all 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 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.
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
differ in results, techniques and scopes used to value the Companys
investments. When these specific
third-party appraisals are
14
Table of Contents
engaged
or accepted, the Company uses estimates of value provided by such appraisals
and its own assumptions, including estimated remaining life, current market
yield and interest rate spreads of similar securities as of the measurement
date, to value the investment the Company has in that business.
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 bid
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 the Financial Accounting Standards Board (FASB) Accounting
Standards Codification (ASC) 820-10,
Fair Value Measurements and Disclosures, which provides guidance on
the use of a reporting entitys own assumptions about future cash flows and risk-adjusted
discount rates when relevant observable inputs, such as quotes in active
markets, are not available. When relevant observable market data does not
exist, the alternative outlined in ASC
820-10 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 applied to the syndicated loans 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 December 31, 2009, the Company assessed
trading activity in its syndicated loan assets and determined that there
continued to be market liquidity and a secondary market for these assets. Thus, firm bid prices or indicative bids were
used to fair value the Companys remaining syndicated loans at December 31,
2009.
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 investments, 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
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 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:
15
Table of Contents
·
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 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 is also 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 December 31, 2009, one Control
investment, ASH Holdings Corp., was on non-accrual with a fair value of
approximately $1.7 million, or 0.9% of the fair value of all loans held in the
Companys portfolio at December 31, 2009.
At March 31, 2009, one Control investment, ASH Holdings Corp., 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. During the
quarter ended December 31, 2009, the Company recorded and collected
approximately $953 of cash dividends on preferred shares of A. Stucki Holding
Corp. Otherwise, the Company has not
accrued for any other such dividend income
.
16
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Recent
Accounting Pronouncements
On
July 1, 2009, the FASB issued Accounting Standard Update (ASU) 2009-01, The FASB Accounting Standards Codification
and the Hierarchy of Generally Accepted Accounting Principles, which has been codified as ASC 105,
Generally Accepted Accounting
Principles
(ASC 105 or
the Codification). ASC 105 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 December 31,
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.
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, Nonmonetary Transactions.
The elimination of the concept of a qualifying special-purpose entity (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 is not expected to have
a material impact on the Companys financial position, results of operations or
liquidity.
In
July 2009, the FASB issued ASC 320, Investments-Debt and Equity
Securities 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.
In
July 2009, the FASB issued ASC 825, Financial Instruments, which
requires disclosures about fair value of financial instruments for interim
reporting periods of publicly traded companies as well as in annual financial
statements, whether recognized or not recognized in the statement of financial
position. The guidance in ASC 825 is effective for interim periods ending after
June 15, 2009. The Companys adoption of this pronouncement did not have a
material impact on the condensed consolidated financial statements.
In
July 2009, the FASB issued ASC 855-10-50, Subsequent Events
which 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.
In
July 2009, the FASB issued ASC 860, Transfers and Servicing
which removes the concept of a 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.
In
August 2009, the FASB issued ASU No. 2009-05, Fair Value
Measurements and Disclosures: Measuring Liabilities at Fair Value. The update provides clarification to ASC 820
for the valuation techniques required to measure the fair value of
liabilities. ASU No. 2009-05 also
provides clarification around required inputs to the fair value measurement of
a liability and definition of a Level 1 liability. The ASU is effective for interim and annual
periods beginning after August 28, 2009.
The Company adopted this
17
Table of Contents
standard
beginning with its financing statements ending December 31, 2009. The Companys adoption of this standard did
not have a material effect on its financial position and results of operations.
In September 2009, the
FASB issued ASU No. 2009-12, Measuring Fair Value Measurements and
Disclosures: Investments in Certain Entities That Calculate Net Asset Value per
Share (or Its Equivalent), that provides additional guidance on how companies
should estimate the fair value of certain alternative investments, such as
hedge funds, private equity funds and venture capital funds. The fair value of
such investments can now be determined using net asset value (NAV) as a
practical expedient, unless it is probable that the investment will not be sold
at a price equal to NAV. In those situations, the practical expedient cannot be
used and disclosure of the remaining actions necessary to complete the sale
will be required. New disclosures of the
attributes of all investments within the scope of the new guidance is required,
regardless of whether an entity used the practical expedient to measure the
fair value of any of its investments.
ASU No. 2009-12 is effective for the first annual or interim
reporting period ending after December 15, 2009, with early application
permitted.
The Companys
adoption of this standard did not have a material effect on
its financial position and results of operations.
In
December 2009, the FASB issued ASU 2009-17, Consolidations: Improvements
to Financial Reporting by Enterprises Involved with Variable Interest Entities,
that amends the FASB ASC for the issuance of FASB Statement No. 167, Amendments to FASB Interpretation No. 46(R). The amendments in this ASU replace the
quantitative-based risks and rewards calculation for determining which
reporting entity, if any, has a controlling financial interest in a variable
interest entity with an approach focused on identifying which reporting entity
has the power to direct the activities of a variable interest entity that most
significantly impact the entitys economic performance and (1) the
obligation to absorb losses of the entity or (2) the right to receive
benefits from the entity. An approach that is expected to be primarily
qualitative will be more effective for identifying which reporting entity has a
controlling financial interest in a variable interest entity. The amendments in
ASU No. 2009-17 also require additional disclosures about a reporting
entitys involvement in variable interest entities, which will enhance the
information provided to users of financial statements. The ASU is effective for annual periods
beginning after November 15, 2009.
The Company does not believe the adoption of this standard will have a
material impact on its financial position and results of operations.
In
January 2010, the FASB issued ASU No. 2010-06, Fair Value
Measurements and Disclosures, that requires reporting entities to make new
disclosures about recurring or nonrecurring fair-value measurements including
significant transfers into and out of Level 1 and Level 2 fair-value
measurements and information on purchases, sales, issuances, and settlements on
a gross basis in the reconciliation of Level 3 fair-value measurements.
The FASB also clarified existing fair-value measurement disclosure guidance
about the level of disaggregation, inputs, and valuation techniques. The new
and revised disclosures are required to be implemented in fiscal years
beginning after December 15, 2009 and December 15, 2010. The
Company is currently evaluating the impact of adopting this standard on its
financial position and results of operations.
NOTE 3. INVESTMENTS
The
Company adopted guidance for fair value measurements, which defines fair value,
establishes a framework for measuring fair value and expands disclosures about
assets and liabilities measured at fair value. The guidance 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
guidance 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 December 31, 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 December 31,
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:
18
Table of Contents
|
|
As
of December 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
|
|
|
|
|
|
|
|
|
|
Senior term debt
|
|
$
|
|
|
$
|
|
|
$
|
19,404
|
|
$
|
19,404
|
|
Senior subordinated term debt
|
|
|
|
|
|
|
|
|
|
Preferred equity
|
|
|
|
|
|
|
|
|
|
Common equity/equivalents
|
|
|
|
|
|
|
|
|
|
Total Non-Control/Non-Affiliate
investments
|
|
|
|
|
|
19,404
|
|
19,404
|
|
|
|
|
|
|
|
|
|
|
|
Control investments
|
|
|
|
|
|
|
|
|
|
Senior term debt
|
|
|
|
|
|
50,473
|
|
50,473
|
|
Senior subordinated term debt
|
|
|
|
|
|
59,464
|
|
59,464
|
|
Preferred equity
|
|
|
|
|
|
16,526
|
|
16,526
|
|
Common equity/equivalents
|
|
|
|
|
|
4,492
|
|
4,492
|
|
Total Control investments
|
|
|
|
|
|
130,955
|
|
130,955
|
|
|
|
|
|
|
|
|
|
|
|
Affiliate investments
|
|
|
|
|
|
|
|
|
|
Senior term debt
|
|
|
|
|
|
23,284
|
|
23,284
|
|
Senior subordinated term debt
|
|
|
|
|
|
11,015
|
|
11,015
|
|
Preferred equity
|
|
|
|
|
|
2,728
|
|
2,728
|
|
Common equity/equivalents
|
|
|
|
|
|
|
|
|
|
Total Affiliate investments
|
|
|
|
|
|
37,027
|
|
37,027
|
|
|
|
|
|
|
|
|
|
|
|
Total investments at fair value
|
|
$
|
|
|
$
|
|
|
$
|
187,386
|
|
$
|
187,386
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
Senior term debt
|
|
$
|
|
|
$
|
|
|
$
|
94,740
|
|
$
|
94,740
|
|
Senior subordinated term debt
|
|
|
|
|
|
|
|
|
|
Preferred equity
|
|
|
|
|
|
|
|
|
|
Common equity/equivalents
|
|
|
|
|
|
|
|
|
|
Total Non-Control/Non-Affiliate
investments
|
|
|
|
|
|
94,740
|
|
94,740
|
|
|
|
|
|
|
|
|
|
|
|
Control investments
|
|
|
|
|
|
|
|
|
|
Senior term debt
|
|
|
|
|
|
50,209
|
|
50,209
|
|
Senior subordinated term debt
|
|
|
|
|
|
60,812
|
|
60,812
|
|
Preferred equity
|
|
|
|
|
|
34,150
|
|
34,150
|
|
Common equity/equivalents
|
|
|
|
|
|
20,992
|
|
20,992
|
|
Total Control investments
|
|
|
|
|
|
166,163
|
|
166,163
|
|
|
|
|
|
|
|
|
|
|
|
Affiliate investments
|
|
|
|
|
|
|
|
|
|
Senior term debt
|
|
|
|
|
|
34,726
|
|
34,726
|
|
Senior subordinated term debt
|
|
|
|
|
|
11,249
|
|
11,249
|
|
Preferred equity
|
|
|
|
|
|
5,893
|
|
5,893
|
|
Common equity/equivalents
|
|
|
|
|
|
1,159
|
|
1,159
|
|
Total 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 nine months ended December 31, 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. Two tables are provided for
each period, where the first table is broken out by Control, Affiliate and
Non-Control/Non-Affiliate classification and the second table is broken out by
major security type.
19
Table of
Contents
Fair value measurements using unobservable data inputs
(Level 3)
Fiscal Year 2010:
|
|
Non-Control/
|
|
|
|
|
|
|
|
|
|
Non-Affiliate
|
|
Control
|
|
Affiliate
|
|
|
|
|
|
Investments
|
|
Investments
|
|
Investments
|
|
Total
|
|
Three months ended
December 31, 2009:
|
|
|
|
|
|
|
|
|
|
Fair value as of September 30, 2009
|
|
$
|
25,004
|
|
$
|
132,399
|
|
$
|
46,900
|
|
$
|
204,303
|
|
Total realized gains (losses)
|
|
(1,318
|
)
|
|
|
|
|
(1,318
|
)
|
Total unrealized gains (losses)
|
|
1,383
|
|
(8,853
|
)
|
1,257
|
|
(6,213
|
)
|
New investments, repayments, and settlements, net
|
|
(5,665
|
)
|
(2,841
|
)
|
(880
|
)
|
(9,386
|
)
|
Transfers
|
|
|
|
10,250
|
|
(10,250
|
)
|
|
|
Fair value as of
December 31, 2009
|
|
$
|
19,404
|
|
$
|
130,955
|
|
$
|
37,027
|
|
$
|
187,386
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended
December 31, 2009:
|
|
|
|
|
|
|
|
|
|
Fair value as of March 31, 2009
|
|
$
|
94,740
|
|
$
|
166,163
|
|
$
|
53,027
|
|
$
|
313,930
|
|
Total realized gains (losses)
|
|
(35,922
|
)
|
|
|
|
|
(35,922
|
)
|
Total unrealized gains (losses)
|
|
36,597
|
|
(35,234
|
)
|
(4,862
|
)
|
(3,499
|
)
|
New investments, repayments, and settlements, net
|
|
(76,011
|
)
|
(10,224
|
)
|
(888
|
)
|
(87,123
|
)
|
Transfers
|
|
|
|
10,250
|
|
(10,250
|
)
|
|
|
Fair value as of
December 31, 2009
|
|
$
|
19,404
|
|
$
|
130,955
|
|
$
|
37,027
|
|
$
|
187,386
|
|
|
|
|
|
Senior
|
|
|
|
Common
|
|
|
|
|
|
Senior
|
|
Subordinated
|
|
Preferred
|
|
Equity/
|
|
|
|
|
|
Term Debt
|
|
Term Debt
|
|
Equity
|
|
Equivalents
|
|
Total
|
|
Three months ended
December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
Fair value as of September 30, 2009
|
|
$
|
103,092
|
|
$
|
70,466
|
|
$
|
25,229
|
|
$
|
5,516
|
|
$
|
204,303
|
|
Total realized gains (losses)
|
|
(1,318
|
)
|
|
|
|
|
|
|
(1,318
|
)
|
Total unrealized gains (losses)
|
|
585
|
|
201
|
|
(5,975
|
)
|
(1,024
|
)
|
(6,213
|
)
|
New investments, repayments, and settlements, net
|
|
(9,198
|
)
|
(188
|
)
|
|
|
|
|
(9,386
|
)
|
Transfers
|
|
|
|
|
|
|
|
|
|
|
|
Fair value as of December 31,
2009
|
|
$
|
93,161
|
|
$
|
70,479
|
|
$
|
19,254
|
|
$
|
4,492
|
|
$
|
187,386
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended
December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
Fair value as of March 31, 2009
|
|
$
|
179,676
|
|
$
|
72,061
|
|
$
|
40,043
|
|
$
|
22,150
|
|
$
|
313,930
|
|
Total realized gains (losses)
|
|
(35,922
|
)
|
|
|
|
|
|
|
(35,922
|
)
|
Total unrealized gains (losses)
|
|
34,593
|
|
355
|
|
(20,789
|
)
|
(17,658
|
)
|
(3,499
|
)
|
New investments, repayments, and settlements, net
|
|
(85,186
|
)
|
(1,937
|
)
|
|
|
|
|
(87,123
|
)
|
Transfers
|
|
|
|
|
|
|
|
|
|
|
|
Fair value as of
December 31, 2009
|
|
$
|
93,161
|
|
$
|
70,479
|
|
$
|
19,254
|
|
$
|
4,492
|
|
$
|
187,386
|
|
Fiscal Year 2009:
|
|
Non-Control/
|
|
|
|
|
|
|
|
|
|
Non-Affiliate
|
|
Control
|
|
Affiliate
|
|
|
|
|
|
Investments
|
|
Investments
|
|
Investments
|
|
Total
|
|
Three months ended
December 31, 2008:
|
|
|
|
|
|
|
|
|
|
Fair value as of September 30, 2008
|
|
$
|
115,133
|
|
$
|
157,246
|
|
$
|
53,877
|
|
$
|
326,256
|
|
Total realized gains (losses)
|
|
|
|
|
|
|
|
|
|
Total unrealized gains (losses)
|
|
(6,988
|
)
|
1,755
|
|
(2,294
|
)
|
(7,527
|
)
|
New investments, repayments, and settlements, net
|
|
(937
|
)
|
8,174
|
|
(671
|
)
|
6,566
|
|
Transfers
|
|
|
|
|
|
|
|
|
|
Fair value as of
December 31, 2008
|
|
$
|
107,208
|
|
$
|
167,175
|
|
$
|
50,912
|
|
$
|
325,295
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended
December 31, 2008:
|
|
|
|
|
|
|
|
|
|
Fair value as of March 31, 2008
|
|
$
|
142,739
|
|
$
|
145,407
|
|
$
|
47,458
|
|
$
|
335,604
|
|
Total realized gains (losses)
|
|
(4,215
|
)
|
|
|
|
|
(4,215
|
)
|
Total unrealized gains (losses)
|
|
(7,714
|
)
|
7,728
|
|
(13,687
|
)
|
(13,673
|
)
|
New investments, repayments, and settlements, net
|
|
(23,602
|
)
|
24,218
|
|
6,963
|
|
7,579
|
|
Transfers
|
|
|
|
(10,178
|
)
|
10,178
|
|
|
|
Fair value as of
December 31, 2008
|
|
$
|
107,208
|
|
$
|
167,175
|
|
$
|
50,912
|
|
$
|
325,295
|
|
20
Table of Contents
|
|
|
|
Senior
|
|
|
|
Common
|
|
|
|
|
|
Senior
|
|
Subordinated
|
|
Preferred
|
|
Equity/
|
|
|
|
|
|
Term Debt
|
|
Term Debt
|
|
Equity
|
|
Equivalents
|
|
Total
|
|
Three months ended
December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
Fair value as of September 30, 2008
|
|
$
|
201,463
|
|
$
|
66,889
|
|
$
|
36,046
|
|
$
|
21,858
|
|
$
|
326,256
|
|
Total realized gains (losses)
|
|
|
|
|
|
|
|
|
|
|
|
Total unrealized gains (losses)
|
|
(9,322
|
)
|
1,860
|
|
(502
|
)
|
437
|
|
(7,527
|
)
|
New investments, repayments, and settlements, net
|
|
3,341
|
|
(500
|
)
|
3,725
|
|
|
|
6,566
|
|
Transfers
|
|
|
|
|
|
(182
|
)
|
182
|
|
|
|
Fair value as of
December 31, 2008
|
|
$
|
195,482
|
|
$
|
68,249
|
|
$
|
39,087
|
|
$
|
22,477
|
|
$
|
325,295
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended
December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
Fair value as of
March 31, 2008
|
|
$
|
237,878
|
|
$
|
46,733
|
|
$
|
29,934
|
|
$
|
21,059
|
|
$
|
335,604
|
|
Total realized gains (losses)
|
|
(4,215
|
)
|
|
|
|
|
|
|
(4,215
|
)
|
Total unrealized gains (losses)
|
|
(11,699
|
)
|
(3,775
|
)
|
616
|
|
1,185
|
|
(13,673
|
)
|
New investments,
repayments, and settlements, net
|
|
(26,482
|
)
|
25,291
|
|
8,537
|
|
233
|
|
7,579
|
|
Transfers
|
|
|
|
|
|
|
|
|
|
|
|
Fair value as of
December 31, 2008
|
|
$
|
195,482
|
|
$
|
68,249
|
|
$
|
39,087
|
|
$
|
22,477
|
|
$
|
325,295
|
|
Non-Control/Non-Affiliate Investments
At
December 31, 2009 and March 31, 2009, the Company held investments in
Non-Control/Non-Affiliates of approximately $19.4 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
non-syndicated loan investments where the Company does not have a significant
ownership interest in the portfolio company. Included in
Non-Control/Non-Affiliate investments, at both December 31, 2009 and March 31,
2009, were common stock warrants of one Non-Control/Non-Affiliate company,
which carried a nominal fair value. At December 31,
2009 and March 31, 2009, the Companys investments, at fair value, in
Non-Control/Non-Affiliates represented approximately 11% and 44%, respectively,
of the Companys net assets.
Investment Activity
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
because Deutsche Bank did not renew the Companys line of credit.
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 such time.
During
October 2009, the Company completed the sales of certain senior syndicated
loans (HMTBP Acquisition II Corp. and a portion of Interstate FiberNet, Inc.).
These loans, in aggregate, had a cost value of approximately $6.8 million and
an aggregate fair market value of approximately $5.5 million. Upon the
settlement of these loans, the Company received approximately $5.5 million in
net cash proceeds and recorded a realized loss of approximately $1.3 million.
Control and Affiliate Investments
At
December 31, 2009 and March 31, 2009, the Company had investments of
approximately $144.2 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 December 31, 2009 and March 31,
2009, the Company had invested approximately $23.8 million and $62.2 million,
respectively, at fair value, in preferred and common equity of those
companies. At December 31, 2009 and
March 31, 2009, the Companys investments in Control investments, at fair
value, represented approximately 75% and 77%, respectively, of the Companys
net assets. Also, at December 31, 2009 and March 31, 2009, the
Companys investments, at fair value, in Affiliate investments represented
approximately 21% and 25%, respectively, of the Companys net assets.
Investment
Activity
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.
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.
21
Table of Contents
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. 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.
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.
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.
During
October 2009, A. Stucki Holding Corp. declared and, on November 3,
2009, paid accrued cash dividends on its preferred stock, of which the Company
received approximately $953.
On
November 2, 2009, the Company entered into an agreement to reduce the
available credit limit on Danco Acquisition Corp.s revolving line of credit
from $3.0 million to $1.5 million. This
was a non-cash transaction.
On December 18,
2009, the Company assumed 100% ownership of Mathey Investments, Inc. (Mathey),
previously an Affiliate investment, exercising its right after certain defaults
on the part of Mathey and subsequent expiration of a forbearance period granted
by the Company. The Company disbursed
approximately $282 to buy out the previous stockholders of Mathey and to pay
for related legal expenses incurred in the process. The Companys investment in Mathey has been
reclassified from an Affiliate to a Control investment in the condensed
consolidated financial statements as of December 31, 2009
.
Investment Concentrations
Approximately 50% of the aggregate fair value of the Companys
investment portfolio at December 31, 2009 was comprised of senior debt,
approximately 37% was senior subordinated debt, and approximately 13% was
preferred and common equity securities. At December 31, 2009, the Company
had investments in 16 portfolio companies with an aggregate fair value of
$187.4 million, of which A. Stucki Holding Corp., Chase II Holdings Corp. and
Cavert II Holding Corp. collectively comprised approximately $80.6 million, or
43% of the Companys total investment portfolio, at fair value. The following table outlines the Companys
investments by type at December 31, 2009 and March 31, 2009:
|
|
December 31,
2009
|
|
March 31,
2009
|
|
|
|
Cost
|
|
Fair
Value
|
|
Cost
|
|
Fair
Value
|
|
Senior Term Debt
|
|
$
|
103,154
|
|
$
|
93,161
|
|
$
|
224,261
|
|
$
|
179,676
|
|
Senior Subordinated Term Debt
|
|
77,424
|
|
70,479
|
|
79,362
|
|
72,061
|
|
Preferred Equity
|
|
40,728
|
|
19,254
|
|
40,728
|
|
40,043
|
|
Common Equity/Equivalents
|
|
4,594
|
|
4,492
|
|
4,594
|
|
22,150
|
|
Total Investments
|
|
$
|
225,900
|
|
$
|
187,386
|
|
$
|
348,945
|
|
$
|
313,930
|
|
22
Table of Contents
Investments
at fair value consisted of the following industry classifications at December 31,
2009 and March 31, 2009:
|
|
December 31,
2009
|
|
March 31,
2009
|
|
|
|
|
|
Percentage
of
|
|
|
|
Percentage
of
|
|
|
|
Fair
Value
|
|
Total
Investments
|
|
Net
Assets
|
|
Fair
Value
|
|
Total
Investments
|
|
Net
Assets
|
|
Aerospace
and Defense
|
|
$
|
16,991
|
|
9.1
|
%
|
9.7
|
%
|
$
|
22,436
|
|
7.2
|
%
|
10.4
|
%
|
Automobile
|
|
8,570
|
|
4.6
|
|
4.9
|
|
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
|
|
10,351
|
|
5.5
|
|
5.9
|
|
10,709
|
|
3.4
|
|
5.0
|
|
Cargo
Transport
|
|
9,316
|
|
5.0
|
|
5.3
|
|
13,324
|
|
4.3
|
|
6.2
|
|
Chemicals,
Plastics and Rubber
|
|
14,479
|
|
7.7
|
|
8.3
|
|
21,420
|
|
6.8
|
|
10.0
|
|
Containers,
Packaging and Glass
|
|
18,035
|
|
9.6
|
|
10.3
|
|
21,446
|
|
6.8
|
|
10.0
|
|
Diversified/Conglomerate
Manufacturing
|
|
42,885
|
|
22.9
|
|
24.5
|
|
56,944
|
|
18.1
|
|
26.5
|
|
Diversified/Conglomerate
Service
|
|
|
|
|
|
|
|
23,585
|
|
7.5
|
|
11.0
|
|
Electronics
|
|
|
|
|
|
|
|
6,594
|
|
2.1
|
|
3.1
|
|
Healthcare,
Education and Childcare
|
|
8,768
|
|
4.7
|
|
5.0
|
|
33,605
|
|
10.7
|
|
15.6
|
|
Machinery
|
|
43,963
|
|
23.5
|
|
25.1
|
|
63,907
|
|
20.4
|
|
29.8
|
|
Oil
and Gas
|
|
4,975
|
|
2.6
|
|
2.8
|
|
6,171
|
|
2.0
|
|
2.9
|
|
Personal,
Food, and Miscellaneous Services
|
|
|
|
|
|
|
|
3,552
|
|
1.1
|
|
1.7
|
|
Printing
and Publishing
|
|
2,895
|
|
1.5
|
|
1.7
|
|
3,158
|
|
1.0
|
|
1.5
|
|
Telecommunications
|
|
6,158
|
|
3.3
|
|
3.5
|
|
9,139
|
|
2.9
|
|
4.3
|
|
Total Investments
|
|
$
|
187,386
|
|
100.0
|
%
|
|
|
$
|
313,930
|
|
100.0
|
%
|
|
|
The
investments at fair value were included in the following geographic regions of
the United States at December 31, 2009 and March 31, 2009:
|
|
December 31,
2009
|
|
March 31,
2009
|
|
|
|
|
|
Percentage
of
|
|
|
|
Percentage
of
|
|
|
|
Fair
Value
|
|
Total Investments
|
|
Net
Assets
|
|
Fair
Value
|
|
Total Investments
|
|
Net
Assets
|
|
Mid-Atlantic
|
|
$
|
72,174
|
|
38.5
|
%
|
41.2
|
%
|
$
|
119,622
|
|
38.1
|
%
|
55.7
|
%
|
Midwest
|
|
68,481
|
|
36.6
|
|
39.1
|
|
105,945
|
|
33.7
|
|
49.3
|
|
Northeast
|
|
7,924
|
|
4.2
|
|
4.5
|
|
17,525
|
|
5.6
|
|
8.2
|
|
Southeast
|
|
23,120
|
|
12.3
|
|
13.2
|
|
40,512
|
|
12.9
|
|
18.9
|
|
West
|
|
15,687
|
|
8.4
|
|
9.0
|
|
30,326
|
|
9.7
|
|
14.1
|
|
Total Investments
|
|
$
|
187,386
|
|
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 three months ending
March 31:
|
|
2010
|
|
$
|
2,506
|
|
For the fiscal year ending March 31:
|
|
2011
|
|
23,705
|
|
|
|
2012
|
|
55,148
|
|
|
|
2013
|
|
13,260
|
|
|
|
2014
|
|
61,282
|
|
|
|
2015
|
|
21,642
|
|
|
|
Thereafter
|
|
3,043
|
|
|
|
Total contractual repayments
|
|
$
|
180,586
|
|
|
|
Investments
in equity securities
|
|
45,322
|
|
|
|
Unamortized
premiums on debt securities
|
|
(8
|
)
|
|
|
Total investments held at December 31, 2009:
|
|
$
|
225,900
|
|
23
Table of Contents
NOTE 4. RELATED PARTY TRANSACTIONS
Investment Advisory and Management Agreement
The
Company is externally managed by the Adviser, which is controlled by its
chairman and chief executive officer, under a contractual investment advisory
agreement (the Advisory Agreement). In
accordance with the Advisory Agreement, 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 fiscal
quarters. The Advisory Agreement also
includes a two-part 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
following tables summarize the management fees, incentive fees and associated
credits reflected in the accompanying condensed consolidated statements of
operations:
|
|
Three
months ended December 31,
|
|
Nine
months ended December 31,
|
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
Base management fee
|
|
$
|
113
|
|
$
|
442
|
|
$
|
588
|
|
$
|
1,303
|
|
Credits to base management fee
from Adviser:
|
|
|
|
|
|
|
|
|
|
Fee reduction for the voluntary, irrevocable
waiver of 2.0% fee on senior syndicated loans to 0.5%
|
|
(34
|
)
|
(413
|
)
|
(265
|
)
|
(1,220
|
)
|
Credit for fees received by Adviser from portfolio
companies
|
|
(93
|
)
|
(281
|
)
|
(326
|
)
|
(744
|
)
|
Net base management fee
|
|
$
|
(14
|
)
|
$
|
(252
|
)
|
$
|
(3
|
)
|
$
|
(661
|
)
|
|
|
|
|
|
|
|
|
|
|
Incentive fee
|
|
$
|
588
|
|
$
|
|
|
$
|
588
|
|
$
|
|
|
Credit from voluntary,
irrevocable waiver issued by Advisers board of directors
|
|
|
|
|
|
|
|
|
|
Net incentive fee
|
|
$
|
588
|
|
$
|
|
|
$
|
588
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
Total credits to fees:
|
|
|
|
|
|
|
|
|
|
Fee reduction for the voluntary, irrevocable
waiver of 2.0% fee on senior syndicated loans to 0.5%
|
|
$
|
(34
|
)
|
$
|
(413
|
)
|
$
|
(265
|
)
|
$
|
(1,220
|
)
|
Credit for fees received by Adviser from portfolio
companies
|
|
(93
|
)
|
(281
|
)
|
(326
|
)
|
(744
|
)
|
Incentive fee credit
|
|
|
|
|
|
|
|
|
|
Credit to base management and
incentive fees from Adviser
|
|
$
|
(127
|
)
|
$
|
(694
|
)
|
$
|
(591
|
)
|
$
|
(1,964
|
)
|
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:
|
|
December 31, 2009
|
|
March 31, 2009
|
|
Unpaid base management fee due to Adviser
|
|
$
|
(14
|
)
|
$
|
(114
|
)
|
Unpaid loan servicing fee due to Adviser
|
|
219
|
|
301
|
|
Unpaid incentive fee due to Adviser
|
|
588
|
|
|
|
Total Due to Adviser
|
|
$
|
793
|
|
$
|
187
|
|
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 directly against the 2.0% base management fee under the Advisory
Agreement. For the three and nine months
ended December 31, 2009, the Company recorded loan servicing fees due to
the Adviser of $886 and $2,892, respectively, as compared to $1,258 and $3,769
for the three and nine months ended December 31, 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.
24
Table of Contents
Administration Agreement
The Company has entered into an administration agreement (the Administration
Agreement) with Gladstone Administration, LLC (the Administrator). Under the Administration Agreement, the
Company pays separately for administrative services. The Company recorded administration fees of
$156 and $527 for the three and nine months ended December 31, 2009,
respectively, as compared to administration fees of $195 and $642 for the three
and nine months ended December 31, 2008, respectively. As of December 31, 2009 and March 31,
2009, $156 and $179, respectively, was unpaid and included in Fee due to
Administrator in the accompanying condensed consolidated statements of assets
and liabilities. On July 8, 2009,
the Companys Board of Directors approved the renewal of its Administration
Agreement with the Administrator through August 31, 2010.
NOTE 5. BORROWINGS
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 December 31,
2009, the Company has approximately $26.8 million of principal outstanding with
approximately $22.6 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 corporate
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 December 31, 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 December 31,
2009, the Company was in compliance with the covenants under the performance
guaranty.
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 0.66%. 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.
25
Table of Contents
On December 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 0.59%. On January 7, 2010, when the securities
matured, the Company repaid the $75.0 million loan from Jefferies in full and,
on January 8, 2010, repaid the $10.0 million drawn on the Credit Facility.
Fair
Value
The
Company elected to apply ASC 825, Financial
Instruments, specifically for the Credit Facility and short-term loan,
which was consistent with its application of ASC 820 to its investments. The Company estimated the fair value of the
Credit Facility using estimates of value provided by an independent third party
and its own assumptions in the absence of observable market data, including
estimated remaining life, credit party risk, current market yield and interest
rate spreads of similar securities as of the measurement date. Due to the nine day duration of the
short-term loan, cost approximated fair value.
The following table presents the Credit Facility and short-term loan
carried at fair value as of December 31, 2009, by caption on the
accompanying consolidated statements of assets and liabilities for each of the
three levels of hierarchy established by ASC 820-10:
|
|
As of December 31, 2009
|
|
|
|
|
|
|
|
|
|
Total Fair Value
|
|
|
|
|
|
|
|
|
|
Reported in
|
|
|
|
|
|
|
|
|
|
Consolidated Statement of
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Assets and Liabilities
|
|
Credit Facility
|
|
$
|
|
|
$
|
|
|
$
|
26,883
|
|
$
|
26,883
|
|
Short-Term Loan
|
|
|
|
|
|
75,000
|
|
75,000
|
|
Total
|
|
$
|
|
|
$
|
|
|
$
|
101,883
|
|
$
|
101,883
|
|
|
|
As of December 31, 2009
|
|
|
|
|
|
|
|
Total Fair Value
|
|
|
|
|
|
|
|
Reported in Condensed
|
|
|
|
Credit
|
|
Short-Term
|
|
Consolidated Statement of
|
|
|
|
Facility
|
|
Loan
|
|
Assets and Liabilities
|
|
Three months ended
December 31, 2009:
|
|
|
|
|
|
|
|
Fair value at
September 30, 2009
|
|
$
|
36,278
|
|
$
|
75,000
|
|
$
|
111,278
|
|
Net decrease in principal outstanding
|
|
(9,350
|
)
|
|
|
(9,350
|
)
|
Net unrealized depreciation of Credit Facility
(a)
|
|
(45
|
)
|
|
|
(45
|
)
|
Fair value at December 31,
2009
|
|
$
|
26,883
|
|
$
|
75,000
|
|
$
|
101,883
|
|
|
|
|
|
|
|
|
|
Nine months ended
December 31, 2009:
|
|
|
|
|
|
|
|
Fair value at
March 31, 2009
(b)
|
|
$
|
110,265
|
|
$
|
|
|
$
|
110,265
|
|
Net (decrease) increase in principal outstanding
|
|
(83,515
|
)
|
75,000
|
|
(8,515
|
)
|
Net unrealized appreciation of Credit Facility
(a)
|
|
133
|
|
|
|
133
|
|
Fair value at December 31,
2009
|
|
$
|
26,883
|
|
$
|
75,000
|
|
$
|
101,883
|
|
(a)
Unrealized
depreciation (appreciation) of $45 and ($133) is reported on the accompanying
condensed consolidated statements of operations for the three and nine months
ended December 31, 2009, respectively.
(b)
ASC 825 was not
adopted until the second quarter of fiscal year 2010; therefore, the Credit
Facility is shown at its principal balance outstanding at March 31, 2009
in the table above.
The fair value of the
collateral under the Credit Facility was approximately $182.8 million and
$309.1 million at December 31, 2009 and March 31, 2009, respectively.
The fair value of the collateral under the short-term loan was approximately
$85.0 million as of December 31, 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 December 31, 2009, the interest rate cap agreement had a fair market
value of approximately $5. 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 condensed consolidated statements 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%.
26
Table of Contents
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. COMMON STOCK
As
of both December 31, 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.
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
.
NOTE 8. NET DECREASE IN NET ASSETS PER SHARE RESULTING FROM
OPERATIONS
The
following table sets forth the computation of basic and diluted net decrease in
net assets per share resulting from operations:
|
|
Three months ended December 31,
|
|
Nine months ended December 31,
|
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
Numerator for basic and diluted net decrease in
net assets resulting from operations per share
|
|
$
|
(4,420
|
)
|
$
|
(3,940
|
)
|
$
|
(31,699
|
)
|
$
|
(7,467
|
)
|
Denominator for basic and diluted shares
|
|
22,080
|
|
22,080
|
|
22,080
|
|
21,368
|
|
Basic and diluted net decrease
in net assets resulting from operations per share
|
|
$
|
(0.20
|
)
|
$
|
(0.18
|
)
|
$
|
(1.44
|
)
|
$
|
(0.35
|
)
|
NOTE 9. DISTRIBUTIONS
The
following table lists the per common share distributions paid for the nine
months ended December 31, 2009 and 2008:
Fiscal
Year 2010:
|
|
|
|
|
|
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
|
|
October 6, 2009
|
|
October 22,
2009
|
|
October 30,
2009
|
|
0.04
|
|
October 6, 2009
|
|
November 19,
2009
|
|
November 30,
2009
|
|
0.04
|
|
October 6, 2009
|
|
December 22,
2009
|
|
December 31,
2009
|
|
0.04
|
|
|
|
|
|
Total
|
|
$
|
0.36
|
|
Fiscal
Year 2009:
|
|
|
|
|
|
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
|
|
October 7, 2008
|
|
October 23,
2008
|
|
October 31,
2008
|
|
0.08
|
|
October 7, 2008
|
|
November 19,
2008
|
|
November 28,
2008
|
|
0.08
|
|
October 7, 2008
|
|
December 22,
2008
|
|
December 31,
2008
|
|
0.08
|
|
|
|
|
|
Total
|
|
$
|
0.72
|
|
27
Table of
Contents
Aggregate
distributions declared and paid for the three months ended December 31,
2009 and 2008 were approximately $2.6 million and $5.3 million,
respectively. Aggregate distributions
declared for the nine months ended December 31, 2009 and 2008 were
approximately $7.9 million and $15.5 million, respectively. All distributions were declared based on
estimates of net investment income for the respective fiscal year, 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.
NOTE 10. COMMITMENTS
AND CONTINGENCIES
At
December 31, 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 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 December 31,
2009, the Company has not been required to make any payments on the guaranty of
the Finance Facility, and the Company considers the credit risk to be remote.
NOTE 11. SUBSEQUENT EVENTS
The Company evaluated all events that have occurred subsequent to December 31,
2009 through the date of the filing of this Form 10-Q on February 8,
2010.
Short-Term Loan Repayment
On
January 7, 2010, when the securities purchased on December 30, 2009
through Jefferies matured, the Company repaid the $75.0 million loan from
Jefferies in full, and, on January 8, 2010, repaid the $10.0 million drawn
on the Credit Facility for the transaction.
Please refer to Note 5,
Borrowings
for
more information.
Distributions
On
January 12, 2010, the Companys Board of Directors declared the following
monthly cash distributions:
|
|
|
|
|
|
Distribution
|
|
Declaration
Date
|
|
Record
Date
|
|
Payment
Date
|
|
Per
Share
|
|
January 12, 2010
|
|
January 21,
2010
|
|
January 29,
2010
|
|
$
|
0.04
|
|
January 12, 2010
|
|
February 18,
2010
|
|
February 26,
2010
|
|
0.04
|
|
January 12, 2010
|
|
March 23,
2010
|
|
March 31,
2010
|
|
0.04
|
|
|
|
|
|
|
|
|
|
|
Portfolio Company Investment Activity
On January 22, 2010, the Company entered into
an agreement with Noble Logistics, Inc. to extend the maturity of their
revolving credit facility to May 2010.
This was a non-cash transaction.
28
Table of Contents
ITEM 2.
MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(dollar amounts in thousands, except per share data unless 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, estimate 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 in our annual report on Form 10-K for the fiscal year ended March 31,
2009.
OVERVIEW
General
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, as
amended (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 may also be
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. An economic downturn 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 general availability of credit and, as a result,
subsequent to our most recent 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 from Deutsche Bank, which matured in April 2009 and was not
extended by that bank. These loans, in aggregate, had a cost value of
approximately $104.2 million, or 29.9% of the cost 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. We completed additional senior syndicated
loan sales in October 2009 (see Recent DevelopmentsSenior Syndicated
Sales section below). As a result of the
settlement of these loan sales, at December 31, 2009, we had two remaining
senior syndicated loans, which we plan to exit in the long-term future. Collectively, these sales 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 December 31, 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 December 31, 2009, the third quarterly measurement date
following the Syndicated Loan Sales, we satisfied the 50% asset diversification
threshold through the purchase of
29
Table of Contents
short-term
qualified securities, which was funded primarily through a short-term loan
agreement. Subsequent to the December 31
st
measurement
date, these securities matured and we repaid the short-term loan, at which time
we again fell below the 50% threshold. See Recent 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 February 8,
2010, approximately $15.0 million was outstanding under the Credit Facility and
$33.7 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
decreased our monthly cash distribution rate in April 2009 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. We are
currently working with our two lending banks to extend our line of credit.
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 February 8,
2010, the closing market price of our common stock was $4.92 which price
represented a 38.0% discount to our December 31, 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 our credit
facility. Additionally, our credit facility contains covenants regarding the
maintenance of certain minimum loan concentrations and net worth covenants
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 our credit facility. As of December 31,
2009, we were in compliance with all of the facility covenants.
30
Table of Contents
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, we
will continue to focus our near-term strategy primarily 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, continue to consider the sale of lower-yielding investments. This
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, which events may be beyond our control.
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, Fair Value Measurements and
Disclosures. However, in monitoring the market activity
during the previous few quarters, 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, 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 unsold senior syndicated loans at December 31, 2009. Where syndicated loans are sold subsequent to
quarter end, the loans are valued at their respective sales prices. As of the date of this filing, there were no
syndicated loans sold subsequent to December 31, 2009.
Recent Developments
Registration
Statement
On
July 21, 2009, we 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 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.
Senior
Syndicated Sales
In
October 2009, we completed the sales of certain senior syndicated loans
(HMTBP Acquisition II Corp. and a portion of Interstate FiberNet, Inc.) and
received approximately $5.5 million in net cash proceeds and recorded a
realized loss of approximately $1.3 million.
Portfolio
Company Investment Activity
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.
During
October 2009, one of our portfolio companies entered into an agreement
with a third party to act as an advisor in looking at strategic investment
alternatives. It is still 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, on November 3,
2009, paid accrued cash dividends on its preferred stock, of which we received
approximately $953.
On
November 2, 2009, we entered into an agreement to reduce the available
credit limit on Danco Acquisition Corp.s revolving line of credit from $3.0
million to $1.5 million. This was a
non-cash transaction.
On December 18,
2009, we assumed 100% ownership of Mathey Investments, Inc. (Mathey),
previously an Affiliate investment, exercising our right after certain defaults
on the part of Mathey and subsequent expiration of a forbearance period granted
by us. We disbursed approximately $282
to buy out the previous stockholders of Mathey and to pay for related legal
expenses incurred in the process. Our
investment in Mathey has been reclassified from an Affiliate to a Control
investment in the condensed consolidated financial statements at December 31,
2009
.
On January 26, 2010,
we entered into an agreement with Noble Logistics, Inc. to extend the maturity
of their revolving credit facility to May 2010. This was a non-cash transaction.
31
Table of Contents
Short-Term
Loan
On
December 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 0.59%. On January 7,
2010, when the securities matured, we repaid the $75.0 million loan from
Jefferies in full, and, on January 8, 2010, repaid the $10.0 million drawn
on the Credit Facility for the transaction.
32
Table of Contents
RESULTS OF OPERATIONS
Comparison of the Three Months Ended December 31,
2009 to the Three Months Ended December 31, 2008
A comparison of our operating
results for the three months ended December 31, 2009 and 2008 is below:
|
|
For the three months ended December 31,
|
|
|
|
2009
|
|
2008
|
|
$ Change
|
|
% Change
|
|
INVESTMENT INCOME
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
|
|
|
|
|
|
|
Non-Control/Non-Affiliate investments
|
|
$
|
489
|
|
$
|
2,339
|
|
$
|
(1,850
|
)
|
(79.1
|
)%
|
Control investments
|
|
2,856
|
|
3,068
|
|
(212
|
)
|
(6.9
|
)
|
Affiliate investments
|
|
1,605
|
|
1,478
|
|
127
|
|
8.6
|
|
Cash and cash equivalents
|
|
1
|
|
21
|
|
(20
|
)
|
(95.2
|
)
|
Total interest income
|
|
4,951
|
|
6,906
|
|
(1,955
|
)
|
(28.3
|
)
|
Other income
|
|
970
|
|
96
|
|
874
|
|
910.4
|
|
Total investment income
|
|
5,921
|
|
7,002
|
|
(1,081
|
)
|
(15.4
|
)
|
|
|
|
|
|
|
|
|
|
|
EXPENSES
|
|
|
|
|
|
|
|
|
|
Loan servicing fee
|
|
886
|
|
1,258
|
|
(372
|
)
|
(29.6
|
)
|
Base management fee
|
|
113
|
|
442
|
|
(329
|
)
|
(74.4
|
)
|
Incentive fee
|
|
588
|
|
|
|
588
|
|
NM
|
|
Administration fee
|
|
156
|
|
195
|
|
(39
|
)
|
(20.0
|
)
|
Interest expense
|
|
385
|
|
1,823
|
|
(1,438
|
)
|
(78.9
|
)
|
Amortization of deferred finance costs
|
|
436
|
|
46
|
|
390
|
|
847.8
|
|
Professional fees
|
|
182
|
|
69
|
|
113
|
|
163.8
|
|
Stockholder related costs
|
|
49
|
|
112
|
|
(63
|
)
|
(56.3
|
)
|
Insurance expense
|
|
71
|
|
57
|
|
14
|
|
24.6
|
|
Directors fees
|
|
48
|
|
50
|
|
(2
|
)
|
(4.0
|
)
|
Other
|
|
61
|
|
57
|
|
4
|
|
7.0
|
|
Expenses before credit from Adviser
|
|
2,975
|
|
4,109
|
|
(1,134
|
)
|
(27.6
|
)
|
Credits to base management fee
|
|
(127
|
)
|
(694
|
)
|
567
|
|
(81.7
|
)
|
Total expenses net of credit to base management fee
|
|
2,848
|
|
3,415
|
|
(567
|
)
|
(16.6
|
)
|
NET INVESTMENT INCOME
|
|
3,073
|
|
3,587
|
|
(514
|
)
|
(14.3
|
)
|
|
|
|
|
|
|
|
|
|
|
REALIZED AND UNREALIZED (LOSS) GAIN ON:
|
|
|
|
|
|
|
|
|
|
Realized loss on sale of Non-Control/Non-Affiliate
investments
|
|
(1,318
|
)
|
|
|
(1,318
|
)
|
NM
|
|
Realized loss on termination of derivative
|
|
|
|
|
|
|
|
|
|
Net unrealized appreciation (depreciation) of
Non-Control/Non-Affiliate investments
|
|
1,383
|
|
(6,988
|
)
|
8,371
|
|
NM
|
|
Net unrealized (depreciation) appreciation of
Control investments
|
|
(8,853
|
)
|
1,755
|
|
(10,608
|
)
|
NM
|
|
Net unrealized appreciation (depreciation) of
Affiliate investments
|
|
1,257
|
|
(2,294
|
)
|
3,551
|
|
NM
|
|
Net unrealized depreciation of derivative
|
|
(7
|
)
|
|
|
(7
|
)
|
NM
|
|
Net unrealized depreciation of borrowings under
line of credit
|
|
45
|
|
|
|
45
|
|
NM
|
|
Net loss on investments and borrowings under line
of credit
|
|
(7,493
|
)
|
(7,527
|
)
|
34
|
|
NM
|
|
|
|
|
|
|
|
|
|
|
|
NET DECREASE IN NET ASSETS RESULTING FROM
OPERATIONS
|
|
$
|
(4,420
|
)
|
$
|
(3,940
|
)
|
$
|
(480
|
)
|
12.2
|
%
|
NM = Not Meaningful
Investment Income
Total
investment income decreased for the three months ended December 31, 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.
33
Table of Contents
Interest
income from our investments in debt securities decreased for the three months
ended December 31, 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 December 31, 2009 was
approximately $179.6 million, compared to approximately $296.0 million for the
prior year period, due primarily to the aggregate senior syndicated loan sales
that occurred during the current year period.
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 0.24% for the three months ended December 31,
2009, as compared to 2.17% for the prior year period.
Interest
income from Non-Control/Non-Affiliate investments decreased for the three
months ended December 31, 2009 due to an overall reduction in the size and
number of Non-Control/Non-Affiliate investments held at December 31, 2009,
as compared to the prior year period. At
December 31, 2008, we held positions in 35 Non-Control/Non-Affiliate
investments; however, as a result of the Syndicated Loan Sales, only four
Non-Control/Non-Affiliate investments were held at December 31, 2009. Also contributing to the decrease in interest
income from Non-Control/Non-Affiliate investments was a decrease in the average
LIBOR between the two periods.
Interest
income from Control investments decreased slightly for the three months ended December 31,
2009, as compared to the prior year period, driven primarily by lower average
principal balances outstanding on loans to these companies during the current
quarter. Decreases in LIBOR played a
minimal role in the decline in interest income from Control investments, as the
majority of these loans include interest rate floors.
Interest
income from Affiliate investments increased slightly for the three months ended
December 31, 2009, as compared to the prior year period, mainly due to
interest rate increases that occurred on loans to certain Affiliate portfolio
companies.
The
following table lists the interest income from investments for the five largest
portfolio company investments during the respective periods:
Three months ended December 31, 2009
|
|
Interest
|
|
|
|
Company
|
|
Income
|
|
%
|
|
Chase II Holdings Corp.
|
|
$
|
620
|
|
12.5
|
%
|
Galaxy Tools Holding Corp.
|
|
595
|
|
12.0
|
|
A. Stucki Holding Corp.
|
|
572
|
|
11.6
|
|
Mathey Investments, Inc.
|
|
479
|
|
9.7
|
|
Danco Acquisition Corp.
|
|
458
|
|
9.2
|
|
Subtotal
|
|
$
|
2,724
|
|
55.0
|
%
|
Other companies
|
|
2,226
|
|
45.0
|
|
Total portfolio interest income
|
|
$
|
4,950
|
|
100.0
|
%
|
Three months ended December 31, 2008
|
|
Interest
|
|
|
|
Company
|
|
Income
|
|
%
|
|
A. Stucki Holding Corp.
|
|
$
|
764
|
|
11.1
|
%
|
Chase II Holdings Corp.
|
|
708
|
|
10.3
|
|
Galaxy Tools Holdings Corp.
|
|
595
|
|
8.6
|
|
Noble Logistics, Inc.
|
|
431
|
|
6.3
|
|
Acme Cryogenics, Inc.
|
|
426
|
|
6.2
|
|
Subtotal
|
|
$
|
2,924
|
|
42.5
|
%
|
Other companies
|
|
3,961
|
|
57.5
|
|
Total portfolio interest income
|
|
$
|
6,885
|
|
100.0
|
%
|
The
annualized weighted average yield on our portfolio, excluding cash and cash
equivalents, for the three months ended December 31, 2009 was 10.68%, compared
to 8.76% 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 December 31,
2008.
Interest
income from invested cash and cash equivalents decreased for the three months
ended December 31, 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.
34
Table of Contents
Other
income increased for the three months ended December 31, 2009, as compared
the prior year period, due to the receipt of approximately $953 of accrued cash
dividends from A. Stucki Holding Corp.
The remaining 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 and incentive fees, decreased for the three months ended December 31,
2009, primarily due to a reduction in interest expense associated with the
Credit Facility, as well as an overall decrease in the amount of fees due to
our Adviser, partially offset by an increase in deferred financing fees related
to the Credit Facility entered into in April 2009, as compared to the
three months ended December 31, 2008.
Loan
servicing fees decreased for the three months ended December 31, 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, and were directly credited against the amount of the base management
fee due to our Adviser. The decrease in fees is a result of the reduced size of
our pledged loan portfolio, caused primarily by the Syndicated Loan Sales.
The
base management fee decreased for the three months ended December 31,
2009, as compared to the prior year period, which is reflective of fewer total
assets held during the quarter ended December 31, 2009 when compared to
the prior year quarter. Likewise, 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 December 31,
|
|
|
|
2009
|
|
2008
|
|
Base management fee
|
|
$
|
113
|
|
$
|
442
|
|
|
|
|
|
|
|
Credits to base management fee
from Adviser:
|
|
|
|
|
|
Fee reduction for the waiver of 2% fee on senior
syndicated loans to 0.5%
|
|
(34
|
)
|
(413
|
)
|
Credit for fees received by Adviser from the
portfolio companies
|
|
(93
|
)
|
(281
|
)
|
Credit to base management fee
from Adviser
|
|
(127
|
)
|
(694
|
)
|
|
|
|
|
|
|
Net base management fee
|
|
$
|
(14
|
)
|
$
|
(252
|
)
|
An
incentive fee was earned by the Adviser during the current quarter, due in part
to a one-time dividend received from A. Stucki Holding Corp. The incentive fee and any associated credits
are summarized in the table below:
|
|
Three
months ended December 31,
|
|
|
|
2009
|
|
2008
|
|
Incentive fee
|
|
$
|
588
|
|
$
|
|
|
Credit from voluntary, irrevocable and unconditional
waiver issued by Advisers board of directors
|
|
|
|
|
|
Net incentive fee
|
|
$
|
588
|
|
$
|
|
|
The
administration fee decreased slightly for the three months ended December 31,
2009, as compared the prior year period.
This decrease is also a result of fewer total assets held during the
quarter ended December 31, 2009 in relation to the other funds
administered by Gladstone Administration, LLC, as compared to the prior year
period. The calculation of the
administration 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 December 31, 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 December 31, 2009 was approximately
$16.9 million, as compared to $117.9 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 and an increase in professional
fees, mainly in additional auditing and accounting fees accrued in the current
quarter.
35
Table of Contents
Realized and Unrealized (Loss) Gain on Investments
Realized Losses
During
the three months ended December 31, 2009, we completed the sales of
certain syndicated loans for aggregate proceeds of $5.5 million and recorded a
realized loss of $1.3 million. No
investments were sold or written off during the three months ended December 31,
2008. 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 exit the senior syndicated loan market.
Unrealized Appreciation and Depreciation
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 December 31,
2009, we recorded net unrealized depreciation of investments in the aggregate
amount of $6.2 million, compared to $7.5 million in the prior year period. The unrealized appreciation (depreciation)
across our investment classes for the three months ended December 31, 2009
was as follows:
Investment Category
|
|
Net Unrealized Appreciation (Depreciation)
|
|
Non-Control/Non-Affiliate
|
|
$
|
1,383
|
|
Control
|
|
(8,853
|
)
|
Affiliate
|
|
1,257
|
|
Total
|
|
$
|
(6,213
|
)
|
We
recorded approximately $1.4 million of net unrealized appreciation on our
Non-Control/Non-Affiliate investments for the quarter ended December 31,
2009, driven primarily by the reversal of previously unrealized losses
associated with the HMTBP sale, as well as a modest appreciation in the value
of American Greetings Corp. For the
three months ended December 31, 2008, we recorded approximately $7.0
million of unrealized depreciation on our Non-Control/Non-Affiliate
investments.
Our
Control investments experienced the most significant net unrealized
depreciation in our total portfolio, particularly our equity holdings, which
alone depreciated in value by an aggregate of $9.0 million during the quarter
ended December 31, 2009. This
depreciation in equity securities primarily related to depreciation of our
equity positions in A. Stucki Holding Corp., Acme Cryogenics, Inc. and Chase II
Holdings Corp., as well as the inclusion of approximately $0.8 million of
unrealized depreciation on our equity position in Mathey, as a result of the
reclassification of Mathey as a Control investment during the quarter,
partially offset by an increase in the value of our equity position in Cavert
II Holdings Corp. The debt portion of
our Control investments appreciated in value by an aggregate of approximately
$0.1 million during the current quarter, which includes approximately $0.2
million of unrealized depreciation on our debt investments in Mathey, resulting
from the reclassification of Mathey as a Control investment during the
quarter. For the three months ended December 31,
2008, we recorded approximately $1.8 million of unrealized appreciation on our
Control investments.
We
recorded approximately $1.3 million of net unrealized appreciation on our
Affiliate investments during the quarter ended December 31, 2009, consisting of
approximately $2.0 million of net unrealized appreciation in equity positions,
partially offset by approximately $0.7 million of unrealized depreciation
related to the debt positions. This
increase was primarily a result of an increase in the value of our equity
position in Quench Holdings Corp. and the impact of the reversal of the
unrealized depreciation on our debt and equity investments in Mathey as a
result of the reclassification of Mathey to a Control investment. Partially offsetting this increase was a
decline in the value of our debt investment in Noble Logistics, Inc. For the three months ended December 31,
2008, we recorded approximately $2.3 million of unrealized depreciation on our
Affiliate investments.
Over
our entire investment portfolio, we recorded an aggregate of approximately $0.8
million of net unrealized appreciation on our debt positions for the quarter
ended December 31, 2009, while our equity holdings experienced an
aggregate of approximately $7.0 million of net unrealized depreciation. At December 31, 2009, the fair value of
our investment portfolio was less than the cost basis of our portfolio by
approximately $38.5 million, as compared to $32.3 million at September 30,
2009, representing an increase in net unrealized depreciation of $6.2 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, a general
decrease in multiples paid for companies and the general downturn in economic
conditions negatively affecting the performance of some of our portfolio
companies. Due to continued depreciation
in our investments, our entire portfolio was fair valued at 83.0% of cost as of
December 31
, 2009,
compared to 90% of cost as of March 31, 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.
Net Unrealized Depreciation of Borrowings Under Line
of Credit
During
the quarter ended December 31, 2009, we recorded unrealized depreciation
of $45 for the line of credit that was fair valued in accordance with ASC 825
by an independent third party. ASC 825
was not applicable for the three months ended December 31, 2008.
36
Table of
Contents
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
December 31
, 2009, the
derivative had a fair value of approximately $5, and unrealized depreciation of
$7 was recorded for the three months ended
December 31
, 2009. For the comparable 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 three months ended
December 31
, 2009, we
recorded a net decrease in net assets resulting from operations of $4.4 million
as a result of the factors discussed above. For the three months ended
December 31
, 2008, we
recorded a net decrease in net assets resulting from operations of $3.9
million. Our net decrease in net assets resulting
from operations per basic and diluted weighted average common share for the
quarters ended
December 31
, 2009 and 2008
were $0.20 and $0.18, respectively.
Comparison of the Nine Months Ended December 31,
2009 to the Nine Months Ended December 31, 2008
A comparison of our operating
results for the nine months ended December 31, 2009 and 2008 is below:
|
|
For the nine months ended December 31,
|
|
|
|
2009
|
|
2008
|
|
$ Change
|
|
% Change
|
|
INVESTMENT INCOME
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
|
|
|
|
|
|
|
Non-Control/Non-Affiliate investments
|
|
$
|
1,840
|
|
$
|
6,797
|
|
$
|
(4,957
|
)
|
(72.9
|
)%
|
Control investments
|
|
8,593
|
|
8,372
|
|
221
|
|
2.6
|
|
Affiliate investments
|
|
4,533
|
|
3,938
|
|
595
|
|
15.1
|
|
Cash and cash equivalents
|
|
1
|
|
67
|
|
(66
|
)
|
(98.5
|
)
|
Total interest income
|
|
14,967
|
|
19,174
|
|
(4,207
|
)
|
(21.9
|
)
|
Other income
|
|
1,066
|
|
682
|
|
384
|
|
56.3
|
|
Total investment income
|
|
16,033
|
|
19,856
|
|
(3,823
|
)
|
(19.3
|
)
|
|
|
|
|
|
|
|
|
|
|
EXPENSES
|
|
|
|
|
|
|
|
|
|
Loan servicing fee
|
|
2,892
|
|
3,769
|
|
(877
|
)
|
(23.3
|
)
|
Base management fee
|
|
588
|
|
1,303
|
|
(715
|
)
|
(54.9
|
)
|
Incentive fee
|
|
588
|
|
|
|
588
|
|
|
|
Administration fee
|
|
527
|
|
642
|
|
(115
|
)
|
(17.9
|
)
|
Interest expense
|
|
1,640
|
|
4,009
|
|
(2,369
|
)
|
(59.1
|
)
|
Amortization of deferred finance costs
|
|
1,187
|
|
324
|
|
863
|
|
266.4
|
|
Professional fees
|
|
502
|
|
383
|
|
119
|
|
31.1
|
|
Stockholder related costs
|
|
276
|
|
413
|
|
(137
|
)
|
(33.2
|
)
|
Insurance expense
|
|
190
|
|
165
|
|
25
|
|
15.2
|
|
Directors fees
|
|
147
|
|
145
|
|
2
|
|
1.4
|
|
Other
|
|
198
|
|
246
|
|
(48
|
)
|
(19.5
|
)
|
Expenses before credit from Adviser
|
|
8,735
|
|
11,399
|
|
(2,664
|
)
|
(23.4
|
)
|
Credits to base management fee
|
|
(591
|
)
|
(1,964
|
)
|
1,373
|
|
(69.9
|
)
|
Total expenses net of credit to base management fee
|
|
8,144
|
|
9,435
|
|
(1,291
|
)
|
(13.7
|
)
|
NET INVESTMENT INCOME
|
|
7,889
|
|
10,421
|
|
(2,532
|
)
|
(24.3
|
)
|
|
|
|
|
|
|
|
|
|
|
REALIZED AND UNREALIZED (LOSS) GAIN ON:
|
|
|
|
|
|
|
|
|
|
Realized loss on sale of Non-Control/Non-Affiliate
investments
|
|
(35,922
|
)
|
(4,215
|
)
|
(31,707
|
)
|
752.2
|
|
Realized loss on termination of derivative
|
|
(53
|
)
|
|
|
(53
|
)
|
NM
|
|
Net unrealized appreciation (depreciation) of
Non-Control/Non-Affiliate investments
|
|
36,597
|
|
(7,714
|
)
|
44,311
|
|
NM
|
|
Net unrealized (depreciation) appreciation of
Control investments
|
|
(35,234
|
)
|
7,728
|
|
(42,962
|
)
|
NM
|
|
Net unrealized depreciation of Affiliate
investments
|
|
(4,862
|
)
|
(13,687
|
)
|
8,825
|
|
(64.5
|
)
|
Net unrealized appreciation of derivative
|
|
19
|
|
|
|
19
|
|
NM
|
|
Net unrealized appreciation of borrowings under
line of credit
|
|
(133
|
)
|
|
|
(133
|
)
|
NM
|
|
Net loss on investments and borrowings under line
of credit
|
|
(39,588
|
)
|
(17,888
|
)
|
(21,700
|
)
|
121.3
|
|
|
|
|
|
|
|
|
|
|
|
NET DECREASE IN NET ASSETS RESULTING FROM
OPERATIONS
|
|
$
|
(31,699
|
)
|
$
|
(7,467
|
)
|
$
|
(24,232
|
)
|
324.5
|
%
|
NM = Not
Meaningful
37
Table of Contents
Investment Income
Investment
income decreased for the nine months ended December 31, 2009, as compared
to the nine months ended December 31, 2008, due mainly to a reduction 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 decreased for the nine months
ended December 31, 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 nine months ended December 31, 2009 was
approximately $210.6 million, compared to approximately $297.9 million for the
prior year period. This decrease was
primarily due to the Syndicated Loan Sales that occurred during the current
year period, as well as scheduled and unscheduled principal repayments. 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 0.29% for the
nine months ended December 31, 2009, as compared to 2.46% for the prior
year period.
Interest
income from Non-Control/Non-Affiliate investments decreased for the nine months
ended December 31, 2009, as compared to the prior year period, due to an
overall reduction in the size and number of Non-Control/Non-Affiliate
investments held at December 31, 2009, as compared to the prior year
period. At December 31, 2008, we held positions in 35
Non-Control/Non-Affiliate investments; however, as a result of the Syndicated
Loan Sales, only four
Non-Control/Non-Affiliate investments were held at December 31,
2009. Also contributing to the decrease in interest income from
Non-Control/Non-Affiliate investments was a decrease in the average LIBOR
between the two periods.
Interest
income from Control investments increased slightly for the nine months ended December 31,
2009, as compared to the prior year period.
The increase is attributable to two additional Control investments, Galaxy
Tool Holding Corp., which was acquired during the second quarter of the prior
fiscal year, and Country Club Enterprises, LLC, which was purchased in the
third quarter of the prior fiscal year, being held for the full nine months
ended December 31, 2009, as opposed to a partial period in the prior year.
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 Control investments during the
current year period, as the majority of these loans include interest rate
floors.
Interest
income from Affiliate investments also increased for the nine months ended December 31,
2009, as compared to the prior year period. This increase was due mainly to the
reclassification of Quench Holdings Corp. 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:
Nine months ended December 31, 2009
|
|
Interest
|
|
|
|
Company
|
|
Income
|
|
%
|
|
Chase II Holdings Corp.
|
|
$
|
1,942
|
|
13.0
|
%
|
Galaxy Tools Holding Corp.
|
|
1,779
|
|
11.9
|
|
A. Stucki Holding Corp.
|
|
1,723
|
|
11.5
|
|
Acme Cryogenics, Inc.
|
|
1,274
|
|
8.5
|
|
Danco Acquisition Corp.
|
|
1,244
|
|
8.3
|
|
Subtotal
|
|
$
|
7,962
|
|
53.2
|
%
|
Other companies
|
|
7,004
|
|
46.8
|
|
Total portfolio interest income
|
|
$
|
14,966
|
|
100.0
|
%
|
38
Table of Contents
Nine months ended December 31, 2008
|
|
Interest
|
|
|
|
Company
|
|
Income
|
|
%
|
|
Chase II Holdings Corp.
|
|
$
|
2,138
|
|
11.2
|
%
|
A. Stucki Holding Corp.
|
|
2,110
|
|
11.0
|
|
Acme Cryogenics, Inc.
|
|
1,274
|
|
6.7
|
|
Cavert II Holding Corp.
|
|
1,230
|
|
6.4
|
|
Noble Logistics, Inc.
|
|
1,218
|
|
6.4
|
|
Subtotal
|
|
$
|
7,970
|
|
41.7
|
%
|
Other companies
|
|
11,137
|
|
58.3
|
|
Total portfolio interest income
|
|
$
|
19,107
|
|
100.0
|
%
|
The
annualized weighted average yield on our portfolio, excluding cash and cash
equivalents, for the nine months ended December 31, 2009 was 10.16%, compared
to 8.12% 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 year period resulted
primarily from our sale of lower interest-bearing senior syndicated loans
subsequent to December 31, 2008.
Interest
income from invested cash and cash equivalents decreased for the nine months
ended December 31, 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 increased for the nine months ended December 31, 2009, as compared
to the prior year period, due to the receipt of approximately $953 of accrued
cash dividends from A. Stucki Holding Corp.
The remaining balance in other income is comprised mainly 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 and incentive fees, decreased for the nine months ended December 31,
2009, primarily due to a reduction in interest expense associated with the
Credit Facility, as well as an overall decrease in the amount of fees due to
our Adviser, partially offset by an increase in deferred financing fees related
to the Credit Facility entered into in April 2009, as compared to the nine
months ended December 31, 2008.
Loan
servicing fees decreased for the nine months ended December 31, 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 primarily by
the Syndicated Loan Sales that occurred during the current year period.
The
base management fee decreased for the nine months ended December 31, 2009,
as compared to the prior year period, which is reflective of fewer total assets
held during the nine months ended December 31, 2009 when compared to the
prior year period. Likewise, 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 on June 2, 2009, and is summarized in the table below:
|
|
Nine
months ended December 31,
|
|
|
|
2009
|
|
2008
|
|
Base management fee
|
|
$
|
588
|
|
$
|
1,303
|
|
|
|
|
|
|
|
Credits to base
management fee from Adviser:
|
|
|
|
|
|
Fee reduction for the waiver of 2% fee on senior
syndicated loans to 0.5%
|
|
(265
|
)
|
(1,220
|
)
|
Credit for fees received by Adviser from the
portfolio companies
|
|
(326
|
)
|
(744
|
)
|
Credit to base management fee
from Adviser
|
|
(591
|
)
|
(1,964
|
)
|
|
|
|
|
|
|
Net base management fee
|
|
$
|
(3
|
)
|
$
|
(661
|
)
|
An
incentive fee was earned by the Adviser during the nine months ended December 31,
2009, primarily due to a one-time dividend received from A. Stucki Holding
Corp. The incentive fee and any
associated credits for the nine months ended December 31, 2009 and 2008
are summarized in the table below:
39
Table of Contents
|
|
Nine
months ended December 31,
|
|
|
|
2009
|
|
2008
|
|
Incentive fee
|
|
$
|
588
|
|
$
|
|
|
Credit from voluntary, irrevocable and
unconditional waiver issued by Advisers board of directors
|
|
|
|
|
|
Net incentive fee
|
|
$
|
588
|
|
$
|
|
|
The
administration fee decreased for the nine months ended December 31, 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 and,
further, is a result of fewer total assets held during the quarter ended December 31,
2009 in relation to the other funds administered by Gladstone Administration,
LLC, as compared to the prior year period.
The calculation of the administration fee is described in detail 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 on June 2, 2009.
Interest
expense decreased for the nine months ended December 31, 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 nine months ended December 31, 2009 was approximately $29.0 million,
as compared to $106.3 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 and an increase in professional
fees. 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 current year period.
Realized and Unrealized (Loss) Gain on Investments
Realized Losses
During
the nine months ended December 31, 2009, we exited 30 senior syndicated
loans and a portion of another senior syndicated loan for aggregate proceeds of
approximately $74.7 million in cash and recorded a realized loss of
approximately $35.9 million. For the nine months ended December 31, 2008,
we received approximately $13.3 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 the Senior Syndicated Loan Sales, which
resulted from the liquidity needs associated with the repayment of amounts
outstanding under our prior credit facility with Deutsche Bank, which matured
in April 2009.
Unrealized Appreciation and Depreciation
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 nine months ended December 31,
2009, we recorded net unrealized depreciation of investments in the aggregate
amount of $3.5 million, compared to net unrealized depreciation of investments
in the aggregate amount of $13.7 million for the prior year period. The unrealized appreciation (depreciation)
across our investment classes for the nine months ended December 31, 2009
was as follows:
Investment Category
|
|
Net Unrealized Appreciation (Depreciation)
|
|
Non-Control/Non-Affiliate
|
|
$
|
36,597
|
*
|
Control
|
|
(35,234
|
)
|
Affiliate
|
|
(4,862
|
)
|
Total
|
|
$
|
(3,499
|
)
|
*
Includes the reversal of approximately $35.7 million
of previously recorded unrealized depreciation related to the sale of
syndicated loans, which resulted in a $35.9 million of realized loss for the
current period.
We
recorded approximately $36.6 million of net unrealized appreciation of our
Non-Control/Non-Affiliate investments for the nine months ended December 31,
2009, due primarily to the reversal of $35.7 million of previously recorded
unrealized depreciation noted in the table above, and appreciation in value in
the aggregate amount of approximately $0.9 million on our remaining
Non-Control/Non-Affiliate investments. Survey Sampling, LLC, experienced the
most significant devaluation; however, this was partially offset by increases
in the values of Interstate FiberNet, Inc. and American Greetings
Corp. For the nine months ended December 31,
2008, we recorded approximately $7.7 million of unrealized depreciation on our
Non-Control/Non-Affiliate investments.
Our
Control investments experienced the most significant net unrealized
depreciation in our total portfolio, particularly our equity holdings, which
alone depreciated in value by an aggregate of approximately $34.9 million during
the nine months ended December
40
Table of Contents
31,
2009. This depreciation in equity
securities primarily related to depreciation of our equity positions in A.
Stucki Holding Corp., Acme Cryogenics, Inc., Chase II Holdings Corp.,
Country Club Enterprises, LLC and Galaxy Tool Holding Corp., as well as the
inclusion of approximately $0.8 million of unrealized depreciation on our
equity position in Mathey, as a result of the reclassification of Mathey as a
Control investment during the nine months ended December 31, 2009,
partially offset by an increase in the value of our equity position in Cavert
II Holdings Corp. The debt portion of
our Control investments depreciated in value by an aggregate of approximately
$0.3 million during the nine months ended December 31, 2009, including
approximately $0.2 million of unrealized depreciation on our debt investments
in Mathey as a result of the reclassification of Mathey as a Control investment
during the nine months ended December 31, 2009. For the nine months ended December 31,
2008, we recorded approximately $7.7 million of unrealized appreciation on our
Control investments.
We
recorded approximately $4.9 million of net unrealized depreciation on our
Affiliate investments during the nine month period ended December 31,
2009, consisting of approximately $3.6 million of net unrealized depreciation
in equity positions and $1.3 million of unrealized depreciation related to debt
positions. This decrease was primarily
due to decreases in the value of our equity positions in Danco Acquisition
Corp. and Tread Corp. and in our debt investments in Noble Logistics, Inc. Partially offsetting the net decrease were
increases in the value of our debt investments in Danco Acquisition Corp., as
well as an appreciation in the value of our overall investment in Quench
Holdings Corp. For the nine months ended
December 31, 2008, we recorded approximately $13.7 million of unrealized
depreciation on our Affiliate investments.
Over
our entire investment portfolio, we recorded an aggregate of approximately
$34.9 million of net unrealized appreciation on our debt positions for the nine
months ended December 31, 2009, while our equity holdings experienced an
aggregate of approximately $38.4 million of net unrealized depreciation. At December 31, 2009, the fair value of
our investment portfolio was less than the cost basis of our portfolio by
approximately $38.5 million, as compared to $35.0 million at March 31,
2009, representing net unrealized appreciation of $3.5 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 83.0% of cost as of December 31,
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.
Net Unrealized Appreciation of Borrowings Under Line
of Credit
During
the nine months ended December 31, 2009, we recorded unrealized
appreciation of $133 for the line of credit that was fair valued in accordance
with ASC 825 by an independent third party.
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
nine months ended December 31, 2008.
Derivatives
During
the nine months ended December 31, 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 December 31, 2009,
the derivative had a fair value of approximately $5, representing an unrealized
depreciation of $34 for the nine months ended December 31, 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 nine months ended December 31, 2009, we recorded a net decrease in net
assets resulting from operations of $31.7 million as a result of the factors
discussed above. For the nine months ended December 31, 2008, we recorded
a net decrease in net assets resulting from operations of $7.5 million. Our net decrease in net assets resulting from
operations per basic and diluted weighted average common share for the nine
months ended December 31, 2009 and 2008 were $1.44 and $0.35,
respectively.
LIQUIDITY
AND CAPITAL RESOURCES
Operating Activities
Net cash provided by operating activities for the nine months ended December 31,
2009 was approximately $172.8 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 loss realized on those sales, and principal payments received
from existing investments. For the nine months ended December 31, 2008,
net cash provided by operating activities was approximately $5.6 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 three new investments and
add-ons to existing investments.
41
Table of
Contents
At
December 31, 2009, we had investments in equity of, loans to, or
syndicated participations in 16 private companies with a cost basis totaling
approximately $225.9 million. At December 31,
2008, we had investments in equity of, loans to, or syndicated participations
in 47 private companies with an aggregate cost basis of approximately $354.2
million. A summary of our investment
activity for the nine months ended December 31, 2009 and 2008 is as
follows:
Quarter Ended
|
|
Investment
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
|
|
$
|
(34,604
|
)
|
September 30, 2009
|
|
318
|
|
2,757
|
|
|
|
|
|
December 31, 2009
|
|
595
|
|
4,496
|
|
5,484
|
|
(1,318
|
)
|
Total
|
|
$
|
2,413
|
|
$
|
14,828
|
|
$
|
74,706
|
|
$
|
(35,922
|
)
|
Quarter
Ended
|
|
Investment
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
|
)
|
December 31, 2008
|
|
11,043
|
|
4,469
|
|
|
|
|
|
Total
|
|
$
|
47,655
|
|
$
|
26,753
|
|
$
|
13,296
|
|
$
|
(4,215
|
)
|
(a)
Includes a non-cash transaction whereby a portfolio
company, Cavert II Holdings Corp., 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) Investment Disbursements:
|
|
New
Investments
|
|
Disbursements
to Existing
|
|
Total
|
|
Quarter
Ended
|
|
Companies
|
|
Investments
|
|
Portfolio
Companies
|
|
Disbursements
|
|
June 30, 2009
|
|
0
|
|
$
|
|
|
$
|
1,500
|
(a)
|
$
|
1,500
|
(a)
|
September 30, 2009
|
|
0
|
|
|
|
318
|
|
318
|
|
December 31, 2009
|
|
0
|
|
|
|
595
|
|
595
|
|
Total
|
|
0
|
|
$
|
|
|
$
|
2,413
|
|
$
|
2,413
|
|
|
|
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
|
|
December 31, 2008
|
|
1
|
(d)
|
10,725
|
|
318
|
|
11,043
|
|
Total
|
|
4
|
|
$
|
41,688
|
|
$
|
5,967
|
|
$
|
47,655
|
|
(a)
See note (a) above.
(b)
Tread Corporation.
(c)
Consists of aggregate investments in the amount of
$21.4 million in Galaxy Tool Corp. and an add-on investment of $3.8 million in
A. Stucki Holding Corp. to finance its acquisition of AlcoSprings.
(d)
Country Club Enterprises, LLC.
(2) Principal Repayments:
Quarter Ended
|
|
Scheduled Principal
Repayments
|
|
Unscheduled Principal
Repayments (a)
|
|
Total Principal
Repayments
|
|
June 30, 2009
|
|
$
|
2,004
|
|
$
|
5,571
|
(b)
|
$
|
7,575
|
|
September 30, 2009
|
|
387
|
|
2,370
|
(c)
|
2,757
|
|
December 31, 2009
|
|
396
|
|
4,100
|
(d)
|
4,496
|
|
Total
|
|
$
|
2,787
|
|
$
|
12,041
|
|
$
|
14,828
|
|
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
|
(e)
|
18,791
|
|
December 31, 2008
|
|
2,018
|
|
2,451
|
|
4,469
|
|
Total
|
|
$
|
7,828
|
|
$
|
18,925
|
|
$
|
26,753
|
|
(a)
Includes principal repayments due to excess cash
flows, covenant trips, exits, refinancings, etc.
42
Table of Contents
(b)
Includes principal payments received in connection
with the refinancings of A. Stucki Holding Corp. and Cavert II Holdings Corp.
(c)
Includes $2.0 million voluntary prepayment from
Cavert II Holdings Corp. on its Senior Term Debt.
(d)
Includes full repayment of Chase II Holdings Corp.
line of credit in the amount of $3.5 million.
(e)
Includes early payoff of Hudson in the amount of
$6.0 million and principal proceeds of $7.0 million received in connection with
the Quench Holdings Corp. restructuring.
(3) Investment Sales / Exits:
Quarter Ended
|
|
Number of
Investments Exited
|
|
Proceeds
Received
|
|
Position
Exited
|
|
Unamortized
Loan Costs (a)
|
|
Net Loss on
Exit
|
|
June 30, 2009
|
|
29
|
(b)
|
$
|
69,222
|
|
$
|
103,772
|
|
$
|
55
|
|
$
|
(34,604
|
)
|
September 30, 2009
|
|
0
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
2
|
(c)
|
5,484
|
|
6,810
|
|
(8
|
)
|
(1,318
|
)
|
Total
|
|
31
|
|
$
|
74,706
|
|
$
|
110,582
|
|
$
|
47
|
|
$
|
(35,922
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
Number of
Investments Exited
|
|
Proceeds
Received
|
|
Position
Exited
|
|
Unamortized
Loan Costs (#)
|
|
Net Loss on
Exit
|
|
June 30, 2008
|
|
9
|
(d)
|
$
|
13,246
|
|
$
|
14,926
|
|
$
|
37
|
|
$
|
(1,717
|
)
|
September 30, 2008
|
|
2
|
(e)
|
50
|
(f)
|
2,530
|
|
18
|
|
(2,498
|
)
|
December 31, 2008
|
|
0
|
|
|
|
|
|
|
|
|
|
Total
|
|
11
|
|
$
|
13,296
|
|
$
|
17,456
|
|
$
|
55
|
|
$
|
(4,215
|
)
|
(a)
Includes the balance of
premiums, discounts, acquisition costs, and deferred compensation unamortized
at time of exit.
(b)
One syndicated loan
(Critical Homecare Solutions) was sold in two separate installments.
(c)
Includes the partial sale of
Interstate FiberNet, Inc.
(d)
Includes the partial sale of three syndicated loans
still held subsequent to June 30, 2008 (CRC Health Group, Graham Packaging
and Pinnacle Foods). One syndicated loan
(NPC International) was sold in two separate installments.
(e)
Includes the write-off of Lexicon and early payoff
of Hudson.
(f)
Dividends received in excess of the gain realized on
the restructuring of Quench Holdings Corp., which reduced our equity basis in
the investment.
Investment Activity
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. Additionally, in October 2009, we completed the sales of certain
senior syndicated loans (HMTBP Acquisition II Corp. and a portion of Interstate
FiberNet, Inc.) to various investors in the syndicated loan market and
received approximately $5.5 million in net cash proceeds and recorded a
realized loss of approximately $1.3 million.
In
April 2009, we received cash payments in the aggregate of approximately
$2.9 million from A. Stucki Holding Corp. and Cavert II Holdings Corp.,
representing prepayments on their respective principal amounts due. Furthermore, in October 2009, our
revolving line of credit with Chase II Holdings Corp. was refinanced, and the
outstanding balance of $3.5 million was repaid in full. See Note 3,
Investments
in our notes to the condensed consolidated financial statements for additional
information on these activities.
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.
Short-term Loan Agreement
On
December 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 0.59%. On January 7, 2010, the securities
matured, and we repaid the $75.0 million loan from Jefferies in full and, on January 8,
2010, 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.
43
Table of Contents
Our
most recent investment in a new portfolio company occurred 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 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.
Financing Activities
Net
cash used in financing activities during the nine months ended December 31,
2009 was approximately $92.2 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 nine months ended December 31,
2008, net cash used in financing activities was approximately $1.8 million, due
mainly to net repayments made on the credit facility in excess of borrowings
and distributions paid, partially offset by the Rights Offering (as defined
below).
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 December 31, 2009. Generally we seek to distribute 100% of our
ordinary income in order to avoid taxes on our income. For the nine months ended December 31,
2009, our distributions to stockholders of approximately $7.9 million exceeded
our net investment income by approximately $60. We declared these distributions
based on our estimates of net investment income for the fiscal year. During the
first quarter of fiscal year 2010, we reduced our monthly distribution from
$0.08 to $0.04 per common share.
Section 19(a) Disclosure
Our
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), we post 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 our final
books and records are finalized for the calendar year. Following the calendar year
end, after definitive information has been determined by us, if we have made
distributions of taxable income (or return of capital), we will deliver a Form 1099-DIV
to our 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 December 31, 2009:
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
|
|
|
|
|
|
|
|
|
|
|
|
|
Because
the Board of Directors declares distributions at the beginning of a quarter, it
is difficult to estimate how much of our monthly distributions, based on GAAP,
will come from ordinary income, capital gains and returns of capital.
Subsequent to the quarter ended December 31, 2009, the following
corrections were made to the above listed estimates for that quarter:
Payment Date
|
|
Ordinary Income
|
|
Return of Capital
|
|
Total Distribution
|
|
October 30, 2009
|
|
$
|
0.042
|
|
$
|
(0.002
|
)
|
$
|
0.040
|
|
November 30, 2009
|
|
0.081
|
|
(0.041
|
)
|
0.040
|
|
December 31, 2009
|
|
0.016
|
|
0.024
|
|
0.040
|
|
|
|
|
|
|
|
|
|
|
|
|
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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
|
|
January 29, 2010
|
|
$
|
0.042
|
|
$
|
(0.002
|
)
|
$
|
0.040
|
|
February 26, 2010
|
|
0.035
|
|
0.005
|
|
0.040
|
|
March 31, 2010
|
|
0.045
|
|
(0.005
|
)
|
0.040
|
|
|
|
|
|
|
|
|
|
|
|
|
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 $64 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 December 31, 2009, our stock closed
trading at $4.56, representing a 42.5% discount to our net asset value of $7.93
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 $40.4 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
At
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, currently scheduled
for August 2010, at which time we currently expect that we will ask our
stockholders 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 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 December 31, 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,
45
Table of Contents
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 February 8, 2010, there was approximately $15.0 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 $33.7 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 $45.0 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 December 31, 2009, the interest rate cap agreement had
depreciated by approximately $34 and had a fair value of $5.
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 $169.0 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 December 31, 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 nine months ended December 31, 2009, net
unrealized depreciation on our investments was approximately $3.5 million,
primarily brought about by continuing devaluations in our equity holdings of
various portfolio companies, partially offset by the reversal of $35.7 million
of previously unrealized depreciation on syndicated loans that were sold during
the period, compared to an unrealized depreciation of approximately $13.7
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 (April 14, 2011) and all
collections of principal from our loans will be required to be used 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 quarters and may decline further. Consequently, any renewal, extension or
refinancing of the Credit Facility may 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 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, as Deutsche Bank, who was a committed lender of 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
recorded in connection with the Syndicated Loan Sales, which resulted in a
realized loss of approximately $34.6 million for the first quarter of fiscal
year 2010. 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 December 31,
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 $0.5 million 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 December 31,
2009, we have not been required to make any payments on the guaranty of the
Finance Facility, and we consider the credit risk to be remote.
46
Table of Contents
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
consolidated amounts of assets and liabilities, including 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
guidance 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 guidance 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.
See
Note 3,
Investments
in the accompanying 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 estimates of value provided by such appraisals and our own
assumptions, including estimated remaining life, current market yield and
interest rate spreads of similar securities as of the measurement date, to
value the investment we have in that business.
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
47
Table of Contents
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, 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 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.
Through December 31, 2009, we assessed trading
activity in syndicated loan assets and determined that there continued to be
market liquidity and a secondary market for these assets. Thus, firm bid prices or indicative bids were
used to fair value our remaining syndicated loans at December 31, 2009.
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 investments,
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, are fair valued in accordance with the terms of the policy, which
utilizes opinions of value submitted to us by Standard & Poors
Securities Evaluations, Inc. (SPSE). We may also submit paid 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 there is a reasonable probability of receiving a success
fee on a given loan. 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
our Board of Directors assessment, 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 the Board of Directors voted to accept, the opinions of value
delivered by
48
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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 accurately
reflect the value of the debt component, our 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;
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·
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 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 probability of default 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 December 31, 2009, one investment,
ASH Holdings Corp., was on non-accrual for approximately $1.7 million at fair
value, or 0.9% of the aggregate fair value of our investment portfolio. Additionally, we do not risk rate our equity
securities.
50
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The
following table lists the risk ratings for all non-syndicated loans in our
portfolio at December 31, 2009 and March 31, 2009, representing
approximately 93% and 59%, respectively, of all loans in our portfolio at the
end of each period:
Rating
|
|
December 31,
2009
|
|
March 31,
2009
|
|
Highest
|
|
8.0
|
|
7.0
|
|
Average
|
|
5.8
|
|
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 December 31, 2009 and March 31,
2009, representing approximately 1% and 12%, respectively, of all loans in our
portfolio at the end of each period:
Rating
|
|
December 31,
2009
|
|
March 31,
2009
|
|
Highest
|
|
6.0
|
|
9.0
|
|
Average
|
|
6.0
|
|
8.0
|
|
Weighted Average
|
|
6.0
|
|
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 December 31,
2009 and March 31, 2009, representing approximately 6% and 29%,
respectively, of all loans in our portfolio at the end of each period:
Rating
|
|
December 31,
2009
|
|
March 31,
2009
|
|
Highest
|
|
B+/Ba3
|
|
BB/Ba2
|
|
Average
|
|
B/B2
|
|
B/B2
|
|
Weighted
Average
|
|
B/B2
|
|
B/B2
|
|
Lowest
|
|
-/B2
|
|
CCC+/B3
|
|
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 must meet certain source-of-income, asset diversification and annual
distribution requirements. Under the
annual distribution requirements, we are required to distribute to stockholders
at least 90% of our investment company taxable income, as defined by the
Code. Our policy is to pay out as
distributions up to 100% of that amount.
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 December 31,
2009, one Control investment, ASH Holdings Corp., was on non-accrual with a
fair value of approximately $1.7 million, or 0.9% of the fair value of all
loans held in our portfolio at December 31, 2009. At March 31, 2009, one Control
investment, ASH Holdings Corp., 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. During
the quarter ended December 31, 2009, we recorded and collected
approximately $953 of cash dividends on preferred shares of A. Stucki Holding
Corp; otherwise, we have not accrued for any other such dividend income
.
51
Table of
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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 and irrevocably 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 accompanying notes to our condensed
consolidated financial statements for a summary of recently issued accounting
pronouncements.
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 December 31, 2009, our portfolio consisted of the following breakdown
in relation to all outstanding debt:
17
|
%
|
variable rates
|
|
48
|
|
variable rates with a floor
|
|
35
|
|
fixed rates
|
|
100
|
%
|
Total
|
|
There
have been no material changes in the quantitative and qualitative market risk
disclosures for the three months ended December 31, 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.
a) Evaluation of Disclosure Controls and
Procedures
As
of December 31, 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.
b)
Changes in Internal Control over Financial Reporting
There
have been no changes in our internal control over financial reporting that
occurred during the quarter ended December 31, 2009, that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
52
Table of
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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. For a discussion of these risks, please
refer to the Risk Factors section in our final prospectus dated October 8,
2009, as filed with the SEC on October 14, 2009 (the Final Prospectus). In connection with our preparation of this
quarterly report, management has reviewed and considered these risk factors and
has determined that the following risk factor should be read in connection with
the existing risk factors disclosed in our Final Prospectus.
Any inability to renew, extend or
replace our credit facility
on terms favorable to us, or at all,
could adversely impact our
liquidity and ability to fund new investments or maintain distributions to our
stockholders.
Availability under the
Credit Facility will terminate on April 14, 2010 and if the facility is
not renewed or extended by such date, all principal and interest will be due
and payable within one year of maturity.
Between the
maturity date and April 14, 2011, our lenders have the right to apply all
interest income to amounts outstanding under the Credit Facility.
As of February 8, 2010,
there was approximately $15.0 million of borrowings outstanding on 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. 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 to stockholders. For
instance, in connection with our most recent renewal, the size of our credit
facility was reduced from $125 million to $50 million. 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
maintain our distributions to stockholders. 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 and 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.
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.
Not
applicable.
ITEM 5. OTHER
INFORMATION.
Not
applicable.
ITEM 6.
EXHIBITS
See
the exhibit index.
53
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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/
David Watson
|
|
|
David
Watson
|
|
|
Chief Financial Officer
|
|
|
|
Date: February 8, 2010
|
|
|
54
Table of
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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.
|
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.
55
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