As filed with the Securities and Exchange Commission on June 16, 2015
1933 Act File No. 333-
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form N-2
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REGISTRATION STATEMENT |
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UNDER |
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THE SECURITIES ACT OF 1933 |
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PRE-EFFECTIVE AMENDMENT NO. |
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POST-EFFECTIVE AMENDMENT NO. |
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GLADSTONE INVESTMENT CORPORATION
(Exact name of registrant as specified in charter)
1521
Westbranch Drive, Suite 100
McLean, VA 22102
Address of principal executive offices (Number, Street, City, State, Zip Code)
Registrants telephone number, including area code: (703) 287-5800
David Gladstone
Chairman and Chief Executive Officer
Gladstone Investment Corporation
1521 Westbranch Drive, Suite 100
McLean, Virginia 22102
Name and address (Number, Street, City, State, Zip Code) of agent for service
COPIES TO:
Lori
B. Morgan
Sehrish Siddiqui
Bass, Berry & Sims PLC
150 Third Avenue South
Suite 2800
Nashville, TN
37201
Tel: (615) 742-6200
Fax: (615) 742-6293
Approximate
date of proposed public offering: From time to time after the effective date of this registration statement.
If any securities being registered on this form will be offered on a delayed or continuous basis in reliance on Rule 415 under the
Securities Act of 1933, other than securities offered in connection with a dividend reinvestment plan, check the following box. x
It is proposed that this filing will become effective (check appropriate box)
¨ when declared effective pursuant to section 8(c).
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
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Title of Securities Being Registered |
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Proposed
Maximum
Aggregate
Offering Price(1) |
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Amount of
Registration Fee |
Common Stock, $0.001 par value per share(2)
Preferred Stock, $0.001 par value per share(2)
Subscription Rights(2)
Warrants(2)
Debt Securities(2) |
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$300,000,000(3) |
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$34,860(3) |
Total |
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(1) |
Estimated solely for the purpose of calculating the registration fee. Pursuant to Rule 457(o) of the rules and regulations under the Securities Act of 1933, as amended (the Securities Act) which permits the
registration fee to be calculated on the basis of the maximum offering price of all the securities listed, the table does not specify by each class information as to the amount to be registered, proposed maximum offering price per unit or proposed
maximum aggregate offering price. |
(2) |
Subject to Note 3 below, there is being registered hereunder an indeterminate amount of common stock, preferred stock, subscription rights, debt securities, warrants or units as may be sold, from time to
time. If any debt securities are issued at an original issue discount, then the offering price shall be in such greater principal amount as shall result in an aggregate price to investors not to exceed $300,000,000. If any warrants are
issued, they will represent rights to purchase common stock, preferred stock or debt securities. |
(3) |
In no event will the aggregate offering price of all securities issued from time to time pursuant to this Registration Statement exceed $300,000,000. Pursuant to Rule 415(a)(6) under the Securities Act of 1933, as
amended, this registration statement includes $157,289,313 of unsold securities of the Registrant that have been previously registered on the Registration Statement on Form N-2 (File No. 333-181879) initially filed by the registrant on
June 4, 2012 and most recently declared effective on September 4, 2014 (the 2012 Registration Statement). A filing fee of $17,540 was paid in connection with such unsold securities and is being offset against the total
registration fee pursuant to Rule 457(p), resulting in a payment of $17,320 in connection with the filing of this Registration Statement. Pursuant to Rule 415(a)(6), the offering of the unsold securities registered under the prior registration
statement will be deemed terminated as of the effective date of this Registration Statement. |
The
Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall
thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until this Registration Statement shall become effective on such date as the Commission, acting pursuant to Section 8(a), may
determine.
The information in this prospectus is not complete and may be changed. We may not sell
these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and is not soliciting an offer to buy these securities in any state where the
offer or sale is not permitted.
SUBJECT TO COMPLETION, DATED JUNE 16, 2015
PRELIMINARY PROSPECTUS
$300,000,000
COMMON STOCK
PREFERRED
STOCK
SUBSCRIPTION RIGHTS
WARRANTS
DEBT SECURITIES
We may offer, from time to time, up to $300,000,000 aggregate primary offering price of our common stock, $0.001 par value per share,
preferred stock, $0.001 par value per share, subscription rights, warrants representing rights to purchase shares of our common stock, or debt securities, or concurrent, separate offerings of these securities, which we refer to in this
prospectus collectively as our Securities, in one or more offerings. The Securities may be offered at prices and on terms to be disclosed in one or more supplements to this prospectus. In the case of our common stock and warrants or rights to
acquire such common stock hereunder, the offering price per share of our common stock by us, less any underwriting commissions or discounts, will not be less than the net asset value per share of our common stock at the time of the offering except
(i) in connection with a rights offering to our existing stockholders, (ii) with the consent of the holders of the majority of our outstanding stock, or (iii) under such other circumstances as the U.S. Securities and Exchange
Commission (SEC) may permit. You should read this prospectus and the applicable prospectus supplement carefully before you invest in our Securities.
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. For federal income tax purposes, we have elected to be treated as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended. Our investment objectives are
to: (1) achieve and grow current income by investing in debt securities of established businesses that we believe will provide stable earnings and cash flow to pay expenses, make principal and interest payments on our outstanding indebtedness
and make distributions to stockholders that grow over time; and (2) provide our stockholders with long-term capital appreciation in the value of our assets by investing in equity securities of established businesses that we believe can grow
over time to permit us to sell our equity investments for capital gains.
Our Securities may be offered directly to one or more
purchasers, including existing stockholders in a rights offering, through agents designated from time to time by us, or to or through underwriters or dealers. The prospectus supplement relating to the offering will identify any agents or
underwriters involved in the sale of our Securities, and will disclose any applicable purchase price, fee, commission or discount arrangement between us and our agents or underwriters or among our underwriters or the basis upon which such amount may
be calculated. See Plan of Distribution. We may not sell any of our Securities through agents, underwriters or dealers without delivery of a prospectus supplement describing the method and terms of the offering of such Securities. Our
common stock is traded on The NASDAQ Global Select Market (NASDAQ) under the symbol GAIN. As of June 12, 2015, the last reported sales price of our common stock was $7.80 and the net asset value per share of our common
stock on March 31, 2015 (the last date prior to the date of this prospectus on which we determined our net asset value per share) was $9.18. Our 7.125% Series A Cumulative Term Preferred Stock is traded on NASDAQ under the symbol
GAINP. As of June 12, 2015, the last reported sales price of our 7.125% Series A Cumulative Term Preferred Stock was $25.74. Our 6.750% Series B Cumulative Term Preferred Stock is traded on NASDAQ under the symbol GAINO.
As of June 12, 2015, the last reported sales price of our 6.750% Series B Cumulative Term Preferred Stock was $25.42. Our 6.500% Series C Cumulative Term Preferred Stock is traded on NASDAQ under the symbol GAINN. As of
June 12, 2015, the last reported sales price of our 6.500% Series C Cumulative Term Preferred Stock was $25.10.
This prospectus
contains information you should know before investing, including information about risks. Please read it before you invest and keep it for future reference. Additional information about us, including our annual, quarterly and current reports, has
been filed with the SEC and can be accessed at its website at www.sec.gov. This information is also available free of charge by calling us collect at (703) 287-5893 or on our corporate website located at
http://www.gladstoneinvestment.com. You may also call us collect at this number to request other information. See Additional Information. Information contained on our website is not incorporated by reference into this prospectus,
and you should not consider that information to be part of this prospectus. This prospectus may not be used to consummate sales of securities unless accompanied by a prospectus supplement.
The securities in which we invest generally would be rated below investment grade if they were rated by rating agencies. Below investment
grade securities, which are often referred to as junk, have predominantly speculative characteristics with respect to the issuers capacity to pay interest and repay principal. They may also be difficult to value and are illiquid.
An investment in our Securities involves certain risks, including, among other things, the risk of leverage and risks relating to
investments in securities of small, private and developing businesses. We describe some of these risks in the section entitled Risk Factors, which begins on page 9. Common shares of closed-end investment companies frequently trade
at a discount to their net asset value per share. If our shares trade at a discount to their net asset value, this will likely increase the risk of loss to purchasers of our Securities. You should carefully consider these risks together with all of
the other information contained in this prospectus and any prospectus supplement before making a decision to purchase our Securities.
The SEC has not approved or disapproved of these Securities or determined if this prospectus is truthful or complete. Any representation to
the contrary is a criminal offense. This prospectus may not be used to consummate sales of securities unless accompanied by a prospectus supplement.
, 2015
TABLE OF CONTENTS
We have not authorized any dealer, salesman or other person to give any information or to make any
representation other than those contained in this prospectus or any accompanying supplement to this prospectus. You must not rely upon any information or representation not contained or incorporated by reference in this prospectus or any
accompanying prospectus supplement as if we had authorized it. This prospectus and any prospectus supplement do not constitute an offer to sell or a solicitation of any offer to buy any security other than the registered securities to which they
relate, nor do they constitute an offer to sell or a solicitation of an offer to buy any securities in any jurisdiction to any person to whom it is unlawful to make such an offer or solicitation in such jurisdiction. The information contained in
this prospectus and any prospectus supplement is accurate as of the dates on their respective covers only. Our business, financial condition, results of operations and prospects may have changed since such dates.
This prospectus is part of a registration statement that we have filed with the Securities and Exchange Commission, or SEC, using the
shelf registration process. Under the shelf registration process, we may offer, from time to time, up to $300,000,000 of our Securities on terms to be determined at the time of the offering. This prospectus provides you with a general
description of the Securities that we may offer. Each time we use this prospectus to offer Securities, we will provide a prospectus supplement that will contain specific information about the terms of that offering. We may sell the Securities
through underwriters or dealers, at-the-market to or through a market maker, into an existing trading market or otherwise directly to one or more purchasers
or through agents or through a combination of methods of sale. The identities of such underwriters, dealers, market makers or agents, as the case may be, will be described in one or more supplements to this prospectus. The prospectus supplement may
also add, update or change information contained in this prospectus. To the extent required by law, we will amend or supplement the information contained in this prospectus and any accompanying prospectus supplement to reflect any material changes
to such information subsequent to the date of the prospectus and any accompanying prospectus supplement and prior to the completion of any offering pursuant to the prospectus and any accompanying prospectus supplement. Please carefully read this
prospectus and any accompanying prospectus supplement together with any exhibits, the additional information described under Available Information and Risk Factors before you make an investment decision.
PROSPECTUS SUMMARY
The following summary highlights some of the information in this prospectus. It is not complete and may not contain all the information
that you may want to consider. You should read the entire prospectus and any prospectus supplement carefully, including the section entitled Risk Factors. Except where the context suggests otherwise, the terms we,
us, our, the Company, the Fund and Gladstone Investment refer to Gladstone Investment Corporation; Adviser refers to Gladstone Management Corporation; Administrator
refers to Gladstone Administration, LLC; Gladstone Commercial refers to Gladstone Commercial Corporation; Gladstone Capital refers to Gladstone Capital Corporation; Gladstone Land refers to Gladstone Land
Corporation; Gladstone Securities refers to Gladstone Securities, LLC; and Gladstone Companies refers to our Adviser and its affiliated companies.
GLADSTONE INVESTMENT CORPORATION
General
We were incorporated under the
General Corporation Laws of the State of Delaware on February 18, 2005. On June 22, 2005, we completed an initial public offering and commenced operations. We operate as a closed-end, non-diversified management investment company and have
elected to be treated as a business development company (BDC), under the Investment Company Act of 1940, as amended, (the 1940 Act). For federal income tax purposes, we have elected to be treated as a regulated investment
company (RIC), under Subchapter M of the Internal Revenue Code of 1986, as amended, (the Code). In order to continue to qualify as a RIC for federal income tax purposes and obtain favorable RIC tax treatment, we must meet
certain requirements, including certain minimum distribution requirements.
Our shares of common stock, 7.125% Series A Cumulative Term
Preferred Stock (Series A Term Preferred Stock), 6.750% Series B Cumulative Term Preferred Stock (Series B Term Preferred Stock) and 6.500% Series C Cumulative Term Preferred Stock (Series C Term Preferred Stock)
are traded on the NASDAQ Global Select Market (NASDAQ) under the trading symbols GAIN, GAINP, GAINO, and GAINN, respectively. At times we refer to our Series A Term Preferred Stock, Series
B Term Preferred Stock and Series C Term Preferred Stock, collectively, as our Term Preferred Stock herein.
Investment Objectives and
Strategy
Our investment objectives are to: (1) achieve and grow current income by investing in debt securities of established
businesses that we believe will provide stable earnings and cash flow to pay expenses, make principal and interest payments on our outstanding indebtedness and make distributions to stockholders that grow over time; and (2) provide our stockholders
with long-term capital appreciation in the value of our assets by investing in equity securities of established businesses that we believe can grow over time to permit us to sell our equity investments for capital gains. To achieve our objectives,
our investment strategy is to invest in several categories of debt and equity securities, with each investment generally ranging from $5 million to $30 million, although investment size may vary, depending upon our total assets or available capital
at the time of investment. We expect that our investment mix over time will consist of approximately 75% in debt securities and 25% in equity securities. However, as of March 31, 2015, our investment mix was approximately 73% in debt securities and
27% in equity securities, at cost.
In general, our investments in debt securities have a term of no more than seven years, accrue
interest at variable rates (based on the London Interbank Offered Rate (LIBOR)) and, to a lesser extent, at fixed rates. We seek debt instruments that pay interest monthly or, at a minimum, quarterly, have a success fee or deferred
interest provision and are primarily interest only with all principal and any accrued but unpaid interest due at maturity. Generally, success fees accrue at a set rate and are contractually due upon a change of control of the business. Some debt
securities have deferred interest whereby some portion of the interest payment is added to the principal balance so that the interest is paid, together with the principal, at maturity. This form of deferred interest is often called paid in
kind (PIK).
Typically, our equity investments consist of common stock, preferred stock, limited liability company
interests, or warrants or options to purchase the foregoing. Often, these equity investments occur in connection with our original investment, buyouts and recapitalizations of a business, or refinancing existing debt.
From our initial public offering in 2005 to March 31, 2015, we have invested in over 113 different companies, while making 118 consecutive
monthly distributions to common stockholders.
We expect that our target portfolio over time will primarily include the following four
categories of investments in private companies in the United States (U.S.):
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Senior Secured Debt Securities: We seek to invest a portion of our assets in senior secured debt securities also known as senior loans, senior term loans, lines of credit and senior notes. Using its assets as
collateral, the borrower typically uses senior debt to cover a substantial portion of the funding needs of the business. The senior secured debt security usually takes the form of first priority liens on all, or substantially all, of the assets of
the business. |
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Senior Subordinated Secured Debt Securities: We seek to invest a portion of our assets in senior subordinated secured debt securities, also known as senior subordinated loans and senior subordinated notes. These
senior subordinated secured debt securities rank junior to the borrowers senior debt securities and may be secured by first priority liens on a portion of the assets of the business or may be designated as second lien notes. Additionally, we
may receive other yield enhancements, such as success fees, in connection with these senior subordinated secured debt securities. |
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Junior Subordinated Debt Securities: We seek to invest a portion of our assets in junior subordinated debt securities, also known as subordinated loans, subordinated notes and mezzanine loans. These junior
subordinated debts include second lien notes and unsecured loans. Additionally, we may receive other yield enhancements and warrants to buy common and preferred stock or limited liability interests in connection with these junior subordinated debt
securities. |
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Preferred and Common Equity/Equivalents: We seek to invest a portion of our assets in equity securities which consist of preferred and common equity or limited liability company interests, or warrants or
options to acquire such securities, and are generally in combination with our debt investment in a business. Additionally, we may receive equity investments derived from restructurings on some of our existing debt investments. In many cases, we will
own a significant portion of the equity which may include having voting control of the businesses in which we invest. |
Additionally, pursuant to the 1940 Act, we must maintain at least 70% of our total assets in qualifying assets, which generally include each
of the investment types listed above. Therefore, the 1940 Act permits us to invest up to 30% of our assets in other non-qualifying assets. See Regulation as a BDC Qualifying Assets for a discussion of the types of qualifying
assets in which we are permitted to invest pursuant to Section 55(a) of the 1940 Act.
Because the majority of the loans in our portfolio
consist of term debt in private companies that typically cannot or will not expend the resources to have their debt securities rated by a credit rating agency, we expect that most, if not all, of the debt securities we acquire will be unrated.
Investors should assume that these loans would be rated below what is today considered investment grade quality. Investments rated below investment grade are often referred to as high yield securities or junk bonds and may be considered
high risk, as compared to investment-grade debt instruments. In addition, many of our debt securities we hold typically do not amortize prior to maturity.
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Our Investment Adviser and Administrator
Gladstone Management Corporation (the Adviser) is our affiliate, investment adviser, and a privately-held company led by a
management team that has extensive experience in our lines of business. Another of our and the Advisers affiliates, a privately-held company, Gladstone Administration, LLC (the Administrator), employs, among others, our chief
financial officer and treasurer, chief accounting officer, chief valuation officer, chief compliance officer, general counsel and secretary (who also serves as the president of the Administrator) and their respective staffs. All of our executive
officers, with the exception of our president, serve as directors, executive officers, officers, or a combination of the foregoing, of the following of our affiliates: Gladstone Commercial Corporation (Gladstone Commercial), a
publicly-traded real estate investment trust; Gladstone Capital Corporation (Gladstone Capital), a publicly-traded BDC and RIC; Gladstone Land Corporation (Gladstone Land), a publicly-traded real estate investment trust; the
Adviser; and the Administrator. Our chief financial officer and treasurer is also the chief financial officer and treasurer of Gladstone Capital and chief accounting officer of the Adviser. Our president is also an executive vice president of our
Adviser. David Gladstone, our chairman and chief executive officer, also serves on the board of managers of our affiliate, Gladstone Securities, LLC (Gladstone Securities), a privately-held broker-dealer registered with the Financial
Industry Regulatory Authority (FINRA) and insured by the Securities Investor Protection Corporation.
The Adviser and
Administrator also provide investment advisory and administrative services, respectively, to our affiliates, including, but not limited to, Gladstone Commercial; Gladstone Capital; and Gladstone Land. In the future, the Adviser and Administrator may
provide investment advisory and administrative services, respectively, to other funds and companies, both public and private.
We are
externally managed by the Adviser pursuant to an investment advisory and management agreement with the Adviser, which we refer to as the Advisory Agreement. The Adviser was organized as a Delaware corporation in 2002 and is a registered investment
adviser under the Investment Advisers Act of 1940, as amended. Since June 22, 2005, we have been externally managed
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by our Adviser, which is headquartered in McLean, Virginia, a suburb of Washington D.C., and also has offices in California, Illinois and New York. At a meeting of our Board of Directors held on
July 15, 2014, our board of directors, or the Board of Directors, unanimously voted to approve the extension of the term of the Advisory Agreement through August 31, 2015. In reaching a decision to approve the Advisory Agreement, the Board
of Directors reviewed a significant amount of information and considered, among other things:
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the nature, quality and extent of the advisory and other services to be provided to us by the Adviser; |
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our investment performance and that of the Adviser; |
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the costs of the services to be provided and profits to be realized by the Adviser from the relationship with us; |
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the fee structures of comparable externally managed business development companies that engage in similar investing activities; and |
During the fiscal years ended March 31, 2015, 2014 and 2013, we
incurred total fees, net of credits, of approximately $9.7 million, $7.9 million and $6.7 million, respectively, to the Adviser under the Advisory Agreement. Based on the information reviewed and the considerations detailed above, our Board of
Directors, including all of the directors who are not interested persons as that term is defined in the 1940 Act, concluded that the investment advisory fee rates and terms are fair and reasonable in relation to the services provided and
approved the Advisory Agreement, as well as an administration agreement, or the Administration Agreement, with the Administrator, as being in the best interests of our stockholders. Additionally, during the fiscal years ended March 31, 2015,
2014 and 2013, we incurred total fees, net of credits, of approximately $0.9 million, $0.9 million and $0.8 million, respectively, to the Administrator under the Administration Agreement.
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THE OFFERING
We may offer, from time to time, up to $300,000,000 of our Securities, on terms to be determined at the time of the offering. Our Securities
may be offered at prices and on terms to be disclosed in one or more prospectus supplements. In the case of our common stock and warrants or rights to acquire such common stock hereunder in any offering, the offering price per share, exclusive of
any distribution commission or discount, will not be less than the net asset value (NAV) per share of our common stock at the time of the offering except (i) in connection with a rights offering to our existing stockholders,
(ii) with the consent of the majority of our common stockholders, or (iii) under such other circumstances as the Securities and Exchange Commission (the SEC) may permit. If we were to sell shares of our common stock below our
then current NAV per share, as we did in October 2012 and March and April 2015, such sales would result in an immediate dilution to the NAV per share. Such a share issuance would also cause a proportionately greater decrease in a stockholders
interest in our earnings and assets than the increase in our assets resulting from such issuance.
Our Securities may be offered directly
to one or more purchasers, including existing stockholders in a rights offering, by us or through agents designated from time to time by us, or to or through underwriters or dealers. The prospectus supplement relating to the offering will disclose
the terms of the offering, including the name or names of any agents or underwriters involved in the sale of our Securities by us, the purchase price, and any fee, commission or discount arrangement between us and our agents or underwriters or among
our underwriters or the basis upon which such amount may be calculated. See Plan of Distribution. We may not sell any of our Securities through agents, underwriters or dealers without delivery of a prospectus supplement describing the
method and terms of the offering of our Securities.
Set forth below is additional information regarding the offering of our Securities:
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Common Stock Trading Symbol (NASDAQ) |
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GAIN |
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7.125% Series A Cumulative Term Preferred Stock Trading Symbol (NASDAQ) |
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GAINP |
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6.750% Series B Cumulative Term Preferred Stock Trading Symbol (NASDAQ) |
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GAINO |
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6.500% Series C Cumulative Term Preferred Stock Due 2022 Trading Symbol (NASDAQ) |
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GAINN |
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Use of Proceeds |
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Unless otherwise specified in a prospectus supplement, we intend to use the net proceeds from the sale of our Securities first to pay down existing short-term debt, then to make investments in buyouts and recapitalizations of small
and mid-sized companies in accordance with our investment objectives, with any remaining proceeds to be used for other general corporate purposes. See Use of Proceeds. |
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Dividends and Distributions |
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We have paid monthly distributions to the holders of our common stock since July 2005 and intend to continue to do so. We have paid monthly dividends on each series of our Term Preferred Stock since the date of issuance of the
respective series of such Term Preferred Stock. The amount of the monthly distribution on our common stock is determined by our Board of Directors on a quarterly basis and is based on our estimate of our annual investment company taxable income. See
Price Range of Common Stock and Distributions. Certain additional amounts may be deemed as distributed to stockholders for income tax purposes. Other types of Securities will likely pay distributions in accordance with their
terms. |
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Taxation |
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We intend to continue to qualify to be treated for federal income tax purposes as a RIC. So long as we continue to qualify, we generally will pay no corporate-level federal income taxes on any ordinary income or capital gains that
we distribute to our stockholders. To maintain our RIC status, we must meet specified source-of-income and asset diversification requirements and distribute annually at least 90% of our taxable ordinary income and realized net short-term capital
gains in excess of realized net long-term capital losses, if any, out of assets legally available for distribution. See Material U.S. Federal Income Tax Considerations. |
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Trading at a Discount |
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Common shares of closed-end investment companies frequently trade at a discount to their NAV. The possibility that our shares may trade at such discount to our NAV is separate and distinct from the risk that our NAV per share may
decline. We cannot predict whether our shares will trade above, at or below NAV, although during the past three years, our common stock has consistently traded, and at times significantly, below NAV. |
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Certain Anti-Takeover Provisions |
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Our Board of Directors is divided into three classes of directors serving staggered three-year terms. This structure is intended to provide us with a greater likelihood of continuity of management, which may be necessary for us to
realize the full value of our investments. A staggered board of directors also may serve to deter hostile takeovers or proxy contests, as may certain provisions of Delaware law and other measures we have adopted. See Certain Provisions of
Delaware Law and of Our Certificate of Incorporation and Bylaws. |
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Dividend Reinvestment Plan |
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Our transfer agent, Computershare, Inc., offers a dividend reinvestment plan for our common stockholders. This is an opt in dividend reinvestment plan, meaning that stockholders may elect to have their cash dividends
automatically reinvested in additional shares of our common stock. Stockholders who do not so elect will receive their dividends in cash. Stockholders who receive distributions in the form of stock will be subject to the same federal, state and
local tax consequences as stockholders who elect to receive their distributions in cash. See Dividend Reinvestment Plan. |
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Management Arrangements |
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Gladstone Management Corporation serves as our investment adviser, and Gladstone Administration, LLC serves as our administrator. For a description of our Adviser, our Administrator, the Gladstone Companies and our contractual
arrangements with these companies, see ManagementCertain TransactionsInvestment Advisory and Management Agreement and ManagementCertain TransactionsAdministration Agreement. |
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FEES AND EXPENSES
The following table is intended to assist you in understanding the costs and expenses that an investor in this offering will bear directly or
indirectly. We caution you that some of the percentages indicated in the table below are estimates and may vary. Except where the context suggests otherwise, whenever this prospectus contains a reference to fees or expenses paid by us or
Gladstone Investment, or that we will pay fees or expenses, stockholders will indirectly bear such fees or expenses as investors in Gladstone Investment. The following annualized percentages were calculated based on actual
expenses incurred in the quarter ended March 31, 2015, and average net assets for the quarter ended March 31, 2015. The table and examples below include all fees and expenses of our consolidated subsidiaries.
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Stockholder Transaction Expenses: |
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Sales load (as a percentage of offering price)(1) |
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Offering expenses (as a percentage of offering price)(1) |
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% |
Dividend reinvestment plan expenses(2) |
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None |
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Total stockholder transaction expenses(1) |
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% |
Annual expenses (as a percentage of net assets attributable to common stock): |
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Base Management fee(3) |
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3.57 |
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Loan servicing fee(4) |
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2.25 |
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Incentive fees payable under investment advisory and management agreement (20% of realized capital gains and 20% of pre-incentive fee
net investment income)(5) |
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2.00 |
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Interest payments on borrowed funds(6) |
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2.08 |
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Dividend expense on mandatorily redeemable preferred stock (7) |
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2.52 |
% |
Other expenses(8) |
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1.30 |
% |
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Total annual expenses as a percentage of average net assets(8) |
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13.73 |
% |
(1) |
The amounts set forth in the table above do not reflect the impact of any sales load or other offering expenses borne by Gladstone Investment and its stockholders. The prospectus supplement relating to an offering of
securities pursuant to this prospectus will disclose the offering price and the estimated offering expenses and total stockholder transaction expenses borne by Gladstone Investment and its stockholders as a percentage of the offering price. In the
event that securities to which this prospectus relates are sold to or through underwriters, the prospectus supplement will also disclose the applicable sales load. |
(2) |
The expenses of the reinvestment plan are included in stock record expenses, a component of Other expenses. The participants in the dividend reinvestment plan will bear a pro rata share of brokerage
commissions incurred with respect to open market purchases, if any. See Dividend Reinvestment Plan for information on the dividend reinvestment plan. |
(3) |
Our annual base management fee is 2% (0.5% quarterly) of our average gross assets, which are defined as total assets of Gladstone Investment, including investments made with proceeds of borrowings, less any uninvested
cash or cash equivalents resulting from borrowings. In accordance with the requirements of the SEC, the table above shows the management fee as a percentage of average net assets attributable to common shareholders. For purposes of the table, the
management fee has been converted to 3.57% of the average net assets as of March 31, 2015 by dividing the total dollar amount of the management fee by the average net assets. Under the Advisory Agreement, our Adviser has provided and continues
to provide managerial assistance to our portfolio companies. It may also provide services other than managerial assistance to our portfolio companies and receive fees therefor. Such services may include, but are not limited to: (i) assistance
obtaining, sourcing or structuring credit facilities, long term loans or additional equity from unaffiliated third parties; (ii) negotiating important contractual financial relationships; (iii) consulting services regarding restructuring
of the portfolio company and financial modeling as it relates to raising additional debt and equity capital from unaffiliated third parties; and (iv) primary role in interviewing, vetting and negotiating employment contracts with candidates in
connection with adding and retaining key portfolio company management team members. At the end of each quarter, 100% of these fees are voluntarily and irrevocably credited against the base management fee that we would otherwise be required to pay to
our Adviser, with the exception of a small percentage of certain fees, primarily for the valuation of portfolio companies, which are retained by the Adviser, pursuant to the terms of the Advisory Agreement, in the form of reimbursement at cost for
tasks completed by personnel of the Adviser. For the quarter ended March 31, 2015, $1.0 million, or 1.59% of total annual expenses, of these fees were voluntarily and irrevocably credited against the base management fee. |
(4) |
In addition, our Adviser services, administers and collects on the loans held by Gladstone Business Investment, LLC, our wholly-owned subsidiary (Business Investment), in return for which our Adviser
receives a 2% annual loan servicing fee payable monthly by Business Investment based on the monthly aggregate balance of loans held by Business Investment in accordance with our fifth amended and restated credit agreement for our revolving line of
credit (the Credit Facility). The entire loan servicing fee paid to our Adviser by Business Investment is voluntarily and irrevocably credited against the base management fee otherwise payable to our Adviser. After all voluntary and
irrevocable credits described in this footnote and footnote 3 above are applied against the base management fee, the total annual expenses after fee credits as a percentage of net assets would be 9.89% for the quarter ended March 31, 2015. See
ManagementCertain TransactionsInvestment Advisory and Management Agreement and footnote 5 below. |
6
(5) |
The incentive fee consists of two parts: an income-based fee and a capital gains-based fee. The income-based fee is payable quarterly in arrears, and equals 20% of the excess, if any, of our pre-incentive fee net
investment income that exceeds a 1.75% quarterly (7% annualized) hurdle rate of our net assets, subject to a catch-up provision measured as of the end of each calendar quarter. The catch-up provision requires us to pay 100%
of our pre-incentive fee net investment income with respect to that portion of such income, if any, that exceeds the hurdle rate but is less than 125% of the quarterly hurdle rate (or 2.1875%) in any calendar quarter (8.75% annualized). The catch-up
provision is meant to provide our Adviser with 20% of our pre-incentive fee net investment income as if a hurdle rate did not apply when our pre-incentive fee net investment income exceeds 125% of the quarterly hurdle rate in any calendar quarter
(8.75% annualized). The income-based incentive fee is computed and paid on income that may include interest that is accrued but not yet received in cash. Our pre-incentive fee net investment income used to calculate this part of the income-based
incentive fee is also included in the amount of our gross assets used to calculate the 2% base management fee (see footnote 3 above). The capital gains-based incentive fee equals 20% of our net realized capital gains since our inception, if any,
computed as all realized capital gains net of all realized capital losses and unrealized capital depreciation since our inception, less any prior payments, and is payable at the end of each fiscal year. The incentive fee payable for the quarter
ended March 31, 2015 was $1.2 million. |
Examples of how the incentive fee would be calculated are as follows:
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Assuming pre-incentive fee net investment income of 0.55%, there would be no income-based incentive fee because such income would not exceed the hurdle rate of 1.75%. |
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Assuming pre-incentive fee net investment income of 2.00%, the income-based incentive fee would be as follows: |
= 100% × (2.00% 1.75%)
= 0.25%
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Assuming pre-incentive fee net investment income of 2.30%, the income-based incentive fee would be as follows: |
= (100% × (catch-up: 2.1875% 1.75%)) + (20%× (2.30% 2.1875%))
= (100% × 0.4375%) + (20% × 0.1125%)
= 0.4375% + 0.0225%
= 0.46%
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Assuming net realized capital gains of 6% and realized capital losses and unrealized capital depreciation of 1%, the capital gains-based incentive fee would be as follows: |
= 20% × (6% 1%)
= 20% × 5%
= 1%
For a more detailed discussion of the calculation of the two-part incentive fee, see ManagementCertain
TransactionsInvestment Advisory and Management Agreement.
(6) |
Includes deferred financing costs. As of March 31, 2015, we had $118.8 million in borrowings outstanding under our Credit Facility. |
(7) |
Includes dividends paid on our Series A and Series B Term Preferred Stock. Dividend expense assumes the Series A and Series B Term Preferred Stock was outstanding during the entire annualized period. Also included
in this line item is the amortization of the offering costs related to our Series A and Series B Term Preferred Stock. In May 2015, the Company issued $40.3 million of our Series C Term Preferred Stock. Assuming the Series C Term Preferred
Stock was outstanding during the quarter ended March 31, 2015, the total annual dividend expense on all Term Preferred Stock would have been 3.66%. See Description of Our SecuritiesTerm Preferred Stock for additional
information. |
(8) |
Includes our overhead expenses, including payments under the administration agreement based on our projected allocable portion of overhead and other expenses incurred by our Administrator in performing its obligations
under the administration agreement. See ManagementCertain TransactionsAdministration Agreement. |
Example
The following examples demonstrate the projected dollar amount of total cumulative expenses that would be incurred over various periods with
respect to a hypothetical investment in our common stock. In calculating the following expense amounts, we have assumed that our annual operating expenses would remain at the levels set forth in the table above. The amounts set forth below do not
reflect the impact of any sales load or offering expenses to be borne by Gladstone Investment and its stockholders. In the prospectus supplement relating to an offering of securities pursuant to this prospectus, the examples below will be restated
to reflect the impact of the estimated offering expenses borne by Gladstone Investment and its stockholders and, in the event that securities to which this prospectus relates are sold to or through underwriters, the impact of the applicable sales
load. The examples below and
7
the expenses in the table above should not be considered a representation of our future expenses, and actual expenses may be greater or less than those shown. While the example assumes, as
required by the SEC, a 5% annual return, our performance will vary and may result in a return greater or less than 5%.
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1 Year |
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3 Years |
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5 Years |
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10 Years |
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You would pay the following expenses on a $1,000 investment: |
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assuming a 5% annual return consisting entirely of ordinary income(1)(2) |
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$ |
123 |
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$ |
343 |
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$ |
532 |
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$ |
896 |
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assuming a 5% annual return consisting entirely of capital gains(2)(3) |
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$ |
132 |
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$ |
364 |
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$ |
560 |
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$ |
926 |
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(1) |
While the example assumes, as required by the SEC, a 5% annual return, our performance will vary and may result in a return greater or less than 5%. For purposes of this example, we have assumed that the entire amount
of such 5% annual return would constitute ordinary income as we have not realized positive capital gains (computed net of all realized capital losses) on our investments from inception through March 31, 2015. Because the assumed 5% annual return is
significantly below the hurdle rate of 7% (annualized) that we must achieve under the investment advisory and management agreement to trigger the payment of an income-based incentive fee, we have assumed, for purposes of this example, that no
income-based incentive fee would be payable if we realized a 5% annual return on our investments. |
(2) |
While the example assumes reinvestment of all dividends and distributions at NAV, participants in our dividend reinvestment plan will receive a number of shares of our common stock, determined by dividing the total
dollar amount of the dividend payable to a participant by the market price per share of our common stock at the close of trading on the valuation date for the dividend, and this price per share may differ from NAV. See Dividend Reinvestment
Plan for additional information regarding our dividend reinvestment plan. |
(3) |
For purposes of this example, we have assumed that the entire amount of such 5% annual return would constitute capital gains and that no accumulated capital losses or unrealized depreciation exist that would have to be
overcome first before a capital gains based incentive fee is payable. |
ADDITIONAL INFORMATION
We have filed with the SEC a registration statement on Form N-2 under the Securities Act of 1933, as amended, which we refer to
as the Securities Act, with respect to the Securities offered by this prospectus. This prospectus, which is a part of the registration statement, does not contain all of the information set forth in the registration statement or exhibits and
schedules thereto. For further information with respect to our business and our Securities, reference is made to the registration statement, including the amendments, exhibits and schedules thereto.
We also file reports, proxy statements and other information with the SEC under the Securities Exchange Act of 1934, as amended, which we
refer to as the Exchange Act. Such reports, proxy statements and other information, as well as the registration statement and the amendments, exhibits and schedules thereto, can be inspected at the public reference facilities maintained by the SEC
at 100 F Street, N.E., Washington, D.C. 20549. Information about the operation of the public reference facilities may be obtained by calling the SEC at 1-800-SEC-0330. The SEC maintains a website that contains reports, proxy
statements and other information regarding registrants, including us, that file such information electronically with the SEC. The address of the SECs web site is http://www.sec.gov. Copies of such material may also be obtained from the
Public Reference Section of the SEC at 100 F Street, N.E., Washington, D.C. 20549, at prescribed rates. Our common stock is listed on NASDAQ and our corporate website is located at http://www.gladstoneinvestment.com. The
information contained on, or accessible through, our website is not a part of this prospectus.
We make available free of charge on our
website our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports as soon as reasonably practicable after such material is electronically filed with or furnished
to the SEC.
We also furnish to our stockholders annual reports, which include annual financial information that has been examined and
reported on, with an opinion expressed, by our independent registered public accounting firm. See Experts.
8
RISK FACTORS
You should carefully consider the risks described below and all other information provided in this prospectus (or any prospectus
supplement) before making a decision to purchase our Securities. The risks and uncertainties described below are not the only ones facing us. Additional risks and uncertainties not presently known to us, or not presently deemed material by us, may
also impair our operations and performance.
If any of the following risks actually occur, our business, financial condition or
results of operations could be materially adversely affected. If that happens, the trading price of our Securities could decline, and you may lose all or part of your investment.
Risks Related to Our Investments
We operate in
a highly competitive market for investment opportunities.
There has been increased competitive pressure in the BDC and investment company marketplace
for senior and senior subordinated secured debt, resulting in lower yields for increasingly riskier investments. A large number of entities compete with us and make the types of investments that we seek to make in small and medium-sized companies.
We compete with public and private buyout funds, commercial and investment banks, commercial financing companies, and, to the extent that they provide an alternative form of financing, hedge funds. Many of our competitors are substantially larger
and have considerably greater financial, technical and marketing resources than we do. For example, some competitors may have a lower cost of funds and access to funding sources that are not available to us. In addition, some of our competitors may
have higher risk tolerances or different risk assessments, which would allow them to consider a wider variety of investments and establish more relationships than us. Furthermore, many of our competitors are not subject to the regulatory
restrictions that the 1940 Act imposes on us as a BDC. The competitive pressures we face could have a material adverse effect on our business, financial condition and results of operations. Also, as a result of this competition, we may not be able
to take advantage of attractive investment opportunities from time to time and we can offer no assurance that we will be able to identify and make investments that are consistent with our investment objective. We do not seek to compete based on the
interest rates we offer, and we believe that some of our competitors may make loans with interest rates that will be comparable to or lower than the rates we offer. We may lose investment opportunities if we do not match our competitors
pricing, terms, and structure. However, if we match our competitors pricing, terms, and structure, we may experience decreased net interest income and increased risk of credit loss.
Our investments in small and medium-sized portfolio companies are extremely risky and could cause you to lose all or a part of your investment.
Investments in small and medium-sized portfolio companies are subject to a number of significant risks including the following:
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Small and medium-sized businesses are likely to have greater exposure to economic downturns than larger businesses. Our portfolio companies may have fewer resources than larger businesses, and any economic
downturns or recessions, are more likely to have a material adverse effect on them. If one of our portfolio companies is adversely impacted by a recession, its ability to repay our loan or engage in a liquidity event, such as a sale,
recapitalization or initial public offering would be diminished. |
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Small and medium-sized businesses may have limited financial resources and may not be able to repay the loans we make to them. Our strategy includes providing financing to portfolio companies that typically
do not have readily available access to financing. While we believe that this provides an attractive opportunity for us to generate profits, this may make it difficult for the portfolio companies to repay their loans to us upon maturity. A
borrowers ability to repay its loan may be adversely affected by numerous factors, including the failure to meet its business plan, a downturn in its industry or negative economic conditions. Deterioration in a borrowers financial
condition and prospects usually will be accompanied by deterioration in the value of any collateral and a reduction in the likelihood of realizing on any guaranties we may have obtained from the borrowers management. As of March 31, 2015,
one portfolio company was on non-accrual status with an aggregate debt cost basis of approximately $11.7 million, or 3.1% of the cost basis of all debt investments in our portfolio. While we are working with the portfolio company to improve its
profitability and cash flows, there can be no assurance that our efforts will prove successful. Although we will generally seek to be the senior secured lender to a borrower, in some of our loans we expect to be subordinated to a senior lender, and
our interest in any collateral would, accordingly, likely be subordinate to another lenders security interest. |
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Small and medium-sized businesses typically have narrower product lines and smaller market shares than large businesses. Because our
target portfolio companies are smaller businesses, they will tend to be more vulnerable to competitors actions and market conditions, as well as general economic downturns. In addition, our portfolio companies
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may face intense competition, including competition from companies with greater financial resources, more extensive development, manufacturing, marketing and other capabilities and a larger
number of qualified managerial and technical personnel. |
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There is generally little or no publicly available information about these businesses. Because we seek to invest in privately owned businesses, there is generally little or no publicly available operating
and financial information about our potential portfolio companies. As a result, we rely on our officers, the Adviser and its employees, Gladstone Securities and consultants to perform due diligence investigations of these portfolio companies, their
operations, and their prospects. We may not learn all of the material information we need to know regarding these businesses through our investigations. |
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Small and medium-sized businesses generally have less predictable operating results. We expect that our portfolio companies may have significant variations in their operating results, may from time to time
be exposed to litigation, may be engaged in rapidly changing businesses with products subject to a substantial risk of obsolescence, may require substantial additional capital to support their operations, to finance expansion or to maintain their
competitive position, may otherwise have a weak financial position or may be adversely affected by changes in the business cycle. Our portfolio companies may not meet net income, cash flow and other coverage tests typically imposed by their senior
lenders. A borrowers failure to satisfy financial or operating covenants imposed by senior lenders could lead to defaults and, potentially, foreclosure on its senior credit facility, which could additionally trigger cross-defaults in other
agreements. If this were to occur, it is possible that the borrowers ability to repay our loan would be jeopardized. |
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Small and medium-sized businesses are more likely to be dependent on one or two persons. Typically, the success of a small or medium-sized business also depends on the management talents and efforts of one
or two persons or a small group of persons. The death, disability or resignation of one or more of these persons could have a material adverse impact on our borrower and, in turn, on us. |
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Small and medium-sized businesses may have limited operating histories. While we intend to target stable companies with proven track records, we may make loans to new companies that meet our other investment
criteria. Portfolio companies with limited operating histories will be exposed to all of the operating risks that new businesses face and may be particularly susceptible to, among other risks, market downturns, competitive pressures and the
departure of key executive officers. |
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Debt securities of small and medium-sized private companies typically are not rated by a credit rating agency. Typically a small or medium-sized private business cannot or will not expend the resources to have
their debt securities rated by a credit rating agency. We expect that most, if not all, of the debt securities we acquire will be unrated. Investors should assume that these loans would be at rates below what is today considered investment
grade quality. Investments rated below investment grade are often referred to as high yield securities or junk bonds and may be considered high risk as compared to investment-grade debt instruments. |
Because the loans we make and equity securities we receive when we make loans are not publicly traded, there is uncertainty regarding the value of our
privately held securities that could adversely affect our determination of our net asset value (NAV).
Our portfolio investments are, and
we expect will continue to be, in the form of securities that are not publicly traded. The fair value of securities and other investments that are not publicly traded may not be readily determinable. Our Board of Directors has ultimate
responsibility for reviewing and approving, in good faith, the fair value of our investments, based on our existing investment valuation policy, which has previously been approved by our Board of Directors (the Policy). Our Board of
Directors reviews valuation recommendations that are provided by the employees of the Adviser and Administrator, under the oversight of our chief valuation officer (the Valuation Team). In valuing our investment portfolio, several
techniques are used, including, a total enterprise value approach, a yield analysis, market quotes, and independent third party assessments. Currently, Standard & Poors Securities Evaluation, Inc. provides estimates of fair value on
generally all of our debt investments and we use another independent valuation firm to provide valuation inputs for our significant equity investments, including earnings multiple ranges, as well as other information. In addition to these
techniques, inputs and information, other factors are considered when determining fair value of our investments, including but limited to: the nature and realizable value of the collateral, including external parties guaranties; any relevant
offers or letters of intent to acquire the portfolio company; and the markets in which the portfolio company operates. All new and follow-on debt and equity investments made during the current three month reporting period ended March 31, 2015
were valued at original cost basis. For additional information on our valuation policies, procedures and processes, see Managements Discussion and Analysis of Financial Condition and Results of Operations Critical
Accounting Policy Investment Valuation.
Fair value measurements of our investments may involve subjective judgments and
estimates and due to the inherent uncertainty of determining these fair values, the fair value of our investments may fluctuate from period to period. Additionally, changes in the market environment and other events that may occur over the life of
the investment may cause the gains or losses ultimately realized
10
on these investments to be different than the valuations currently assigned. Further, such investments are generally subject to legal and other restrictions on resale or otherwise are less liquid
than publicly traded securities. If we were required to liquidate a portfolio investment in a forced or liquidation sale, we could realize significantly less than the value at which it is recorded.
Our NAV would be adversely affected if the fair value of our investments that are approved by our Board of Directors are higher than the values that we
ultimately realize upon the disposal of such securities.
The lack of liquidity of our privately held investments may adversely affect our business.
We will generally make investments in private companies whose securities are not traded in any public market. Substantially all of the investments we
presently hold and the investments we expect to acquire in the future are, and will be, subject to legal and other restrictions on resale and will otherwise be less liquid than publicly-traded securities. The illiquidity of our investments may make
it difficult for us to quickly obtain cash equal to the value at which we record our investments if the need arises. This could cause us to miss important investment opportunities. In addition, if we are required to liquidate all or a portion of our
portfolio quickly, we may record substantial realized losses upon liquidation. We may also face other restrictions on our ability to liquidate an investment in a portfolio company to the extent that we, the Adviser, or our respective officers,
employees or affiliates have material non-public information regarding such portfolio company.
Due to the uncertainty inherent in valuing these
securities, the Advisers determinations of fair value may differ materially from the values that could be obtained if a ready market for these securities existed. Our NAV could be materially affected if the Advisers determinations
regarding the fair value of our investments are materially different from the values that we ultimately realize upon our disposal of such securities.
Our financial results could be negatively affected if a significant portfolio investment fails to perform as expected.
Our total investment in companies may be significant individually or in the aggregate. As a result, if a significant investment in one or more companies fails
to perform as expected, our financial results could be more negatively affected and the magnitude of the loss could be more significant than if we had made smaller investments in more companies. Our five largest investments represented 28.8% of the
fair value of our total portfolio as of March 31, 2015, compared to 32.8% as of March 31, 2014. Any disposition of a significant investment in one or more companies may negatively impact our net investment income and limit our ability to
pay distributions.
We generally will not control our portfolio companies.
We do not, and do not expect to, control most of our portfolio companies, even though we may have board representation or board observation rights, and our
debt agreements may contain certain restrictive covenants. As a result, we are subject to the risk that a portfolio company in which we invest may make business decisions with which we disagree and the management of such company, as representatives
of the holders of their common stock, may take risks or otherwise act in ways that do not serve our interests as debt investors. Due to the lack of liquidity for our investments in non-traded companies, we may not be able to dispose of our interests
in our portfolio companies as readily as we would like or at an appropriate valuation. As a result, a portfolio company may make decisions that could decrease the value of our portfolio holdings.
We typically invest in transactions involving acquisitions, buyouts and recapitalizations of companies, which will subject us to the risks associated with
change in control transactions.
Our strategy, in part, includes making debt and equity investments in companies in connection with acquisitions,
buyouts and recapitalizations, which subjects us to the risks associated with change in control transactions. Change in control transactions often present a number of uncertainties. Companies undergoing change in control transactions often face
challenges retaining key employees and maintaining relationships with customers and suppliers. While we hope to avoid many of these difficulties by participating in transactions where the management team is retained and by conducting thorough due
diligence in advance of our decision to invest, if our portfolio companies experience one or more of these problems, we may not realize the value that we expect in connection with our investments, which would likely harm our operating results and
financial condition.
Our portfolio companies may incur debt that ranks equally with, or senior to, our investments in such companies.
We primarily invest in secured first and second lien debt securities issued by our portfolio companies. In some cases portfolio companies will be permitted to
have other debt that ranks equally with, or senior to, the debt securities in which we invest. By their terms, such debt securities may provide that the holders thereof are entitled to receive payment of interest and principal on or before the dates
on which we are entitled to receive payments in respect of the debt securities in which we invest. Also, in the event of
11
insolvency, liquidation, dissolution, reorganization, or bankruptcy of a portfolio company, holders of debt instruments ranking senior to our investment in that portfolio company would typically
be entitled to receive payment in full before we receive any distribution in respect of our investment. After repaying such senior creditors, such portfolio company may not have any remaining assets to use for repaying its obligation to us. In the
case of debt ranking equally with debt securities in which we invest, we would have to share on an equal basis any distributions with other creditors holding such debt in the event of an insolvency, liquidation, dissolution, reorganization, or
bankruptcy of a portfolio company.
Prepayments of our investments by our portfolio companies could adversely impact our results of operations and
reduce our return on equity.
In addition to risks associated with delays in investing our capital, we are also subject to the risk that investments
we make in our portfolio companies may be repaid prior to maturity. During the fiscal year 2015, we experienced prepayments of debt investments from Cambridge Sound Management, Inc. (Cambridge), Frontier Packaging, Inc.
(Frontier), Funko, LLC (Funko), Old World Christmas, Inc. (Old World), and Star Seed, Inc. (Star Seed). We will first use any proceeds from prepayments to repay any borrowings outstanding on our credit
facility. In the event that funds remain after repayment of our outstanding borrowings, then we will generally reinvest these proceeds in government securities, pending their future investment in new debt and/or equity securities. These government
securities will typically have substantially lower yields than the debt securities being prepaid and we could experience significant delays in reinvesting these amounts. As a result, our results of operations could be materially adversely affected
if one or more of our portfolio companies elect to prepay amounts owed to us. Additionally, prepayments could negatively impact our return on equity, which could result in a decline in the market price of our common stock.
Higher taxation of our portfolio companies may impact our quarterly and annual operating results.
The recessions adverse effect on federal, state and municipality revenues may induce these government entities to raise various taxes to make up for
lost revenues. Additional taxation may have an adverse effect on our portfolio companies earnings and reduce their ability to repay our loans to them, thus affecting our quarterly and annual operating results.
Our portfolio is concentrated in a limited number of companies and industries, which subjects us to an increased risk of significant loss if any one of
these companies does not repay us or if the industries experience downturns.
As of March 31, 2015, we had investments in 34 portfolio companies,
of which there were five investments, Counsel Press, Inc. (Counsel Press), Specialty Knives & Tools, LLC (SOG), Funko, Acme Cryogenics, Inc. (Acme), and Old World that comprised $134.3 million, or 28.8%,
of our total investment portfolio, at fair value. A consequence of a limited number of investments is that the aggregate returns we realize may be substantially adversely affected by the unfavorable performance of a small number of such loans or a
substantial write-down of any one investment. Beyond our regulatory and income tax diversification requirements, as well as our credit facility requirements, we do not have fixed guidelines for industry concentration and our investments could
potentially be concentrated in relatively few industries. In addition, while we do not intend to invest 25% or more of our total assets in a particular industry or group of industries at the time of investment, it is possible that as the values of
our portfolio companies change, one industry or a group of industries may comprise in excess of 25% of the value of our total assets. A downturn in a particular industry in which we have invested a significant portion of our total assets could have
a materially adverse effect on us. As of March 31, 2015, our largest industry concentration was in Home and Office Furnishings, Housewares, and Durable Consumer Products, representing 15.1% of our total investments, at fair value.
Our investments are typically long term and will require several years to realize liquidation events.
Since we generally make five to seven year term loans and hold our loans and related warrants or other equity positions until the loans mature, you should not
expect realization events, if any, to occur over the near term. In addition, we expect that any warrants or other equity positions that we receive when we make loans may require several years to appreciate in value and we cannot give any assurance
that such appreciation will occur.
The disposition of our investments may result in contingent liabilities.
Currently, all of our investments involve private securities. In connection with the disposition of an investment in private securities, we may be required to
make representations about the business and financial affairs of the underlying portfolio company typical of those made in connection with the sale of a business. We may also be required to indemnify the purchasers of such investment to the extent
that any such representations turn out to be inaccurate or with respect to certain potential liabilities. These arrangements may result in contingent liabilities that ultimately yield funding obligations that must be satisfied through our return of
certain distributions previously made to us.
12
There may be circumstances where our debt investments could be subordinated to claims of other creditors or we
could be subject to lender liability claims.
Even though we have structured most of our investments as secured first and second lien loans, if one of
our portfolio companies were to go bankrupt, depending on the facts and circumstances, including the extent to which we actually provided managerial assistance to that portfolio company, a bankruptcy court might re-characterize our debt investments
and subordinate all, or a portion, of our claims to that of other creditors. Holders of debt instruments ranking senior to our investments typically would be entitled to receive payment in full before we receive any distributions. After repaying
such senior creditors, such portfolio company may not have any remaining assets to use to repay its obligation to us. We may also be subject to lender liability claims for actions taken by us with respect to a borrowers business or in
instances in which we exercised control over the borrower. It is possible that we could become subject to a lenders liability claim, including as a result of actions taken in rendering significant managerial assistance.
Portfolio company-related litigation could result in costs, including defense costs or damages, and the diversion of management time and resources.
In the course of investing in and often providing significant managerial assistance to certain of our portfolio companies, certain persons employed
by the Adviser sometimes serve as directors on the boards of such companies. To the extent that litigation arises out of our investments in these companies, even if meritless, we or such employees may be named as defendants in such litigation, which
could result in additional costs, including defense costs, and the diversion of management time and resources. We may be unable to accurately estimate our exposure to litigation risk if we record balance sheet reserves for probable loss
contingencies. As a result, any reserves we establish to cover any settlements or judgments may not be sufficient to cover our actual financial exposure, which may have a material impact on our results of operations, financial condition, or cash
flows.
In view of the inherent difficulty of predicting the outcome of legal actions and regulatory matters, we cannot provide assurance as to the
outcome of any threatened or pending matter or, if resolved adversely, the costs associated with any such matter, particularly where the claimant seeks very large or indeterminate damages or where the matter presents novel legal theories, involves a
large number of parties or is at a preliminary stage. The resolution of any such matters may be time consuming, expensive, and may distract management from the conduct of our business. The resolution of certain threatened or pending legal actions or
regulatory matters, if unfavorable, whether in settlement or a judgment, could have a material adverse effect on our financial condition, results of operations, or cash flows for the quarter in which such actions or matters are resolved or a reserve
is established.
For example, a former portfolio company, Noble Logistics, Inc. (Noble) is a defendant in employment law wage and hour and
independent contractor misclassification claims in a purported class action seeking monetary damages, Maximo v. Aspen Contracting California LLC d/b/a/ Noble Logistics, et al., or Maximo. Noble is a debtor in a bankruptcy case under Chapter 11 of
the federal bankruptcy code, pending in federal bankruptcy court in Delaware. The claims against Noble asserted in the Maximo case have been stayed by the filing of Nobles bankruptcy case. A lawsuit brought by plaintiffs Clarence and Sheila
Walder against a customer of Noble is also pending in California based on similar facts relating to Noble and claims under California law. The Maximo and Walder plaintiffs have attempted to bring claims against the Company and other former investors
in Noble based primarily on allegations that the Company and other investors controlled Noble and were responsible for the misclassification of Nobles workforce. To date, claims against the Company have been struck by a court or voluntarily
dismissed by the plaintiffs in connection with the automatic stay arising in connection with the Noble bankruptcy. While neither the Company nor any of its portfolio companies (other than Noble) are currently defendants in these cases, they may in
the future be subject to claims by these plaintiffs or other persons alleging similar claims, or may expend funds on behalf of Noble to defend claims.
While the Company believes it would have valid defenses to potential claims, based on the current claims and facts alleged, and intends to defend any claims
vigorously, it may nevertheless expend significant amounts of money in defense costs and expenses. Further, if the Company enters into settlements or suffers an adverse outcome in any litigation, the Company could be required to pay significant
amounts. In addition, if any of the Companys portfolio companies become subject to direct or indirect claims or other obligations, such as defense costs or damages in litigation or settlement, the Companys investment in such companies
could diminish in value and the Company could suffer indirect losses. Further, these matters could cause the Company to expend significant management time and effort in connection with assessment and defense of any claims. No range of potential
expenses, costs or damages in connection with these matters can be estimated at this time.
We may not realize gains from our equity investments and
other yield enhancements.
When we make a loan, we may receive warrants to purchase stock issued by the borrower or other yield enhancements, such as
success fees. Our goal is to ultimately dispose of these equity interests and realize gains upon our disposition of such interests. We expect that, over time, the gains we realize on these warrants and other yield enhancements will offset any losses
we may experience
13
on loan defaults. However, any warrants we receive may not appreciate in value and, in fact, may decline in value and any other yield enhancements, such as success fees, may not be realized.
Accordingly, we may not be able to realize gains from our equity interests or other yield enhancements and any gains we do recognize may not be sufficient to offset losses we experience on our loan portfolio.
During the fiscal year ended March 31, 2015, we recorded a net realized loss of $0.1 million related to reversal of escrows from previous investment
exits. During the fiscal year ended March 31, 2014, we recorded a net realized gain of $8.2 million primarily consisting of a $24.8 million gain on the sale of Venyu Solutions, Inc. (Venyu), partially offset by realized losses of
$11.4 million and $1.8 million related to the equity sales of Auto Safety House, LLC (ASH) and Packerland Whey Products, Inc. (Packerland), respectively, and a realized loss of $3.4 million related to the restructuring
of Noble. During the fiscal year ended March 31, 2013, we recorded a realized gain of $0.8 million relating to post-closing adjustments on our previous investment exit of A. Stucki Holding Corp. (A. Stucki). There can be no
guarantees that such realized gains can be achieved in future periods and the impact of such sales on our results of operations in prior periods should not be relied upon as being indicative of performance in future periods. For the years ended
March 31, 2015, 2014 and 2013, success fees totaled $1.4 million, $4.2 million and $0.8 million, respectively.
Any cumulative unrealized
depreciation we experience on our investment portfolio may be an indication of future realized losses, which could reduce our income available for distribution.
As a BDC we are required to carry our investments at market value or, if no market value is ascertainable, at fair value as determined in good faith by or
under the direction of our Board of Directors. We will record decreases in the market values or fair values of our investments as unrealized depreciation. Since our inception, we have, at times, incurred a cumulative net unrealized depreciation of
our portfolio. Any unrealized depreciation in our investment portfolio could result in realized losses in the future and ultimately in reductions of our income available for distribution to stockholders in future periods.
The recent volatility of oil and natural gas prices could impair certain of our portfolio companies operations and ability to satisfy obligations to
their respective lenders and investors, including us, which could negatively impact our financial condition.
Many of our portfolio companies
businesses are heavily dependent upon the prices of, and demand for, oil and natural gas, which have recently declined significantly and such volatility could continue or increase in the future. A substantial or extended decline in oil and natural
gas demand or prices may adversely affect the business, financial condition, cash flow, liquidity or results of operations of these portfolio companies and might impair their ability to meet capital expenditure obligations and financial commitments.
A prolonged or continued decline in oil prices could therefore have a material adverse effect on our business, financial condition and results of operations.
Risks Related to Our External Financing
In
addition to regulatory limitations on our ability to raise capital, our revolving line of credit contains various covenants which, if not complied with, could accelerate our repayment obligations under the facility, thereby materially and adversely
affecting our liquidity, financial condition, results of operations and ability to pay distributions.
We will have a continuing need for capital to
finance our investments. As of March 31, 2015, we had $118.8 million in borrowings outstanding under our fifth amended and restated credit agreement, which provides for maximum borrowings of $185.0 million (our Credit
Facility), with a revolving period end date of June 26, 2017 (the Revolving Period End Date). Our Credit Facility permits us to fund additional loans and investments as long as we are within the conditions and covenants set
forth in the credit agreement. Our Credit Facility contains covenants that require our wholly-owned subsidiary, Business Investment, to maintain its status as a separate legal entity, prohibit certain significant corporate transactions (such as
mergers, consolidations, liquidations or dissolutions) and restrict material changes to our credit and collection policies without lenders consent. Our Credit Facility also generally seeks to restrict distributions on our common stock to the
sum of certain amounts, including, but not limited to, our net investment income, plus net capital gains, plus amounts elected by the Company to be considered as having been paid during the prior fiscal year in accordance with Section 855(a) of
the Code. We are also subject to certain limitations on the type of loan investments we can make, including restrictions on geographic concentrations, sector concentrations, loan size, payment frequency and status, average life and lien property.
Our Credit Facility also requires us to comply with other financial and operational covenants, which obligate us to, among other things, maintain certain financial ratios, including asset and interest coverage and a minimum number of obligors
required in the borrowing base of the credit agreement. Additionally, we are subject to a performance guaranty that requires us to maintain (i) a minimum net worth of $170 million plus 50% of all equity and subordinated debt raised minus any
equity or subordinated debt redeemed or retired after June 26, 2014, which equates to $202.9 million as of March 31, 2015, (ii) asset coverage with respect to senior securities representing indebtedness of at
least 200%, in accordance with Section 18, as modified by Section 61, of the 1940 Act and (iii) our status as a BDC under the 1940 Act and as a RIC under the Code. As of March 31, 2015 and as of the date of this filing, we were
in compliance with the covenants under our Credit Facility; however, our continued compliance depends on many factors, some of which are beyond our control.
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Given the continued uncertainty in the capital markets, the cumulative net unrealized depreciation in our
portfolio may increase in future periods and threaten our ability to comply with the minimum net worth covenant and other covenants under our Credit Facility. Our failure to satisfy these covenants could result in foreclosure by our lenders, which
would accelerate our repayment obligations under the facility and thereby have a material adverse effect on our business, liquidity, financial condition, results of operations and ability to pay distributions to our stockholders.
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.
If our Credit Facility is not renewed or extended by the Revolving Period End Date,
all principal and interest will be due and payable on or before June 26, 2017. Subject to certain terms and conditions, our Credit Facility may be expanded to a total of $250 million through the addition of other lenders to the facility.
However, if additional lenders are unwilling to join the facility on its terms, we will be unable to expand the facility and thus will continue to have limited availability to finance new investments under our Credit Facility. There can be no
guarantee that we will be able to renew, extend or replace our Credit Facility upon its Revolving Period End Date on terms that are favorable to us, if at all. Our ability to expand our Credit Facility, and to obtain replacement financing at or
before the time of its Revolving Period End Date, will be constrained by then-current economic conditions affecting the credit markets. In the event that we are not able to expand our Credit Facility, or to renew, extend or refinance our Credit
Facility by the Revolving Period End Date, this could have a material adverse effect on our liquidity and ability to fund new investments, our ability to make distributions to our stockholders and our ability to qualify as a RIC under the Code.
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. Such circumstances would also
increase the likelihood that we would be required to redeem some or all of our outstanding Term Preferred Stock, which could potentially require us to sell more assets. In addition to selling assets, or as an alternative, we may issue common equity
in order to repay amounts outstanding under our Credit Facility. Based on the recent trading prices of our common stock, such an equity offering may have a substantial dilutive impact on our existing stockholders interest in our earnings,
assets and voting interest in us. If we are able to renew, extend or refinance our Credit Facility prior to maturity, renewal, extension or refinancing, it could potentially result in significantly higher interest rates and related charges and may
impose significant restrictions on the use of borrowed funds to fund investments or maintain distributions to common and preferred stockholders.
Because we expect to distribute substantially all of our net investment income, at least 90%, on an annual basis, our business plan is dependent upon
external financing, which is constrained by the limitations of the 1940 Act.
We completed recent equity offerings of our Series C and Series B Term
Preferred Stock in May 2015 and November 2014, respectively; our Series A Term Preferred Stock in March 2012; and our common offerings in March 2015 and in October 2012, and there can be no assurance that we will be able to raise capital through
issuing equity in the near future. Our business requires a substantial amount of cash to operate and grow. We may acquire such additional capital from the following sources:
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Senior Securities. We may issue senior securities representing indebtedness (including borrowings under our Credit Facility) and senior securities that are stock, such as our Series A, B, and C Term Preferred
Stock, up to the maximum amount permitted by the 1940 Act. The 1940 Act currently permits us, as a BDC, to issue senior securities representing indebtedness and senior securities which are stock (such as our Term Preferred Stock) (collectively, our
Senior Securities), in amounts such that our asset coverage, as defined in Section 18(h) of the 1940 Act, is at least 200% immediately after each issuance of such Senior Security. As a result of incurring indebtedness (in whatever
form), we will be exposed to the risks associated with leverage. Although borrowing money for investments increases the potential for gain, it also increases the risk of a loss. A decrease in the value of our investments will have a greater impact
on the value of our common stock to the extent that we have borrowed money to make investments. There is a possibility that the costs of borrowing could exceed the income we receive on the investments we make with such borrowed funds. In addition,
our ability to pay distributions, issue Senior Securities or repurchase shares of our common stock would be restricted if the asset coverage on each of our Senior Securities is not at least 200%. If the aggregate value of our assets declines, we
might be unable to satisfy that 200% requirement. To satisfy the 200% asset coverage requirement in the event that we are seeking to pay a distribution, we might either have to (i) liquidate a portion of our loan portfolio to repay a portion of
our indebtedness or (ii) issue common stock. This may occur at a time when a sale of a portfolio asset may be disadvantageous, or when we have limited access to capital markets on agreeable terms. In addition, any amounts that we use to service
our indebtedness or for offering expenses will not be available for distributions to stockholders. Furthermore, if we have to issue common stock below NAV per common share, any non-participating stockholders will be subject to dilution, as described
below. Pursuant to Section 61(a)(2) of the 1940 Act, we are permitted, under specified conditions, to issue multiple classes of senior securities representing indebtedness. However, pursuant to Section 18(c) of the 1940 Act, we are
permitted to issue only one class of Senior Securities that is stock. |
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Common and Convertible Preferred Stock. Because we are constrained in our ability to issue debt or Senior Securities for the reasons given above, we are dependent on the issuance of equity as a financing source.
If we raise additional funds by issuing more common stock, the percentage ownership of our common stockholders at the time of the issuance would decrease and our existing common stockholder may experience dilution. In addition, under the 1940 Act,
we will generally not be able to issue additional shares of our common stock at a price below NAV per common share to purchasers, other than to our existing common stockholders through a rights offering, without first obtaining the approval of our
stockholders and our independent directors. If we were to sell shares of our common stock below our then current NAV per common share, as we did in March 2015 and October 2012, such sales would result in an immediate dilution to the NAV per common
share. This dilution would occur as a result of the sale of common shares at a price below the then current NAV per share of our common stock and a proportionately greater decrease in a common stockholders interest in our earnings and assets
and voting percentage than the increase in our assets resulting from such issuance. For example, if we issue and sell an additional 10% of our common stock at a 5% discount from NAV, a common stockholder who does not participate in that offering for
its proportionate interest will suffer NAV dilution of up to 0.5% or $5 per $1,000 of NAV. This imposes constraints on our ability to raise capital when our common stock is trading below NAV per common share, as it generally has for the last several
years. As noted above, the 1940 Act prohibits the issuance of multiple classes of senior securities that are stock. As a result, we would be prohibited from issuing convertible preferred stock to the extent that such a security was deemed to be a
separate class of stock from our outstanding Term Preferred Stock. |
We financed certain of our investments with borrowed money and
capital from the issuance of Senior Securities, which will magnify the potential for gain or loss on amounts invested and may increase the risk of investing in us.
The following table illustrates the effect of leverage on returns from an investment in our common stock assuming various annual returns on our portfolio, net
of expenses. The calculations in the table below are hypothetical, and actual returns may be higher or lower than those appearing in the table below.
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Assumed Return on Our Portfolio (Net of Expenses) |
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(10)% |
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(5)% |
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0% |
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5% |
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10% |
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Corresponding return to common stockholder(1) |
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(21.6 |
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(12.8 |
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(3.9 |
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4.9 |
% |
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13.8 |
% |
(1) |
The hypothetical return to common stockholders is calculated by multiplying our total assets as of March 31, 2015, by the assumed rates of return and subtracting all interest on our debt and dividends on our Term
Preferred Stock expected to be paid or declared during the twelve months following March 31, 2015; and then dividing the resulting difference by our total net assets attributable to Common Stock as of March 31, 2015. Based on $483.5
million in total assets, $118.8 million in debt outstanding at cost, $5.1 million in a secured borrowing, $40.0 million in aggregate liquidation preference of Series A Term Preferred Stock, $41.4 million in aggregate liquidation preference of
Series B Term Preferred Stock and $273.4 million in net assets as of March 31, 2015. |
Based on an aggregate outstanding indebtedness of
$123.9 million at cost as of March 31, 2015, the effective annual interest rate of 4.0% as of that date, and aggregate liquidation preference of our Term Preferred Stock of $81.4 million, our investment portfolio at fair value would have had to
produce an annual return of at least 2.3% to cover annual interest payments on the outstanding debt and dividends on our Term Preferred Stock.
A
change in interest rates may adversely affect our profitability and our hedging strategy may expose us to additional risks.
We anticipate using a
combination of equity and long-term and short-term borrowings to finance our investment activities. As a result, a portion of our income will depend upon the spread between the rate at which we borrow funds and the rate at which we loan these funds.
An increase or decrease in interest rates could reduce the spread between the rate at which we invest and the rate at which we borrow, and thus, adversely affect our profitability, if we have not appropriately hedged against such event.
Alternatively, our interest rate hedging activities may limit our ability to participate in the benefits of lower interest rates with respect to the hedged portfolio.
Ultimately, we expect approximately 90.0% of the loans in our portfolio to be at variable rates determined on the basis of the LIBOR and approximately 10.0%
to be at fixed rates. As of March 31, 2015, based on the total principal balance of debt investments outstanding, our portfolio consisted of 79.9% of loans at variable rates with floors and 20.1% at fixed rates.
We currently hold one interest rate cap agreement for a notional amount of $45.0 million. While hedging activities may insulate us against adverse
fluctuations in interest rates, they may also limit our ability to participate in the benefits of lower interest rates with
16
respect to the hedged portfolio. Adverse developments resulting from changes in interest rates or any future hedging transactions could have a material adverse effect on our business, financial
condition and results of operations. Our ability to receive payments pursuant to an interest rate cap agreement is linked to the ability of the counter-party to that agreement to make the required payments. To the extent that the counter-party to
the agreement is unable to pay pursuant to the terms of the agreement, we may lose the hedging protection of the interest rate cap agreement.
Also, the
fair value of certain of our debt investments is based in part on the current market yields or interest rates of similar securities. A change in interest rates could have a significant impact on our determination of the fair value of these debt
investments. In addition, a change in interest rates could also have an impact on the fair value of our interest rate cap agreements that could result in the recording of unrealized appreciation or depreciation in future periods. Therefore, adverse
developments resulting from changes in interest rates could have a material adverse effect on our business, financial condition and results of operations. For additional information on interest rate fluctuations, see Managements Discussion
and Analysis of Financial Condition and Results of OperationsQuantitative and Qualitative Disclosures About Market Risk and Financial Statements and Supplementary Data for additional information on interest rate cap
agreements.
Risks Related to Our Regulation and Structure
We will be subject to corporate-level tax if we are unable to satisfy Code requirements for RIC qualification.
To maintain our qualification as a RIC, we must meet income source, annual distribution and asset diversification requirements. The annual distribution
requirement is satisfied if we distribute at least 90% of our investment company taxable income to our stockholders on an annual basis. Because we use leverage, we are subject to certain asset coverage ratio requirements under the 1940 Act and
could, under certain circumstances, be restricted from making distributions necessary to qualify as a RIC. Warrants we receive with respect to debt investments will create original issue discount (OID), which we must
recognize as ordinary income over the term of the debt investment. Similarly, PIK interest which is accrued generally over the term of the debt investment but not paid in cash. Both OID and PIK interest will increase the amounts we are required to
distribute to maintain RIC status. Because such OIDs and PIK interest will not produce distributable cash for us at the same time as we are required to make distributions, we will need to use cash from other sources to satisfy such distribution
requirements. Additionally, we must meet asset diversification and income source requirements at the end of each calendar quarter. If we fail to meet these tests, we may need to quickly dispose of certain investments to prevent the loss of RIC
status. Since most of our investments will be illiquid, such dispositions, if even possible, may not be made at prices advantageous to us and, in fact, may result in substantial losses. If we fail to qualify as a RIC as of a calendar quarter or
annually for any reason and become fully subject to corporate income tax, the resulting corporate taxes could substantially reduce our net assets, the amount of income available for distribution, and the actual amount distributed. Such a failure
would have a material adverse effect on us and our common stock. For additional information regarding asset coverage ratio and RIC requirements, see BusinessMaterial U.S. Federal Income Tax ConsiderationsRIC Status.
From time to time, some of our debt investments may include success fees that would generate payments to us if the business is ultimately sold. Because
the satisfaction of these success fees, and the ultimate payment of these fees, is uncertain and highly contingent, we generally only recognize them as income when the payment is received. Success fee amounts are characterized as ordinary income for
tax purposes and, as a result, we are required to distribute such amounts to our stockholders in order to maintain RIC status.
If we do not invest a
sufficient portion of our assets in qualifying assets, we could fail to qualify as a BDC under the 1940 Act or be precluded from investing according to our current business strategy.
As a BDC, we may not acquire any assets other than qualifying assets unless, at the time of and after giving effect to such acquisition, at least
70% of our total assets are qualifying assets, as defined in Section 55(a) of the 1940 Act.
We believe that most of the investments that we may
acquire in the future will constitute qualifying assets. However, we may be precluded from investing in what we believe to be attractive investments if such investments are not qualifying assets for purposes of the 1940 Act. If we do not invest a
sufficient portion of our assets in qualifying assets, we could violate the 1940 Act provisions applicable to BDCs. As a result of such violation, specific rules under the 1940 Act could prevent us, for example, from making follow-on investments in
existing portfolio companies (which could result in the dilution of our position) or could require us to dispose of investments at inappropriate times in order to come into compliance with the 1940 Act. If we need to dispose of such investments
quickly, it could be difficult to dispose of such investments on favorable terms. We may not be able to find a buyer for such investments and, even if we do find a buyer, we may have to sell the investments at a substantial loss. Any such outcomes
would have a material adverse effect on our business, financial condition, results of operations and cash flows.
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If we do not maintain our status as a BDC, we would be subject to regulation as a registered closed-end
investment company under the 1940 Act. As a registered closed-end investment company, we would be subject to substantially more regulatory restrictions under the 1940 Act, which would significantly decrease our operating flexibility. For additional
information regarding qualifying assets, see BusinessRegulation as a BDC Qualifying Assets.
Changes in laws or
regulations governing our operations, or changes in the interpretation thereof, and any failure by us to comply with laws or regulations governing our operations may adversely affect our business.
We, and our portfolio companies, are subject to regulation by laws at the local, state and federal levels. These laws and regulations, as well as their
interpretation, may be changed from time to time. Accordingly, any change in these laws or regulations, or their interpretation, or any failure by us or our portfolio companies to comply with these laws or regulations may adversely affect our
business. For additional information regarding the regulations to which we are subject, see BusinessMaterial U.S. Federal Income Tax Considerations RIC Status and BusinessRegulation as a BDC.
Provisions of the Delaware General Corporation Law and of our certificate of incorporation and bylaws could restrict a change in control and have an
adverse impact on the price of our common stock.
We are subject to provisions of the Delaware General Corporation Law that, in general, prohibit any
business combination with a beneficial owner of 15% or more of our common stock for three years unless the holders acquisition of our stock was either approved in advance by our Board of Directors or ratified by our Board of Directors and
stockholders owning two-thirds of our outstanding stock not owned by the acquiring holder. Although we believe these provisions collectively provide for an opportunity to receive higher bids by requiring potential acquirers to negotiate with our
Board of Directors, they would apply even if the offer may be considered beneficial by some stockholders.
We have also adopted other measures that may
make it difficult for a third party to obtain control of us, including provisions of our certificate of incorporation classifying our Board of Directors in three classes serving staggered three-year terms, and provisions of our certificate of
incorporation authorizing our Board of Directors to approve the issuance of additional shares of our stock. These provisions, as well as other provisions of our certificate of incorporation and bylaws, may delay, defer, or prevent a transaction or a
change in control that might otherwise be in the best interests of our stockholders.
Risks Related to Our External Management
We are dependent upon our key management personnel and the key management personnel of the Adviser, particularly David Gladstone, Terry Lee Brubaker and
David Dullum, and on the continued operations of the Adviser, for our future success.
We have no employees. Our chief executive officer, chief
operating officer, chief financial officer and treasurer, chief valuation officer, chief accounting officer, and the employees of the Adviser, do not spend all of their time managing our activities and our investment portfolio. We are particularly
dependent upon David Gladstone, Terry Lee Brubaker and David Dullum for their experience, skills, and networks. Our executive officers and the employees of the Adviser allocate some, and in some cases a material portion, of their time to businesses
and activities that are not related to our business. We have no separate facilities and are completely reliant on the Adviser, which has significant discretion as to the implementation and execution of our business strategies and risk management
practices. We are subject to the risk of discontinuation of the Advisers operations or termination of the Advisory Agreement and the risk that, upon such event, no suitable replacement will be found. We believe that our success depends to a
significant extent upon the Adviser and that discontinuation of its operations or the loss of its key management personnel could have a material adverse effect on our ability to achieve our investment objectives.
Our success depends on the Advisers ability to attract and retain qualified personnel in a competitive environment.
The Adviser experiences competition in attracting and retaining qualified personnel, particularly investment professionals and senior executives, and we may
be unable to maintain or grow our business if we cannot attract and retain such personnel. The Advisers ability to attract and retain personnel with the requisite credentials, experience and skills depends on several factors including, but not
limited to, its ability to offer competitive wages, benefits and professional growth opportunities. The Adviser competes with investment funds (such as private equity funds and mezzanine funds) and traditional financial services companies for
qualified personnel, many of which have greater resources than us. Searches for qualified personnel may divert managements time from the operation of our business. Strain on the existing personnel resources of the Adviser, in the event
that it is unable to attract experienced investment professionals and senior executives, could have a material adverse effect on our business.
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We are dependent upon the contacts and relationships of the Adviser to provide us with potential investment
opportunities.
We depend upon the Adviser to maintain its relationships with private equity sponsors, placement agents, investment banks, management
groups and other financial institutions, and we expect to rely to a significant extent upon these relationships to provide us with potential investment opportunities. If the Adviser or members of our investment team fail to maintain such
relationships, or to develop new relationships with other sources of investment opportunities, we will not be able to grow our investment portfolio. In addition, individuals with whom the Adviser has relationships are not obligated to provide us
with investment opportunities, and we can offer no assurance that these relationships will generate investment opportunities for us in the future. Failure of the Adviser to maintain such relationships or enter into new relationships that would
generate additional investment opportunities, could have a material adverse effect on our business.
The Adviser can resign on 60 days notice,
and we may not be able to find a suitable replacement within that time, resulting in a disruption in our operations that could adversely affect our financial condition, business and results of operations.
The Adviser has the right to resign under the Advisory Agreement at any time upon not less than 60 days written notice, whether we have found a
replacement or not. If the Adviser resigns, we may not be able to find a new investment adviser or hire internal management with similar expertise and ability to provide the same or equivalent services on acceptable terms within 60 days, or at all.
If we are unable to do so quickly, our operations are likely to experience a disruption, our financial condition, business and results of operations as well as our ability to pay distributions are likely to be adversely affected and the market price
of our common stock may decline. In addition, the coordination of our internal management and investment activities is likely to suffer if we are unable to identify and reach an agreement with a single institution or group of executives having the
expertise possessed by the Adviser and its affiliates. Even if we are able to retain comparable management, whether internal or external, the integration of such management and their lack of familiarity with our investment objective may result in
additional costs and time delays that may adversely affect our business, financial condition, results of operations and cash flows.
Our incentive fee
may induce the Adviser to make certain investments, including speculative investments.
The management compensation structure that has been
implemented under the Advisory Agreement may cause the Adviser to invest in high-risk investments or take other investment risks. In addition to its management fee, the Adviser is entitled under the Advisory Agreement to receive incentive
compensation based in part upon our achievement of specified levels of income. In evaluating investments and other management strategies, the opportunity to earn incentive compensation based on net investment income may lead the Adviser to place
undue emphasis on the maximization of net investment income at the expense of other criteria, such as preservation of capital, maintaining sufficient liquidity, or management of credit risk or market risk, in order to achieve higher incentive
compensation. Investments with higher yield potential are generally riskier or more speculative. This could result in increased risk to the value of our investment portfolio.
We may be obligated to pay the Adviser incentive compensation even if we incur a loss.
The Advisory Agreement entitles the Adviser to incentive compensation for each fiscal quarter in an amount equal to a percentage of the
excess of our net investment income for that quarter (before deducting incentive fee, net operating losses and certain other items) above a threshold return of 1.75% for that quarter. When calculating our incentive fee, our pre-incentive fee net
investment income excludes realized and unrealized losses or depreciation that we may incur in the fiscal quarter, even if such losses or depreciation result in a net loss on our statement of operations for that quarter. Thus, we may be required to
pay the Adviser incentive compensation for a fiscal quarter even if there is a decline in the value of our portfolio or we incur a net realized or unrealized loss for that quarter. For additional information on incentive compensation under the
Advisory Agreement with the Adviser, see Business Investment Advisory and Management Agreement.
We may be
required to pay the Adviser incentive compensation on income accrued, but not yet received in cash.
That part of the incentive fee payable by us that
relates to our net investment income is computed and paid on income that may include interest that has been accrued but not yet received in cash, such as debt instruments with PIK interest. If a portfolio company defaults on a loan, it is possible
that such accrued interest previously used in the calculation of the incentive fee will become uncollectible. Consequently, we may make incentive fee payments on income accruals that we may not collect in the future and with respect to which we do
not have a clawback right against the Adviser. During the years ended March 31, 2015, 2014 and 2013, PIK income and any other non-cash income represents less than 1% of total income for the year.
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The Advisers failure to identify and invest in securities that meet our investment criteria or perform
its responsibilities under the Advisory Agreement would likely adversely affect our ability for future growth.
Our ability to achieve our investment
objectives will depend on our ability to grow, which in turn will depend on the Advisers ability to identify and invest in securities that meet our investment criteria. Accomplishing this result on a cost-effective basis will be largely a
function of the Advisers structuring of the investment process, its ability to provide competent and efficient services to us, and our access to financing on acceptable terms. The senior management team of the Adviser has substantial
responsibilities under the Advisory Agreement. In order to grow, the Adviser will need to hire, train, supervise, and manage new employees successfully. Any failure to manage our future growth effectively would likely have a material adverse effect
on our business, financial condition, and results of operations and cash flows.
There are significant potential conflicts of interest, including with
the Adviser, which could impact our investment returns.
Our executive officers and directors, and the officers and directors of the Adviser, serve or
may serve as officers, directors, or principals of entities that operate in the same or a related line of business as we do or of investment funds managed by our affiliates. Accordingly, they may have obligations to investors in those entities, the
fulfillment of which might not be in the best interests of us or our stockholders. For example, Mr. Gladstone, our chairman and chief executive officer, is the chairman of the board and chief executive officer of the Adviser and Administrator,
Gladstone Investment, Gladstone Commercial and Gladstone Land. In addition, Mr. Brubaker, our vice chairman and chief operating officer, is the vice chairman and chief operating officer of the Adviser and Administrator, Gladstone Capital,
Gladstone Commercial and Gladstone Land. Mr. Dullum, our president and a director, is an executive managing director of the Adviser. Moreover, the Adviser may establish or sponsor other investment vehicles which from time to time may have
potentially overlapping investment objectives with ours and accordingly may invest in, whether principally or secondarily, asset classes we target. While the Adviser generally has broad authority to make investments on behalf of the investment
vehicles that it advises, the Adviser has adopted investment allocation procedures to address these potential conflicts and intends to direct investment opportunities to the Gladstone affiliate with the investment strategy that most closely fits the
investment opportunity. Nevertheless, the management of the Adviser may face conflicts in the allocation of investment opportunities to other entities managed by the Adviser. As a result, it is possible that we may not be given the opportunity to
participate in certain investments made by other funds managed by the Adviser. Our Board of Directors approved a revision of our investment objectives and strategies that became effective on January 1, 2013, which may enhance the potential for
conflicts in the allocation of investment opportunities to us and other entities managed by the Adviser.
In certain circumstances, we may make
investments in a portfolio company in which one of our affiliates has or will have an investment, subject to satisfaction of any regulatory restrictions and, where required, the prior approval of our Board of Directors. As of March 31, 2015,
our Board of Directors has approved the following types of co-investment transactions not under the July 2012 co-invest exemption order we received from the SEC:
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Our affiliate, Gladstone Commercial, may, under certain circumstances, lease property to portfolio companies that we do not control. We may pursue such transactions only if (i) the portfolio company is not
controlled by us or any of our affiliates, (ii) the portfolio company satisfies the tenant underwriting criteria of Gladstone Commercial, and (iii) the transaction is approved by a majority of our independent directors and a majority of
the independent directors of Gladstone Commercial. We expect that any such negotiations between Gladstone Commercial and our portfolio companies would result in lease terms consistent with the terms that the portfolio companies would be likely to
receive were they not portfolio companies of ours. |
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We may invest simultaneously with our affiliate Gladstone Capital in senior loans in the broadly syndicated market whereby neither we nor any affiliate has the ability to dictate the terms of the loans.
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Additionally, pursuant to an exemptive order granted by the SEC in July 2012, under certain circumstances, we may co-invest with Gladstone Capital and any future BDC or closed-end
management investment company that is advised by the Adviser (or sub-advised by the Adviser if it controls the fund) or any combination of the foregoing subject to the conditions included therein. |
Certain of our officers, who are also officers of the Adviser, may from time to time serve as directors of certain of our portfolio companies. If an officer
serves in such capacity with one of our portfolio companies, such officer will owe fiduciary duties to stockholders of the portfolio company, which duties may from time to time conflict with the interests of our stockholders.
In the course of our investing activities, we will pay management and incentive fees to the Adviser and will reimburse the Administrator for certain expenses
it incurs. As a result, investors in our common stock will invest on a gross basis and receive distributions on a net basis after expenses, resulting in, among other things, a lower rate of return than one might achieve
through
20
our investors themselves making direct investments. As a result of this arrangement, there may be times when the management team of the Adviser has interests that differ from those of our
stockholders, giving rise to a conflict. In addition, as a BDC, we make available significant managerial assistance to our portfolio companies and provide other services to such portfolio companies. While neither we nor the Adviser currently
receives fees in connection with managerial assistance, the Adviser and Gladstone Securities have, at various times, provided other services to certain of our portfolio companies and received fees for these other services.
Our business model is dependent upon developing and sustaining strong referral relationships with investment bankers, business brokers and other
intermediaries and any change in our referral relationships may impact our business plan.
We are dependent upon informal relationships with
investment bankers, business brokers and traditional lending institutions to provide us with deal flow. If we fail to maintain our relationship with such funds or institutions, or if we fail to establish strong referral relationships with other
funds, we will not be able to grow our portfolio of investments and fully execute our business plan.
The Adviser is not obligated to provide credits
of the base management fee or incentive fees, which could negatively impact our earnings and our ability to maintain our current level of distributions to our stockholders.
The Advisory Agreement provides for a base management fee, based on our gross assets, and an incentive fee, that is based on our income and capital gains. Our
Board of Directors has accepted in the past and may accept in the future voluntary, unconditional and irrevocable credits to reduce the annual 2.0% base management fee or the incentive fee, on a quarterly or annual basis. Any fees credited may not
be recouped by the Adviser in the future. However, the Adviser is not required to issue these or other credits of fees under the Advisory Agreement. If the Adviser does not issue these credits in the future, it could negatively impact our earnings
and may compromise our ability to maintain our current level of distributions to our stockholders, which could have a material adverse impact on our common stock price.
Our base management fee may induce the Adviser to incur leverage.
The fact that our base management fee is payable based upon our gross assets, which would include any investments made with proceeds of borrowings, may
encourage the Adviser to use leverage to make additional investments. Under certain circumstances, the use of increased leverage may increase the likelihood of default, which would disfavor holders of our securities. Given the subjective nature of
the investment decisions made by the Adviser on our behalf, we will not be able to monitor this potential conflict of interest.
Risks Related to an
Investment in Our Securities
We may experience fluctuations in our quarterly and annual operating results.
We may experience fluctuations in our quarterly and annual operating results due to a number of factors, including, among others, variations in our investment
income, the interest rates payable on the debt securities we acquire, the default rates on such securities, the level of our expenses, variations in and the timing of the recognition of realized and unrealized gains or losses, placing and removing
investments on non-accrual status, the degree to which we encounter competition in our markets, the ability to sell investments at attractive terms, the ability to fund and close suitable investments, the level of our expenses, the degree to which
we encounter competition in our markets, and general economic conditions, including the impacts of inflation. The majority of our portfolio companies are in industries that are directly impacted by inflation, such as manufacturing and consumer goods
and services. Our portfolio companies may not be able to pass on to customers increases in their costs of production which could greatly affect their operating results, impacting their ability to repay our loans. In addition, any projected future
decreases in our portfolio companies operating results due to inflation could adversely impact the fair value of those investments. Any decreases in the fair value of our investments could result in future realized and unrealized losses and
therefore reduce our net assets resulting from operations. As a result of these factors, results for any period should not be relied upon as being indicative of performance in future periods.
There is a risk that you may not receive distributions or that distributions may not grow over time.
Our current intention is to distribute at least 90% of our investment company taxable income to our common stockholders on a quarterly basis by paying monthly
common distributions. We expect to retain some or all net realized long-term capital gains by first offsetting them with realized capital losses, and, secondly, through a deemed distribution to supplement our equity capital and support
the growth of our portfolio, although our Board of Directors may determine in certain cases to distribute these gains to our common stockholders. In addition, our Credit Facility restricts the amount of distributions we are permitted to make
annually. We cannot assure you that we will achieve investment results or maintain a tax status that will allow or require any specified level of cash distributions.
21
Investing in our securities may involve an above average degree of risk.
The investments we make in accordance with our investment objective may result in a higher amount of risk than alternative investment options and a higher
risk of volatility or loss of principal. Our investments in portfolio companies may be highly speculative, and therefore, an investment in our common stock may not be suitable for someone with lower risk tolerance.
Distributions to our common stockholders have included and may in the future include a return of capital.
Our Board of Directors declares monthly common distributions each quarter based on the respective quarters estimates of investment company taxable
income for each fiscal year, which may differ, and in the past have differed, from actual results. Because our common distributions are based on estimates of investment company taxable income that may differ from actual results, future common
distributions payable to our common stockholders may also include a return of capital. Moreover, to the extent that we distribute amounts that exceed our accumulated earnings and profits, these distributions constitute a return of capital. A return
of capital represents a return of a common stockholders original investment in common shares of our stock and should not be confused with a distribution from earnings and profits. Although return of capital distributions may not be taxable,
such distributions may increase an investors tax liability for capital gains upon the sale of our common stock by reducing the investors tax basis for such common stock. Such returns of capital reduce our asset base and also adversely
impact our ability to raise debt capital as a result of the leverage restrictions under the 1940 Act, which could have a material adverse impact on our ability to make new investments.
The market price of our shares may fluctuate significantly.
The trading price of our common stock and our preferred stock may fluctuate substantially. Due to the volatility and disruptions that have affected the
capital and credit markets over the past few years, our stock has experienced greater than usual price volatility.
The market price and marketability of
our shares may from time to time be significantly affected by numerous factors, including many over which we have no control and that may not be directly related to us. These factors include, but are not limited to, the following:
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general economic trends and other external factors, such as inflation, oil and gas prices, GDP growth; |
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price and volume fluctuations in the stock market from time to time, which are often unrelated to the operating performance of particular companies; |
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significant volatility in the market price and trading volume of shares of RICs, BDCs or other companies in our sector, which is not necessarily related to the operating performance of these companies;
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changes in stock index definitions or policies, which may impact an investors desire to hold shares of BDCs; |
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changes in regulatory policies or tax guidelines, particularly with respect to RICs or BDCs; |
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changes in our earnings or variations in our operating results; |
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changes and perceived projected changes in prevailing interest rates; |
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changes in the value of our portfolio of investments; |
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any shortfall in our revenue or net income or any increase in losses from levels expected by securities analysts; |
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departure of key personnel; |
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operating performance of companies comparable to us; |
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short-selling pressure with respect to our shares or BDCs generally; |
22
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the announcement of proposed, or completed, offerings of our securities, including a rights offering; and |
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loss of a major funding source. |
Fluctuations in the trading prices of our shares may adversely affect the
liquidity of the trading market for our shares and, if we seek to raise capital through future equity financings, our ability to raise such equity capital.
Common shares of closed-end investment companies frequently trade at a discount from NAV.
Shares of closed-end investment companies frequently trade at a discount from NAV per common share. Since our inception, our common stock has at times traded
above NAV, and at times below NAV. During the past year, our common stock has often, and at times significantly, traded below NAV. Subsequent to March 31, 2015, our common stock has traded at discounts of up to 19.9% of our NAV per share, which
was $9.18 as of March 31, 2015. This characteristic of shares of closed-end investment companies is separate and distinct from the risk that our NAV per share will decline. As with any stock, the price of our common shares will fluctuate with
market conditions and other factors. If common shares are sold, the price received may be more or less than the original investment. Whether investors will realize gains or losses upon the sale of our shares will not depend directly upon our NAV,
but will depend upon the market price of the shares at the time of sale. Since the market price of our common shares will be affected by such factors as the relative demand for and supply of the shares in the market, general market and economic
conditions and other factors beyond our control, we cannot predict whether the common shares will trade at, below or above our NAV. Under the 1940 Act, we are generally not able to issue additional shares of our common stock at a price below NAV per
share to purchasers other than our existing common stockholders through a rights offering without first obtaining the approval of our stockholders and our independent directors. Additionally, at times when our common stock is trading below its NAV
per share, our dividend yield may exceed the weighted average returns that we would expect to realize on new investments that would be made with the proceeds from the sale of such stock, making it unlikely that we would determine to issue additional
common shares in such circumstances. Thus, for as long as our common stock may trade below NAV we will be subject to significant constraints on our ability to raise capital through the issuance of common stock. Additionally, an extended period of
time in which we are unable to raise capital may restrict our ability to grow and adversely impact our ability to increase or maintain our distributions.
Common stockholders may incur dilution if we sell shares of our common stock in one or more offerings at prices below the then current NAV per share.
At our most recent annual meeting of stockholders on August 7, 2014, our stockholders approved a proposal designed to allow us to sell shares of
our common stock below the then current NAV per share in one or more offerings for a period of one year from the date of such approval, subject to certain conditions (including, but not limited to, that the number of common shares issued and sold
pursuant to such authority does not exceed 25% of our then outstanding common stock immediately prior to each such sale).
We exercised this right with
Board of Director approval in March 2015, when we completed a public offering of 3.3 million shares of our common stock at a public offering price of $7.40 per share, which was below our then current NAV of $8.55 per share. Gross proceeds
totaled approximately $24.4 million and net proceeds, after deducting underwriting discounts and offering expenses borne by us, were approximately $23.0 million. The net dilutive effect of the issuance of common stock, net of expenses, below NAV was
$0.22 per share of common stock.
We previously exercised this right with our Board of Directors approval in October 2012, when we completed a
public offering of 4.4 million shares of our common stock at a public offering price of $7.50 per share, which was below our then current NAV of $8.65 per share. Gross proceeds totaled approximately $33.0 million and net proceeds, after
deducting underwriting discounts and offering expenses borne by us, were approximately $31.0 million. The net dilutive effect of the issuance of common stock, net of expenses, below NAV was $0.31 per share of common stock.
At the upcoming annual stockholders meeting scheduled for August 6, 2015, we expect that our stockholders will again be asked to vote in favor of
renewing this proposal for another year. During the past year, our common stock has traded consistently, and at times significantly, below NAV. Any decision to sell shares of our common stock below the then current NAV per share of our common stock
would be subject to the determination by our Board of Directors that such issuance is in our and our stockholders best interests.
If we were to
sell shares of our common stock below NAV per share, such sales would result in an immediate dilution to the NAV per share. This dilution would occur as a result of the sale of shares at a price below the then current NAV per share of our common
stock and a proportionately greater decrease in a common stockholders interest in our earnings and assets and voting interest in us than the increase in our assets resulting from such issuance. The greater the difference between the sale price
and the NAV per share at the time of the offering, the more significant the dilutive impact would be. Because the number of shares of common stock that could be so issued and the timing of any issuance is not currently known, the actual dilutive
effect, if any, cannot be currently predicted.
23
However, if, for example, we sold an additional 10% of our common stock at a 5% discount from NAV, an existing
common stockholder who did not participate in that offering for its proportionate interest would suffer NAV dilution of up to 0.5% or $5 per $1,000 of NAV.
If we fail to pay dividends on our Term Preferred Stock for two years, the holders of our preferred stock will be entitled to elect a majority of our
directors.
The terms of our Term Preferred Stock provide for annual dividends of $1.78125, $1.68750, and $1.62500 per outstanding share of our Series
A Term Preferred Stock, Series B Term Preferred Stock and Series C Term Preferred Stock, respectively. In accordance with the terms of each of our three series of mandatorily redeemable term preferred stock, if dividends thereon are unpaid in an
amount equal to at least two years of dividends, the holders of such series of stock will be entitled to elect a majority of our Board of Directors.
Other Risks
Market volatility and the
condition of the debt and equity capital markets could negatively impact our financial condition and stock price.
Beginning in the third quarter of
2007, global credit and other financial markets began to suffer substantial stress, volatility, illiquidity and disruption. These forces reached extraordinary levels in late 2008, resulting in the bankruptcy of, the acquisition of, or government
intervention in the affairs of several major domestic and international financial institutions. In particular, the financial services sector was negatively impacted by significant write-offs as the value of the assets held by financial firms
declined, impairing their capital positions and abilities to lend and invest. We believe that such value declines were exacerbated by widespread forced liquidations as leveraged holders of financial assets, faced with declining prices, were
compelled to sell to meet margin requirements and maintain compliance with applicable capital standards. Such forced liquidations also impaired or eliminated many investors and investment vehicles, leading to a decline in the supply of capital for
investment and depressed pricing levels for many assets. These events significantly diminished overall confidence in the debt and equity markets, engendered unprecedented declines in the values of certain assets, and caused extreme economic
uncertainty. If market conditions similar to these were to recur, our assets could experience a similar decline in value, among other negative impacts we could suffer.
Since March 2009, the global credit and other financial market conditions have improved as stability has increased throughout the international financial
system and, specifically, in the U.S. economy in which we operate, and many public market indices have experienced positive total returns. However, the macroeconomic environment and recovery from the downturn has been challenging and inconsistent.
Instability in the credit markets, the impact of periodic uncertainty regarding the U.S. federal budget, tapering of bond purchases by the U.S. Federal Reserve and debt ceiling, the instability in the geopolitical environment in many parts of the
world, sovereign debt conditions in Europe and other disruptions may continue to put pressure on economic conditions in the U.S. and abroad, all of which can have an adverse effect on our business.
Economic recessions or downturns could impair our portfolio companies and harm our operating results.
Many of our portfolio companies may be susceptible to economic downturns or recessions and may be unable to repay our loans during these periods. Therefore,
during these periods our non-performing assets may increase and the value of these assets may decrease. Adverse economic conditions may also decrease the value of collateral securing some of our loans and the value of our equity investments.
Economic slowdowns or recessions could lead to financial losses in our portfolio and a decrease in investment income, net investment income and assets. Unfavorable economic conditions also could increase our funding costs, limit our access to the
capital markets or result in a decision by lenders not to extend credit to us. These events could prevent us from increasing investments and harm our operating results. We experienced to some extent such effects as a result of the economic downturn
that occurred from 2008 through 2009 and may experience such effects again in any future downturn or recession.
The valuation process for certain of
our portfolio holdings creates a conflict of interest.
A substantial portion of our portfolio investments are made in the form of securities that are
not publicly traded. As a result, our Board of Directors determines the fair value of these securities in good faith pursuant the Policy. In connection with that determination, our Valuation Team prepares portfolio company valuations based upon the
most recent portfolio company financial statements available and projected financial results of each portfolio company. In addition, certain members of our Board of Directors have a pecuniary interest in our Adviser. The participation of our
Advisers investment professionals in our valuation process, and the pecuniary interest in our Adviser by certain members of our Board of Directors, may result in a conflict of interest as the management fees that we pay our Adviser are based
on our gross assets less cash.
24
We could face losses and potential liability if intrusion, viruses or similar disruptions to our technology
jeopardize our confidential information, whether through breach of our network security or otherwise.
Maintaining our network security is of critical
importance because our systems store highly confidential financial models and portfolio company information. Although we have implemented, and will continue to implement and upgrade, security measures, our technology platform is and will continue to
be vulnerable to intrusion, computer viruses or similar disruptive problems caused by transmission from unauthorized users. The misappropriation of proprietary information could expose us to a risk of loss or litigation.
Terrorist attacks, acts of war, or national disasters may affect any market for our stock, impact the businesses in which we invest, and harm our business,
operating results, and financial conditions.
Terrorist acts, acts of war, or national disasters have created, and continue to create, economic and
political uncertainties and have contributed to global economic instability. Future terrorist activities, military or security operations, or national disasters could further weaken the domestic/global economies and create additional uncertainties,
which may negatively impact the businesses in which we invest directly or indirectly and, in turn, could have a material adverse impact on our business, operating results, and financial condition. Losses from terrorist attacks and national disasters
are generally uninsurable.
25
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
All statements contained or incorporated by reference in this prospectus or any accompanying prospectus supplement, 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 of us and our portfolio companies. In some cases, you can identify forward-looking
statements by terminology such as may, might, believe, will, provide, anticipate, future, could, growth, plan,
intend, expect, should, would, if, seek, possible, potential, likely or the negative of such terms or comparable terminology. These
forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity,
performance or achievements expressed or implied by such forward-looking statements. Such factors include, among others: (1) further adverse changes in the economy and the capital markets; (2) risks associated with negotiation and
consummation of pending and future transactions; (3) the loss of one or more of our executive officers, in particular David Gladstone, Terry Lee Brubaker or David Dullum; (4) changes in our business strategy; (5) availability, terms
and deployment of capital; (6) changes in our industry, interest rates, or exchange rates; (7) the degree and nature of our competition; and (8) those factors described in the Risk Factors section of this prospectus and
any accompanying prospectus supplement. We caution readers not to place undue reliance on any such forward-looking statement, which speak only as of the date made. 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 prospectus. The forward-looking statements contained or incorporated by reference in this prospectus or any accompanying prospectus supplement are
excluded from the safe harbor protection provided by the Private Securities Litigation Reform Act of 1995 and Section 27A of the Securities Act.
USE OF PROCEEDS
Unless otherwise specified in any prospectus supplement accompanying this prospectus, we intend to use the net proceeds from the sale of the
Securities first to pay down existing short-term debt, then to make investments in small and mid-sized businesses in accordance with our investment objectives, with any remaining proceeds to be used for other general corporate purposes. Indebtedness
under our Credit Facility currently accrues interest at the rate of approximately 3.5% and the revolving period ends on June 26, 2017. We anticipate that substantially all of the net proceeds of any offering of Securities will be utilized in
the manner described above within three months of the completion of such offering. Pending such utilization, we intend to invest the net proceeds of any offering of Securities primarily in cash, cash equivalents, U.S. government securities, and
other high-quality debt investments that mature in one year or less from the date of investment, consistent with the requirements for continued qualification as a RIC for federal income tax purposes.
PRICE RANGE OF COMMON STOCK AND DISTRIBUTIONS
We currently intend to distribute in the form of cash dividends, a minimum of 90% of our net ordinary income and net short-term capital gains,
if any, on a quarterly basis to our stockholders in the form of monthly dividends. We intend to retain long-term capital gains and treat them as deemed distributions for tax purposes. We report the estimated tax characteristics of each distribution
when declared while the actual tax characteristics of distributions are reported annually to each stockholder on IRS Form 1099-DIV. There is no assurance that we will achieve investment results or maintain a tax status that will permit any
specified level of cash distributions or year-to-year increases in cash distributions. At the option of a holder of record of common stock, all cash distributions with respect to shares of our common stock can be reinvested automatically under our
dividend reinvestment plan in additional whole and fractional shares. A stockholder whose shares of our common stock are held in the name of a broker or other nominee should contact the broker or nominee regarding participation in our dividend
reinvestment plan on the stockholders behalf. See Risk FactorsRisks Related to Our Regulation and StructureWe will be subject to corporate-level tax if we are unable to satisfy Code requirements for RIC qualification;
Dividend Reinvestment Plan; and Material U.S. Federal Income Tax Considerations.
26
Our common stock is traded on the NASDAQ under the symbol GAIN. The following table
reflects, by quarter, the high and low sales prices per share of our common stock on the NASDAQ, the intra-day sales prices as a percentage of NAV and quarterly distributions declared per share for each fiscal quarter during the last two fiscal
years and the current fiscal year through June 12, 2015.
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Net Asset Value Per |
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Sales Price |
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Dividend |
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Discount (Premium) of
High Sales Price to Net Asset |
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Discount (Premium) of Low Sales Price to Net |
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Share (1) |
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High |
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Low |
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Declared |
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Value (2) |
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Asset Value (2) |
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Fiscal Year ending March 31, 2014 |
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First Quarter |
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$ |
8.70 |
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$ |
7.52 |
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$ |
7.02 |
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$ |
0.1500 |
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14 |
% |
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19 |
% |
Second Quarter |
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$ |
9.12 |
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$ |
7.57 |
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$ |
6.80 |
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$ |
0.1500 |
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17 |
% |
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25 |
% |
Third Quarter |
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$ |
8.49 |
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$ |
8.06 |
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$ |
6.80 |
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$ |
0.2300 |
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5 |
% |
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20 |
% |
Fourth Quarter |
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$ |
8.34 |
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$ |
8.50 |
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$ |
7.35 |
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$ |
0.1800 |
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(2 |
)% |
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12 |
% |
Fiscal Year ending March 31, 2015 |
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First Quarter |
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$ |
8.57 |
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$ |
8.39 |
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$ |
7.23 |
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$ |
0.1800 |
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2 |
% |
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16 |
% |
Second Quarter |
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$ |
8.49 |
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$ |
7.77 |
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$ |
7.08 |
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$ |
0.1800 |
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9 |
% |
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17 |
% |
Third Quarter |
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$ |
8.55 |
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$ |
7.50 |
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$ |
6.72 |
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$ |
0.2300 |
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12 |
% |
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21 |
% |
Fourth Quarter |
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$ |
9.18 |
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$ |
8.04 |
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$ |
6.98 |
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$ |
0.1800 |
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12 |
% |
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24 |
% |
Fiscal Year ending March 31, 2016 |
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First Quarter (through June 12, 2015) |
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$ |
9.18 |
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$ |
7.81 |
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$ |
7.35 |
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$ |
0.1875 |
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* |
% |
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* |
% |
(1) |
NAV per share is determined as of the last day in the relevant quarter and therefore may not reflect the NAV per common share on the date of the high and low sales prices. The NAVs shown are based on outstanding common
shares at the end of each period. |
(2) |
The discounts set forth in these columns represent the high or low, as applicable, intra-day sale prices per share for the relevant quarter minus the NAV per share as of the end of such quarter, and therefore may not
reflect the discount to NAV per share on the date of the high and low intra-day sales prices. |
* |
Not yet available, as the NAV per share as of the end of this quarter has not yet been determined. |
Common shares of closed-end investment companies frequently trade at a discount to their NAV. The possibility that our common shares may trade
at such discount to our NAV is separate and distinct from the risk that our NAV per share may decline. We cannot predict whether our common shares will trade above, at or below NAV, although during the past three years, our common stock has
consistently traded, and at times significantly, below NAV.
As of May 19, 2015, there were 22 record owners of our common stock.
The following are our outstanding classes of Securities as of May 19, 2015.
|
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|
|
|
|
|
|
|
|
(1)
Title of Class |
|
(2) Amount Authorized |
|
|
(3) Amount Held by us or for Our Account |
|
|
(4) Amount Outstanding Exclusive of Amounts Shown Under(3) |
|
Common Stock |
|
|
100,000,000 |
|
|
|
|
|
|
|
30,270,958 |
|
7.125% Series A Cumulative Term Preferred Stock |
|
|
1,610,000 |
|
|
|
|
|
|
|
1,600,000 |
|
6.750% Series B Cumulative Term Preferred Stock |
|
|
1,656,000 |
|
|
|
|
|
|
|
1,656,000 |
|
6.500% Series C Cumulative Term Preferred Stock |
|
|
1,700,000 |
|
|
|
|
|
|
|
1,610,000 |
|
27
RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED DIVIDENDS
For the years ended March 31, 2015, 2014, 2013, 2012 and 2011 the ratio of earnings to fixed charges and preferred dividends of
the Company, computed as set forth below, was as follows:
|
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|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31, |
|
|
|
2015 |
|
|
2014 |
|
|
2013 |
|
|
2012 |
|
|
2011 |
|
|
|
|
|
|
|
Ratio of earnings to combined fixed charges and preferred dividends |
|
|
3.3x |
|
|
|
4.2x |
|
|
|
4.5x |
|
|
|
10.6x |
|
|
|
14.6x |
|
For purposes of computing the ratio, earnings consists of net investment income before fixed charges and preferred
dividends. Fixed charges and preferred dividends include interest expense on borrowings, dividend expense on our Series A and Series B Term Preferred Stock, amortization of deferred financing fees, and the portion of operating lease expense that
represents interest. The portion of operating lease expense that represents interest is calculated by dividing the amount of rent expense, allocated to us by our Adviser as part of the administration fee payable under the Advisory Agreement, by
three. Our Series C Term Preferred Stock is not included in the calculation because we issued our Series C Term Preferred Stock subsequent to March 31, 2015. You should read these ratios of earnings to fixed charges in connection with our
consolidated financial statements, including the notes to those statements, included in this prospectus.
28
CONSOLIDATED SELECTED FINANCIAL AND OTHER DATA
The following consolidated selected financial data for the fiscal years ended March 31, 2015, 2014, 2013, 2012 and 2011, are derived from our audited
consolidated financial statements. The other data included at the bottom of the table is unaudited. The data should be read in conjunction with our consolidated financial statements and notes thereto and Managements Discussion and
Analysis of Financial Condition and Results of Operations included elsewhere in this prospectus.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31, |
|
|
|
2015 |
|
|
2014 |
|
|
2013 |
|
|
2012 |
|
|
2011 |
|
Statement of operations data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment income |
|
$ |
41,643 |
|
|
$ |
36,264 |
|
|
$ |
30,538 |
|
|
$ |
21,242 |
|
|
$ |
26,064 |
|
Total expenses net of credits from Adviser |
|
|
21,746 |
|
|
|
16,957 |
|
|
|
14,050 |
|
|
|
7,499 |
|
|
|
9,893 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income |
|
|
19,897 |
|
|
|
19,307 |
|
|
|
16,488 |
|
|
|
13,743 |
|
|
|
16,171 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net gain (loss) |
|
|
30,317 |
|
|
|
(20,636 |
) |
|
|
791 |
|
|
|
8,223 |
|
|
|
268 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in net assets resulting from operations |
|
$ |
50,214 |
|
|
$ |
(1,329 |
) |
|
$ |
17,279 |
|
|
$ |
21,966 |
|
|
$ |
16,439 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per common share data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in net assets resulting from operations per common sharebasic and diluted(A) |
|
$ |
1.88 |
|
|
$ |
(0.05 |
) |
|
$ |
0.71 |
|
|
$ |
0.99 |
|
|
$ |
0.74 |
|
Net investment income before net gain (loss) per common sharebasic and
diluted(A) |
|
|
0.75 |
|
|
|
0.73 |
|
|
|
0.68 |
|
|
|
0.62 |
|
|
|
0.73 |
|
Cash distributions declared per common share |
|
|
0.77 |
|
|
|
0.71 |
|
|
|
0.60 |
|
|
|
0.61 |
|
|
|
0.48 |
|
Statement of assets and liabilities data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
483,521 |
|
|
$ |
330,694 |
|
|
$ |
379,803 |
|
|
$ |
325,297 |
|
|
$ |
241,109 |
|
Net assets |
|
|
273,429 |
|
|
|
220,837 |
|
|
|
240,963 |
|
|
|
207,216 |
|
|
|
198,829 |
|
Net asset value per common share |
|
|
9.18 |
|
|
|
8.34 |
|
|
|
9.10 |
|
|
|
9.38 |
|
|
|
9.00 |
|
Common shares outstanding |
|
|
29,775,958 |
|
|
|
26,475,958 |
|
|
|
26,475,958 |
|
|
|
22,080,133 |
|
|
|
22,080,133 |
|
Weighted common shares outstandingbasic and diluted |
|
|
26,665,821 |
|
|
|
26,475,958 |
|
|
|
24,189,148 |
|
|
|
22,080,133 |
|
|
|
22,080,133 |
|
Senior securities data:(B) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total borrowings, at cost(C) |
|
$ |
123,896 |
|
|
$ |
66,250 |
|
|
$ |
94,016 |
|
|
$ |
76,005 |
|
|
$ |
40,000 |
|
Mandatorily redeemable preferred stock |
|
|
81,400 |
|
|
|
40,000 |
|
|
|
40,000 |
|
|
|
40,000 |
|
|
|
|
|
Asset coverage ratio(B) |
|
|
230 |
% |
|
|
298 |
% |
|
|
272 |
% |
|
|
268 |
% |
|
|
534 |
% |
Asset coverage per unit(D) |
|
$ |
2,301 |
|
|
$ |
2,978 |
|
|
$ |
2,725 |
|
|
$ |
2,676 |
|
|
$ |
5,344 |
|
Other unaudited data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of portfolio companies |
|
|
34 |
|
|
|
29 |
|
|
|
21 |
|
|
|
17 |
|
|
|
17 |
|
Average size of portfolio company investment at cost |
|
$ |
14,861 |
|
|
$ |
13,225 |
|
|
$ |
15,544 |
|
|
$ |
15,670 |
|
|
$ |
11,600 |
|
Principal amount of new investments |
|
|
108,197 |
|
|
|
132,291 |
|
|
|
87,607 |
|
|
|
91,298 |
|
|
|
43,634 |
|
Proceeds from loan repayments and investments sold |
|
|
11,259 |
|
|
|
83,415 |
|
|
|
28,424 |
|
|
|
27,185 |
|
|
|
97,491 |
|
Weighted average yield on investments(E) |
|
|
12.60 |
% |
|
|
12.61 |
% |
|
|
12.51 |
% |
|
|
12.32 |
% |
|
|
11.36 |
% |
Total return(F) |
|
|
11.96 |
|
|
|
24.26 |
|
|
|
4.73 |
|
|
|
5.58 |
|
|
|
38.56 |
|
(A) |
Per share data is based on the weighted average common stock outstanding for both basic and diluted. |
(B) |
As a BDC, we are generally required to maintain an asset coverage ratio (as defined in Section 18(h) of the 1940 Act) of at least 200% on our Senior Securities. Our mandatorily redeemable preferred stock is a
senior security that is stock. |
(C) |
Includes borrowings under our Credit Facility, other secured borrowings, and short-term loans, as applicable. |
(D) |
Asset coverage per unit is the asset coverage ratio expressed in terms of dollar amounts per one thousand dollars of indebtedness. |
(E) |
Weighted average yield on investments equals interest income earned on investments divided by the weighted average interest-bearing principal balance throughout the fiscal year. |
(F) |
Total return equals the change in the ending market value of our common stock from the beginning of the fiscal year, taking into account common dividends reinvested in accordance with the terms of our dividend
reinvestment plan. Total return does not take into account common distributions that may be characterized as a return of capital. For further information on the estimated character of our distributions to common stockholders, please refer to Note
9Distributions to Common Stockholders to our Consolidated Financial Statements included in this prospectus. |
29
SELECTED QUARTERLY FINANCIAL DATA
The following tables set forth certain quarterly financial information for each of the eight quarters in the two years ended March 31,
2015. The information was derived from our unaudited consolidated financial statements. Results for any quarter are not necessarily indicative of results for the past fiscal year or for any future quarter.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended |
|
Fiscal Year 2015 |
|
June 30, 2014 |
|
|
September 30, 2014 |
|
|
December 31, 2014 |
|
|
March 31, 2015 |
|
Total investment income |
|
$ |
9,837 |
|
|
$ |
9,071 |
|
|
$ |
11,562 |
|
|
$ |
11,173 |
|
Net investment income |
|
|
4,859 |
|
|
|
4,204 |
|
|
|
5,839 |
|
|
|
4,995 |
|
Net increase in net assets resulting from operations |
|
|
10,770 |
|
|
|
2,697 |
|
|
|
7,589 |
|
|
|
29,158 |
|
Net increase in net assets resulting from operations per weighted average common share basic & diluted |
|
$ |
0.41 |
|
|
$ |
0.10 |
|
|
$ |
0.29 |
|
|
$ |
1.08 |
|
|
|
|
|
Quarter Ended |
|
Fiscal Year 2014 |
|
June 30, 2013 |
|
|
September 30, 2013 |
|
|
December 31, 2013 |
|
|
March 31, 2014 |
|
Total investment income |
|
$ |
7,398 |
|
|
$ |
11,359 |
|
|
$ |
8,696 |
|
|
$ |
8,811 |
|
Net investment income |
|
|
4,033 |
|
|
|
6,228 |
|
|
|
4,402 |
|
|
|
4,644 |
|
Net (decrease) increase in net assets resulting from operations |
|
|
(6,519 |
) |
|
|
14,939 |
|
|
|
(10,686 |
) |
|
|
937 |
|
Net (decrease) increase in net assets resulting from operations per weighted average common share basic &
diluted |
|
$ |
(0.25 |
) |
|
$ |
0.57 |
|
|
$ |
(0.40 |
) |
|
$ |
0.03 |
|
30
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(dollar amounts included in tables in thousands, except per share data and as otherwise indicated)
The following analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the
notes thereto contained elsewhere herein. Historical financial condition and results of operations and percentage relationships among any amounts in the financial statements are not necessarily indicative of financial condition, results of
operations or percentage relationships for any future periods.
OVERVIEW
General
We were incorporated under the General
Corporation Laws of the State of Delaware on February 18, 2005. We operate as an externally managed, closed-end, non-diversified management investment company and have elected to be treated as a business development company (BDC)
under the Investment Company Act of 1940, as amended (the 1940 Act). For federal income tax purposes, we have elected to be treated as a regulated investment company (RIC) under Subchapter M of the Internal Revenue Code of
1986, as amended (the Code). In order to continue to qualify as a RIC for federal income tax purposes and obtain favorable RIC tax treatment, we must meet certain requirements, including certain minimum distribution requirements.
We were established for the purpose of investing in debt and equity securities of established private businesses operating in the United States
(U.S.). Our investment objectives are to: (1) achieve and grow current income by investing in debt securities of established businesses that we believe will provide stable earnings and cash flow to pay expenses, make principal and
interest payments on our outstanding indebtedness and make distributions to stockholders that grow over time; and (2) provide our stockholders with long-term capital appreciation in the value of our assets by investing in equity securities of
established businesses that we believe can grow over time to permit us to sell our equity investments for capital gains. To achieve our objectives, our investment strategy is to invest in several categories of debt and equity securities, with each
investment generally ranging from $5 million to $30 million, although investment size may vary, depending upon our total assets or available capital at the time of investment. We seek to avoid investments in high-risk, early stage
enterprises. We expect that our investment portfolio over time will consist of approximately 75% in debt securities and 25% in equity securities, at cost. As of March 31, 2015, our investment portfolio was made up of 73% in debt securities and
27% in equity securities, at cost.
We focus on investing in small and medium-sized private businesses in the United States (U.S.) that meet
certain criteria, including, but not limited to, the following: the sustainability of the business free cash flow and its ability to grow it over time, adequate assets for loan collateral, experienced management teams with a significant
ownership interest in the borrower, reasonable capitalization of the borrower, including an ample equity contribution or cushion based on prevailing enterprise valuation multiples, and the potential to realize appreciation and gain liquidity in our
equity position, if any. We anticipate that liquidity in our equity position will be achieved through a merger or acquisition of the borrower, a public offering of the borrowers stock or by exercising our right to require the borrower to
repurchase our warrants, though there can be no assurance that we will always have these rights. We lend to borrowers that need funds for growth capital or to finance acquisitions or recapitalize or refinance their existing debt facilities. We seek
to avoid investing in high-risk, early-stage enterprises. We invest by ourselves or jointly with other funds and/or management of the portfolio company, depending on the opportunity. If we are participating in an investment with one or more
co-investors, our investment is likely to be smaller than if we were investing alone.
In July 2012, the Securities and Exchange Commission
(SEC) granted us an exemptive order that expanded our ability to co-invest with certain of our affiliates under certain circumstances and any future business development company or closed-end management investment company that is advised
(or sub-advised if it controls the fund) by our external investment adviser, or any combination of the foregoing, subject to the conditions in the SECs order. We believe this ability to co-invest has enhanced and will continue to enhance our
ability to further our investment objectives and strategies.
In general, our investments in debt securities have a term of no more than seven years,
accrue interest at variable rates (based on the one-month London Interbank Offered Rate (LIBOR)) and, to a lesser extent, at fixed rates. We seek debt instruments that pay interest monthly or, at a minimum, quarterly, and which may
include a yield enhancement such as a success fee or deferred interest provision and are primarily interest only with all principal and any accrued but unpaid interest due at maturity. Generally, success fees accrue at a set rate and are
contractually due upon a change of control of the business. Some debt securities have deferred interest whereby some portion of the interest payment is added to the principal balance so that the interest is paid, together with the principal, at
maturity. This form of deferred interest is often called PIK interest.
31
Typically, our investments in equity securities take the form of common stock, preferred stock, limited liability
company interests, or warrants or options to purchase the foregoing. Often, these equity investments occur in connection with our original investment, buyouts and recapitalizations of a business, or refinancing existing debt.
We are externally managed by our investment advisor, Gladstone Management Corporation (the Adviser), a SEC registered investment adviser and an
affiliate of ours, pursuant to the Advisory Agreement. The Adviser manages our investment activities. We have also entered into an administration agreement (the Administration Agreement) with Gladstone Administration, LLC (our
Administrator), an affiliate of ours and the Adviser, whereby we pay separately for administrative services.
Our shares of common stock,
7.125% Series A Cumulative Term Preferred Stock (Series A Term Preferred Stock), 6.75% Series B Cumulative Term Preferred Stock (Series B Term Preferred Stock), and 6.50% Series C Cumulative Term Preferred Stock
(Series C Term Preferred Stock) are traded on the NASDAQ Global Select Market (NASDAQ) under the trading symbols GAIN, GAINP, GAINO, and GAINN, respectively.
Business
Portfolio Activity
While conditions remain challenging, we are seeing many new investment opportunities consistent with our investment strategy of providing a combination of debt
and equity in support of management and sponsor-led buyouts of small and medium-sized companies in the U.S. For the fiscal year ended March 31, 2015, we invested a total of $108.2 million in six new deals, resulting in a net expansion in our
overall portfolio to 34 portfolio companies and a year over year increase of 28.2% in our portfolio at cost. These new investments, along with our capital raising efforts discussed below, have allowed us to invest $419.0 million in 25 new debt and
equity deals since October 2010. For the fiscal year ended March 31, 2015, our new investments consisted of approximately 78.3% senior and subordinated secured term loans and 21.7% equity investments, based on the originating principal
balances, respectively.
Generally, the majority of our debt securities in our portfolio, have a success fee component, which enhances the yield on our
debt investments. Unlike PIK income, we generally do not recognize success fees as income until they are received in cash. Due to their contingent nature, there are no guarantees that we will be able to collect any or all of these success fees or
know the timing of such collections. As a result, as of March 31, 2015, we had unrecognized success fees of $24.3 million, or $0.82 per common share. Consistent with accounting principles generally accepted in the U.S. (GAAP), we
generally have not recognized our success fee receivable and related income in our accompanying Consolidated Financial Statements.
The improved
investing environment has presented us with an opportunity to realize gains and other income from four management-supported buyout liquidity events since June 2010, and in the aggregate, these four liquidity events have generated $54.4 million in
realized gains and $13.1 million in other income, for a total increase to our net assets of $67.5 million. We believe each of these transactions was an equity-oriented investment success and exemplifies our investment strategy of striving to achieve
returns through current income on the debt portion of our investments and capital gains from the equity portion. With the four liquidity events that resulted in realized gains since June 2010, we have nearly overcome our cumulative realized losses
since inception that were primarily incurred during the recession and in connection with the sale of performing loans at a realized loss to pay off a former lender. These successful exits, in part, enabled us to increase the monthly distribution
50.0% since March 2011 and allowed us to declare and pay a special distribution of $0.03 per common share in fiscal year 2012, $0.05 per common share in November 2013, and $0.05 per common share in December 2014.
Capital Raising Efforts
Despite the challenges
that have existed in the economy for the past several years, we have been able to meet our capital needs through extensions and increases to our revolving line of credit and by accessing the capital markets in the form of public offerings of stock.
We have successfully extended our revolving line of credit pursuant to our fifth amended and restated credit agreement (the Credit Facility) revolving period multiple times, most recently to June 2017, and increased the commitment from
$60.0 million to $185.0 million (with a total commitment of $250.0 million through additional commitments of new or existing lenders). Additionally, we issued approximately 1.7 million shares of our Series B Term Preferred Stock for gross
proceeds of $41.4 million in November 2014, approximately 3.8 million shares of common stock for gross proceeds of $28.1 million in March and April 2015, and approximately 1.6 million shares of our Series C Term Preferred Stock for gross
proceeds of approximately $40.3 million in May 2015. Refer to Liquidity and Capital Resources Equity Common Stock and Liquidity and Capital Resources Equity Term Preferred Stock and
Description of Capital Stock for further discussion of our common stock and Term Preferred Stock and Liquidity and Capital Resources Revolving Credit Facility for further discussion of our Credit
Facility.
32
Although we were able to access the capital markets during 2014 and 2015, we believe market conditions continue
to affect the trading price of our common stock and thus our ability to finance new investments through the issuance of equity. On May 19, 2015, the closing market price of our common stock was $7.54, which represented a 17.9% discount to our
March 31, 2015 net asset value (NAV) per share of $9.18. When our common stock trades below NAV, our ability to issue equity is constrained by provisions of the 1940 Act, which generally prohibit the issuance and sale of our common
stock at an issuance price below the then current NAV per share without stockholder approval, other than through sales to our then-existing stockholders pursuant to a rights offering.
At our 2014 Annual Meeting of Stockholders held on August 7, 2014, our stockholders approved a proposal authorizing us to issue and sell shares of our
common stock at a price below our then current NAV per share, subject to certain limitations, including that the number of common shares issued and sold pursuant to such authority does not exceed 25.0% of our then outstanding common stock
immediately prior to each such sale, provided that our board of directors (our Board of Directors) makes certain determinations prior to any such sale. This August 2014 stockholder authorization is in effect for one year from the date of
stockholder approval. With our Board of Directors subsequent approval, we issued shares of our common stock in March and April 2015 at a price per share below the then current NAV per share. We sought and obtained stockholder approval
concerning a similar proposal at the Annual Meeting of Stockholders held in August 2012, and with our Board of Directors subsequent approval, we issued shares of our common stock in October and November 2012 at a price per share below the then
current NAV per share. The resulting proceeds, in part, have allowed us to grow the portfolio by making new investments, generate additional income through these new investments, provide us additional equity capital to help ensure continued
compliance with regulatory tests and increase our debt capital while still complying with our applicable debt-to-equity ratios. Refer to Liquidity and Capital Resources Equity Common Stock for further discussion of
our common stock.
Regulatory Compliance
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 an asset coverage ratio (as defined in
Section 18(h) of the 1940 Act), of at least 200% on our senior securities representing indebtedness and our senior securities that are stock (collectively the Senior Securities). As of March 31, 2015, our asset coverage ratio
was 229.9%.
Investment Highlights
For the
fiscal year ended March 31, 2015, we disbursed $108.2 million in new debt and equity investments and extended $24.7 million of investments to existing portfolio companies through revolver draws or additions to term notes. From our initial
public offering in June 2005 through March 31, 2015, we have made 237 investments in 113 companies for a total of approximately $1.1 billion, before giving effect to principal repayments on investments and divestitures.
Investment Activity
During the fiscal year ended
March 31, 2015, the following significant transactions occurred:
|
|
|
In May 2014, NDLI, Inc. (NDLI), one of our portfolio companies, completed the purchase of certain of Noble Logistics, Inc.s assets, one of our other portfolio companies, out of bankruptcy.
|
|
|
|
In August 2014, we made a $1.8 million equity investment in Roanoke Industries Corp. (Roanoke), formerly known as Tread Real Estate Corp., which purchased the building owned by another one of our portfolio
companies, Tread Corporation (Tread). This building has subsequently been leased back to Tread. |
|
|
|
In September 2014, we invested $20.2 million in Cambridge through a combination of secured debt and equity. Cambridge, based in Waltham, Massachusetts, is the developer of sound systems and solutions. |
|
|
|
In October 2014, we invested $24.4 million in Old World through a combination of secured debt and equity. Old World, headquartered in Spokane, Washington, is a designer and distributor of an extensive collection of
blown glass Christmas ornaments, table top figurines, vintage-style light covers and nostalgic greeting cards into the independent gift channel. |
|
|
|
In December 2014, we invested $19.6 million in B+T Group Acquisition Inc. (B+T) through a combination of secured debt and equity. B+T, headquartered in Tulsa, Oklahoma, is a full-service provider of
structural engineering, construction, and technical services to the wireless tower industry for tower upgrades and modifications. Gladstone Capital also participated as a co-investor by providing $8.4 million of debt and equity financing at the same
price and terms as our investment. |
33
|
|
|
In December 2014, B-Dry, LLC (B-Dry) was restructured, resulting in $2.0 million of secured debt being converted into preferred equity. |
|
|
|
In March 2015, we invested $10.8 million in Logo Sportswear, Inc. (Logo) through a combination of secured debt and equity. Logo, headquartered in Cheshire, Connecticut, is an online provider of
user-customized uniforms and apparel for teams, leagues, schools, businesses and organizations. |
|
|
|
In March 2015, we invested $32.0 million in Counsel Press through a combination of secured debt and equity. Counsel Press, headquartered in New York, New York, provides expert assistance in preparing, filing, and
serving appeals in state and federal appellate courts nationwide and several international tribunals. |
Recent Developments
Credit Facility Extension and Expansion
In June 2014, we, through our wholly-owned subsidiary, Gladstone Business Investment (Business Investment), entered into Amendment No. 1 to
the Fifth Amended and Restated Credit Agreement originally entered into on April 30, 2013, with Key Equipment Finance, a division of KeyBank National Association (KeyBank) as administrative agent, lead arranger and lender; other
lenders; and the Adviser, as servicer, to extend the revolving period and reduce the interest rate of our revolving line of credit. The revolving period was extended 14 months to June 26, 2017. We incurred fees of $0.4 million in connection
with this amendment, which are being amortized through our Credit Facilitys revolver period end date of June 26, 2017.
In September 2014, we
further increased our borrowing capacity under our Credit Facility from $105.0 million to $185.0 million (with a total commitment up to $250.0 million through additional commitments of new or existing lenders) by entering into Joinder Agreements
pursuant to our Credit Facility, by and among Business Investment, KeyBank, the Adviser and other lenders. We incurred fees of $1.3 million in connection with this expansion, which are being amortized through our Credit Facilitys revolver
period end date of June 26, 2017. Refer to Liquidity and Capital Resources Revolving Credit Facility for further discussion of our Credit Facility.
Term Preferred Stock Offerings
In November 2014,
we completed a public offering of 1,656,000 shares of our Series B Term Preferred Stock at a public offering price of $25.00 per share. Gross proceeds totaled $41.4 million and net proceeds, after deducting underwriting discounts and offering
expenses borne by us, were approximately $39.7 million.
In May 2015, we completed a public offering of 1,610,000 shares of our Series C Term Preferred
Stock at a public offering price of $25.00 per share. Gross proceeds totaled $40.3 million and net proceeds, after deducting underwriting discounts and offering expenses borne by us, were approximately $38.6 million. Refer to Liquidity and
Capital Resources Equity Term Preferred Stock for further discussion of our recently issued Series C Term Preferred Stock.
Common Stock Offering
In March 2015, we completed
a public offering of 3.3 million shares of our common stock. Gross proceeds totaled $24.4 million and net proceeds, after deducting underwriting discounts and offering expenses borne by us, were approximately $23.0 million. In April 2015, the
underwriters fully exercised their overallotment option to purchase approximately 0.5 million additional shares of our common stock, resulting in net proceeds, after deducting underwriting discounts and offering expenses borne by us, of
approximately $3.5 million. Refer to Liquidity and Capital Resources Equity Common Stock for further discussion of our common stock.
Executive Officers
On January 9, 2015, David
Watson resigned as the Companys chief financial officer and treasurer. On January 13, 2015, our Board of Directors accepted Mr. Watsons resignation and appointed Melissa Morrison, Gladstone Capitals chief financial officer and
treasurer, as the Companys chief financial officer and treasurer. On April 14, 2015, our Board of Directors appointed Julia Ryan as the Companys chief accounting officer.
34
RESULTS OF OPERATIONS
Comparison of the Fiscal Year Ended March 31, 2015, to the Fiscal Year Ended March 31, 2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Fiscal Years Ended March 31, |
|
|
|
2015 |
|
|
2014 |
|
|
$ Change |
|
|
% Change |
|
INVESTMENT INCOME |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
$ |
36,685 |
|
|
$ |
30,460 |
|
|
$ |
6,225 |
|
|
|
20.4 |
% |
Other income |
|
|
4,958 |
|
|
|
5,804 |
|
|
|
(846 |
) |
|
|
(14.6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment income |
|
|
41,643 |
|
|
|
36,264 |
|
|
|
5,379 |
|
|
|
14.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EXPENSES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Base management fee |
|
|
7,569 |
|
|
|
6,207 |
|
|
|
1,362 |
|
|
|
21.9 |
|
Loan servicing fee |
|
|
4,994 |
|
|
|
4,326 |
|
|
|
668 |
|
|
|
15.4 |
|
Incentive fee |
|
|
4,975 |
|
|
|
3,983 |
|
|
|
992 |
|
|
|
24.9 |
|
Administration fee |
|
|
932 |
|
|
|
863 |
|
|
|
69 |
|
|
|
8.0 |
|
Interest and dividend expense |
|
|
7,460 |
|
|
|
4,925 |
|
|
|
2,535 |
|
|
|
51.5 |
|
Amortization of deferred financing costs |
|
|
1,329 |
|
|
|
1,024 |
|
|
|
305 |
|
|
|
29.8 |
|
Other |
|
|
2,329 |
|
|
|
2,264 |
|
|
|
65 |
|
|
|
2.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses before credits from Adviser |
|
|
29,588 |
|
|
|
23,592 |
|
|
|
5,996 |
|
|
|
25.4 |
|
Credits to fees from Adviser |
|
|
(7,842 |
) |
|
|
(6,635 |
) |
|
|
(1,207 |
) |
|
|
(18.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses, net of credits to fees |
|
|
21,746 |
|
|
|
16,957 |
|
|
|
4,789 |
|
|
|
28.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INVESTMENT INCOME |
|
|
19,897 |
|
|
|
19,307 |
|
|
|
590 |
|
|
|
3.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
REALIZED AND UNREALIZED GAIN (LOSS) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized (loss) gain on investments |
|
|
(73 |
) |
|
|
8,241 |
|
|
|
(8,314 |
) |
|
|
(100.9 |
) |
Net realized loss on other |
|
|
|
|
|
|
(29 |
) |
|
|
29 |
|
|
|
100.0 |
|
Net unrealized appreciation (depreciation) of investments |
|
|
29,940 |
|
|
|
(29,206 |
) |
|
|
59,146 |
|
|
|
NM |
|
Net unrealized depreciation of other |
|
|
450 |
|
|
|
358 |
|
|
|
92 |
|
|
|
25.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized and unrealized gain (loss) on investments and other |
|
|
30,317 |
|
|
|
(20,636 |
) |
|
|
50,953 |
|
|
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS |
|
$ |
50,214 |
|
|
$ |
(1,329 |
) |
|
$ |
51,543 |
|
|
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BASIC AND DILUTED PER COMMON SHARE: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income |
|
$ |
0.75 |
|
|
$ |
0.73 |
|
|
$ |
0.02 |
|
|
|
2.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in net assets resulting from operations |
|
$ |
1.88 |
|
|
$ |
(0.05 |
) |
|
$ |
1.93 |
|
|
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NM = Not Meaningful
Investment Income
Total investment income increased by
14.8% for the year ended March 31, 2015, as compared to the prior year. This increase was due to an increase in interest income, which resulted primarily from an increase in the size of our portfolio during the year ended March 31, 2015,
partially offset by a decline in other income for the same period. This decline in other income was primarily a result of success fees and dividend income related to the exit of Venyu, which were recorded during the year ended March 31, 2014,
but did not recur in the year ended March 31, 2015.
Interest income from our investments in debt securities increased 20.4% for the year ended
March 31, 2015, as compared to the prior year. The level of interest income from investments is directly related to the principal balance of our interest-bearing investment portfolio outstanding during the period multiplied by the weighted
average yield. The weighted average principal balance of our interest-bearing investment portfolio during the year ended March 31, 2015, was approximately $292.2 million, compared to approximately $241.5 million for the prior year. This
increase was primarily due to approximately $84.7 million in new debt investments originated after March 31, 2014, including Roanoke, Cambridge, Old World, B+T, Logo, and Counsel Press.
35
At March 31, 2015, the loans of one portfolio company, Tread, were on non-accrual status, with an aggregate
weighted average principal balance of $11.6 million during the year ended March 31, 2015. These loans had an aggregate weighted average principal balance of $11.9 million during the year ended March 31, 2014. The weighted average yield on
our interest-bearing investments, excluding cash and cash equivalents and receipts recorded as other income, was 12.6% for both years ended March 31, 2015 and 2014. The weighted average yield may vary from period to period, based on the current
stated interest rate on interest-bearing investments.
Other income for the year ended March 31, 2015 decreased 14.6% from the prior year. During the
year ended March 31, 2015, other income primarily consisted of $2.6 million and $0.6 million of dividend income received from Mathey Investments, Inc. (Mathey) and Drew Foam Company, Inc. (Drew Foam), respectively, and
$0.5 million resulting from prepaid success fees received from SOG. During the year ended March 31, 2014, other income primarily consisted of a combined $3.3 million in success fee and dividend income received in connection with the exit of
Venyu, $0.8 million and $0.2 million in success and prepayment fees resulting from payoffs from Channel Technologies Group, LLC (Channel) and Cavert II Holding Corp. (Cavert), respectively, and SOGs and Frontiers
elections to prepay success fees of $0.5 million and $0.2 million, respectively.
The following table lists the investment income for our five largest
portfolio company investments at fair value during the respective fiscal years:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2015 |
|
|
Year Ended March 31, 2015 |
|
Company |
|
Fair Value |
|
|
% of Portfolio |
|
|
Investment Income |
|
|
% of Total Investment Income |
|
Counsel Press, Inc. (A) |
|
$ |
31,995 |
|
|
|
6.9 |
% |
|
$ |
9 |
|
|
|
0.0 |
% |
SOG Specialty Knives & Tools, LLC |
|
|
31,851 |
|
|
|
6.8 |
|
|
|
2,657 |
|
|
|
6.4 |
|
Funko, LLC |
|
|
25,008 |
|
|
|
5.4 |
|
|
|
991 |
|
|
|
2.4 |
|
Acme Cryogenics, Inc. |
|
|
23,019 |
|
|
|
4.9 |
|
|
|
1,691 |
|
|
|
4.1 |
|
Old World Christmas, Inc. (A) |
|
|
22,427 |
|
|
|
4.8 |
|
|
|
1,060 |
|
|
|
2.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotalfive largest investments |
|
|
134,300 |
|
|
|
28.8 |
|
|
|
6,408 |
|
|
|
15.4 |
|
Other portfolio companies |
|
|
331,753 |
|
|
|
71.2 |
|
|
|
35,235 |
|
|
|
84.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment portfolio |
|
$ |
466,053 |
|
|
|
100.0 |
% |
|
$ |
41,643 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2014 |
|
|
Year Ended March 31, 2014 |
|
Company |
|
Fair Value |
|
|
% of Portfolio |
|
|
Investment Income |
|
|
% of Total Investment Income |
|
SOG Specialty Knives and Tools, LLC |
|
$ |
26,639 |
|
|
|
8.5 |
% |
|
$ |
3,157 |
|
|
|
8.7 |
% |
Acme Cryogenics, Inc. |
|
|
25,776 |
|
|
|
8.2 |
|
|
|
1,691 |
|
|
|
4.7 |
|
Galaxy Tool Holding, Inc. |
|
|
18,512 |
|
|
|
5.9 |
|
|
|
2,124 |
|
|
|
5.9 |
|
Ginsey Home Solutions, Inc. |
|
|
16,132 |
|
|
|
5.1 |
|
|
|
1,786 |
|
|
|
4.9 |
|
Edge Adhesives Holdings, Inc. (A) |
|
|
15,969 |
|
|
|
5.1 |
|
|
|
142 |
|
|
|
0.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotalfive largest investments |
|
|
103,028 |
|
|
|
32.8 |
|
|
|
8,900 |
|
|
|
24.6 |
|
Other portfolio companies |
|
|
211,365 |
|
|
|
67.2 |
|
|
|
27,364 |
|
|
|
75.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment portfolio |
|
$ |
314,393 |
|
|
|
100.0 |
% |
|
$ |
36,264 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A) |
New investment during the applicable year. |
Expenses
Total expenses, net of any voluntary, irrevocable and non-contractual credits from the Adviser, increased 28.2% for the year ended March 31, 2015, as
compared to the prior year period, primarily due to an increase in the net base management fee, incentive fee, and interest and dividend expense as compared to the prior year.
The net base management fee increased for the fiscal year ended March 31, 2015, as compared to the prior year period, as a result of the increased size
of our portfolio over the respective periods. An incentive fee of $5.0 million was earned by the Adviser during the fiscal year ended March 31, 2015, compared to an incentive fee of $4.0 million for the prior year.
36
The base management fee, loan servicing fee, incentive fee, and their related unconditional and irrevocable
voluntary credits are computed quarterly, as described under Investment Advisory and Management Agreement in Note 4 Related Party Transactions of the notes to our accompanying Consolidated Financial Statements and
are summarized in the following table:
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31, |
|
|
|
2015 |
|
|
2014 |
|
Average total assets subject to base management fee(A) |
|
$ |
378,450 |
|
|
$ |
310,350 |
|
Multiplied by annual base management fee of 2% |
|
|
2.0 |
% |
|
|
2.0 |
% |
|
|
|
|
|
|
|
|
|
Base management fee(B) |
|
|
7,569 |
|
|
|
6,207 |
|
Credits to fees from Adviser other(B) |
|
|
(2,848 |
) |
|
|
(2,309 |
) |
|
|
|
|
|
|
|
|
|
Net base management fee |
|
$ |
4,721 |
|
|
$ |
3,898 |
|
|
|
|
|
|
|
|
|
|
Loan servicing fee(B) |
|
|
4,994 |
|
|
|
4,326 |
|
Credits to base management fee loan servicing fee(B) |
|
|
(4,994 |
) |
|
|
(4,326 |
) |
|
|
|
|
|
|
|
|
|
Net loan servicing fee |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
Incentive fee(B) |
|
|
4,975 |
|
|
|
3,983 |
|
Credits to fees from Adviser other(B) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net incentive fee |
|
$ |
4,975 |
|
|
$ |
3,983 |
|
|
|
|
|
|
|
|
|
|
(A) |
Average total assets subject to the base management fee is defined as total assets, including investments made with proceeds of borrowings, less any uninvested cash or cash equivalents resulting from borrowings,
valued at the end of the applicable quarters within the respective periods and adjusted appropriately for any share issuances or repurchases during the periods. |
(B) |
Reflected as a line item on our accompanying Consolidated Statement of Operations. |
Interest and
dividend expense increased 51.5% for the year ended March 31, 2015, as compared to the prior year, primarily due to increased average borrowings under our Credit Facility. The weighted average balance outstanding on our Credit Facility
during the fiscal year ended March 31, 2015, was $79.2 million, as compared to $34.6 million in the prior year. The increase in average borrowings under our Credit Facility was partially offset by a decrease in the interest rate due to an
amendment of our Credit Facility that occurred in June 2014. Dividends on Term Preferred Stock increased as a result of the issuance of $41.4 million of our Series B Term Preferred Stock in November 2014.
Realized and Unrealized Gain (Loss)
Realized Gain
(Loss) on Investments
During the year ended March 31, 2015, we recorded minimal realized activity. During the fiscal year ended March 31,
2014, we recorded a net realized gain of $8.2 million consisting of a $24.8 million gain on the Venyu sale, partially offset by realized losses of $11.4 million and $1.8 million related to the equity sales of ASH and Packerland, respectively, and
realized losses of $3.4 million related to the restructuring of Noble.
Net Unrealized Appreciation (Depreciation) of Investments
During the year ended March 31, 2015, we recorded net unrealized appreciation of investments in the aggregate amount of $29.9 million.
37
The realized loss and unrealized appreciation (depreciation) across our investments for the fiscal year ended
March 31, 2015, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended March 31, 2015 |
|
Portfolio Company |
|
Realized Loss |
|
|
Unrealized Appreciation (Depreciation) |
|
|
Reversal of Unrealized (Appreciation) Depreciation |
|
|
Net Gain (Loss) |
|
Funko, LLC |
|
$ |
|
|
|
$ |
13,090 |
|
|
$ |
|
|
|
$ |
13,090 |
|
SOG Specialty Knives & Tools, LLC |
|
|
|
|
|
|
5,211 |
|
|
|
|
|
|
|
5,211 |
|
Drew Foam Company, Inc. |
|
|
|
|
|
|
4,994 |
|
|
|
|
|
|
|
4,994 |
|
Jackrabbit, Inc. |
|
|
|
|
|
|
4,575 |
|
|
|
|
|
|
|
4,575 |
|
NDLI Inc. |
|
|
|
|
|
|
4,397 |
|
|
|
|
|
|
|
4,397 |
|
Ginsey Home Solutions, Inc. |
|
|
|
|
|
|
3,904 |
|
|
|
|
|
|
|
3,904 |
|
Mathey Investments, Inc. |
|
|
|
|
|
|
2,735 |
|
|
|
|
|
|
|
2,735 |
|
Cambridge Sound Management, LLC |
|
|
|
|
|
|
2,698 |
|
|
|
|
|
|
|
2,698 |
|
Alloy Die Casting Corp. |
|
|
|
|
|
|
2,068 |
|
|
|
|
|
|
|
2,068 |
|
Tread Corp. |
|
|
|
|
|
|
1,896 |
|
|
|
|
|
|
|
1,896 |
|
Frontier Packaging, Inc. |
|
|
|
|
|
|
1,816 |
|
|
|
|
|
|
|
1,816 |
|
SBS, Industries, LLC |
|
|
|
|
|
|
1,746 |
|
|
|
|
|
|
|
1,746 |
|
Behrens Manufacturing, LLC |
|
|
|
|
|
|
692 |
|
|
|
|
|
|
|
692 |
|
Old World Christmas, Inc. |
|
|
|
|
|
|
477 |
|
|
|
|
|
|
|
477 |
|
Quench Holdings Corp. |
|
|
|
|
|
|
375 |
|
|
|
|
|
|
|
375 |
|
B+T Group Acquisition Inc. |
|
|
|
|
|
|
344 |
|
|
|
|
|
|
|
344 |
|
Edge Adhesives Holdings, Inc. |
|
|
|
|
|
|
(274 |
) |
|
|
|
|
|
|
(274 |
) |
Meridian Rack & Pinion, Inc. |
|
|
|
|
|
|
(411 |
) |
|
|
|
|
|
|
(411 |
) |
D.P.M.S., Inc. |
|
|
|
|
|
|
(605 |
) |
|
|
|
|
|
|
(605 |
) |
Country Club Enterprises, LLC |
|
|
|
|
|
|
(806 |
) |
|
|
|
|
|
|
(806 |
) |
Channel Technologies Group, LLC |
|
|
|
|
|
|
(807 |
) |
|
|
|
|
|
|
(807 |
) |
Galaxy Tool Holding Corp. |
|
|
|
|
|
|
(2,992 |
) |
|
|
|
|
|
|
(2,992 |
) |
Acme Cryogenics, Inc. |
|
|
|
|
|
|
(3,881 |
) |
|
|
|
|
|
|
(3,881 |
) |
B-Dry, LLC |
|
|
|
|
|
|
(4,081 |
) |
|
|
|
|
|
|
(4,081 |
) |
Mitchell Rubber Products, Inc. |
|
|
|
|
|
|
(7,178 |
) |
|
|
|
|
|
|
(7,178 |
) |
Other, net (<$250 Net) |
|
|
(73 |
) |
|
|
(43 |
) |
|
|
|
|
|
|
(116 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
(73 |
) |
|
$ |
29,940 |
|
|
$ |
|
|
|
$ |
29,867 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The primary reason for the change in our net unrealized appreciation of $29.9 million for the year ended March 31, 2015,
was an increase in the equity valuations of Funko, SOG, Drew Foam, Jackrabbit, Inc. (Jackrabbit), and NDLI, due to an increase in the portfolio companies performance and an increase in certain comparable multiples used to estimate
the fair value of our investments. This was partially offset by decreased performance in several of our portfolio companies.
During the year ended
March 31, 2014, we recorded net unrealized depreciation on investments in the aggregate amount of $29.2 million, which included the reversal of $0.8 million in aggregate unrealized appreciation, primarily related to the sale of Venyu,
partially offset by the sale of ASH and Packerland, and the restructure of Noble. Excluding reversals, we had $28.4 million in net unrealized depreciation for the year ended March 31, 2014.
38
Realized gains (losses) and unrealized appreciation (depreciation) across our investments for the year ended
March 31, 2014, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31, 2014 |
|
Portfolio Company |
|
Realized Gain (Loss) |
|
|
Unrealized (Depreciation) Appreciation |
|
|
Reversal of Unrealized (Appreciation) Depreciation |
|
|
Net Gain (Loss) |
|
Venyu Solutions, Inc.(A) |
|
$ |
24,798 |
|
|
$ |
(1,596 |
) |
|
$ |
(17,374 |
) |
|
$ |
5,828 |
|
Auto Safety House, LLC (B) |
|
|
(11,402 |
) |
|
|
4,925 |
|
|
|
11,410 |
|
|
|
4,933 |
|
Quench Holdings Corp. |
|
|
|
|
|
|
3,377 |
|
|
|
|
|
|
|
3,377 |
|
Frontier Packaging, Inc. |
|
|
|
|
|
|
1,712 |
|
|
|
|
|
|
|
1,712 |
|
Channel Technologies Group, LLC |
|
|
|
|
|
|
2,187 |
|
|
|
(583 |
) |
|
|
1,604 |
|
B-Dry, LLC |
|
|
|
|
|
|
1,555 |
|
|
|
|
|
|
|
1,555 |
|
Funko, LLC |
|
|
|
|
|
|
1,113 |
|
|
|
|
|
|
|
1,113 |
|
Packerland Whey Products, Inc. (C) |
|
|
(1,764 |
) |
|
|
(369 |
) |
|
|
2,500 |
|
|
|
367 |
|
Tread Corp. |
|
|
|
|
|
|
(735 |
) |
|
|
|
|
|
|
(735 |
) |
Mathey Investments, Inc. |
|
|
|
|
|
|
(922 |
) |
|
|
|
|
|
|
(922 |
) |
D.P.M.S., Inc. |
|
|
|
|
|
|
(1,229 |
) |
|
|
|
|
|
|
(1,229 |
) |
Star Seed, Inc. |
|
|
|
|
|
|
(1,406 |
) |
|
|
|
|
|
|
(1,406 |
|
Acme Cryogenics, Inc. |
|
|
|
|
|
|
(1,564 |
) |
|
|
|
|
|
|
(1,564 |
) |
Jackrabbit, Inc. |
|
|
|
|
|
|
(1,687 |
) |
|
|
|
|
|
|
(1,687 |
) |
Mitchell Rubber Products, Inc. |
|
|
|
|
|
|
(2,016 |
) |
|
|
|
|
|
|
(2,016 |
) |
Alloy Die Casting Corp. |
|
|
|
|
|
|
(2,111 |
) |
|
|
|
|
|
|
(2,111 |
) |
Galaxy Tool Holding Corp. |
|
|
|
|
|
|
(2,364 |
) |
|
|
|
|
|
|
(2,364 |
) |
Drew Foam Company, Inc. |
|
|
|
|
|
|
(2,837 |
) |
|
|
|
|
|
|
(2,837 |
) |
Noble Logistics, Inc. (D) |
|
|
(3,432 |
) |
|
|
(2,989 |
) |
|
|
3,432 |
|
|
|
(2,989 |
) |
SOG Specialty Knives & Tools, LLC |
|
|
|
|
|
|
(3,183 |
) |
|
|
|
|
|
|
(3,183 |
) |
Precision Southeast, Inc. |
|
|
|
|
|
|
(3,227 |
) |
|
|
|
|
|
|
(3,227 |
) |
Schylling, Inc. |
|
|
|
|
|
|
(3,853 |
) |
|
|
|
|
|
|
(3,853 |
) |
Ginsey Home Solutions, Inc. |
|
|
|
|
|
|
(5,702 |
) |
|
|
|
|
|
|
(5,702 |
) |
SBS, Industries, LLC |
|
|
|
|
|
|
(5,823 |
) |
|
|
|
|
|
|
(5,823 |
) |
Other, net (<$250 Net) |
|
|
41 |
|
|
|
328 |
|
|
|
(175 |
) |
|
|
194 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
8,241 |
|
|
$ |
(28,416 |
) |
|
$ |
(790 |
) |
|
$ |
(20,965 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A) |
Venu was sold in August 2013. |
(B) |
ASH equity investment was sold in October 2013. |
(C) |
Packerland equity investment was sold in November 2013. |
(D) |
Noble was restructured in February 2014. |
The primary changes in our net unrealized depreciation for the year
ended March 31, 2014, were due to decreased equity valuations in several of our portfolio companies, primarily due to decreased portfolio company performance and decreases in certain comparable multiples used to estimate the fair value of our
investments.
Over our entire investment portfolio, we recorded approximately $1.0 million of net unrealized appreciation on our debt positions and $28.9
million of net unrealized appreciation on our equity holdings for the year ended March 31, 2015. At March 31, 2015, the fair value of our investment portfolio was less than our cost basis by approximately $39.2 million, as compared to
$69.1 million at March 31, 2014, representing net unrealized appreciation of $29.9 million for the year ended March 31, 2015. We believe that our aggregate investment portfolio is valued at a depreciated value due to the lingering effects
of the recent recession on the performance of certain of our portfolio companies. Our entire portfolio was fair valued at 92.2% of cost as of March 31, 2015. 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.
Realized Loss on Other
For the year ended March 31,
2014, we recorded a net realized loss of $29, due to the expiration of interest rate cap agreements. For the year ended March 31, 2015, no such amounts were incurred.
39
Net Unrealized Depreciation on Other
For the years ended March 31, 2015 and 2014, we recorded $0.5 million and $0.4 million, respectively, of net unrealized depreciation on our Credit
Facility recorded at fair value.
Comparison of the Fiscal Year Ended March 31, 2014, to the Fiscal Year Ended March 31, 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Fiscal Years Ended March 31, |
|
|
|
2014 |
|
|
2013 |
|
|
$ Change |
|
|
% Change |
|
INVESTMENT INCOME |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
$ |
30,460 |
|
|
$ |
24,798 |
|
|
$ |
5,662 |
|
|
|
22.8 |
% |
Other income |
|
|
5,804 |
|
|
|
5,740 |
|
|
|
64 |
|
|
|
1.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment income |
|
|
36,264 |
|
|
|
30,538 |
|
|
|
5,726 |
|
|
|
18.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EXPENSES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Base management fee |
|
|
6,207 |
|
|
|
5,412 |
|
|
|
795 |
|
|
|
14.7 |
|
Loan servicing fee |
|
|
4,326 |
|
|
|
3,725 |
|
|
|
601 |
|
|
|
16.1 |
|
Incentive fee |
|
|
3,983 |
|
|
|
2,585 |
|
|
|
1,398 |
|
|
|
54.1 |
|
Administration fee |
|
|
863 |
|
|
|
785 |
|
|
|
78 |
|
|
|
9.9 |
|
Interest and dividend expense |
|
|
4,925 |
|
|
|
3,977 |
|
|
|
948 |
|
|
|
23.8 |
|
Amortization of deferred financing costs |
|
|
1,024 |
|
|
|
791 |
|
|
|
233 |
|
|
|
29.5 |
|
Other |
|
|
2,264 |
|
|
|
1,828 |
|
|
|
436 |
|
|
|
23.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses before credits from Adviser |
|
|
23,592 |
|
|
|
19,103 |
|
|
|
4,489 |
|
|
|
23.5 |
|
Credits to fees from Adviser |
|
|
(6,635 |
) |
|
|
(5,053 |
) |
|
|
(1,582 |
) |
|
|
(31.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses, net of credits to fees |
|
|
16,957 |
|
|
|
14,050 |
|
|
|
2,907 |
|
|
|
20.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INVESTMENT INCOME |
|
|
19,307 |
|
|
|
16,488 |
|
|
|
2,819 |
|
|
|
17.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
REALIZED AND UNREALIZED (LOSS) GAIN |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized gain on investments |
|
|
8,241 |
|
|
|
843 |
|
|
|
7,398 |
|
|
|
877.6 |
|
Net realized loss on other |
|
|
(29 |
) |
|
|
(41 |
) |
|
|
12 |
|
|
|
29.3 |
|
Net unrealized (depreciation) appreciation of investments |
|
|
(29,206 |
) |
|
|
804 |
|
|
|
(30,010 |
) |
|
|
NM |
|
Net unrealized depreciation (appreciation) of other |
|
|
358 |
|
|
|
(815 |
) |
|
|
1,173 |
|
|
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized and unrealized (loss) gain on investments and other |
|
|
(20,636 |
) |
|
|
791 |
|
|
|
(21,427 |
) |
|
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET (DECREASE) INCREASE IN NET ASSETS RESULTING FROM OPERATIONS |
|
$ |
(1,329 |
) |
|
$ |
17,279 |
|
|
$ |
(18,608 |
) |
|
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BASIC AND DILUTED PER COMMON SHARE: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income |
|
$ |
0.73 |
|
|
$ |
0.68 |
|
|
$ |
0.05 |
|
|
|
7.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in net assets resulting from operations |
|
|
(0.05 |
) |
|
|
0.71 |
|
|
|
(0.76 |
) |
|
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NM = Not Meaningful
Investment Income
Total investment income increased by
18.8% for the year ended March 31, 2014, as compared to the prior year. This increase was primarily due an increase in interest income in the year ended March 31, 2014, as a result of an increase in the size of our loan portfolio and
holding higher-yielding debt investments.
Interest income from our investments in debt securities increased 22.8% for the year ended March 31, 2014,
as compared to the prior year. The level of interest income from investments is directly related to the principal balance of our interest-bearing investment portfolio outstanding during the period multiplied by the weighted average yield. The
weighted average principal balance of our interest-bearing investment portfolio during the year ended March 31, 2014, was approximately $241.5 million, compared to approximately $198.1 million for the prior year. This increase was primarily due
to $125.6 million in new investments originated after March 31, 2013, including Jackrabbit, Funko, Star Seed, Schylling, Inc. (Schylling), Alloy Die Casting Corp. (ADC), Behrens Manufacturing, LLC (Behrens),
Meridian Rack & Pinion, Inc. (Meridian), Head Country Food Products, Inc. (Head Country) and Edge Adhesives Holdings Inc. (Edge), partially offset by the exit of Venyu and the repayment of debt
investments of Cavert and Channel.
40
As of March 31, 2014, our loans to Tread were on non-accrual. ASH, which was on non-accrual as of
September 30, 2013, was sold to certain members of its existing management team in October 2013. As a result of the sale, we retained a $5.0 million accruing revolving credit facility in ASH, which is no longer on non-accrual. The non-accrual
aggregate weighted average principal balance was $19.9 million during the year ended March 31, 2014. As of March 31, 2013, loans to two portfolio companies, ASH and Tread, were on non-accrual, with an aggregate weighted average principal
balance of $20.5 million during the year ended March 31, 2013. Tread was put on non-accrual and Country Club Enterprises, LLC (CCE) was taken off non-accrual during the three months ended December 31, 2012. The weighted average
yield on our interest-bearing investments, excluding cash and cash equivalents and excluding receipts recorded as other income, for the year ended March 31, 2014, was 12.6%, compared to 12.5% for the prior year.
Other income for the year ended March 31, 2014 remained relatively unchanged from the prior year. During the year ended March 31, 2014, other income
primarily consisted of a combined $3.3 million in success fee and dividend income received in connection with the exit of Venyu, $0.8 million and $0.2 million in success and prepayment fees resulting from payoffs from Channel and Cavert,
respectively, and SOGs and Frontiers elections to prepay success fees of $0.5 million and $0.2 million, respectively. During the year ended March 31, 2013, other income primarily consisted of $4.1 million of dividend income from the
Galaxy Tool Holding Corp. (Galaxy) recapitalization, $0.7 million in dividend income received on preferred shares of Acme, and Matheys and Caverts elections to each prepay $0.4 million of success fees.
The following table lists the investment income for our five largest portfolio company investments at fair value during the respective fiscal years:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2014 |
|
|
Year Ended March 31, 2014 |
|
Company |
|
Fair Value |
|
|
% of Portfolio |
|
|
Investment Income |
|
|
% of Total Investment Income |
|
SOG Specialty Knives and Tools, LLC |
|
$ |
26,639 |
|
|
|
8.5 |
% |
|
$ |
3,157 |
|
|
|
8.7 |
% |
Acme Cryogenics, Inc. |
|
|
25,776 |
|
|
|
8.2 |
|
|
|
1,691 |
|
|
|
4.7 |
|
Galaxy Tool Holding, Inc. |
|
|
18,512 |
|
|
|
5.9 |
|
|
|
2,124 |
|
|
|
5.9 |
|
Ginsey Home Solutions, Inc. |
|
|
16,132 |
|
|
|
5.1 |
|
|
|
1,786 |
|
|
|
4.9 |
|
Edge Adhesives Holdings, Inc. (A) |
|
|
15,969 |
|
|
|
5.1 |
|
|
|
142 |
|
|
|
0.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotalfive largest investments |
|
|
103,028 |
|
|
|
32.8 |
|
|
|
8,900 |
|
|
|
24.6 |
|
Other portfolio companies |
|
|
211,365 |
|
|
|
67.2 |
|
|
|
27,364 |
|
|
|
75.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment portfolio |
|
$ |
314,393 |
|
|
|
100.0 |
% |
|
$ |
36,264 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2013 |
|
|
Year Ended March 31, 2013 |
|
Company |
|
Fair Value |
|
|
% of Portfolio |
|
|
Investment Income |
|
|
% of Total Investment Income |
|
Venyu Solutions, Inc. (B) |
|
$ |
43,970 |
|
|
|
15.4 |
% |
|
$ |
2,502 |
|
|
|
8.2 |
% |
SOG Specialty Knives and Tools, LLC |
|
|
29,822 |
|
|
|
10.4 |
|
|
|
2,657 |
|
|
|
8.7 |
|
Acme Cryogenics, Inc. |
|
|
27,340 |
|
|
|
9.5 |
|
|
|
2,368 |
|
|
|
7.8 |
|
Ginsey Home Solutions, Inc.(A) |
|
|
21,833 |
|
|
|
7.6 |
|
|
|
1,331 |
|
|
|
4.4 |
|
Galaxy Tool Holding, Inc.(C) |
|
|
20,876 |
|
|
|
7.3 |
|
|
|
4,711 |
|
|
|
15.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotalfive largest investments |
|
|
143,841 |
|
|
|
50.2 |
|
|
|
13,569 |
|
|
|
44.5 |
|
Other portfolio companies |
|
|
142,641 |
|
|
|
49.8 |
|
|
|
16,969 |
|
|
|
55.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment portfolio |
|
$ |
286,482 |
|
|
|
100.0 |
% |
|
$ |
30,538 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A) |
New investment during the applicable year. |
(B) |
Venyu was sold in August 2013. |
(C) |
Investment income includes $4.1 million non-cash dividend recognized from recapitalization. |
41
Expenses
Total expenses, excluding any voluntary, irrevocable and non-contractual credits from the Adviser, increased 23.4% for the year ended March 31, 2014, as
compared to the prior year, primarily due to an increase in the base management fee, incentive fee, and interest expense as compared to the prior year.
The base management fee increased for the year ended March 31, 2014, as compared to the prior year, as a result of the increased size of our portfolio.
Additionally, a net incentive fee of $3.9 million was earned by the Adviser during the fiscal year ended March 31, 2014, compared to $2.4 million for the prior year. The base management fee, loan servicing fee, and incentive fee, and their
related unconditional and irrevocable voluntary credits, are computed quarterly, as described under Investment Advisory and Management Agreement in Note 4 of the notes to our accompanying Consolidated Financial Statements and are
summarized in the following table:
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31, |
|
|
|
2014 |
|
|
2013 |
|
Average total assets subject to base management fee(A) |
|
$ |
310,350 |
|
|
$ |
270,600 |
|
Multiplied by annual base management fee of 2% |
|
|
2.0 |
% |
|
|
2.0 |
% |
|
|
|
|
|
|
|
|
|
Base management fee(B) |
|
|
6,207 |
|
|
|
5,412 |
|
Credits to fees from Adviser other(B) |
|
|
(2,309 |
) |
|
|
(1,107 |
) |
|
|
|
|
|
|
|
|
|
Net base management fee |
|
$ |
3,898 |
|
|
$ |
4,305 |
|
|
|
|
|
|
|
|
|
|
Loan servicing fee(B) |
|
|
4,326 |
|
|
|
3,725 |
|
Credits to base management fee loan servicing fee(B) |
|
|
(4,326 |
) |
|
|
(3,725 |
) |
|
|
|
|
|
|
|
|
|
Net loan servicing fee |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
Incentive fee(B) |
|
|
3,983 |
|
|
|
2,585 |
|
Credits to fees from Adviser other(B) |
|
|
|
|
|
|
(221 |
) |
|
|
|
|
|
|
|
|
|
Net Incentive fee |
|
$ |
3,983 |
|
|
$ |
2,364 |
|
|
|
|
|
|
|
|
|
|
(A) |
Average total assets subject to the base management fee is defined as total assets, including investments made with proceeds of borrowings, less any uninvested cash or cash equivalents resulting from borrowings, valued
at the end of the applicable quarters within the respective periods and adjusted appropriately for any share issuances or repurchases during the periods. |
(B) |
Reflected as a line item on our accompanying Consolidated Statement of Operations. For the year ended March 31, 2013, the credits to incentive fee and the credits to base management fee are combined into one
line item, Credits to fees from Adviser-other, on the accompanying Consolidated Statement of Operations. |
Interest and dividend
expense increased 23.8% for the fiscal year ended March 31, 2014, as compared to the prior year, primarily due to increased commitment (unused) fees related to the expansion of our Credit Facility from $60 million to $105 million and
increased average borrowings under our Credit Facility. The average balance outstanding on our Credit Facility during the fiscal year ended March 31, 2014, was $34.6 million, as compared to $15.5 million in the prior year.
Realized and Unrealized Gain (Loss)
Net Realized Gain
on Investments
During the fiscal year ended March 31, 2014, we recorded a net realized gain of $8.2 million consisting of a $24.8 million gain on
the Venyu sale, partially offset by the realized losses of $11.4 million and $1.8 million related to the equity sales of ASH and Packerland, respectively, and the realized loss of $3.4 million related to the restructuring of Noble. During the year
ended March 31, 2013, we recorded a realized gain of $0.8 million relating to post-closing adjustments on the previous investment exit of A. Stucki.
Net Unrealized Appreciation (Depreciation) of Investments
During the year ended March 31, 2014, we recorded net unrealized depreciation on investments in the aggregate amount of $29.2 million, which included
the reversal of $0.8 million in aggregate unrealized appreciation, primarily related to the sale of Venyu, partially offset by the sale of ASH and Packerland, and the restructure of Noble. Excluding reversals, we had $28.4 million in net unrealized
depreciation for the year ended March 31, 2014.
42
The realized gains (losses) and unrealized appreciation (depreciation) across our investments for the year ended
March 31, 2014, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31, 2014 |
|
Portfolio Company |
|
Realized Gain (Loss) |
|
|
Unrealized Appreciation (Depreciation) |
|
|
Reversal of Unrealized (Appreciation) Depreciation |
|
|
Net Gain (Loss) |
|
Venyu Solutions, Inc.(A) |
|
$ |
24,798 |
|
|
$ |
(1,596 |
) |
|
$ |
(17,374 |
) |
|
$ |
5,828 |
|
Auto Safety House, LLC (B) |
|
|
(11,402 |
) |
|
|
4,925 |
|
|
|
11,410 |
|
|
|
4,933 |
|
Quench Holdings Corp. |
|
|
|
|
|
|
3,377 |
|
|
|
|
|
|
|
3,377 |
|
Frontier Packaging, Inc. |
|
|
|
|
|
|
1,712 |
|
|
|
|
|
|
|
1,712 |
|
Channel Technologies Group, LLC |
|
|
|
|
|
|
2,187 |
|
|
|
(583 |
) |
|
|
1,604 |
|
B-Dry, LLC |
|
|
|
|
|
|
1,555 |
|
|
|
|
|
|
|
1,555 |
|
Funko, LLC |
|
|
|
|
|
|
1,113 |
|
|
|
|
|
|
|
1,113 |
|
Packerland Whey Products, Inc. (C) |
|
|
(1,764 |
) |
|
|
(369 |
) |
|
|
2,500 |
|
|
|
367 |
|
Tread Corp. |
|
|
|
|
|
|
(735 |
) |
|
|
|
|
|
|
(735 |
) |
Mathey Investments, Inc. |
|
|
|
|
|
|
(922 |
) |
|
|
|
|
|
|
(922 |
) |
D.P.M.S., Inc. |
|
|
|
|
|
|
(1,229 |
) |
|
|
|
|
|
|
(1,229 |
) |
Star Seed, Inc. |
|
|
|
|
|
|
(1,406 |
) |
|
|
|
|
|
|
(1,406 |
) |
Acme Cryogenics, Inc. |
|
|
|
|
|
|
(1,564 |
) |
|
|
|
|
|
|
(1,564 |
) |
Jackrabbit, Inc. |
|
|
|
|
|
|
(1,687 |
) |
|
|
|
|
|
|
(1,687 |
) |
Mitchell Rubber Products, Inc. |
|
|
|
|
|
|
(2,016 |
) |
|
|
|
|
|
|
(2,016 |
) |
Alloy Die Casting Corp. |
|
|
|
|
|
|
(2,111 |
) |
|
|
|
|
|
|
(2,111 |
) |
Galaxy Tool Holding Corp. |
|
|
|
|
|
|
(2,364 |
) |
|
|
|
|
|
|
(2,364 |
) |
Drew Foam Company, Inc. |
|
|
|
|
|
|
(2,837 |
) |
|
|
|
|
|
|
(2,837 |
) |
Noble Logistics, Inc. (D) |
|
|
(3,432 |
) |
|
|
(2,989 |
) |
|
|
3,432 |
|
|
|
(2,989 |
) |
SOG Specialty Knives & Tools, LLC |
|
|
|
|
|
|
(3,183 |
) |
|
|
|
|
|
|
(3,183 |
) |
Precision Southeast, Inc. |
|
|
|
|
|
|
(3,227 |
) |
|
|
|
|
|
|
(3,227 |
) |
Schylling, Inc. |
|
|
|
|
|
|
(3,853 |
) |
|
|
|
|
|
|
(3,853 |
) |
Ginsey Home Solutions, Inc. |
|
|
|
|
|
|
(5,702 |
) |
|
|
|
|
|
|
(5,702 |
) |
SBS, Industries, LLC |
|
|
|
|
|
|
(5,823 |
) |
|
|
|
|
|
|
(5,823 |
) |
Other, net (<$250 Net) |
|
|
41 |
|
|
|
328 |
|
|
|
(175 |
) |
|
|
194 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
8,241 |
|
|
$ |
(28,416 |
) |
|
$ |
(790 |
) |
|
$ |
(20,965 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A) |
Venyu was sold in August 2013. |
(B) |
ASH equity investment was sold in October 2013. |
(C) |
Packerland equity investment was sold in November 2013. |
(D) |
Noble was restructured in February 2014. |
The primary changes in our net unrealized depreciation for
the year ended March 31, 2014, were due to decreased equity valuations in several of our portfolio companies, primarily due to decreased portfolio company performance and decreases in certain comparable multiples used to estimate the fair value
of our investments.
43
During the year ended March 31, 2013, we recorded net unrealized depreciation on investments in the
aggregate amount of $0.8 million. The realized gains (losses) and unrealized appreciation (depreciation) across our investments for the year ended March 31, 2013, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31, 2013 |
|
|
|
|
|
|
|
|
|
Reversal of |
|
|
|
|
|
|
|
|
|
Unrealized |
|
|
Unrealized |
|
|
|
|
|
|
Realized |
|
|
Appreciation |
|
|
(Appreciation) |
|
|
Net Gain |
|
Portfolio Company |
|
Gain (Loss) |
|
|
(Depreciation) |
|
|
Depreciation |
|
|
(Loss) |
|
Venyu Solutions, Inc. |
|
$ |
|
|
|
$ |
20,640 |
|
|
$ |
|
|
|
$ |
20,640 |
|
Galaxy Tool Holdings, Inc. |
|
|
|
|
|
|
12,057 |
|
|
|
|
|
|
|
12,057 |
|
Country Club Enterprises, LLC |
|
|
|
|
|
|
7,467 |
|
|
|
|
|
|
|
7,467 |
|
Mathey Investments, Inc. |
|
|
|
|
|
|
1,653 |
|
|
|
|
|
|
|
1,653 |
|
Precision Southeast, Inc. |
|
|
|
|
|
|
1,594 |
|
|
|
|
|
|
|
1,594 |
|
SBS, Industries, LLC |
|
|
|
|
|
|
1,238 |
|
|
|
|
|
|
|
1,238 |
|
A. Stucki Holding Corp. |
|
|
861 |
|
|
|
|
|
|
|
|
|
|
|
861 |
|
Drew Foam Company, Inc. |
|
|
|
|
|
|
750 |
|
|
|
|
|
|
|
750 |
|
SOG Specialty Knives & Tools, LLC |
|
|
|
|
|
|
(273 |
) |
|
|
|
|
|
|
(273 |
) |
Ginsey Home Solutions, Inc. |
|
|
|
|
|
|
(618 |
) |
|
|
|
|
|
|
(618 |
) |
Frontier Packaging, Inc. |
|
|
|
|
|
|
(872 |
) |
|
|
|
|
|
|
(872 |
) |
Quench Holdings Corp. |
|
|
|
|
|
|
(944 |
) |
|
|
|
|
|
|
(944 |
) |
Acme Cryogenics, Inc. |
|
|
|
|
|
|
(962 |
) |
|
|
|
|
|
|
(962 |
) |
Channel Technologies Group, LLC |
|
|
|
|
|
|
(1,288 |
) |
|
|
|
|
|
|
(1,288 |
) |
Auto Safety House, LLC |
|
|
|
|
|
|
(1,458 |
) |
|
|
|
|
|
|
(1,458 |
) |
Mitchell Rubber Products, Inc. |
|
|
|
|
|
|
(1,762 |
) |
|
|
|
|
|
|
(1,762 |
) |
Packerland Whey Products, Inc. |
|
|
|
|
|
|
(2,131 |
) |
|
|
|
|
|
|
(2,131 |
) |
B-Dry, LLC |
|
|
|
|
|
|
(3,953 |
) |
|
|
|
|
|
|
(3,953 |
) |
Noble Logistics, Inc. |
|
|
|
|
|
|
(6,420 |
) |
|
|
|
|
|
|
(6,420 |
) |
D.P.M.S., Inc. |
|
|
|
|
|
|
(8,225 |
) |
|
|
|
|
|
|
(8,225 |
) |
Tread Corp. |
|
|
|
|
|
|
(15,930 |
) |
|
|
|
|
|
|
(15,930 |
) |
Other, net (<$250 Net) |
|
|
(18 |
) |
|
|
241 |
|
|
|
|
|
|
|
223 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
843 |
|
|
$ |
804 |
|
|
$ |
|
|
|
$ |
1,647 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The primary changes in our net unrealized appreciation for the fiscal year ended March 31, 2013, were due to notable
unrealized appreciation of our equity investment in Venyu, primarily due to increased portfolio company performance and an increase in certain comparable multiples used to estimate the fair value. We also experienced notable appreciation in our
investments in Galaxy and CCE, primarily due to increased portfolio company performance. This unrealized appreciation was partially offset by notable depreciation of our debt investments in D.P.M.S., Inc. (d/b/a Danco Acquisition Corp.)
(Danco) and in our debt and equity investments in Tread, Noble and B-Dry, primarily due to decreased portfolio company performance and, to a lesser extent, a decrease in certain comparable multiples used to estimate the fair value of our
investments.
Over our entire investment portfolio, we recorded, in the aggregate, $10.7 million of net unrealized appreciation and $39.9 million of net
unrealized depreciation on our debt positions and equity holdings, respectively, for the year ended March 31, 2014. As of March 31, 2014, the fair value of our investment portfolio was less than our cost basis by $69.1 million, as compared
to $39.9 million as of March 31, 2013, representing net unrealized depreciation of $29.2 million for fiscal year 2014. We believe that our aggregate investment portfolio was valued at a depreciated value due to the lingering effects of the
recent recession on the performance of certain of our portfolio companies. Our entire investment portfolio was fair valued at 82.0% of cost as of March 31, 2014. 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.
Realized Loss on other
For the years ended
March 31, 2014 and 2013, we recorded a net realized loss of $29 and $41, respectively, due to the expiration of interest rate cap agreements in each year.
Net Unrealized Depreciation (Appreciation) on other
For
the years ended March 31, 2014 and 2013, we recorded $0.4 million of net unrealized depreciation and $0.9 million of net unrealized appreciation, respectively, on our Credit Facility recorded at fair value.
44
LIQUIDITY AND CAPITAL RESOURCES
Operating Activities
Our cash flows from operating
activities are primarily generated from cash collections of interest and dividend payments from our portfolio companies, as well as cash proceeds received through repayments of debt investments and sales of equity investments. These cash collections
are primarily used to pay distributions to our stockholders, interest payments on our Credit Facility, dividend payments on our Term Preferred Stock, management fees to the Adviser, and for other operating expenses. Net cash used in operating
activities for the year ended March 31, 2015, was approximately $97.6 million, as compared to $33.6 million for the year ended March 31, 2014. This increase in cash used in operating activities was primarily due to a decrease in principal
repayments and proceeds from the sale of investments year over year. Repayments and proceeds from the sale of investments totaled $11.3 million during the year ended March 31, 2015, compared to $83.4 million during the year ended March 31,
2014, largely due to our exit of Venyu in August 2013, which resulted in sale proceeds of $30.8 million and principal repayments of $19.0 million.
Net
cash used in operating activities for the year ended March 31, 2014, was $33.6 million, as compared to $39.7 million during the year ended March 31, 2013. This decrease in cash used in operating activities was primarily due to an increase
in principal repayments and sales proceeds of $55 million over the prior year, largely due to our exit of Venyu in August 2013, partially offset by increased investment originations of $48.7 million over the prior year.
As of March 31, 2015, we had equity investments in or loans to 34 private companies with an aggregate cost basis of approximately $505.3 million. As of
March 31, 2014, we had equity investments in or loans to 29 private companies with an aggregate cost basis of approximately $383.5 million. The following table summarizes our total portfolio investment activity for the years ended
March 31, 2015 and 2014:
|
|
|
|
|
|
|
|
|
|
|
Years Ended March 31, |
|
|
|
2015 |
|
|
2014 |
|
Beginning investment portfolio, at fair value |
|
$ |
314,393 |
|
|
$ |
286,482 |
|
New investments |
|
|
108,197 |
|
|
|
125,567 |
|
Disbursements to existing portfolio companies |
|
|
24,705 |
|
|
|
6,636 |
|
Increase in investment balance due to PIK |
|
|
78 |
|
|
|
88 |
|
Scheduled principal repayments |
|
|
(878 |
) |
|
|
(110 |
) |
Unscheduled principal repayments |
|
|
(10,382 |
) |
|
|
(51,718 |
) |
Proceeds from sales |
|
|
|
|
|
|
(31,587 |
) |
Net realized gain |
|
|
|
|
|
|
8,241 |
|
Net unrealized appreciation (depreciation) |
|
|
29,940 |
|
|
|
(28,416 |
) |
Reversal of net unrealized appreciation |
|
|
|
|
|
|
(790 |
) |
|
|
|
|
|
|
|
|
|
Ending Investment Portfolio, at Fair Value |
|
$ |
466,053 |
|
|
$ |
314,393 |
|
|
|
|
|
|
|
|
|
|
The following table summarizes the contractual principal repayment and maturity of our investment portfolio by fiscal year,
assuming no voluntary prepayments, as of March 31, 2015:
|
|
|
|
|
|
|
|
|
|
|
Amount |
|
For the fiscal years ending March 31: |
|
2016 |
|
$ |
19,567 |
|
|
|
2017 |
|
|
43,861 |
|
|
|
2018 |
|
|
100,316 |
|
|
|
2019 |
|
|
81,681 |
|
|
|
2020 |
|
|
115,403 |
|
|
|
Thereafter |
|
|
9,618 |
|
|
|
|
|
|
|
|
|
|
Total contractual repayments |
|
$ |
370,446 |
|
|
|
Investments in equity securities |
|
|
134,812 |
|
|
|
|
|
|
|
|
|
|
Total Cost Basis of Investments Held as of March 31, 2015: |
|
$ |
505,258 |
|
|
|
|
|
|
|
|
Financing Activities
Net cash provided by financing activities for the year ended March 31, 2015, was approximately $97.9 million, which consisted primarily of $41.4 million
of proceeds from the issuance of our Series B Term Preferred Stock, $23.0 million of net proceeds from the issuance of additional shares of our common stock, and $57.5 million of net borrowings on our Credit Facility, partially offset by
$20.6 million in distributions to common stockholders. Net cash used in financing activities for the year ended March 31, 2014, was $47.7 million and consisted primarily of net repayments of our short-term borrowings of $58.0 million
and distributions to common stockholders of $18.8 million, partially offset by $30.3 million in net borrowings from our Credit Facility.
45
Distributions to Stockholders
Common Stock Distributions
To qualify to be taxed
as a RIC and thus avoid corporate level federal income tax on the income we distribute to our stockholders, we are required to distribute to our stockholders on an annual basis at least 90% of our investment company taxable income. Additionally, our
Credit Facility generally restricts the amount of distributions to stockholders that we can pay out to be no greater than the sum of certain amounts, including, but not limited to, our net investment income, plus net capital gains, plus amounts
elected by the Company to be considered as having been paid during the prior fiscal year in accordance with Section 855(a) of the Code. In accordance with these requirements, our Board of Directors declared and we paid monthly cash
distributions of $0.06 per common share for each month during the year ended March 31, 2015, as well as a special distribution of $0.05 in December 2014. In April 2015, our Board of Directors also declared a monthly distribution of $0.0625 per
common share for each of April, May, and June 2015, which is a 4.2% run rate increase on a monthly basis. Our Board of Directors declared these distributions based on estimates of taxable income for the fiscal year ending March 31, 2016.
For federal income tax purposes, we determine the tax characterization of our common distributions as of the end of our fiscal year based upon our taxable
income for the full fiscal year and distributions paid during the full fiscal year. The characterization of the common stockholder distributions declared and paid for the year ending March 31, 2016 will be determined after the 2016 fiscal year
end based upon our taxable income for the full year and distributions paid during the full year. Such a characterization made on a quarterly basis may not be representative of the actual full year characterization.
For the year ended March 31, 2015, distributions to common stockholders totaled of $20.6 million and were less than our taxable income for the same year,
when also considering prior year spillover amounts under Section 855(a) of the Code. In addition, we recorded a $0.6 million adjustment for estimated book-tax differences, which decreased capital in excess of par value and increased net
investment income in excess of distributions. At March 31, 2015, we elected to treat $4.0 million of the first distribution paid after fiscal year-end as having been paid in the prior fiscal year, in accordance with Section 855(a) of the
Code. For the year ended March 31, 2014, distributions to common stockholders totaled $18.8 million and were less than our taxable income for the same year, when also considering prior year spillover amounts under Section 855(a) of the
Code. At March 31, 2014, we elected to treat $3.9 million of the first distribution paid after fiscal year-end as having been paid in the prior fiscal year, in accordance with Section 855(a) of the Code.
Preferred Stock Dividends
Our Board of Directors
declared and we paid monthly cash dividends of $0.1484375 per share to holders of our Series A Term Preferred Stock for each month during the year ended March 31, 2015. For the year ended March 31, 2015, our Board of Directors declared and
we paid dividends for the pro-rated month of November 2014 and for each full month from December 2014 through March 31, 2015 in aggregate of $0.703125 per share to our holders of Series B Term Preferred Stock. In April 2015, our Board of
Directors also declared a monthly dividend of $0.1484375 and $0.140625 per preferred share for each of April, May, and June 2015 to the holders of our Series A Term Preferred Stock and Series B Term Preferred Stock, respectively. In May 2015, our
Board of Directors declared a combined prorated dividend for May 2015 and a full month dividend for June 2015, which totaled $0.221181 per share, to the holders of our Series C Term Preferred Stock. In accordance with GAAP, we treat these monthly
dividends as an operating expense. For federal income tax purposes, the dividends paid by us to preferred stockholders generally constitute ordinary income to the extent of our current and accumulated earnings and profits.
Dividend Reinvestment Plan
We offer a dividend
reinvestment plan for our common stockholders who hold their shares through our transfer agent, Computershare, Inc. This is an opt in dividend reinvestment plan, meaning that common stockholders may elect to have their cash distributions
automatically reinvested in additional shares of our common stock. Common stockholders who do not so elect will receive their distributions in cash. Common stockholders who receive distributions in the form of stock will be subject to the same
federal, state and local tax consequences as stockholders who elect to receive their distributions in cash. The common stockholder will have an adjusted basis in the additional common shares purchased through the plan equal to the amount of the
reinvested distribution. The additional shares will have a new holding period commencing on the day following the date on which the shares are credited to the common stockholders account. Our plan agent purchases shares in the open market in
connection with the obligations under the plan. We do not have a dividend reinvestment plan for our preferred stock stockholders.
46
Equity
Registration Statement
The Registration Statement,
of which this prospectus is a part, permits us to issue, through one or more transactions, up to an aggregate of $300.0 million in securities, consisting of common stock, preferred stock, subscription rights, debt securities and warrants to purchase
common stock or preferred stock, including through concurrent, separate offerings of such securities.
Common Stock
Pursuant to a prior registration statement on Form N-2 (Registration No. 333-181879), on October 5, 2012, we completed a public offering of
4.0 million shares of our common stock at a public offering price of $7.50 per share, which was below then current NAV of $8.65 per share. Gross proceeds totaled $30.0 million and net proceeds, after deducting underwriting discounts and
offering expenses borne by us, were approximately $28.3 million, which was used to repay borrowings under our Credit Facility. In connection with the offering, in November 2012, the underwriters exercised their option to purchase an additional
395,825 shares at the public offering price to cover over-allotments, which resulted in gross proceeds of $3.0 million and net proceeds, after deducting underwriting discounts, of approximately $2.8 million.
Also pursuant to a prior registration statement on Form N-2 (Registration No. 333-181879), on March 13, 2015, we completed a public offering of
3.3 million shares of our common stock at a public offering price of $7.40 per share, which was below then current NAV of $8.55 per share. Gross proceeds totaled $24.4 million and net proceeds, after deducting underwriting discounts and
offering expenses borne by us, were approximately $23.0 million, which were primarily used to repay borrowings under our Credit Facility. In connection with the offering, on April 2, 2015, the underwriters exercised their option to purchase an
additional 495,000 shares at the public offering price to cover over-allotments, which resulted in gross proceeds of $3.7 million and net proceeds, after deducting underwriting discounts, of approximately $3.5 million.
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. When our common stock is trading at a price below NAV per share, as it has consistently since September 30, 2008, the 1940 Act places regulatory constraints on our
ability to obtain additional capital by issuing common stock. Generally, the 1940 Act provides that we may not issue and sell our common stock at a price below our NAV per common share, other than to our then existing common stockholders pursuant to
a rights offering, without first obtaining approval from our stockholders and our independent directors. On May 19, 2015, the closing market price of our common stock was $7.54 per share, representing a 17.9% discount to our NAV of $9.18 as of
March 31, 2015. To the extent that our common stock continues to trade at a market price below our NAV per common share, we will generally be precluded from raising equity capital through public offerings of our common stock, other than
pursuant to stockholder approval or through a rights offering to existing common stockholders. At our 2014 Annual Meeting of Stockholders held on August 7, 2014, our stockholders approved a proposal authorizing us to issue and sell shares of
our common stock at a price below our then current NAV per common share for a period of one year from the date of such approval, provided that our Board of Directors makes certain determinations prior to any such sale. At our 2015 Annual Meeting of
Stockholders, scheduled to take place in August 2015, we will again ask our stockholders to vote in favor of a similar proposal so that it may be in effect for another year.
Term Preferred Stock
Pursuant to a prior
registration statement on Form N-2 (File No. 333-160720), in March 2012, we completed an offering of 1,600,000 shares of our Series A Term Preferred Stock at a public offering price of $25.00 per share. Gross proceeds totaled
$40.0 million, and net proceeds, after deducting underwriting discounts and offering expenses borne by us, were approximately $38.0 million, a portion of which was used to repay borrowings under our Credit Facility, with the remaining
proceeds being held to make additional investments and for general corporate purposes. We incurred $2.0 million in total offering costs related to the offering, which have been recorded as deferred financing costs on our accompanying Consolidated
Statements of Assets and Liabilities and are being amortized over the period ending February 28, 2017, the mandatory redemption date.
Our Series
A Term Preferred Stock provides for a fixed dividend equal to 7.125% per year, payable monthly (which equates to $2.9 million per year). We are required to redeem all of the outstanding Series A Term Preferred Stock on February 28,
2017, for cash at a redemption price equal to $25.00 per share plus an amount equal to accumulated but unpaid dividends, if any, to the date of redemption. Our Series A Term Preferred Stock is not convertible into our common stock or any other
security. In addition, three other potential redemption triggers are as follows: (1) upon the occurrence of certain events that would constitute a change in control of us, we would be required to redeem all of the outstanding Series A Term
Preferred Stock; (2) if we fail to maintain an asset coverage ratio of at least 200%, we are required to redeem a portion of the outstanding Series A Term Preferred Stock or otherwise cure the ratio redemption trigger and (3) at our sole
option, at any time on or after February 28, 2016, we may redeem some or all of our Series A Term Preferred Stock.
47
Pursuant to a prior registration statement on Form N-2 (Registration No. 333-181879), in November 2014, we
completed a public offering of 1,656,000 shares of our Series B Term Preferred Stock at a public offering price of $25.00 per share. Gross proceeds totaled $41.4 million and net proceeds, after deducting underwriting discounts and offering expenses
borne by us, were $39.7 million. We incurred $1.7 million in total offering costs related to this offering, which have been recorded as deferred financing costs on our accompanying Consolidated Statements of Assets and Liabilities and are
being amortized over the period ending December 31, 2021, the mandatory redemption date.
Our Series B Term Preferred Stock is not convertible into
our common stock or any other security. Our Series B Term Preferred Stock provides for a fixed dividend equal to 6.75% per year, payable monthly (which equates to $2.8 million per year). We are required to redeem all shares of our outstanding
Series B Term Preferred Stock on December 31, 2021, for cash at a redemption price equal to $25.00 per share, plus an amount equal to accumulated but unpaid dividends, if any, to, but excluding, the date of redemption. In addition, two other
potential mandatory redemption triggers are as follows: (1) upon the occurrence of certain events that would constitute a change in control of us, we would be required to redeem all of our outstanding Series B Term Preferred Stock, (2) if
we fail to maintain an asset coverage ratio of at least 200%, we are required to redeem a portion of our outstanding Series B Term Preferred Stock or otherwise cure the ratio redemption trigger. We may also voluntarily redeem all or a portion of our
Series B Term Preferred Stock at our sole option at the redemption price in order to have an asset coverage ratio of up to and including 215.0% and at any time on or after December 31, 2017.
Also pursuant to a prior registration statement on Form N-2 (Registration No. 333-181879), in May 2015, we completed a public offering of 1,610,000
shares of our Series C Term Preferred Stock at a public offering price of $25.00 per share. Gross proceeds totaled $40.3 million and net proceeds, after deducting underwriting discounts and offering expenses borne by us, were $38.6 million. We
incurred $1.6 million in total offering costs related to this offering, which will be recorded as deferred financing costs on future Consolidated Statements of Assets and Liabilities and will be amortized over the period ending May 31, 2022,
the mandatory redemption date.
Our Series C Term Preferred Stock is not convertible into our common stock or any other security. Our Series C Term
Preferred Stock provides for a fixed dividend equal to 6.50% per year, payable monthly (which equates to $2.6 million per year). We are required to redeem all shares of our outstanding Series C Term Preferred Stock on May 31, 2022, for
cash at a redemption price equal to $25.00 per share, plus an amount equal to accumulated but unpaid dividends, if any, to, but excluding, the date of redemption. In addition, two other potential mandatory redemption triggers are as follows:
(1) upon the occurrence of certain events that would constitute a change in control of us, we would be required to redeem all of our outstanding Series C Term Preferred Stock, (2) if we fail to maintain an asset coverage ratio of at least
200%, we are required to redeem a portion of our outstanding Series C Term Preferred Stock or otherwise cure the ratio redemption trigger. We may also voluntarily redeem all or a portion of our Series C Term Preferred Stock at our sole option at the
redemption price in order to have an asset coverage ratio of up to and including 215.0% and at any time on or after May 31, 2018.
Each series of our
Term Preferred Stock has a preference over our common stock with respect to dividends, whereby no distributions are payable on our common stock unless the stated dividends, including any accrued and unpaid dividends, on the mandatorily redeemable
preferred stock have been paid in full. The Series A, B, and C Term Preferred Stock are considered liabilities in accordance with GAAP and, as such, affect our asset coverage, exposing us to additional leverage risks.
Revolving Credit Facility
On June 26, 2014,
we, through Business Investment, entered into Amendment No. 1 to our Credit Facility, with KeyBank, administrative agent, lead arranger and a lender; other lenders; and the Adviser, as servicer, to extend the revolving period and reduce the
interest rate of our revolving line of credit. The revolving period was extended 14 months to June 26, 2017, and if not renewed or extended by June 26, 2017, all principal and interest will be due and payable on or before June 26,
2019 (two years after the revolving period end date). In addition, we have retained the two one-year extension options, to be agreed upon by all parties, which may be exercised on or before June 26, 2015 and 2016, respectively, and upon
exercise, the options would extend the revolving period to June 26, 2018 and 2019 and the maturity date to June 26, 2020 and 2021, respectively. Subject to certain terms and conditions, our Credit Facility can be expanded by up to $145.0
million, to a total facility amount of $250 million, through additional commitments of existing or new committed lenders. Advances under our Credit Facility generally bear interest at 30-day LIBOR, plus 3.25% per annum, down from 3.75% prior to
the amendment, and our Credit Facility includes an unused fee of 0.50% on undrawn amounts. Once the revolving period ends, the interest rate margin increases to 3.75% for the period from June 26, 2017 to June 26, 2018, and further
increases to 4.25% through maturity. We incurred fees of $0.4 million in connection with this amendment, which are being amortized through our Credit Facilitys revolver period end date of June 26, 2017.
48
On September 19, 2014, we further increased our borrowing capacity under our Credit Facility from $105.0
million to $185.0 million by entering into Joinder Agreements pursuant to our Credit Facility, by and among Business Investment, KeyBank, the Adviser and other lenders. We incurred fees of $1.3 million in connection with this expansion, which are
being amortized through our Credit Facilitys revolver period end date of June 26, 2017.
Our Credit Facility contains covenants that require
Business Investment to maintain its status as a separate legal entity; prohibit certain significant corporate transactions (such as mergers, consolidations, liquidations or dissolutions) and restrict material changes to our credit and collection
policies without lenders consent. The Credit Facility generally also limits distributions to be no greater than the sum of certain amounts, including, but not limited to, our net investment income, plus net capital gains, plus amounts elected
by the Company to be considered as having been paid during the prior fiscal year in accordance with Section 855(a) of the Code, for each of the twelve month periods ending March 31, 2016 and 2017. We are also subject to certain limitations
on the type of loan investments we can make, including restrictions on geographic concentrations, sector concentrations, loan size, payment frequency and status, average life and lien property. Our Credit Facility also requires us to comply with
other financial and operational covenants, which obligate us to, among other things, maintain certain financial ratios, including asset and interest coverage and a minimum number of obligors required in the borrowing base of the credit agreement.
Additionally, we are subject to a performance guaranty that requires us to maintain (i) a minimum net worth of $170.0 million plus 50.0% of all equity and subordinated debt raised minus any equity or subordinated debt redeemed or retired after
June 26, 2014, which equates to $202.9 million as of March 31, 2015, (ii) asset coverage with respect to senior securities representing indebtedness of at least 200%, in accordance with Section 18 of the
1940 Act and (iii) our status as a BDC under the 1940 Act and as a RIC under the Code. As of March 31, 2015, and as defined in the performance guaranty of our Credit Facility, we had a net worth of $354.8 million, an asset coverage of
229.9% and an active status as a BDC and RIC. As of March 31, 2015, we were in compliance with all covenants under our Credit Facility.
Our Credit
Facility also requires that any interest or principal payments on pledged loans be remitted directly by the borrower into a lockbox account with KeyBank and with The Bank of New York Mellon Trust Company, N.A. as custodian. KeyBank is also the
trustee of the account and generally remits the collected funds to us once a month.
Pursuant to the terms of our Credit Facility, in July 2013, we
entered into a forward interest rate cap agreement, effective October 2013 and expiring April 2016, for a notional amount of $45.0 million. We incurred a premium fee of $75 in conjunction with this agreement. The interest rate cap agreement
effectively limits the interest rate on a portion of the borrowings pursuant to the terms of our Credit Facility.
CONTRACTUAL OBLIGATIONS AND
OFF-BALANCE SHEET ARRANGEMENTS
We have lines of credit and other uncalled capital commitments to certain of our portfolio companies that have not been
fully drawn. Since these lines of credit and uncalled capital commitments have expiration dates and we expect many will never be fully drawn, the total line of credit and other uncalled capital commitment amounts do not necessarily represent future
cash requirements. We estimate the fair value of the combined unused line of credit and other uncalled capital commitments as of March 31, 2015 to be minimal.
In addition to the lines of credit and other uncalled capital commitments to our portfolio companies, we have also extended certain guarantees on behalf of
some our portfolio companies, whereby we have guaranteed an aggregate of $2.6 million of obligations of CCE. As of March 31, 2015, we have not been required to make any payments on any of the guarantees, and we consider the credit risks to be
remote and the fair value of the guaranties to be minimal.
The following table shows our contractual obligations as of March 31, 2015, at cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period |
|
|
|
|
|
|
Less than |
|
|
|
|
|
|
|
|
More than |
|
Contractual Obligations(A) |
|
Total |
|
|
1 Year |
|
|
1-3 Years |
|
|
3-5 Years |
|
|
5 Years |
|
Credit Facility (B) |
|
$ |
118,800 |
|
|
$ |
|
|
|
$ |
118,800 |
|
|
$ |
|
|
|
$ |
|
|
Mandatorily redeemable preferred stock(C) |
|
|
81,400 |
|
|
|
|
|
|
|
40,000 |
|
|
|
|
|
|
|
41,400 |
|
Secured borrowing |
|
|
5,096 |
|
|
|
|
|
|
|
5,096 |
|
|
|
|
|
|
|
|
|
Interest payments on obligations(D) |
|
|
35,681 |
|
|
|
10,571 |
|
|
|
17,301 |
|
|
|
5,674 |
|
|
|
2,135 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
240,977 |
|
|
$ |
10,571 |
|
|
$ |
181,197 |
|
|
$ |
5,674 |
|
|
$ |
43,535 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A) |
Excludes our unused line of credit commitments and uncalled capital commitments and guaranties to our portfolio companies in the aggregate amount of $12.6 million. |
(B) |
Principal balance of borrowings outstanding under our Credit Facility, based on the current contractual revolver period end date due to the revolving nature of the facility. |
(C) |
Excludes $40.3 million of our Series C Term Preferred Stock issued in May 2015 with a mandatory redemption date in May 2022. |
(D) |
Includes interest payments due on our Credit Facility and dividend obligations on each series of our Term Preferred Stock. Dividend payments on our mandatorily redeemable term preferred stock assume quarterly
declarations and monthly distributions through the date of mandatory redemption of each series. |
49
Of our interest bearing debt investments as of March 31, 2015, 83.0% had a success fee component, which
enhances the yield on our debt investments. Unlike PIK income, we generally recognize success fees as income only when the payment has been received. As a result, as of March 31, 2015 and 2014, we had aggregate off-balance sheet success fee
receivables of $24.3 million and $17.7 million (or approximately $0.82 and $0.69 per common share), respectively, on our accruing debt investments that would be owed to us based on our current portfolio if fully paid off. Consistent with GAAP, we
have not recognized our success fee receivable on our balance sheet or income statement. Due to our success fees contingent nature, there are no guarantees that we will be able to collect all of these success fees or know the timing of such
collections.
Litigation
From time to time,
we may become involved in various investigations, claims and legal proceedings that arise in the ordinary course of our business. Furthermore, third parties may try to seek to impose liability on us in connection with the activities of our portfolio
companies. While we do not expect that the resolution of these matters if they arise would materially affect our business, financial condition, results of operations or cash flows, resolution will be subject to various uncertainties and could result
in the expenditure of significant financial and managerial resources.
Critical Accounting Policies
The preparation of financial statements and related disclosures in conformity with 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 under different assumptions or conditions. We have identified our investment valuation policy (which has been approved by our Board of Directors) (the Policy) as our most critical accounting policy.
Investment Valuation
The most significant
estimate inherent in the preparation of our consolidated financial statements is the valuation of our investments and the related amounts of unrealized appreciation and depreciation of investments recorded in our accompanying Consolidated
Financial Statements.
Accounting Recognition
We
record our investments at fair value in accordance with the Financial Accounting Standards Board (the FASB) Accounting Standards Codification Topic 820, Fair Value Measurements and Disclosures (ASC 820) and
the 1940 Act. Investment transactions are recorded on the trade date. Realized gains or losses are measured by the difference between the net proceeds from the repayment or sale and amortized cost basis of the investment, without regard to
unrealized appreciation or depreciation previously recognized, and include investments charged off during the period, net of recoveries. Unrealized appreciation or depreciation primarily reflects the change in investment fair values, including the
reversal of previously recorded unrealized appreciation or depreciation when gains or losses are realized.
In accordance with ASC 820, our
investments fair value is determined to be the price that would be received for an investment in a current sale, which assumes an orderly transaction between willing market participants on the measurement date. This fair value definition
focuses on exit price in the principal, or most advantageous, market and prioritizes, within a measurement of fair value, the use of market-based inputs over entity-specific inputs. ASC 820 also establishes the following three-level hierarchy for
fair value measurements based upon the transparency of inputs to the valuation of a financial instrument as of the measurement date.
|
|
Level 1 inputs to the valuation methodology are quoted prices (unadjusted) for identical financial instruments in active markets; |
|
|
Level 2 inputs to the valuation methodology include quoted prices for similar financial instruments in active or inactive markets, and inputs that are observable for the financial instrument, 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 |
50
|
|
Level 3 inputs to the valuation methodology are unobservable and significant to the fair value measurement. Unobservable inputs are those inputs that reflect assumptions that market participants would use
when pricing the financial instrument and can include the Valuation Teams (as defined below) assumptions based upon the best available information. |
When a determination is made to classify our investments within Level 3 of the valuation hierarchy, such determination is based upon the significance of the
unobservable factors to the overall fair value measurement. However, Level 3 financial instruments typically include, in addition to the unobservable, or Level 3, inputs, observable inputs (or, components that are actively quoted and can be
validated to external sources). The level in the fair value hierarchy within which the fair value measurement falls is determined based on the lowest level input that is significant to the fair value measurement. As of March 31, 2015 and 2014,
all of our investments were valued using Level 3 inputs and during the years ended March 31, 2015 and 2014, there were no investments transferred into or out of Level 1, 2 or 3.
Board Responsibility
In accordance with the 1940 Act,
our Board of Directors has the ultimate responsibility for reviewing and approving, in good faith, the fair value of our investments based on the Policy. Our Board of Directors reviews valuation recommendations that are provided by professionals of
the Adviser and Administrator with oversight and direction from the chief valuation officer, (the Valuation Team). There is no single standard for determining fair value (especially for privately-held businesses), as fair value depends
upon the specific facts and circumstances of each individual investment. In determining the fair value of our investments, the Valuation Team, led by the chief valuation officer, uses the Policy and each quarter our Board of Directors reviews the
Policy to determine if changes thereto are advisable and also reviews whether the Valuation Team has applied the Policy consistently.
Use of Third
Party Valuation Firms
The Valuation Team engages third party valuation firms to provide independent assessments of fair value of certain of our
investments.
Standard & Poors Securities Evaluation, Inc. (SPSE) provides estimates of fair value on our debt investments. The
Valuation Team generally assigns SPSEs estimates of fair value to our debt investments where we do not have the ability to effectuate a sale of the applicable portfolio company. The Valuation Team corroborates SPSEs estimates of fair
value using one or more of the valuation techniques discussed below. The Valuation Teams estimate of value on a specific debt investment may significantly differ from SPSEs. When this occurs, our Board of Directors reviews whether the
Valuation Team has followed the Policy and whether the Valuation Teams recommended fair value is reasonable in light of the Policy and other facts and circumstances and then votes to accept or reject the Valuation Teams recommended fair
value.
We may engage other independent valuation firms to provide earnings multiple ranges, as well as other information, and evaluate such information
for incorporation into the total enterprise value of certain of our investments. Generally, at least once per year, we engage an independent valuation firm to value or review the Companys valuation of our significant equity investments,
which includes providing the information noted above. The Valuation Team evaluates such information for incorporation into our total enterprise value, including review of all inputs provided by the independent valuation firm. The Valuation Team
then makes a recommendation to our Board of Directors as to the fair value. Our Board of Directors reviews the recommended fair value and whether it is reasonable in light of the Policy and other relevant facts and circumstances and then votes
to accept or reject the Valuation Teams recommended fair value.
Valuation Techniques
In accordance with ASC 820, the Valuation Team uses the following techniques when valuing our investment portfolio:
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Total Enterprise Value In determining the fair value using a total enterprise value (TEV), the Valuation Team first
calculates the TEV of the portfolio company by incorporating some or all of the following factors: the portfolio companys ability to make payments and other specific portfolio company attributes; the earnings of the portfolio company (the
trailing or projected twelve month revenue or earnings before interest, taxes, depreciation and amortization (EBITDA)); EBITDA or revenue multiples obtained from our indexing methodology whereby the original transaction EBITDA or revenue
multiple at the time of our closing is indexed to a general subset of comparable disclosed transactions and EBITDA or revenue multiples from recent sales to third parties of similar securities in similar industries; a comparison to publicly traded
securities in similar industries, and other pertinent |
51
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factors. The Valuation Team generally references industry statistics and may use outside experts when gathering this information. Once the TEV is determined for a portfolio company, the Valuation
Team then generally allocates the TEV to the portfolio companys securities in order of their relative priority in the capital structure. Generally, the Valuation Team uses TEV to value our equity investments and, in the circumstances where we
have the ability to effectuate a sale of a portfolio company, our debt investments. |
TEV is primarily calculated using
EBITDA or revenue multiples; however, TEV may also be calculated using a discounted cash flow (DCF) analysis whereby future expected cash flows of the portfolio company are discounted to determine a net present value using estimated
risk-adjusted discount rates, which incorporate adjustments for nonperformance and liquidity risks. Generally, the Valuation Team uses the DCF to calculate TEV to corroborate estimates of value for our equity investments where we do not have the
ability to effectuate a sale of a portfolio company or for debt of credit impaired portfolio companies.
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Yield Analysis The Valuation Team generally determines the fair value of our debt investments using the yield analysis, which includes a DCF calculation and the Valuation Teams own assumptions,
including, but not limited to, estimated remaining life, current market yield, current leverage, and interest rate spreads. This technique develops a modified discount rate that incorporates risk premiums including, among other things, increased
probability of default, increased loss upon default and increased liquidity risk. Generally, the Valuation Team uses the yield analysis to corroborate both estimates of value provided by SPSE and market quotes. |
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Market Quotes For our investments for which a limited market exists, fair value is generally based on readily available and reliable market quotations which are corroborated by the Valuation Team
(generally by using the yield analysis explained above). In addition, the Valuation Team assesses trading activity for similar investments and evaluates variances in quotations and other market insights to determine if any available quoted prices
are reliable. Typically, the Valuation Team uses the lower indicative bid price (IBP) in the bid-to-ask price range obtained from the respective originating syndication agents trading desk on or near the valuation date. The
Valuation Team may take further steps to consider additional information to validate that price in accordance with the Policy. |
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Investments in Funds For equity investments in other funds, where we cannot effectuate a sale, the Valuation Team generally determines the fair value of our uninvested capital at par value and of our
invested capital at the NAV provided by the fund. The Valuation Team may also determine fair value of our investments in other investment funds based on the capital accounts of the underlying entity. |
In addition to the above valuation techniques, the Valuation Team may also consider other factors when determining fair values of our investments, including
but not limited to: the nature and realizable value of the collateral, including external parties guaranties; any relevant offers or letters of intent to acquire the portfolio company; and the markets in which the portfolio company operates.
If applicable, new and follow-on debt and equity investments made during the current reporting quarter (the three months ended March 31, 2015) are generally valued at original cost basis.
Fair value measurements of our investments may involve subjective judgments and estimates and due to the uncertainty inherent in valuing these securities, the
Advisers determinations of fair value may fluctuate from period to period and may differ materially from the values that could be obtained if a ready market for these securities existed. Our NAV could be materially affected if the
Advisers determinations regarding the fair value of our investments are materially different from the values that we ultimately realize upon our disposal of such securities. Additionally, changes in the market environment and other events that
may occur over the life of the investment may cause the gains or losses ultimately realized on these investments to be different than the valuations currently assigned. Further, such investments are generally subject to legal and other restrictions
on resale or otherwise are less liquid than publicly traded securities. If we were required to liquidate a portfolio investment in a forced or liquidation sale, we could realize significantly less than the value at which it is recorded.
Refer to Note 3Investments in the accompanying notes to our accompanying Consolidated Financial Statements included elsewhere in this
report for additional information regarding fair value measurements and our application of ASC 820.
Credit Monitoring and Risk Rating
The 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 and, in some instances, used as inputs in our valuation techniques. Generally, we, through the Adviser, participate in periodic board meetings of our portfolio companies in which we hold board seats and also require them to
provide annual audited and monthly unaudited financial statements. Using these statements or comparable information and board discussions, the Adviser calculates and evaluates certain credit statistics.
52
The Adviser risk rates all of our investments in debt securities. The Adviser does not risk rate our equity
securities. For loans that have been rated by a Nationally Recognized Statistical Rating Organization (NRSRO) (as defined in Rule 2a-7 under the 1940 Act), the Adviser generally uses the average of two corporate level NRSROs
risk ratings for such security. For all other debt securities, the Adviser uses a proprietary risk rating system. While the Adviser seeks to mirror the NRSRO systems, we cannot provide any assurance that the Advisers risk rating system will
provide the same risk rating as an NRSRO for these securities. The Advisers risk rating system is used to estimate the probability of default on debt securities and the expected loss if there is a default. The Advisers risk rating system
uses a scale of 0 to >10, with >10 being the lowest probability of default. It is the Advisers 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, the Advisers 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 the Advisers scale is equal to a BBB or Baa2 on an NRSRO scale. The Advisers risk rating system covers both qualitative and quantitative aspects of the business and the securities we hold. During the three
months ended June 30, 2014, we modified our risk rating model to incorporate additional factors in our qualitative and quantitative analysis. While the overall process did not change, we believe the additional factors enhance the quality of the
risk ratings of our investments. No adjustments were made to prior periods as a result of this modification.
The following table reflects risk ratings
for all loans in our portfolio as of March 31, 2015 and 2014:
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As of March 31, |
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Rating |
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2015 |
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2014 |
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Highest |
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10.0 |
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9.1 |
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Average |
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5.9 |
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5.7 |
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Weighted Average |
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6.4 |
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5.2 |
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Lowest |
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3.0 |
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2.6 |
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Tax Status
We
intend to continue to maintain our qualification as a RIC under Subchapter M of the Code for federal income tax purposes. As a RIC, we are not subject to federal income tax on the portion of our taxable income and gains distributed to our
stockholders. To maintain our qualification as a RIC, we must meet certain source-of-income and asset diversification requirements. In addition, in order to qualify to be taxed as a RIC, we must also meet certain annual stockholder distribution
requirements. To satisfy the RIC annual distribution requirement, we must distribute to stockholders at least 90.0% of our investment company taxable income. Our policy generally is to make distributions to our stockholders in an amount up to 100.0%
of our investment company taxable income.
In an effort to limit certain federal excise taxes imposed on RICs, we currently intend to distribute to our
stockholders, during each calendar year, an amount at least equal to the sum of: (1) 98.0% of our ordinary income for the calendar year, (2) 98.2% of our capital gain net income for the one-year period ending on October 31 of the
calendar year, and (3) any ordinary income and capital gain net income from preceding years that were not distributed during such years. Under the RIC Modernization Act (the RIC Act), we are permitted to carryforward capital losses
incurred in taxable years beginning after September 30, 2011, for an unlimited period. However, any losses incurred during those future taxable years will be required to be utilized prior to the losses incurred in pre-enactment taxable years,
which carry an expiration date. As a result of this ordering rule, pre-enactment capital loss carryforwards may be more likely to expire unused. Additionally, post-enactment capital loss carryforwards will retain their character as either short-term
or long-term capital losses rather than being considered all short-term as permitted under the Treasury regulations applicable to pre-enactment capital loss carryforwards. Our total capital loss carry forward balance was $0.3 million as of
March 31, 2015.
Revenue Recognition
Interest Income Recognition
Interest income, adjusted for
amortization of premiums, amendment fees and acquisition costs and 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. Interest payments received on non-accrual loans may be recognized as income or applied to the cost basis, depending upon managements
judgment. Generally, non-accrual loans are restored to accrual status when past-due principal and interest are paid, and, in managements judgment, are likely to
53
remain current, or due to a restructuring, the interest income is deemed to be collectible. As of March 31, 2015, our loans to Tread were on non-accrual status, with an aggregate debt cost
basis of $11.7 million, or 3.1% of the cost basis of all debt investments in our portfolio, and an aggregate fair value of $1.8 million, or 0.5% of the fair value of all debt investments in our portfolio. As of March 31, 2014, our loans to
Tread were on non-accrual status, with an aggregate debt cost basis of $11.7 million, or 4.2% of the cost basis of all debt investments in our portfolio, and an aggregate fair value of $0.
PIK interest, computed at the contractual rate specified in the loan agreement, is added to the principal balance of the loan and recorded as interest income.
To maintain our status as a RIC, this non-cash source of income must be included in our calculation of distributable income for purposes of complying with our distribution requirements, even though we have not yet collected the cash. During the
years ended March 31, 2015 and 2014, we recorded PIK income of $0.1 million. We did not hold any loans in our portfolio that contained a PIK provision during the year ended March 31, 2013.
Other Income Recognition
We generally record success
fees upon receipt of cash. Success fees are contractually due upon a change of control in a portfolio company, typically from an exit or sale. We recorded an aggregate of $1.4 million of success fees during the year ended March 31, 2015 related
to prepaid success fees from SOG, ASH, Drew Foam, Frontier, and Mathey. We recorded an aggregate of $4.2 million of success fees during the year ended March 31, 2014 related to debt exits or prepayments from Venyu, Channel, Cavert, SOG, Mathey
and Frontier. During the year ended March 31, 2013, we recorded an aggregate of $0.8 million of success fees, representing prepayments received from Mathey and Cavert.
Dividend income on equity investments is accrued to the extent that such amounts are expected to be collected and if we have the option to collect such
amounts in cash. During the year ended March 31, 2015, we recorded an aggregate of $3.5 million of dividend income from Funko, SOG, Drew Foam, Frontier, and Mathey. For the year ended March 31, 2014, we recorded $1.4 million in dividend
income related to the exit of Venyu. During the year ended March 31, 2013, we recorded an aggregate of $4.8 million in dividend income, which resulted from payments from Galaxy and Acme, respectively.
Both dividend income and success fees are recorded in other income in our accompanying Consolidated Statements of Operations.
Recent Accounting Pronouncements
In April 2015,
the FASB issued Accounting Standards Update 2015-03, Simplifying the Presentation of Debt Issuance Costs (ASU-2015-03), which simplifies the presentation of debt issuance costs. We are currently assessing the impact of
ASU 2015-03 and do not anticipate a material impact on our financial position, results of operations or cash flows from adopting this standard. ASU 2015-03 is effective for annual reporting periods beginning after December 15, 2015
and interim periods within those years, with early adoption permitted.
In February 2015, the FASB issued Accounting Standards Update 2015-02,
Amendments to the Consolidation Analysis (ASU-2015-02), which amends or supersedes the scope and consolidation guidance under existing GAAP. The new standard changes the way a
reporting entity evaluates whether a) limited partnerships and similar entities should be consolidated, b) fees paid to decision makers or service provides are variable interests in a variable interest entity (VIE), and c) variable
interests in a VIE held by related parties require the reporting entity to consolidate the VIE. ASU 2015-02 also eliminates the VIE consolidation model based on majority exposure to variability that applied to certain investment companies and
similar entities. We do not anticipate ASU 2015-02 to have a material impact on our financial position, results of operations or cash flows. ASU 2015-02 is effective for annual reporting periods beginning after December 15, 2015 and
interim periods within those years, with early adoption permitted.
In August 2014, the FASB issued Accounting Standards Update 201415,
Presentation of Financial Statements Going Concern (Subtopic 205 40): Disclosure of Uncertainties About an Entitys Ability to Continue as a Going Concern (ASU 2014-15). ASU 2014-15 requires
management to evaluate whether there are conditions or events that raise substantial doubt about the entitys ability to continue as a going concern, and to provide certain disclosures when it is probable that the entity will be unable to meet
its obligations as they become due within one year after the date that the financial statements are issued. Since this guidance is primarily around certain disclosures to the financial statements, we anticipate no impact on our financial position,
results of operations or cash flows from adopting this standard. We are currently assessing the additional disclosure requirements, if any, of ASU 2014-15. ASU 2014-15 is effective for the annual period ending after December 31, 2016 and
for annual periods and interim periods thereafter, with early adoption permitted.
In May 2014, the FASB issued Accounting Standards Update 2014-09,
Revenue from Contracts with Customers (ASU 2014-09), which supersedes or replaces nearly all GAAP revenue recognition guidance. The new guidance establishes a new control-based
54
revenue recognition model, changes the basis for deciding when revenue is recognized over time or at a point in time and will expand disclosures about revenue. We are currently assessing the
impact of ASU 2014-09 and anticipate no impact on our financial position, results of operations or cash flows from adopting this standard. ASU 2014-09 is effective for annual reporting periods that begin after December 15, 2016 and interim
periods within those years, with early adoption not permitted.
In June 2013, the FASB issued Accounting Standards Update 2013-08, Financial
Services Investment Companies (Topic 946): Amendments to the Scope, Measurement, and Disclosure Requirements (ASU 2013-08), which amends the criteria that define an investment company and clarifies the measurement
guidance and requires new disclosures for investment companies. Under ASU 2013-08, an entity already regulated under the 1940 Act is automatically an investment company under the new GAAP definition, so there was no impact from adopting this
standard on our financial position or results of operations. We adopted ASU 2013-08 beginning with our quarter ended June 30, 2014, and have increased our disclosure requirements as necessary.
55
SALES OF COMMON STOCK BELOW NET ASSET VALUE
At our 2014 annual stockholders meeting, our stockholders approved our ability to sell or otherwise issue shares of our common stock at a
price below the then current NAV per common share, which we refer to as the Stockholder Approval, during a period beginning on August 7, 2014 and expiring on the first anniversary of such date. We intend to seek a similar approval at our 2015
annual meeting of stockholders in August 2015. To sell shares of common stock pursuant to this authorization, no further authorization from our stockholders will be solicited but a majority of our directors who have no financial interest in the sale
and a majority of our independent directors must (i) find that the sale is in our best interests and in the best interests of our stockholders and (ii) in consultation with any underwriter or underwriters of the offering, make a good faith
determination as of a time either immediately prior to the first solicitation by us or on our behalf of firm commitments to purchase such shares of common stock, or immediately prior to the issuance of such common stock, that the price at which such
shares of common stock are to be sold is not less than a price which closely approximates the market value of those shares of common stock, less any distributing commission or discount. Further, the total number of shares issued and sold pursuant to
such Stockholder Approval may not exceed 25% of our then outstanding common stock immediately prior to each such sale, aggregated over a period of one year from the date of such Stockholder Approval.
Any offering of common stock below its NAV per share will be designed to raise capital for investment in accordance with our investment
objectives.
In making a determination that an offering of common stock below its NAV per share is in our and our stockholders best
interests, our Board of Directors will consider a variety of factors including, but not limited to:
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the effect that an offering below NAV per share would have on our stockholders, including the potential dilution they would experience as a result of the offering; |
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the amount per share by which the offering price per share and the net proceeds per share are less than our most recently determined NAV per share; |
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the relationship of recent market prices of par common stock to NAV per share and the potential impact of the offering on the market price per share of our common stock; |
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whether the estimated offering price would closely approximate the market value of shares of our common stock; |
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the potential market impact of being able to raise capital during the current financial market difficulties; |
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the nature of any new investors anticipated to acquire shares of our common stock in the offering; |
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the anticipated rate of return on and quality, type and availability of investments; and |
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the leverage available to us. |
Our Board of Directors will also consider the fact that sales
of shares of common stock at a discount will benefit our Adviser as our Adviser will ultimately earn additional investment management fees on the proceeds of such offerings, as it would from the offering of any other securities of the Company or
from the offering of common stock at a premium to NAV per share.
We will not sell shares of our common stock under this prospectus or an
accompanying prospectus supplement pursuant to the Stockholder Approval without first filing a post-effective amendment to the registration statement if the cumulative dilution to the Companys NAV per share from offerings under the
registration statement exceeds 15%. This would be measured separately for each offering pursuant to the registration statement by calculating the percentage dilution or accretion to aggregate NAV from that offering and then summing the percentage
from each offering. For example, if our most recently determined NAV per share at the time of the first offering is $10.00 and we have 140 million shares outstanding, the sale of 35 million shares at net proceeds to us of $5.00 per share
(a 50% discount) would produce dilution of 10%. If we subsequently determined that our NAV per share increased to $11.00 on the then 175 million shares outstanding and then made an additional offering, we could, for example, sell approximately
an additional 43.75 million shares at net proceeds to us of $8.25 per share, which would produce dilution of 5%, before we would reach the aggregate 15% limit. If we file a new post-effective amendment, the threshold would reset.
Sales by us of our common stock at a discount from NAV per share pose potential risks for our existing stockholders whether or not they
participate in the offering, as well as for new investors who participate in the offering. Any sale of common stock at a price below NAV per share would result in an immediate dilution to existing common stockholders who do not participate in such
sale on at least a pro-rata basis. See Risk Factors-Risks Related to an Investment in Our Securities.
The following three
headings and accompanying tables explain and provide hypothetical examples on the impact of an offering of our common stock at a price less than NAV per share on three different types of investors:
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existing stockholders who do not purchase any shares in the offering; |
56
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existing stockholders who purchase a relative small amount of shares in the offering or a relatively large amount of shares in the offering; and |
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new investors who become stockholders by purchasing shares in the offering. |
Impact on Existing
Stockholders Who Do Not Participate in an Offering
Our existing common stockholders who do not participate in an offering below NAV
per share or who do not buy additional shares in the secondary market at the same or lower price we obtain in the offering (after expenses and commissions) face the greatest potential risks. These stockholders will experience an immediate decrease
(often called dilution) in the NAV of the common shares they hold and their NAV per common share. These common stockholders will also experience a disproportionately greater decrease in their participation in our earnings and assets and their voting
power than the increase we will experience in our assets, potential earning power and voting interests due to the offering. These stockholders may also experience a decline in the market price of their shares, which often reflects to some degree
announced or potential increases and decreases in NAV per common share. This decrease could be more pronounced as the size of the offering and level of discounts increase. Further, if current common stockholders do not purchase any shares to
maintain their percentage interest, regardless of whether such offering is above or below the then current NAV, their voting power will be diluted.
The following table illustrates the level of NAV dilution that would be experienced by a nonparticipating common stockholder in three
different hypothetical offerings of different sizes and levels of discount from NAV per common share, although it is not possible to predict the level of market price decline that may occur. Actual sales prices and discounts may differ from the
presentation below.
The examples assume that we have 1,000,000 common shares outstanding, $15,000,000 in total assets and $5,000,000 in
total liabilities. The current NAV and NAV per common share are thus $10,000,000 and $10.00. The table illustrates the dilutive effect on a nonparticipating common stockholder of (1) an offering of 50,000 shares of common stock (5% of the
outstanding common shares) at $9.50 per share after offering expenses and commission (a 5% discount from NAV), (2) an offering of 100,000 shares (10% of the outstanding common shares) at $9.00 per share after offering expenses and
commissions (a 10% discount from NAV) and (3) an offering of 250,000 shares of common stock (25% of the outstanding common shares) at $7.50 per common share after offering expenses and commissions (a 25% discount from NAV). The prospectus
supplement pursuant to which any discounted offering is made will include a chart based on the actual number of shares of common stock in such offering and the actual discount to the most recently determined NAV.
57
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Example 1 5% Offering at 5% Discount |
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Example 2 10% Offering at 10% Discount |
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Example 3 25% Offering at 25% Discount |
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Prior to Sale Below NAV |
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Following Sale |
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% Change |
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Following Sale |
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% Change |
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Following Sale |
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% Change |
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Offering Price |
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Price per Common Share to Public |
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$ |
10.00 |
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$ |
9.47 |
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$ |
7.90 |
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Net Proceeds per Common Share to Issuer |
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$ |
9.50 |
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$ |
9.00 |
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$ |
7.50 |
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Decrease to NAV |
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Total Common Shares Outstanding |
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1,000,000 |
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1,050,000 |
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5.00 |
% |
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1,100,000 |
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10.00 |
% |
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1,250,000 |
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25.00 |
% |
NAV per Common Share |
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$ |
10.00 |
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$ |
9.98 |
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(0.20 |
)% |
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$ |
9.91 |
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(0.90 |
)% |
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$ |
9.50 |
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5.00 |
% |
Dilution to Stockholder |
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Common Shares Held by Stockholder |
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10,000 |
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10,000 |
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10,000 |
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10,000 |
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Percentage Held by Common Stockholder |
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1.0 |
% |
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0.95 |
% |
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(4.76 |
)% |
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0.91 |
% |
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(9.09 |
)% |
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0.83 |
% |
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(16.67 |
)% |
Total Asset Values |
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Total NAV Held by Common Stockholder |
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$ |
100,000 |
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$ |
99,800 |
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(0.20 |
)% |
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$ |
99,100 |
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(0.90 |
)% |
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$ |
95,000 |
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(5.00 |
)% |
Total Investment by Common Stockholder (Assumed to be $10.00 per Common Share) |
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$ |
100,000 |
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$ |
100,000 |
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$ |
100,000 |
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$ |
100,000 |
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Total Dilution to Common Stockholder (Total NAV Less Total Investment) |
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$ |
(200 |
) |
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$ |
(900 |
) |
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$ |
5,000 |
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Per Share Amounts |
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NAV Per Share Held by Common Stockholder |
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$ |
9.98 |
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$ |
9.91 |
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$ |
9.50 |
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Investment per Share Held by Common Stockholder (Assumed to be $10.00 per Common Share on Common Shares Held prior to
Sale) |
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$ |
10.00 |
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$ |
10.00 |
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$ |
10.00 |
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$ |
10.00 |
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Dilution per Common Share Held by Stockholder (NAV per Common Share Less Investment per Share) |
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$ |
(0.02 |
) |
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|
|
$ |
(0.09 |
) |
|
|
|
|
|
$ |
(0.50 |
) |
|
|
|
|
Percentage Dilution to Common Stockholder (Dilution per Common Share Divided by Investment per Common Share) |
|
|
|
|
|
|
|
|
|
|
(0.20 |
)% |
|
|
|
|
|
|
(0.90 |
)% |
|
|
|
|
|
|
(5.00 |
)% |
Impact on Existing Stockholders Who Do Participate in an Offering
Our existing common stockholders who participate in an offering below NAV per common share or who buy
additional shares in the secondary market at the same or lower price as we obtain in the offering (after expenses and commissions) will experience the same types of NAV dilution as the nonparticipating common stockholders, albeit at a lower level,
to the extent they purchase less than the same percentage of the discounted offering as their interest in our common shares immediately prior to the offering. The
58
level of NAV dilution will decrease as the number of common shares such stockholders purchase increases. Existing common stockholders who buy more than such percentage will experience NAV
dilution but will, in contrast to existing common stockholders who purchase less than their proportionate share of the offering, experience an increase (often called accretion) in NAV per common share over their investment per share and will also
experience a disproportionately greater increase in their participation in our earnings and assets and their voting power than our increase in assets, potential earning power and voting interests due to the offering. The level of accretion will
increase as the excess number of shares such common stockholder purchases increases. Even a common stockholder who over-participates will, however, be subject to the risk that we may make additional discounted offerings in which such common
stockholder does not participate, in which case such a stockholder will experience NAV dilution as described above in such subsequent offerings. These stockholders may also experience a decline in the market price of their shares, which often
reflects to some degree announced or potential increases and decreases in NAV per share. This decrease could be more pronounced as the size of the offering and level of discount to NAV increases.
The following chart illustrates the level of dilution and accretion in the hypothetical 25% discount offering from the prior chart for a
common stockholder that acquires shares equal to (1) 50% of its proportionate share of the offering (i.e., 1,250 shares, which is 0.50% of the offering 250,000 common shares rather than its 1% proportionate share) and (2) 150% of
such percentage (i.e., 3,750 shares, which is 1.50% of an offering of 250,000 common shares rather than its 1% proportionate share). The prospectus supplement pursuant to which any discounted offering is made will include a chart for this
example based on the actual number of shares in such offering and the actual discount from the most recently determined NAV per common share. It is not possible to predict the level of market price decline that may occur.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50% Participation |
|
|
150% Participation |
|
|
|
Prior to Sale Below NAV |
|
|
Following Sale |
|
|
% Change |
|
|
Following Sale |
|
|
% Change |
|
Offering Price |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Price per Common Share to Public |
|
|
|
|
|
$ |
7.90 |
|
|
|
|
|
|
$ |
7.90 |
|
|
|
|
|
Net Proceeds per Common Share to Issuer |
|
|
|
|
|
$ |
7.50 |
|
|
|
|
|
|
$ |
7.50 |
|
|
|
|
|
Increases in Shares and Decrease to NAV |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Common Shares Outstanding |
|
|
1,000,000 |
|
|
|
1,250,000 |
|
|
|
25.00 |
% |
|
|
1,250,000 |
|
|
|
25.00 |
% |
NAV per Common Share |
|
$ |
10.00 |
|
|
$ |
9.50 |
|
|
|
5.00 |
% |
|
$ |
9.50 |
|
|
|
5.00 |
% |
Dilution/Accretion to Common Stockholder |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Shares Held by Stockholder |
|
|
10,000 |
|
|
|
11,250 |
|
|
|
12.50 |
% |
|
|
13,750 |
|
|
|
37.50 |
% |
Percentage Held by Common Stockholder |
|
|
1.0 |
% |
|
|
0.90 |
% |
|
|
10.00 |
% |
|
|
1.10 |
% |
|
|
10.00 |
% |
Total Asset Values |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total NAV Held by Common Stockholder |
|
$ |
100,000 |
|
|
$ |
106,875 |
|
|
|
6.88 |
% |
|
$ |
130,625 |
|
|
|
30.63 |
% |
Total Investment by Common Stockholder (Assumed to be $10.00 per Common Share on Common Shares Held prior to Sale) |
|
$ |
100,000 |
|
|
$ |
109,875 |
|
|
|
|
|
|
$ |
129,625 |
|
|
|
|
|
Total Dilution/Accretion to Common Stockholder (Total NAV Less Total Investment) |
|
|
|
|
|
|
3,000 |
|
|
|
|
|
|
$ |
1,000 |
|
|
|
|
|
Per Common Share Amounts |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NAV Per Common Share Held by Stockholder |
|
|
|
|
|
$ |
9.50 |
|
|
|
|
|
|
$ |
9.50 |
|
|
|
|
|
Investment per Common Share Held by Stockholder (Assumed to be $10.00 per Common Share on Common Shares Held prior to
Sale) |
|
$ |
10.00 |
|
|
$ |
9.77 |
|
|
|
2.33 |
% |
|
$ |
9.43 |
|
|
|
5.73 |
% |
Dilution/Accretion per Common Share Held by Stockholder (NAV per Common Share Less Investment per Common Share) |
|
|
|
|
|
$ |
0.27 |
|
|
|
|
|
|
$ |
0.07 |
|
|
|
|
|
Percentage Dilution/Accretion to Stockholder (Dilution/Accretion per Common Share Divided by Investment per Common Share) |
|
|
|
|
|
|
|
|
|
|
2.73 |
% |
|
|
|
|
|
|
0.77 |
% |
Impact on New Investors
Investors who are not currently stockholders, but who participate in an offering below NAV and whose investment per common share is greater
than the resulting NAV per share (due to selling compensation and expenses paid by us) will experience an immediate decrease, albeit small, in the NAV of their shares and their NAV per share compared to the price they pay for their shares of common
stock. Investors who are not currently stockholders and who participate in an offering below NAV per common share and whose investment per common share is also less than the resulting NAV per common share due to selling compensation and expenses
paid by the issuer being significantly less than the discount per common share will experience an immediate increase in the NAV of their shares and their NAV per share compared to the price they pay for their shares of common stock. These investors
will experience a disproportionately greater participation in our earnings and assets and their voting power than our increase in assets, potential earning power and voting interests. These investors will, however, be subject to the risk that we may
make additional discounted offerings in which such new common stockholder does not participate, in which case such new stockholder will experience dilution as described above in such subsequent offerings. These investors may also experience a
decline in the market price of their shares of common stock, which often reflects to some degree announced or potential increases and decreases in NAV per share. This decrease could be more pronounced as the size of the offering and level of
discounts increases.
59
The following chart illustrates the level of dilution or accretion for new investors that would
be experienced by a new investor in the same 5%, 10% and 25% discounted offerings as described in the first chart above. The illustration is for a new investor who purchases the same percentage (1%) of the common shares in the offering as the
common stockholder in the prior examples held immediately prior to the offering, The prospectus supplement pursuant to which any discounted offering is made will include a chart for this example based on the actual number of common shares in such
offering and the actual discount from the most recently determined NAV per common share. It is not possible to predict the level of market price decline that may occur.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Example 1 5% Offering at 5% Discount |
|
|
Example 2 10% Offering at 10% Discount |
|
|
Example 3 25% Offering at 25% Discount |
|
|
|
Prior to Sale Below NAV |
|
|
Following Sale |
|
|
% Change |
|
|
Following Sale |
|
|
% Change |
|
|
Following Sale |
|
|
% Change |
|
Offering Price |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Price per Common Share to Public |
|
|
|
|
|
$ |
10.00 |
|
|
|
|
|
|
$ |
9.47 |
|
|
|
|
|
|
$ |
7.90 |
|
|
|
|
|
Net Proceeds per Common Share to Issuer |
|
|
|
|
|
$ |
9.50 |
|
|
|
|
|
|
$ |
9.00 |
|
|
|
|
|
|
$ |
7.50 |
|
|
|
|
|
Decrease to NAV |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Common Shares Outstanding |
|
|
1,000,000 |
|
|
|
1,050,000 |
|
|
|
5.00 |
% |
|
|
1,100,000 |
|
|
|
10.00 |
% |
|
|
1,250,000 |
|
|
|
25.00 |
% |
NAV per Common Share |
|
$ |
10.00 |
|
|
$ |
9.98 |
|
|
|
(0.20 |
)% |
|
$ |
9.91 |
|
|
|
(0.90 |
)% |
|
$ |
9.50 |
|
|
|
5.00 |
% |
Dilution/Accretion to Common Stockholder |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Shares Held by Stockholder |
|
|
|
|
|
|
500 |
|
|
|
|
|
|
|
1,000 |
|
|
|
|
|
|
|
2,500 |
|
|
|
|
|
Percentage Held by Common Stockholder |
|
|
0.0 |
% |
|
|
0.05 |
% |
|
|
|
|
|
|
0.09 |
% |
|
|
|
|
|
|
0.20 |
% |
|
|
|
|
Total Asset Values |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total NAV Held by Common Stockholder |
|
|
|
|
|
$ |
4,990 |
|
|
|
|
|
|
$ |
9,910 |
|
|
|
|
|
|
$ |
23,750 |
|
|
|
|
|
Total Investment by Common Stockholder |
|
|
|
|
|
$ |
5,000 |
|
|
|
|
|
|
$ |
9,470 |
|
|
|
|
|
|
$ |
19,750 |
|
|
|
|
|
Total Dilution/Accretion to Common Stockholder (Total NAV Less Total Investment) |
|
|
|
|
|
$ |
(10 |
) |
|
|
|
|
|
$ |
440 |
|
|
|
|
|
|
$ |
4,000 |
|
|
|
|
|
Per Common Share Amounts |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NAV Per Common Share Held by Common Stockholder |
|
|
|
|
|
$ |
9.98 |
|
|
|
|
|
|
$ |
9.91 |
|
|
|
|
|
|
$ |
9.50 |
|
|
|
|
|
Investment per Share Held by Common Stockholder |
|
|
|
|
|
$ |
10.00 |
|
|
|
|
|
|
$ |
9.47 |
|
|
|
|
|
|
$ |
7.90 |
|
|
|
|
|
Dilution/Accretion per Common Share Held by Common Stockholder (NAV per Common Share Less Investment per Common Share) |
|
|
|
|
|
$ |
(0.02 |
) |
|
|
|
|
|
$ |
0.44 |
|
|
|
|
|
|
$ |
1.60 |
|
|
|
|
|
Percentage Dilution/Accretion to Common Stockholder (Dilution/Accretion per Common Share Divided by Investment per Common
Share) |
|
|
|
|
|
|
|
|
|
|
(0.20 |
)% |
|
|
|
|
|
|
4.65 |
% |
|
|
|
|
|
|
20.25 |
% |
60
SENIOR SECURITIES
Information about our senior securities is shown in the following table as of March 31, 2015, (the end of our fiscal year of operations)
and for the years indicated in the table, unless otherwise noted. The annual information has been derived from our audited financial statements for each respective period, which have been audited by PricewaterhouseCoopers LLP, our independent
registered public accounting firm. PricewaterhouseCoopers LLPs report on the senior securities table as of March 31, 2015 is attached as an exhibit to the registration statement of which this prospectus is a part.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class and Year |
|
Total Amount
Outstanding
Exclusive of
Treasury Securities (1) |
|
|
Asset Coverage Per Unit (2) |
|
|
Involuntary
Liquidating
Preference Per Unit (3) |
|
|
Average Market Value Per Unit (4) |
|
7.125% Series A Cumulative Term Preferred Stock (5) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2015 |
|
$ |
40,000,000 |
|
|
$ |
2,301 |
|
|
$ |
25.00 |
|
|
$ |
25.78 |
|
March 31, 2014 |
|
|
40,000,000 |
|
|
|
2,978 |
|
|
|
25.00 |
|
|
|
26.53 |
|
March 31, 2013 |
|
|
40,000,000 |
|
|
|
2,725 |
|
|
|
25.00 |
|
|
|
26.92 |
|
March 31, 2012 |
|
|
40,000,000 |
|
|
|
2,676 |
|
|
|
25.00 |
|
|
|
24.97 |
|
|
|
|
|
|
6.750% Series B Cumulative Term Preferred Stock (6) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2015 |
|
$ |
41,400,000 |
|
|
$ |
2,301 |
|
|
$ |
25.00 |
|
|
$ |
25.38 |
|
|
|
|
|
|
Revolving credit facilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2015 |
|
$ |
118,800,000 |
|
|
$ |
2,301 |
|
|
|
|
|
|
|
N/A |
|
March 31, 2014 |
|
|
61,250,000 |
|
|
|
2,978 |
|
|
|
|
|
|
|
N/A |
|
March 31, 2013 |
|
|
31,000,000 |
|
|
|
2,725 |
|
|
|
|
|
|
|
N/A |
|
March 31, 2012 |
|
|
|
|
|
|
N/A |
|
|
|
|
|
|
|
N/A |
|
March 31, 2011 |
|
|
|
|
|
|
N/A |
|
|
|
|
|
|
|
N/A |
|
March 31, 2010 |
|
|
27,800,000 |
|
|
|
2,814 |
|
|
|
|
|
|
|
N/A |
|
March 31, 2009 |
|
|
110,265,000 |
|
|
|
2,930 |
|
|
|
|
|
|
|
N/A |
|
March 31, 2008 |
|
|
144,835,000 |
|
|
|
2,422 |
|
|
|
|
|
|
|
N/A |
|
March 31, 2007 |
|
|
100,000,000 |
|
|
|
3,228 |
|
|
|
|
|
|
|
N/A |
|
|
|
|
|
|
Short-term loan |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2015 |
|
|
|
|
|
|
N/A |
|
|
|
|
|
|
|
N/A |
|
March 31, 2014 |
|
|
|
|
|
|
N/A |
|
|
|
|
|
|
|
N/A |
|
March 31, 2013 |
|
$ |
58,016,000 |
|
|
$ |
2,725 |
|
|
|
|
|
|
|
N/A |
|
March 31, 2012 |
|
|
76,005,000 |
|
|
|
2,676 |
|
|
|
|
|
|
|
N/A |
|
March 31, 2011 |
|
|
40,000,000 |
|
|
|
5,344 |
|
|
|
|
|
|
|
N/A |
|
March 31, 2010 |
|
|
75,000,000 |
|
|
|
2,814 |
|
|
|
|
|
|
|
N/A |
|
|
|
|
|
|
Secured borrowings (7) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2015 |
|
$ |
5,095,785 |
|
|
$ |
2,301 |
|
|
|
|
|
|
|
N/A |
|
March 31, 2014 |
|
|
5,000,000 |
|
|
|
2,978 |
|
|
|
|
|
|
|
N/A |
|
March 31, 2013 |
|
|
5,000,000 |
|
|
|
2,725 |
|
|
|
|
|
|
|
N/A |
|
(1) |
Total amount of each class of senior securities outstanding as of the dates presented. Our Series C Term Preferred Stock was issued and outstanding subsequent to March 31, 2015 and is therefore not included in the
table. |
(2) |
Asset coverage ratio is the ratio of the carrying value of our total consolidated assets, less all liabilities and indebtedness not represented by senior securities, to the aggregate amount of senior securities
representing indebtedness (including interest payable and guarantees). Asset coverage per unit is the asset coverage ratio expressed in terms of dollar amounts per one thousand dollars of indebtedness. |
(3) |
The amount to which such class of senior security would be entitled upon the involuntary liquidation of the issuer in preference to any security junior to it. |
(4) |
Only applicable to our Term Preferred Stock because the other senior securities are not registered for public trading. Average market value per unit is the average of the closing price of the shares on the NASDAQ during
the last 10 trading days of the period. |
(5) |
Our Series A Term Preferred Stock was issued in March 2012. |
(6) |
Our Series B Term Preferred Stock was issued in November 2014. |
(7) |
In August 2012, we entered into a participation agreement with a third-party related to $5.0 million of our senior subordinated term debt investment
in Ginsey Home Solutions, Inc. (Ginsey). We evaluated whether the transaction should be accounted for as a sale or a financing-type transaction under the applicable guidance of ASC 860. Based on the terms of the participation agreement,
we are required to treat the participation as a financing-type transaction. Specifically, the third-party has a senior |
61
|
claim to our remaining investment in the event of default by Ginsey which, in part, resulted in the loan participation bearing a rate of interest lower than the contractual rate established at
origination. Therefore, our Consolidated Statements of Assets and Liabilities reflects the entire senior subordinated term debt investment in Ginsey and a corresponding $5.1 million secured borrowing liability. The secured borrowing has a
stated interest rate of 7% and a maturity date of January 3, 2018. |
62
BUSINESS
Overview
We were incorporated under the General
Corporation Laws of the State of Delaware on February 18, 2005. On June 22, 2005 we completed an initial public offering and commenced operations. We operate as an externally managed, closed-end, non-diversified management investment
company and have elected to be treated as a business development company (BDC) under the Investment Company Act of 1940, as amended (the 1940 Act). For federal income tax purposes, we have elected to be treated as a regulated
investment company (RIC) under Subchapter M of the Internal Revenue Code of 1986, as amended (the Code). In order to continue to qualify as a RIC for federal income tax purposes and obtain favorable RIC tax treatment, we must
meet certain requirements, including certain minimum distribution requirements.
Investment Objectives and Strategy
We were established for the purpose of investing in debt and equity securities of established private businesses operating in the United States
(U.S.). Our investment objectives are to: (1) achieve and grow current income by investing in debt securities of established businesses that we believe will provide stable earnings and cash flow to pay expenses, make principal and
interest payments on our outstanding indebtedness and make distributions to stockholders that grow over time; and (2) provide our stockholders with long-term capital appreciation in the value of our assets by investing in equity securities,
generally in combination with the aforementioned debt securities, of established businesses that we believe can grow over time to permit us to sell our equity investments for capital gains. To achieve our objectives, our investment strategy is to
invest in several categories of debt and equity securities, with each investment generally ranging from $5 million to $30 million, although investment size may vary, depending upon our total assets or available capital at the time of investment. We
seek to avoid investments in high-risk, early stage enterprises. We expect that our investment portfolio over time will consist of approximately 75% in debt securities and 25% in equity securities, at cost. As of March 31, 2015, our investment
portfolio was made up of 73% in debt securities and 27% in equity securities, at cost.
We invest by ourselves or jointly with other funds or management
of the portfolio company, depending on the opportunity. If we are participating in an investment with one or more co-investors, our investment is likely to be smaller than if we were investing alone.
In July 2012, the Securities and Exchange Commission (SEC) granted us an exemptive order that expanded our ability to co-invest with certain of
our affiliates under certain circumstances and any future business development company or closed-end management investment company that is advised (or sub-advised if it controls the fund) by our external investment adviser, or any combination of the
foregoing, subject to the conditions in the SECs order. We believe this ability to co-invest will continue to enhance our ability to further our investment objectives and strategies.
In general, our investments in debt securities have a term of no more than seven years, accrue interest at variable rates (based on the one-month London
Interbank Offered Rate (LIBOR)) and, to a lesser extent, at fixed rates. In addition, many of the debt securities we hold typically do not amortize prior to maturity. We seek debt instruments that pay interest monthly or, at a minimum,
quarterly, and which may include a yield enhancement such as a success fee or deferred interest provision and are primarily interest only, with all principal and any accrued but unpaid interest due at maturity. Generally, success fees accrue at a
set rate and are contractually due upon a change of control of the business. Some debt securities have deferred interest whereby some portion of the interest payment is added to the principal balance so that the interest is paid, together with the
principal, at maturity. This form of deferred interest is often called paid-in-kind (PIK) interest.
Typically, our investments in
equity securities take the form of common stock, preferred stock, limited liability company interests, or warrants or options to purchase the foregoing. Often, these equity investments occur in connection with our original investment, buyouts and
recapitalizations of a business, or refinancing existing debt.
As of March 31, 2015, our portfolio consisted of investments in 34 companies located
in 16 states in 18 different industries with an aggregate fair value of $466.1 million. Since our initial public offering in 2005 and through March 31, 2015, we have invested in over 113 different companies, while making 118 consecutive monthly
distributions to common stockholders.
We expect that our target portfolio over time will primarily include the following four categories of investments
in private companies in the United States (U.S.):
|
|
|
Senior Secured Debt Securities: We seek to invest a portion of our assets in senior secured debt securities also known as senior loans, senior term loans, lines of credit and senior notes. Using its assets as
collateral, the borrower typically uses senior debt to cover a substantial portion of the funding needs of the business. The senior secured debt security usually takes the form of first priority liens on all, or substantially all, of the assets of
the business. |
|
|
|
Senior Subordinated Secured Debt Securities: We seek to invest a portion of our assets in senior subordinated secured debt securities, also known as senior subordinated loans and senior subordinated notes. These
senior subordinated secured debt securities rank junior to the borrowers senior debt securities and may be secured by first priority liens on a portion of the assets of the business or may be designated as second lien notes. Additionally, we
may receive other yield enhancements, such as success fees, in connection with these senior subordinated secured debt securities. |
63
|
|
|
Junior Subordinated Debt Securities: We seek to invest a portion of our assets in junior subordinated debt securities, also known as subordinated loans, subordinated notes and mezzanine loans. These junior
subordinated debts may be secured by certain assets of the borrower or may be unsecured loans. Additionally, we may receive other yield enhancements in addition to or in lieu of success fees, such as warrants to buy common and preferred stock or
limited liability interests in connection with these junior subordinated debt securities. |
|
|
|
Preferred and Common Equity/Equivalents: We seek to invest a portion of our assets in equity securities, which consist of preferred and common equity, or limited liability company interests, or warrants or
options to acquire such securities, and are generally in combination with our debt investment in a business. Additionally, we may receive equity investments derived from restructurings on some of our existing debt investments. In many cases, we will
own a significant portion of the equity which may include having voting control of the businesses in which we invest. |
Additionally,
pursuant to the 1940 Act, we must maintain at least 70% of our total assets in qualifying assets, which generally include each of the investment types listed above. Therefore, the 1940 Act permits us to invest up to 30% of our assets in other
non-qualifying assets. See Regulation as a BDC Qualifying Assets for a discussion of the types of qualifying assets in which we are permitted to invest pursuant to Section 55(a) of the 1940 Act.
Because the majority of the loans in our portfolio consist of term debt in private companies that typically cannot or will not expend the resources to have
their debt securities rated by a credit rating agency, we expect that most, if not all, of the debt securities we acquire will be unrated. Investors should assume that these loans would be rated below what is today considered investment
grade quality. Investments rated below investment grade are often referred to as high yield securities or junk bonds and may be considered high risk, as compared to investment-grade debt instruments.
Investment Concentrations
Year over year, our investment
concentration as a percentage of fair value and of cost has remained relatively unchanged. As of March 31, 2015, our investment portfolio consisted of investments in 34 portfolio companies located in 16 states across 18 different industries
with an aggregate fair value of $466.1 million, of which our investments in Counsel Press, SOG, Funko, Acme, and Old World our five largest portfolio investments at fair value, collectively comprised $134.3 million, or 28.8%, of our total investment
portfolio at fair value. The following table summarizes our investments by security type as of March 31, 2015 and 2014:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2015 |
|
|
March 31, 2014 |
|
|
|
Cost |
|
|
Fair Value |
|
|
Cost |
|
|
Fair Value |
|
Senior secured debt |
|
$ |
284,509 |
|
|
|
56.3 |
% |
|
$ |
263,141 |
|
|
|
56.5 |
% |
|
$ |
196,293 |
|
|
|
51.2 |
% |
|
$ |
169,870 |
|
|
|
54.0 |
% |
Senior subordinated secured debt |
|
|
85,937 |
|
|
|
17.0 |
|
|
|
70,378 |
|
|
|
15.1 |
|
|
|
82,348 |
|
|
|
21.5 |
|
|
|
70,827 |
|
|
|
22.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt |
|
|
370,446 |
|
|
|
73.3 |
|
|
|
333,519 |
|
|
|
71.6 |
|
|
|
278,641 |
|
|
|
72.7 |
|
|
|
240,697 |
|
|
|
76.5 |
|
Preferred equity |
|
|
127,762 |
|
|
|
25.3 |
|
|
|
111,090 |
|
|
|
23.8 |
|
|
|
98,099 |
|
|
|
25.6 |
|
|
|
62,901 |
|
|
|
20.0 |
|
Common equity/equivalents |
|
|
7,050 |
|
|
|
1.4 |
|
|
|
21,444 |
|
|
|
4.6 |
|
|
|
6,797 |
|
|
|
1.7 |
|
|
|
10,795 |
|
|
|
3.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity/equivalents |
|
|
134,812 |
|
|
|
26.7 |
|
|
|
132,534 |
|
|
|
28.4 |
|
|
|
104,896 |
|
|
|
27.3 |
|
|
|
73,696 |
|
|
|
23.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Investments |
|
$ |
505,258 |
|
|
|
100.0 |
% |
|
$ |
466,053 |
|
|
|
100.0 |
% |
|
$ |
383,537 |
|
|
|
100.0 |
% |
|
$ |
314,393 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our investments at fair value consisted of the following industry classifications as of March 31, 2015 and 2014:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2015 |
|
|
March 31, 2014 |
|
|
|
Fair Value |
|
|
Percentage of Total Investments |
|
|
Fair Value |
|
|
Percentage of Total Investments |
|
Home and Office Furnishings, Housewares, and Durable Consumer Products |
|
$ |
70,533 |
|
|
|
15.1 |
% |
|
$ |
21,188 |
|
|
|
6.7 |
% |
Diversified/Conglomerate Manufacturing |
|
|
62,996 |
|
|
|
13.5 |
|
|
|
54,845 |
|
|
|
17.4 |
|
Chemicals, Plastics, and Rubber |
|
|
49,312 |
|
|
|
10.6 |
|
|
|
52,753 |
|
|
|
16.8 |
|
Leisure, Amusement, Motion Pictures, Entertainment |
|
|
44,931 |
|
|
|
9.6 |
|
|
|
39,867 |
|
|
|
12.7 |
|
Diversified/Conglomerate Services |
|
|
31,995 |
|
|
|
6.9 |
|
|
|
|
|
|
|
|
|
Machinery (Non-agriculture, Non-construction, Non-electronic |
|
|
30,397 |
|
|
|
6.5 |
|
|
|
25,917 |
|
|
|
8.2 |
|
Personal and Non-Durable Consumer Products (Manufacturing Only) |
|
|
25,008 |
|
|
|
5.4 |
|
|
|
10,005 |
|
|
|
3.2 |
|
64
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Automobile |
|
|
24,530 |
|
|
|
5.3 |
|
|
|
25,735 |
|
|
|
8.2 |
|
Farming and Agriculture |
|
|
22,438 |
|
|
|
4.8 |
|
|
|
20,557 |
|
|
|
6.5 |
|
Containers, Packaging, and Glass |
|
|
19,447 |
|
|
|
4.2 |
|
|
|
17,889 |
|
|
|
5.7 |
|
Telecommunications |
|
|
19,241 |
|
|
|
4.1 |
|
|
|
|
|
|
|
|
|
Aerospace and Defense |
|
|
18,770 |
|
|
|
4.0 |
|
|
|
18,512 |
|
|
|
5.9 |
|
Cargo Transport |
|
|
13,972 |
|
|
|
3.0 |
|
|
|
6,500 |
|
|
|
2.1 |
|
Beverage, Food and Tobacco |
|
|
12,982 |
|
|
|
2.8 |
|
|
|
13,050 |
|
|
|
4.2 |
|
Textiles and Leather |
|
|
10,750 |
|
|
|
2.3 |
|
|
|
|
|
|
|
|
|
Buildings and Real Estate |
|
|
1,860 |
|
|
|
0.4 |
|
|
|
7,575 |
|
|
|
2.4 |
|
Other < 2.0% |
|
|
6,891 |
|
|
|
1.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Investments |
|
$ |
466,053 |
|
|
|
100.0 |
% |
|
$ |
314,393 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our investments at fair value were included in the following U.S. geographic regions as of March 31, 2015 and 2014:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2015 |
|
|
March 31, 2014 |
|
|
|
Fair Value |
|
|
Percentage of Total Investments |
|
|
Fair Value |
|
|
Percentage of Total Investments |
|
West |
|
$ |
161,444 |
|
|
|
34.6 |
% |
|
$ |
117,781 |
|
|
|
37.5 |
% |
Northeast |
|
|
133,814 |
|
|
|
28.7 |
|
|
|
67,862 |
|
|
|
21.6 |
|
South |
|
|
133,703 |
|
|
|
28.7 |
|
|
|
89,915 |
|
|
|
28.6 |
|
Midwest |
|
|
37,092 |
|
|
|
8.0 |
|
|
|
38,835 |
|
|
|
12.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Investments |
|
$ |
466,053 |
|
|
|
100.0 |
% |
|
$ |
314,393 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The geographic region indicates the location of the headquarters for our portfolio companies. A portfolio company may have
additional business locations in other geographic regions.
Investment Principal Repayments
The following table summarizes the contractual principal repayments and maturity of our investment portfolio for the next five fiscal years and thereafter,
assuming no voluntary prepayments, as of March 31, 2015:
|
|
|
|
|
|
|
|
|
|
|
Amount |
|
For the fiscal year ending March 31: |
|
2016 |
|
$ |
19,567 |
|
|
|
2017 |
|
|
43,816 |
|
|
|
2018 |
|
|
100,316 |
|
|
|
2019 |
|
|
81,681 |
|
|
|
2020 |
|
|
115,403 |
|
|
|
Thereafter |
|
|
9,618 |
|
|
|
|
|
|
|
|
|
|
Total contractual repayments |
|
$ |
370,446 |
|
|
|
Investments in equity securities |
|
|
134,812 |
|
|
|
|
|
|
|
|
|
|
Total cost basis of investments held at March 31, 2015: |
|
$ |
505,258 |
|
|
|
|
|
|
|
|
Receivables from Portfolio Companies
Receivables from portfolio companies represent non-recurring costs that we incurred on behalf of portfolio companies and are included in other assets on our
accompanying Consolidated Statements of Assets and Liabilities. We generally maintain an allowance for uncollectible receivables from portfolio companies when the receivable balance becomes 90 days or more past due or if it is determined,
based upon managements judgment, that the portfolio company is unable to pay its obligations. We charge the accounts receivable to the established allowance when collection efforts have been exhausted and the receivables are deemed
uncollectible. As of March 31, 2015 and 2014, we had gross receivables from portfolio companies of $1.5 million and $1.2 million, respectively. The allowance for uncollectible receivables was $349 and $44 as of March 31, 2015 and 2014,
respectively.
65
Our Investment Adviser and Administrator
Gladstone Management Corporation (the Adviser) is our affiliate, investment adviser, and a privately-held company led by a management team that has
extensive experience in our lines of business. Another of our and the Advisers affiliates, a privately-held company, Gladstone Administration, LLC (the Administrator), employs, among others, our chief financial officer and
treasurer, chief accounting officer, chief valuation officer, chief compliance officer, general counsel and secretary (who also serves as the president of the Administrator) and their respective staffs. All but one of our executive officers serve as
directors, executive officers, officers, or a combination of the foregoing, of the following of our affiliates: Gladstone Commercial Corporation (Gladstone Commercial), a publicly-traded real estate investment trust; Gladstone Capital
Corporation (Gladstone Capital), a publicly-traded BDC and RIC; Gladstone Land Corporation (Gladstone Land), a publicly-traded real estate investment trust; the Adviser; and the Administrator. Our chief financial officer and
treasurer is also the chief financial officer and treasurer of Gladstone Capital. David Gladstone, our chairman and chief executive officer, also serves on the board of managers of our affiliate, Gladstone Securities, LLC (Gladstone
Securities), a privately-held broker-dealer registered with the Financial Industry Regulatory Authority (FINRA) and insured by the Securities Investor Protection Corporation.
The Adviser and Administrator also provide investment advisory and administrative services, respectively, to our affiliates, including, but not limited to,
Gladstone Commercial; Gladstone Capital; and Gladstone Land. In the future, the Adviser and Administrator may provide investment advisory and administrative services, respectively, to other funds and companies, both public and private.
We have been externally managed by the Adviser pursuant to an investment advisory and management agreement and the Administrator has provided administration
services to us under an administration agreement since June 22, 2005. The Adviser was organized as a corporation under the laws of the State of Delaware on July 2, 2002, and is a registered investment adviser under the Investment Advisers
Act of 1940, as amended. The Administrator was organized as a limited liability company under the laws of the State of Delaware on March 18, 2005. The Adviser and Administrator are headquartered in McLean, Virginia, a suburb of Washington, D.C.
The Advisor also has offices in several other states.
Investment Process
Overview of Investment and Approval Process
To
originate investments, the Advisers investment professionals use an extensive referral network comprised primarily of private equity sponsors, venture capitalists, leveraged buyout funds, investment bankers, attorneys, accountants, commercial
bankers and business brokers. The Advisers investment professionals review information received from these and other sources in search of potential financing opportunities. If a potential opportunity matches our investment objectives, the
investment professionals will seek an initial screening of the opportunity with our president, David Dullum, to authorize the submission of an indication of interest (IOI) to the prospective portfolio company. If the prospective
portfolio company passes this initial screening and the IOI is accepted by the prospective company, the investment professionals will seek approval to issue a letter of intent (LOI) from the Advisers investment committee, which is
composed of Mr. Gladstone (our chairman and chief executive officer), Terry Lee Brubaker (our vice chairman and chief operating officer), and Mr. Dullum, to the prospective company. If this LOI is issued, then the Adviser and Gladstone
Securities (the Due Diligence Team) will conduct a due diligence investigation and create a detailed profile summarizing the prospective portfolio companys historical financial statements, industry, competitive position and
management team and analyzing its conformity to our general investment criteria. The investment professionals then present this profile to the Advisers investment committee, which must approve each investment. Further, each investment is
available for review by the members of our board of directors (our Board of Directors), a majority of whom are not interested persons as defined in Section 2(a)(19) of the 1940 Act.
Prospective Portfolio Company Characteristics
We
have identified certain characteristics that we believe are important in identifying and investing in prospective portfolio companies. The criteria listed below provide general guidelines for our investment decisions, although not all of these
criteria may be met by each portfolio company.
|
|
Experienced Management. We typically require that the businesses in which we invest have experienced management teams or a hiring plan in place to install an experienced management team. We also require the
businesses to have in place proper incentives to induce management to succeed and act in concert with our interests as investors, including having significant equity or other interests in the financial performance of their companies.
|
|
|
Value-and-Income Orientation and Positive Cash Flow. Our investment philosophy places a premium on fundamental analysis from an investors perspective and has a distinct value-and-income orientation. In
seeking value, we focus on established companies in which we can invest at relatively low multiples of earnings before interest, taxes, depreciation and amortization (EBITDA), and that have positive operating cash flow at the time of
investment. In seeking income, we typically invest in companies that generate relatively stable to growing sales, cash flows, and EBITDA to fixed charges coverage, which provides some assurance that the borrowers will be able to service their debt.
We do not expect to invest in start-up companies or companies with what we believe to be speculative business plans. |
66
|
|
Strong Competitive Position in an Industry. We seek to invest in businesses that have developed strong market positions and significant relative market share within their respective markets and that we believe
are well-positioned to capitalize on growth opportunities. We seek businesses that demonstrate significant competitive advantages versus their competitors, which we believe will help to protect their market positions and profitability.
|
|
|
Liquidation Value of Assets. The projected liquidation value of the assets, if any, is an important factor in our investment analysis in collateralizing our debt securities. |
Extensive Due Diligence
Our Due Diligence Team
conducts what we believe are extensive due diligence investigations of our prospective portfolio companies and investment opportunities. The due diligence investigation may begin with a review of publicly available information followed by in depth
business analysis, including, but not limited to, some or all of the following:
|
|
a review of the prospective portfolio companys historical and projected financial information, including a quality of earnings analysis; |
|
|
visits to the prospective portfolio companys business site(s) and evaluation of potential environmental issues; |
|
|
interviews with the prospective portfolio companys management, employees, customers and vendors; |
|
|
review of loan documents and material contracts; |
|
|
background checks and a management capabilities assessment on the prospective portfolio companys management team; and |
|
|
research, including market analyses, on the prospective portfolio companys products, services or particular industry and its competitive position therein. |
Upon completion of a due diligence investigation and a decision to proceed with an investment, the Advisers investment professionals who have primary
responsibility for the investment present the investment opportunity to the Advisers investment committee. The investment committee then determines whether to pursue the potential investment. Additional due diligence of a potential investment
may be conducted on our behalf by attorneys and independent accountants, as well as other outside advisers, prior to the closing of the investment, as appropriate.
We also rely on the long-term relationships that the Advisers investment professionals have with venture capitalists, leveraged buyout funds, investment
bankers, commercial bankers, private equity sponsors, attorneys, accountants and business brokers. In addition, the extensive direct experiences of our executive officers and managing directors in the operations of and providing debt and equity
capital to small and medium-sized private businesses plays a significant role in our investment evaluation and assessment of risk.
Investment
Structure
Once the Adviser has determined that an investment meets our standards and investment criteria, the Adviser works with the management of
that company and other capital providers to structure the transaction in a way that we believe will provide us with the greatest opportunity to maximize our return on the investment, while providing appropriate incentives to management of the
company. As discussed above, the capital classes through which we typically structure a deal include senior secured debt, senior subordinated secured debt, junior subordinated secured debt, and preferred and common equity or equivalents, the
majority of which is secured first and second lien debt investments. Through its risk management process, the Adviser seeks to limit the downside risk of our investments by:
|
|
making investments with an expected total return (including interest, yield enhancements and potential equity appreciation) that it believes compensates us for the credit risk of the investment; |
|
|
seeking collateral or superior positions in the portfolio companys capital structure where possible; |
|
|
incorporating put rights and call protection into the investment structure where possible; |
|
|
negotiating covenants in connection with our investments that afford our portfolio companies as much flexibility as possible in managing their businesses, consistent with preserving our capital; and |
|
|
holding board seats or securing board observation rights at the portfolio company. |
We expect to hold most of
our debt investments until maturity or repayment, but may sell our investments (including our equity investments) earlier if a liquidity event takes place, such as the sale or recapitalization of a portfolio company or, in the case of an equity
investment in a company, its initial public offering. Occasionally, we may sell some or all of our investment interests in a portfolio company to a third party, such as an existing investor in the portfolio company, in a privately negotiated
transaction.
67
Competitive Advantages
A large number of entities compete with us and make the types of investments that we seek to make in small and medium-sized privately-owned businesses. Such
competitors include private equity funds, leveraged buyout funds, other BDCs, venture capital funds, investment banks and other equity and non-equity based investment funds, and other financing sources, including traditional financial services
companies such as commercial banks. Many of our competitors are substantially larger than we are and have considerably greater funding sources or are able to access capital more cost effectively. In addition, certain of our competitors may have
higher risk tolerances or different risk assessments, which could allow them to consider a wider variety of investments, and establish a larger portfolio of investments. Furthermore, many of these competitors are not subject to the regulatory
restrictions that the 1940 Act imposes on us as a BDC. However, we believe that we have the following competitive advantages over many other providers of financing to small and medium-sized businesses.
Management Expertise
Mr. Gladstone, our
chairman and chief executive officer, is also the chairman and chief executive officer of the Adviser and its affiliated companies, other than Gladstone Securities, (the Gladstone Companies) and has been involved in all aspects of the
Gladstone Companies investment activities, including serving as a member of the Advisers investment committees for each of the Company, Gladstone Capital, Gladstone Commercial, and Gladstone Land. Mr. Gladstone and Mr. Dullum,
our president and a director, have extensive experience in investing in middle market companies and with operating in the BDC marketplace in general. Mr. Brubaker, our vice chairman and chief operating officer, has substantial experience in
acquisitions and operations of companies. Messrs. Gladstone and Brubaker also have principal management responsibility for the Adviser as its executive officers. These three individuals dedicate a significant portion of their time to managing
our investment portfolio. Our senior management has extensive experience providing capital to small and medium-sized companies and has worked together at the Gladstone Companies for more than ten years. In addition, we have access to the
resources and expertise of the Advisers investment professionals and support staff who possess a broad range of transactional, financial, managerial, and investment skills.
Increased Access to Investment Opportunities Developed Through Extensive Network of Contacts
The Adviser seeks to identify potential investments through active origination and due diligence and through its dialogue with numerous management teams,
members of the financial community and potential corporate partners with whom the Advisers investment professionals have long-term relationships. We believe that the Advisers investment professionals have developed a broad network of
contacts within the investment, commercial banking, private equity and investment management communities, and that their reputation, experience, and focus on investing in small and medium-sized companies enables us to source and identify
well-positioned prospective portfolio companies, which provide attractive investment opportunities. Additionally, the Adviser expects to generate information from its professionals network of accountants, consultants, lawyers and management
teams of portfolio companies and other companies to support the Advisers investment activities.
Disciplined, Value and Income-Oriented
Investment Philosophy with a Focus on Preservation of Capital
In making its investment decisions, the Adviser focuses on the risk and reward
profile of each prospective portfolio company, seeking to minimize the risk of capital loss without foregoing the potential for capital appreciation. We expect the Adviser to use the same value and income-oriented investment philosophy that its
professionals use in the management of the other Gladstone Companies and to commit resources to manage downside exposure. The Advisers approach seeks to reduce our risk in investments by using some or all of the following approaches:
|
|
focusing on companies with attractive and sustainable market positions and cash flow; |
|
|
investing in businesses with experienced and established management teams; |
|
|
engaging in extensive due diligence from the perspective of a long-term investor; |
|
|
investing at low price-to-cash flow multiples; and |
|
|
adopting flexible transaction structures by drawing on the experience of the investment professionals of the Adviser and its affiliates. |
Longer Investment Horizon
Unlike private equity
and venture capital funds that are typically organized as finite-life partnerships, we are not subject to standard periodic capital return requirements. The partnership agreements of most private equity and venture capital funds typically provide
that these funds may only invest investors capital once and must return all capital and realized gains to investors within a finite time period, often seven to ten years. These provisions often force private equity and venture capital funds to
seek returns on their investments by causing their portfolio companies to pursue mergers, public equity offerings, or other liquidity events more quickly than might otherwise be optimal or desirable, potentially resulting in a lower overall return
to investors and/or an adverse impact on their portfolio companies. In contrast, we are a corporation of perpetual duration and are exchange-traded. We believe that our flexibility to make investments with a long-term view and without the capital
return requirements of traditional private investment vehicles provides us with the opportunity to achieve greater long-term returns on invested capital.
68
Flexible Transaction Structuring
We believe our management teams broad expertise and its ability to draw upon many years of combined experience enables the Adviser to identify, assess,
and structure investments successfully across all levels of a companys capital structure and manage potential risk and return at all stages of the economic cycle. We are not subject to many of the regulatory limitations that govern traditional
lending institutions, such as banks. As a result, we are flexible in selecting and structuring investments, adjusting investment criteria and transaction structures and, in some cases, the types of securities in which we invest, thereby affording us
a competitive advantage of providing both, equity and debt financing, which may limit uncertainty related to the close of the transaction. We believe that this approach enables the Adviser to develop a financing structure which best fits the
investment and growth profile of the underlying business and yields attractive investment opportunities that will continue to generate current income and capital gain potential throughout the economic cycle, including during turbulent periods in the
capital markets.
Leverage
For the purpose of
making investments and taking advantage of favorable interest rates, we may issue senior securities up to the maximum amount permitted by the 1940 Act. The 1940 Act currently permits us to issue senior securities representing indebtedness and senior
securities that are stock (collectively our Senior Securities) in amounts such that we maintain an asset coverage ratio, as defined in Section 18(h) of the 1940 Act, of at least 200% on our Senior Securities immediately after each
issuance of such Senior Securities. We may also incur such indebtedness to repurchase our common stock. We may also be exposed to the risks of leverage as a result of incurring indebtedness, generally through our revolving line of credit or issuing
Senior Securities representing indebtedness, such as our Term Preferred Stock. Although borrowing money for investments increases the potential for gain, it also increases the risk of a loss. A decrease in the value of our investments will have a
greater impact on the value of our common stock to the extent that we have borrowed money to make investments. There is a possibility that the costs of borrowing could exceed the income we receive on the investments we make with such borrowed funds.
Our Board of Directors is authorized to provide for the issuance of Senior Securities with such preferences, powers, rights and privileges as it deems appropriate, subject to the requirements of the 1940 Act. See Regulation as a
BDCAsset Coverage for a discussion of our leveraging constraints and Risk FactorsRisks Related to Our External Financing for further discussion of certain leveraging risks.
Ongoing Management of Investments and Portfolio Company Relationships
The Advisers investment professionals actively oversee each investment by continuously evaluating the portfolio companys performance and typically
working collaboratively with the portfolio companys management to identify and incorporate best resources and practices that help us achieve our projected investment performance.
Monitoring
The Advisers investment
professionals monitor the financial performance, trends, and changing risks of each portfolio company on an ongoing basis to determine if each company is performing within expectations and to guide the portfolio companys management in taking
the appropriate courses of action. The Adviser employs various methods of evaluating and monitoring the performance of our investments in portfolio companies, which can include the following:
|
|
|
monthly analysis of financial and operating performance; |
|
|
|
assessment of the portfolio companys performance against its business plan and our investment expectations; |
|
|
|
attendance at and/or participation in the portfolio companys board of directors or management meetings; |
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|
|
assessment of portfolio company management, sponsor, governance and strategic direction; |
|
|
|
assessment of the portfolio companys industry and competitive environment; and |
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|
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review and assessment of the portfolio companys operating outlook and financial projections. |
Relationship Management
The Advisers investment
professionals interact with various parties involved with a portfolio company, or investment, by actively engaging with internal and external constituents, including:
69
|
|
|
advisers and consultants. |
Managerial Assistance and Services
As a BDC, we make available significant managerial assistance to our portfolio companies and provide other services to such portfolio companies. Neither we,
nor the Adviser, currently receive fees in connection with the managerial assistance we make available. At times, the Adviser provides other services to certain of our portfolio companies and it receives fees for these other services. Such services
may include, but are not limited to: (i) assistance obtaining, sourcing or structuring credit facilities, long term loans or additional equity from unaffiliated third parties; (ii) negotiating important contractual financial relationships;
(iii) consulting services regarding restructuring of the portfolio company and financial modeling as it relates to raising additional debt and equity capital from unaffiliated third parties; and (iv) primary role in interviewing, vetting
and negotiating employment contracts with candidates in connection with adding and retaining key portfolio company management team members. At the end of each quarter, the Adviser voluntarily and irrevocably credits 100% of these fees against the
base management fee that we would otherwise be required to pay to the Adviser. However, pursuant to the terms of the agreement with the Adviser, a small percentage of certain of such fees, primarily for the valuation of portfolio companies, is
retained by the Adviser in the form of reimbursement, at cost, for tasks completed by personnel of the Adviser.
In February 2011, Gladstone Securities
started providing other services (such as investment banking and due diligence services) to certain of our portfolio companies. Any such fees paid by portfolio companies to Gladstone Securities do not impact the overall fees we pay to the Adviser or
the overall fees credited against the base management fee.
Valuation Process
The following is a general description of the Companys investment valuation policy (the Policy) (which has been approved by our Board of
Directors) that the professionals of the Adviser and Administrator, with oversight and direction from the chief valuation officer, an employee of the Administrator that reports directly to the Companys Board of Directors, (collectively, the
Valuation Team) use each quarter to determine the fair value of our investment portfolio. In accordance with the 1940 Act, our Board of Directors has the ultimate responsibility for reviewing and approving, in good faith, the fair value
of our investments based on the Policy. The Adviser values our investments in accordance with the requirements of the 1940 Act and GAAP. There is no single standard for determining fair value (especially for privately-held businesses), as fair value
depends upon the specific facts and circumstances of each individual investment. Each quarter, our Board of Directors reviews the Policy to determine if changes thereto are advisable and assesses whether the Valuation Team has applied the Policy
consistently. With respect to the valuation of our investment portfolio, the Valuation Team performs the following steps each quarter:
|
|
|
Each portfolio company or investment is initially assessed by the Valuation Team using the Policy, which may include: |
|
|
|
obtaining fair value quotes or utilizing valuation inputs from third party valuation firms; and |
|
|
|
using techniques, such as total enterprise value, yield analysis, market quotes and other factors, including but not limited to: the nature and realizable value of the collateral, including external parties
guaranties; any relevant offers or letters of intent to acquire the portfolio company; and the markets in which the portfolio company operates. |
|
|
|
Preliminary valuation conclusions are then discussed amongst the Valuation Team and with our management and documented for review by our Board of Directors. |
|
|
|
Next, our Board of Directors reviews this documentation and discusses the information provided by our Valuation Team, and determines whether the Valuation Team has followed the Policy, whether the Valuation Teams
recommended fair value is reasonable in light of the Policy and reviews other facts and circumstances. Then our Board of Directors votes to accept or reject the Valuation Teams recommended valuation. |
Fair value measurements of our investments may involve subjective judgment and estimates. Due to the uncertainty inherent in valuing these securities, the
Advisers determinations of fair value may fluctuate from period to period and may differ materially from the values that could be obtained if a ready market for these securities existed. Our NAV could be materially affected if the
Advisers determinations regarding the fair value of our investments are materially different from the values that we ultimately realize upon our disposal of such securities. Our valuation policies, procedures and processes are more fully
described under Managements Discussion and Analysis of Financial Condition and Results of Operations Critical Accounting Policies Investment Valuation.
Investment Advisory and Management Agreement
We
entered into an investment advisory and management agreement with the Adviser (the Advisory Agreement). In accordance with the Advisory Agreement, we pay the Adviser fees as compensation for its services, consisting of a base management
fee and an incentive fee. On July 15, 2014, our Board of Directors approved the annual renewal of the Advisory Agreement with the Adviser through August 31, 2015. Our Board of Directors considered the following factors as the basis for its
decision to renew the Advisory
70
Agreement: (1) the nature, extent and quality of services provided by the Adviser to our stockholders; (2) the investment performance of the Company and the Adviser, (3) the costs
of the services to be provided and profits to be realized by the Adviser and its affiliates from the relationship with the Company, (4) the extent to which economies of scale will be realized as the Company and the Companys affiliates
that are managed by the same Adviser (Gladstone Commercial, Gladstone Capital and Gladstone Land) grow and whether the fee level under the Advisory Agreement reflects the economies of scale for the Companys investors, (5) the fee
structure of the advisory and administrative agreements of comparable funds, and (6) indirect profits to the Adviser created through the Company and (7) in light of the foregoing considerations, the overall fairness of the advisory fee
paid under the Advisory Agreement.
Base Management Fee
The base management fee is computed and generally payable quarterly to the Adviser and is assessed at an annual rate of 2.0%, computed on the basis of the
value of our average gross assets at the end of the two most recently completed quarters (inclusive of the current quarter), which are total assets, including investments made with proceeds of borrowings, less any uninvested cash or cash equivalents
resulting from borrowings, and adjusted appropriately for any share issuances or repurchases during the period. Additionally, pursuant to the requirements of the 1940 Act, the Adviser makes available significant managerial assistance to our
portfolio companies. The Adviser may also provide other services to our portfolio companies under other agreements and may receive fees for services other than managerial assistance, as discussed above. The Adviser generally voluntarily and
irrevocably credits 100% of these fees against the base management fee that we would otherwise be required to pay to the Adviser; however, pursuant to the terms of the Advisory Agreement, a small percentage of certain of such fees, primarily for the
valuation of portfolio companies, is retained by the Adviser in the form of reimbursement, at cost, for tasks completed by personnel of the Adviser.
Loan Servicing Fee
The Adviser also services the
loans held by our wholly-owned subsidiary, Gladstone Business Investment, LLC (Business Investment), in return for which the Adviser receives a 2.0% annual fee based on the monthly aggregate outstanding balance of loans pledged under our
revolving line of credit. The entire loan servicing fee paid monthly to the Adviser by Business Investment is voluntarily and irrevocably credited against the base management fee otherwise payable to the Adviser since Business Investment is a
consolidated subsidiary of the Company, and overall, the base management fee, inclusive of the loan servicing fee, cannot exceed 2.0% of total assets (as reduced by cash and cash equivalents pledged to creditors) during any given calendar year
pursuant to the Advisory Agreement.
Incentive Fee
The incentive fee consists of two parts: an income-based incentive fee and a capital gains-based incentive fee. The income-based incentive fee rewards the
Adviser if our quarterly net investment income (before giving effect to any incentive fee) exceeds 1.75% of our net assets (the hurdle rate). The income-based incentive fee with respect to our pre-incentive fee net investment income is
generally payable quarterly to the Adviser and is computed as follows:
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no incentive fee in any calendar quarter in which our pre-incentive fee net investment income does not exceed the hurdle rate (7.0% annualized); |
|
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|
100.0% of our pre-incentive fee net investment income with respect to that portion of such pre-incentive fee net investment income, if any, that exceeds the hurdle rate but is less than 2.1875% of our net assets in any
calendar quarter (8.75% annualized); and |
|
|
|
20.0% of the amount of our pre-incentive fee net investment income, if any, that exceeds 2.1875% of our net assets in any calendar quarter (8.75% annualized). |
Quarterly Incentive Fee Based on Net Investment Income
Pre-incentive fee net investment income
(expressed as a percentage of the value of net assets)
Percentage of pre-incentive fee net investment income
allocated to income-related portion of incentive fee
71
The second part of the incentive fee is a capital gains-based incentive fee that is determined and payable in
arrears as of the end of each fiscal year (or upon termination of the Advisory Agreement, as of the termination date), and equals 20.0% of our realized capital gains, less any realized capital losses and unrealized depreciation, calculated as of the
end of the preceding calendar year. The capital gains-based incentive fee payable to the Adviser is calculated based on (i) cumulative aggregate realized capital gains since our inception, less (ii) cumulative aggregate realized capital
losses since our inception, if any, less (iii) the entire portfolios aggregate unrealized capital depreciation, if any, as of the date of the calculation. If this number is positive at the applicable calculation date, then the capital
gains-based incentive fee for such year equals 20.0% of such amount, less the aggregate amount of any capital gains-based incentive fees paid in respect of our portfolio in all prior years. For calculation purposes, cumulative aggregate realized
capital gains, if any, equals the sum of the excess between the net sales price of each investment, when sold, and the original cost of such investment since our inception. Cumulative aggregate realized capital losses equals the sum of the deficit
between the net sales price of each investment, when sold, and the original cost of such investment since our inception. The entire portfolios aggregate unrealized capital depreciation, if any, equals the sum of the deficit between the fair
value of each investment security as of the applicable calculation date and the original cost of such investment security. We have not incurred capital gains-based incentive fees from inception through March 31, 2015, as cumulative net
unrealized capital depreciation has exceeded cumulative realized capital gains net of cumulative realized capital losses.
Additionally, in accordance
with GAAP, a capital gains-based incentive fee accrual is calculated using the aggregate cumulative realized capital gains and losses and aggregate cumulative unrealized capital depreciation included in the calculation of the capital gains-based
incentive fee plus the aggregate cumulative unrealized capital appreciation. If such amount is positive at the end of a reporting period, then GAAP requires us to record a capital gains-based incentive fee equal to 20.0% of such amount, less the
aggregate amount of actual capital gains-based incentive fees paid in all prior years. If such amount is negative, then there is no accrual for such reporting period. GAAP requires that the capital gains-based incentive fee accrual consider the
cumulative aggregate unrealized capital appreciation in the calculation, as a capital gains-based incentive fee would be payable if such unrealized capital appreciation were realized. There can be no assurance that any such unrealized capital
appreciation will be realized in the future. There has been no GAAP accrual recorded for a capital gains-based incentive fee since our inception through March 31, 2015.
Our Board of Directors accepted an unconditional and irrevocable voluntary credit from the Adviser to reduce the income-based incentive fee to the extent net
investment income did not cover 100% of the distributions to common stockholders for the year ended March 31, 2013, which credit totaled $0.2 million. For the years ended March 31, 2015 and 2014, there were no such incentive fee credits
from the Adviser.
Administration Agreement
We have entered into an administration agreement with the Administrator (the Administration Agreement), whereby we pay separately for
administrative services. The Administration Agreement provides for payments equal to our allocable portion of the Administrators expenses incurred while performing services to us, which are primarily rent and salaries and benefits expenses of
the Administrators employees, including our chief financial officer and treasurer, chief accounting officer, chief valuation officer, chief compliance officer and general counsel and secretary (who also serves as the Administrators
president) and their respective staff. Prior to July 1, 2014, our allocable portion of the expenses were generally derived by multiplying that portion of the Administrators expenses allocable to all funds managed by the Adviser by the
percentage of our total assets at the beginning of each quarter in comparison to the total assets at the beginning of each quarter of all funds managed by the Adviser.
Effective July 1, 2014, our allocable portion of the Administrators expenses are generally derived by multiplying the Administrators total
expenses by the approximate percentage of time during the current quarter the Administrators employees performed services for us in relation to their time spent performing services for all companies serviced by the Administrator. These
administrative fees are accrued at the end of the quarter when the services are performed and generally paid the following quarter. On July 15, 2014, our Board of Directors approved the annual renewal of the Administration Agreement through
August 31, 2015.
Staffing
We do not currently
have any employees and do not expect to have any employees in the foreseeable future. Currently, services necessary for our business are provided by individuals who are employees of the Adviser and the Administrator pursuant to the terms of the
Advisory Agreement and the Administration Agreement, respectively. No employee of the Adviser or the Administrator will dedicate all of his or her time to us. However, we expect that 25 to 30 full time employees of the Adviser and the Administrator
will spend substantial time on our matters during the remainder of calendar year 2015 and all of calendar year 2016. To the extent we acquire more investments, we anticipate that the number of employees of the Adviser and the Administrator who
devote time to our matters will increase.
72
As of June 12, 2015, the Adviser and Administrator collectively had 65 full-time employees. A breakdown of
these employees is summarized by functional area in the table below:
|
|
|
Number of Individuals |
|
Functional Area |
11 |
|
Executive management |
16 |
|
Accounting, administration, compliance, human resources, legal and treasury |
38 |
|
Investment management, portfolio management and due diligence |
Properties
We do not own
any real estate or other physical properties materially important to our operations. Gladstone Management Corporation is the current leaseholder of all properties in which we operate. We occupy these premises pursuant to the Advisory Agreement and
Administration Agreement. Our Adviser and Administrator are headquartered in McLean, Virginia and our Adviser also has offices in several other states.
Legal Proceedings
From time to time, we may become
involved in various investigations, claims and legal proceedings that arise in the ordinary course of our business. Furthermore, third parties may try to seek to impose liability on us in connection with the activities of our portfolio companies.
See Risk FactorsPortfolio company-related litigation could result in costs, including defense costs or damages, and the diversion of management time and resources. While we do not expect that the resolution of these
matters if they arise would materially affect our business, financial condition, results of operations or cash flows, resolution will be subject to various uncertainties and could result in the expenditure of significant financial and managerial
resources.
73
PORTFOLIO COMPANIES
The following table sets forth certain information as of March 31, 2015, regarding each portfolio company in which we had a debt or
equity security as of such date. All such investments have been made in accordance with our investment policies and procedures described in this prospectus.
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|
|
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|
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|
|
|
|
Company(A) |
|
Industry |
|
Investment |
|
Percentage of Class Held on a Fully Diluted Basis |
|
|
Cost |
|
|
Fair Value |
|
|
|
|
|
|
|
|
|
|
(Dollar amounts in thousands) |
|
|
|
|
|
|
|
|
|
|
(unaudited) |
|
CONTROL INVESTMENTS: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Galaxy Tool Holding Corporation 1111 Industrial Rd. Winfield, KS 67156 |
|
Aerospace and Defense |
|
Line of Credit $1,250 available |
|
|
|
|
|
$ |
3,250 |
|
|
$ |
3,250 |
|
|
|
|
|
Senior Subordinated Term Debt |
|
|
|
|
|
|
15,520 |
|
|
|
15,520 |
|
|
|
|
|
Preferred Stock |
|
|
74.7 |
% |
|
|
11,464 |
|
|
|
|
|
|
|
|
|
Common Stock |
|
|
55.0 |
% |
|
|
48 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30,282 |
|
|
|
18,770 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Roanoke Industries Corp. 176 Eastpark Dr. Roanoke, VA 24019 |
|
Buildings and Real Estate |
|
Senior Subordinated Term Debt |
|
|
|
|
|
|
1,650 |
|
|
|
1,650 |
|
|
|
|
|
Common Stock |
|
|
100 |
% |
|
|
100 |
|
|
|
210 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,750 |
|
|
|
1,860 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Control Investments (represents 4.4% of total investments at fair value) |
|
|
|
|
|
$ |
32,032 |
|
|
$ |
20,630 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AFFILIATE INVESTMENTS: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acme Cryogenics, Inc. |
|
Chemicals, Plastics, and Rubber |
|
Senior Subordinated Term Debt |
|
|
|
|
|
$ |
14,500 |
|
|
$ |
14,500 |
|
2801 Mitchell Avenue |
|
|
|
Preferred Stock |
|
|
91.1 |
% |
|
|
7,956 |
|
|
|
8,519 |
|
Allentown, PA 18103 |
|
|
|
Common Stock |
|
|
78.6 |
% |
|
|
1,197 |
|
|
|
|
|
|
|
|
|
Common Stock Warrants |
|
|
78.6 |
% |
|
|
25 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23,678 |
|
|
|
23,019 |
|
|
|
|
|
|
|
Alloy Die Casting Corp. 6550 Caballero
Blvd |
|
Diversified/Conglomerate Manufacturing |
|
Senior Secured Term Debt |
|
|
|
|
|
|
12,215 |
|
|
|
12,154 |
|
Buena Park, CA 90620 |
|
|
|
Preferred Stock |
|
|
68.8 |
% |
|
|
4,064 |
|
|
|
4,122 |
|
|
|
|
|
Common Stock |
|
|
62.0 |
% |
|
|
41 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,320 |
|
|
|
16,276 |
|
|
|
|
|
|
|
Behrens Manufacturing, LLC 1250 E 8th St.
Winona, MN 55987 |
|
Diversified/Conglomerate Manufacturing |
|
Senior Secured Term Debt |
|
|
|
|
|
|
9,975 |
|
|
|
9,975 |
|
|
|
|
|
Preferred Stock |
|
|
58.5 |
% |
|
|
2,922 |
|
|
|
3,447 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,897 |
|
|
|
13,422 |
|
74
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company(A) |
|
Industry |
|
Investment |
|
Percentage of Class Held on a Fully Diluted Basis |
|
|
Cost |
|
|
Fair Value |
|
|
|
|
|
|
|
|
|
|
(Dollar amounts in thousands) |
|
|
|
|
|
|
|
|
|
|
(unaudited) |
|
B-Dry, LLC |
|
Personal, Food and Miscellaneous Services |
|
Line of Credit, $175 available |
|
|
|
|
|
|
2,075 |
|
|
|
1,124 |
|
13876 Cravath Place |
|
|
|
Senior Secured Term Debt |
|
|
|
|
|
|
6,443 |
|
|
|
3,490 |
|
Woodbridge, VA 22191 |
|
|
|
Senior Secured Term Debt |
|
|
|
|
|
|
840 |
|
|
|
455 |
|
|
|
|
|
Preferred Stock |
|
|
90.0 |
% |
|
|
2,250 |
|
|
|
|
|
|
|
|
|
Common Stock |
|
|
56.0 |
% |
|
|
300 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,908 |
|
|
|
5,069 |
|
|
|
|
|
|
|
B+T Group Acquisition |
|
Telecommunications |
|
Line of Credit, $700 available |
|
|
|
|
|
|
700 |
|
|
|
700 |
|
1717 Boulder Ave #300, Tulsa, OK 74119 |
|
|
|
Senior Secured Term Debt |
|
|
|
|
|
|
14,000 |
|
|
|
14,000 |
|
|
|
|
|
Preferred Stock |
|
|
69.9 |
% |
|
|
4,196 |
|
|
|
4,541 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,896 |
|
|
|
19,241 |
|
|
|
|
|
|
|
Cambridge Sound Management, Inc. 404 Wyman
St., Waltham, MA 02451 |
|
Home and Office Furnishing, Housewares and Durable Consumer Products |
|
Senior Secured Term Debt |
|
|
|
|
|
|
15,000 |
|
|
|
15,000 |
|
|
|
|
|
Preferred Stock |
|
|
97.3 |
% |
|
|
4,500 |
|
|
|
7,198 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19.500 |
|
|
|
22,198 |
|
|
|
|
|
|
|
Channel Technologies Group, LLC 879 Ward
Drive Santa Barbara, CA 93111 |
|
Diversified/Conglomerate Manufacturing |
|
Preferred Stock |
|
|
6.3 |
% |
|
|
2,864 |
|
|
|
2,315 |
|
|
|
|
|
Common Stock |
|
|
6.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,864 |
|
|
|
2,315 |
|
|
|
|
|
|
|
Counsel Press, Inc. 460 West 34th Street, Fourth Floor New York, NY 10001 |
|
Diversified/Conglomerate Services |
|
Line of Credit, $500 available |
|
|
|
|
|
|
1,500 |
|
|
|
1,500 |
|
|
|
|
|
Senior Secured Term Debt |
|
|
|
|
|
|
18,000 |
|
|
|
18,000 |
|
|
|
|
|
Senior Secured Term Debt |
|
|
|
|
|
|
5,500 |
|
|
|
5,500 |
|
|
|
|
|
Preferred Stock |
|
|
89.9 |
% |
|
|
6,995 |
|
|
|
6,995 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31,995 |
|
|
|
31,995 |
|
|
|
|
|
|
|
D.P.M.S., Inc. 950 George St.
Santa Clara, CA 95054 |
|
Diversified/Conglomerate Manufacturing |
|
Line of Credit, $550 available |
|
|
|
|
|
|
4,000 |
|
|
|
762 |
|
|
|
|
|
Senior Secured Term Debt |
|
|
|
|
|
|
2,575 |
|
|
|
490 |
|
|
|
|
|
Senior Secured Term Debt |
|
|
|
|
|
|
8,795 |
|
|
|
1674 |
|
|
|
|
|
Senior Secured Term Debt |
|
|
|
|
|
|
1,150 |
|
|
|
219 |
|
|
|
|
|
Preferred Stock |
|
|
59.5 |
% |
|
|
2,500 |
|
|
|
|
|
|
|
|
|
Common Stock |
|
|
92.5 |
% |
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19,023 |
|
|
|
3,145 |
|
|
|
|
|
|
|
Edge Adhesives Holdings, Inc. 5117 Northeast
Pkwy Fort Worth, TX 76106 |
|
Diversified/Conglomerate Manufacturing |
|
Line of Credit, $10 available |
|
|
|
|
|
|
1,490 |
|
|
|
1,488 |
|
|
|
|
|
Senior Secured Term Debt |
|
|
|
|
|
|
9,300 |
|
|
|
9,300 |
|
|
|
|
|
Senior Subordinated Term Debt |
|
|
|
|
|
|
2,400 |
|
|
|
2,403 |
|
|
|
|
|
Preferred Stock |
|
|
43.4 |
% |
|
|
3,474 |
|
|
|
3,931 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,664 |
|
|
|
16,390 |
|
76
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company(A) |
|
Industry |
|
Investment |
|
Percentage of Class Held on a Fully Diluted Basis |
|
|
Cost |
|
|
Fair Value |
|
|
|
|
|
|
|
|
|
|
(Dollar amounts in thousands) (unaudited) |
|
Head Country Food Products, Inc. 2116 North Ash
St. Ponca City, OK 74601 |
|
Beverage, Food and Tobacco |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Secured Term Debt |
|
|
|
|
|
|
9,050 |
|
|
|
9,050 |
|
|
|
|
|
Preferred Stock |
|
|
88.9 |
% |
|
|
4,000 |
|
|
|
3,931 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,050 |
|
|
|
12,981 |
|
|
|
|
|
|
|
Logo Sportswear, Inc. 500 Cornwall Avenue
Cheshire, CT 06410 |
|
Textiles and Leather |
|
Line of Credit, $500 available |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Secured Term Debt |
|
|
|
|
|
|
9,200 |
|
|
|
9,200 |
|
|
|
|
|
Preferred Stock |
|
|
54.7 |
% |
|
|
1,550 |
|
|
|
1,550 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.750 |
|
|
|
10,750 |
|
|
|
|
|
|
|
Meridian Rack & Pinion, Inc. 6740
Cobra Way San Diego, CA 92121 |
|
Automobile |
|
Senior Secured Term Debt |
|
|
|
|
|
|
9,660 |
|
|
|
9,612 |
|
|
|
|
|
Preferred Stock |
|
|
54.4 |
% |
|
|
3,381 |
|
|
|
3,117 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,041 |
|
|
|
13,236 |
|
|
|
|
|
|
|
NDLI Acquisition, LLC. 11335 Clay Rd Ste.
100 Houston, TX 77041 |
|
Cargo Transport |
|
Line of Credit, $50 available |
|
|
|
|
|
|
2,875 |
|
|
|
2,308 |
|
|
|
|
|
Senior Secured Term Debt |
|
|
|
|
|
|
7,227 |
|
|
|
5,803 |
|
|
|
|
|
Senior Secured Term Debt |
|
|
|
|
|
|
3,650 |
|
|
|
2,931 |
|
|
|
|
|
Senior Secured Term Debt |
|
|
|
|
|
|
3,650 |
|
|
|
2,930 |
|
|
|
|
|
Preferred Stock |
|
|
100 |
% |
|
|
3,600 |
|
|
|
|
|
|
|
|
|
Common Stock |
|
|
85.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21,002 |
|
|
|
13,972 |
|
|
|
|
|
|
|
Old Word Christmas, Inc. PO Box 8000
Spokane, Washington 99203 |
|
Home and Office Furnishings, Housewares, and Durable Consumer Products |
|
Senior Secured Term Debt |
|
|
|
|
|
|
15,770 |
|
|
|
15,770 |
|
|
|
|
|
Preferred Stock |
|
|
99.2 |
% |
|
|
6,180 |
|
|
|
6,657 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21,950 |
|
|
|
22,427 |
|
|
|
|
|
|
|
Precision Southeast, Inc. P.O. Box
50610 |
|
Diversified/Conglomerate Manufacturing |
|
Senior Secured Term Debt |
|
|
|
|
|
|
9,617 |
|
|
|
9,617 |
|
4900 Hwy 501 |
|
|
|
Preferred Stock |
|
|
100 |
% |
|
|
3,739 |
|
|
|
1,830 |
|
Myrtle Beach, SC 29579 |
|
|
|
Common Stock |
|
|
83.7 |
% |
|
|
91 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,477 |
|
|
|
11,447 |
|
|
|
|
|
|
|
SOG Specialty Knives & Tools, LLC 6521
212th St. SW Lynnwood, WA 98036 |
|
Leisure, Amusement, Motion Pictures, Entertainment |
|
Senior Secured Term Debt |
|
|
|
|
|
|
6,200 |
|
|
|
6,200 |
|
|
|
|
|
Senior Secured Term Debt |
|
|
|
|
|
|
12,200 |
|
|
|
12,200 |
|
|
|
|
|
Preferred Stock |
|
|
70.9 |
% |
|
|
9,749 |
|
|
|
13,451 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28,149 |
|
|
|
31,851 |
|
|
|
|
|
|
|
Tread Corporation 176 Eastpark Dr.
Roanoke, VA 24019 |
|
Oil and Gas |
|
Line of Credit, $853 available |
|
|
|
|
|
|
2,397 |
|
|
|
375 |
|
|
|
|
|
Senior Subordinated Secured Term Debt |
|
|
|
|
|
|
5,000 |
|
|
|
782 |
|
|
|
|
|
Senior Subordinated Secured Term Debt |
|
|
|
|
|
|
2,750 |
|
|
|
430 |
|
|
|
|
|
Senior Subordinated Secured Term Debt |
|
|
|
|
|
|
1,000 |
|
|
|
156 |
|
|
|
|
|
Senior Subordinated Secured Term Debt |
|
|
|
|
|
|
510 |
|
|
|
80 |
|
77
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company(A) |
|
Industry |
|
Investment |
|
Percentage of Class Held on a Fully Diluted Basis |
|
|
Cost |
|
|
Fair Value |
|
|
|
|
|
|
|
|
|
|
(Dollar amounts in thousands)
(unaudited) |
|
|
|
|
|
Preferred Stock |
|
|
86.4 |
% |
|
|
3,333 |
|
|
|
|
|
|
|
|
|
Common Stock |
|
|
89.7 |
% |
|
|
501 |
|
|
|
|
|
|
|
|
|
Common Stock Warrants |
|
|
89.7 |
% |
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,494 |
|
|
|
1,823 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Affiliate Investments (represents 58.2% of total investments at fair value) |
|
|
$ |
310,628 |
|
|
$ |
271,050 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NON-CONTROL/NON-AFFILIATE INVESTMENTS: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Auto Safety House, LLC 2630 W. Buckey Rd.
Phoenix, AZ 85009 |
|
Automobile |
|
Line of Credit, $1,000 available |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Subordinated Secured Term Debt |
|
|
|
|
|
$ |
5,000 |
|
|
$ |
4,938 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,000 |
|
|
|
4,938 |
|
|
|
|
|
|
|
Cavert II Holding Corp. |
|
Containers, Packaging, and Glass |
|
Preferred Stock |
|
|
86.4 |
% |
|
|
1,845 |
|
|
|
3,265 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
620 Forum Parkway Rural Hall, NC 27045 |
|
|
|
|
|
|
|
|
|
|
1,845 |
|
|
|
3,265 |
|
|
|
|
|
|
|
Country Club Enterprises, LLC |
|
Automobile |
|
Senior Subordinated Secured Term Debt |
|
|
|
|
|
|
4,000 |
|
|
|
4,000 |
|
29 Tobey Rd. |
|
|
|
Preferred Stock |
|
|
59.9 |
% |
|
|
7,725 |
|
|
|
2,863 |
|
W. Wareham, MA 02576 |
|
|
|
Guaranty |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guaranty |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,725 |
|
|
|
6,863 |
|
|
|
|
|
|
|
Drew Foam Company, Inc. |
|
Chemicals, Plastics, and Rubber |
|
Senior Secured Term Debt |
|
|
|
|
|
|
10,913 |
|
|
|
10,913 |
|
1093 Highway 278 East |
|
|
|
Preferred Stock |
|
|
63.7 |
% |
|
|
3,375 |
|
|
|
3,532 |
|
Moticello, AR 71655 |
|
|
|
Common Stock |
|
|
53.7 |
% |
|
|
63 |
|
|
|
2,813 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,351 |
|
|
|
17,258 |
|
|
|
|
|
|
|
Frontier Packaging, Inc. |
|
Containers, Packaging, and Glass |
|
Senior Secured Term Debt |
|
|
|
|
|
|
12,000 |
|
|
|
12,000 |
|
1201 Andover |
|
|
|
Preferred Stock |
|
|
67.8 |
% |
|
|
1,373 |
|
|
|
1,404 |
|
Park East, Suite 101 Tukwila, WA 98188 |
|
|
|
Common Stock |
|
|
57.6 |
% |
|
|
152 |
|
|
|
2,777 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,525 |
|
|
|
16,181 |
|
|
|
|
|
|
|
Funko, LLC 1202 Shuksan Way
Everett, WA 98203 |
|
Personal and Non-Durable Consumer Products (Manufacturing Only) |
|
Senior Subordinated Secured Term Debt |
|
|
|
|
|
|
7,500 |
|
|
|
7,734 |
|
|
|
|
|
Senior Subordinated Secured Term Debt |
|
|
|
|
|
|
2,000 |
|
|
|
2,063 |
|
|
|
|
|
Preferred Stock |
|
|
10.0 |
% |
|
|
1,305 |
|
|
|
15,211 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,805 |
|
|
|
25,008 |
|
|
|
|
|
|
|
Ginsey Home Solutions, Inc. 2078 Center Square
Rd Swedesboro, NJ 08085 |
|
Home and Office Furnishings, Housewares, and Durable Consumer Products |
|
Senior Subordinated Secured Term Debt |
|
|
|
|
|
|
13,300 |
|
|
|
13,300 |
|
|
|
|
|
Preferred Stock |
|
|
94.9 |
% |
|
|
9,583 |
|
|
|
7,176 |
|
|
|
|
|
Common Stock |
|
|
78.5 |
% |
|
|
8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22,891 |
|
|
|
20,476 |
|
78
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company(A) |
|
Industry |
|
Investment |
|
Percentage of Class Held on a Fully Diluted Basis |
|
|
Cost |
|
|
Fair Value |
|
|
|
|
|
|
|
|
|
|
(Dollar amounts in thousands) (unaudited) |
|
Jackrabbit, Inc. |
|
Farming and Agriculture |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
471 Industrial Ave. |
|
|
|
Senior Secured Term Debt |
|
|
|
|
|
|
11,000 |
|
|
|
11,000 |
|
Rippon, CA 95366 |
|
|
|
Preferred Stock |
|
|
79.8 |
% |
|
|
3,556 |
|
|
|
4,139 |
|
|
|
|
|
Common Stock |
|
|
55.4 |
% |
|
|
94 |
|
|
|
2,399 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,650 |
|
|
|
17,538 |
|
|
|
|
|
|
|
Mathey Investments, Inc. 4344 S. Maybelle
Ave. Tulsa, OK 74107 |
|
Machinery (Nonagriculture, Nonconstruction, Nonelectronic) |
|
Senior Secured Term Debt |
|
|
|
|
|
|
1,375 |
|
|
|
1,375 |
|
|
|
|
|
Senior Secured Term Debt |
|
|
|
|
|
|
3,727 |
|
|
|
3,727 |
|
|
|
|
|
Senior Secured Term Debt |
|
|
|
|
|
|
3,500 |
|
|
|
3,500 |
|
|
|
|
|
Common Stock |
|
|
85.0 |
% |
|
|
777 |
|
|
|
7,630 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,379 |
|
|
|
16,232 |
|
79
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company(A) |
|
Industry |
|
Investment |
|
Percentage of Class Held on a Fully Diluted Basis |
|
|
Cost |
|
|
Fair Value |
|
|
|
|
|
|
|
|
|
|
(Dollar amounts in thousands)
(unaudited) |
|
Mitchell Rubber Products, Inc. |
|
Chemicals, Plastics, and Rubber |
|
Subordinated Secured Term Debt |
|
|
|
|
|
|
13,560 |
|
|
|
8,136 |
|
|
|
|
|
Subordinated Secured Term Debt |
|
|
|
|
|
|
1,500 |
|
|
|
900 |
|
10220 San Sevane Way |
|
|
|
Preferred Stock |
|
|
31.7 |
% |
|
|
2,790 |
|
|
|
|
|
Mira Loma, CA 91752 |
|
|
|
Common Stock |
|
|
28.8 |
% |
|
|
28 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,878 |
|
|
|
9,036 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quench Holdings Corp. 780 5th Ave., Ste, 110 Kings of Prussia, PA 19046 |
|
Home and Office Furnishings, Housewares, and Durable Consumer Products |
|
Common Stock |
|
|
3.3 |
% |
|
|
3,397 |
|
|
|
5,432 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,397 |
|
|
|
5,432 |
|
|
|
|
|
|
|
SBS, Industries, LLC 1843 N. 106th E. Ave Tulsa, OK 74116 |
|
Machinery (Nonagriculture, Nonconstruction, Nonelectronic) |
|
Senior Secured Term Debt |
|
|
|
|
|
|
11,355 |
|
|
|
11,355 |
|
|
|
|
|
Preferred Stock |
|
|
90.9 |
% |
|
|
1,994 |
|
|
|
2,627 |
|
|
|
|
|
Common Stock |
|
|
76.2 |
% |
|
|
222 |
|
|
|
183 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,571 |
|
|
|
14,165 |
|
|
|
|
|
|
|
Schylling Investments, LLC 306 Newburyport
Tpke |
|
Leisure, Amusement, Motion Pictures, Entertainment |
|
Senior Secured Term Debt |
|
|
|
|
|
|
13,081 |
|
|
|
13,081 |
|
Rowley, MA 01969 |
|
|
|
Preferred Stock |
|
|
72.7 |
% |
|
|
4,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,081 |
|
|
|
13,081 |
|
|
|
|
|
|
|
Star Seed, Inc. |
|
Farming and Agriculture |
|
Senior Secured Term Debt |
|
|
|
|
|
|
5,000 |
|
|
|
4,900 |
|
101 N Industrial Ave |
|
|
|
Preferred Stock |
|
|
60.0 |
% |
|
|
1,499 |
|
|
|
|
|
Osborne, KS 67473 |
|
|
|
Common Stock |
|
|
50.8 |
% |
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,500 |
|
|
|
4,900 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Non-Control/Non-Affiliate Investments (represents 37.4% of total investments at fair value) |
|
|
$ |
162,598 |
|
|
$ |
174,373 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL INVESTMENTS |
|
|
$ |
505,258 |
|
|
$ |
466,053 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A) |
Certain of the securities listed above are issued by affiliate(s) of the indicated portfolio company. |
Significant Portfolio Companies
Set
forth below is a brief description of each portfolio company in which we have made an investment that represents greater than 5% of our total assets (excluding cash and cash equivalents pledged to creditors) as of March 31, 2015. Because of the
relative size of our investments in these companies, we are exposed to a greater degree to the risks associated with these companies.
Counsel Press,
Inc.
We hold investments, having an aggregate fair value of $32.0 million as of March 31, 2015, in Counsel Press. Our investments
in Counsel Press as of March 31, 2015 include $7.0 million of preferred stock, at cost,, two senior secured term loans with an aggregate principal amount outstanding of $23.5 million, each maturing on March 31, 2020, and a revolving
line of credit with an aggregate principal amount outstanding of $1.5 million, which matures on March 31, 2017.
Founded in 1938,
Counsel Press supports appellate attorneys and their clients pursuing appeals in courts across the U.S. Based in New York, NY, it provides document preparation, procedural and technical advice, and a full range of traditional printing and electronic
filing services. Once engaged by a customer, Counsel Press organizes, prepares, and files appellate briefs, records and appendices.
80
Our Adviser has entered into a services agreement with Counsel Press, pursuant to which our
Adviser has agreed to advise and provide certain management and consulting services as mutually agreed upon by Counsel Press and our Adviser.
Because of the relative size of this investment, we are significantly exposed to the risks associated with Counsel Presss business. As
courts replace paper filings with e-filings, the Company may lose economies of scale on its print business (e.g. ability to charge by page printed), although we expect lost print revenue to be captured by increased digital service fees. Thus,
Counsel Press could be adversely affected by the change to paperless filings. Additionally, the death, disability or departure by one or more of Counsel Presss senior managers could have a negative impact on its business and operations.
One of the Advisers managing directors, Erika Highland, serves as a director of Counsel Presss board. Counsel Presss
principal executive office is located at 460 W. 34th Street, 4th Floor, New York, NY 10001.
Funko, LLC.
We hold investments, having
an aggregate fair value of $25.0 million as of March 31, 2015, in Funko. Our investments in Funko as of March 31, 2015 include $1.3 million of preferred stock, at cost, and two senior subordinated secured term loans with an aggregate
principal amount outstanding of $9.5 million, each maturing on May 28, 2019.
Based in Everett, WA, Funko is a designer,
importer, and marketer of pop-culture collectibles. Funko, founded in 1998, has an extensive portfolio of licenses, ranging from tent pole movies to cult classics and retro pop icons. Although it originally operated a single product platform,
bobbleheads, over time, Funko has expanded into six product platforms, across which it can deploy its portfolio of licenses. These platforms include plush toys, vinyl figures, 3-D bookmarks, electronics and more.
Because of the relative size of this investment, we are significantly exposed to the risks associated with Funkos business. Traditional
toy companies generally experience large swings in activity from trendy toys that generally have a several year cycle or from seasonal products. Due to the collectible and pop culture nature of Funkos products, the Company is more
insulated from this characteristic of the toy industry and experiences a relatively consistent revenue stream and profitability and minimal seasonality. However, fluctuations in the popularity of its licenses, as well as shifts in the overall toy
industry, could adversely impact our investment in Funko. Further, the death, disability or departure by one or more of Funkos senior managers could have a negative impact on its business and operations.
One of our Advisers managing directors, Chris Daniel, serves as a director on Funkos board. Funkos principal executive
office is located at 1202 Shuksan Way, Everett, WA 98203.
SOG Specialty Knives & Tools, LLC
We currently hold investments, having an aggregate fair value of $31.9 million as of March 31, 2015, in SOG. Our investments in SOG as of
March 31, 2015 include $9.7 million of preferred stock, at cost, and two senior subordinated secured term loans with an aggregate principal amount outstanding of $18.4 million, each maturing on October 3, 2017.
SOG, based in Lynnwood, Washington, takes its name from the Studies and Observations Group (the forefathers of the U.S. militarys
Special Operations Forces), designs and produces specialty knives and tools for the hunting/outdoors, military/law enforcement and industrial markets.
Because of the relative size of this investment, we are significantly exposed to the risks associated with SOGs business. The
companys brand has a good reputation among those within the industry; however, it is largely viewed as more of a niche player, with somewhat limited awareness outside of core customer segments. Although it has experienced recent gains in
market share, it still lags behind some of its competitors based on overall market size. Thus, SOG could be adversely affected by the aggressive actions of one of those competitors. SOG is dependent on a small group of long-time managers for the
execution of its business plan. The death, disability or departure by one or more of these individuals could have a negative impact on its business and operations.
81
Our Adviser has entered into an advisory services agreement with SOG. Under the terms of the
agreement, our Adviser has agreed to assist SOG with obtaining or structuring credit facilities, long term loans or additional equity, to provide advice and administrative support in the management of SOGs credit facilities and other important
contractual financial relationships, and to monitor and review SOGs capital structure and financial performance as it relates to raising additional debt and equity capital for growth and acquisitions. The agreement also provides that our
Adviser will be available to assist and advise SOG in connection with adding key people to the management team that will lead to the development of best industry practices in business promotion, business development and employee and customer
relations.
One of our Advisers managing directors, Kyle Largent, is a director of SOG. The principal executive offices of SOG are
located at 6521 212th Street SW, Lynnwood, Washington 98036.
82
MANAGEMENT
Our business and affairs are managed under the direction of our Board of Directors (the Board). Our Board currently consists of
seven members, four of whom are not considered to be interested persons of Gladstone Investment as defined in Section 2(a)(19) of the 1940 Act. We refer to these individuals as our independent directors. Our Board of Directors
elects our officers, who serve at the discretion of the Board.
Board of Directors
Under our certificate of incorporation, our directors are divided into three classes. Each class consists, as nearly as possible, of one-third
of the total number of directors, and each class has a three year term. Holders of our common stock and preferred stock vote together as a class for the election of directors, except that the holders of our term preferred stock have the sole right
to elect two of our directors. At each annual meeting of our stockholders, the successors to the class of directors whose term expires at such meeting will be elected to hold office for a term expiring at the annual meeting of stockholders held in
the third year following the year of their election. Each director will hold office for the term to which he or she is elected and until his or her successor is duly elected and qualifies. Information regarding our Board is as follows (the address
for each director is c/o Gladstone Investment Corporation, 1521 Westbranch Drive, Suite 100, McLean, Virginia 22102):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Name |
|
Age |
|
|
Position |
|
Director Since |
|
|
Expiration of Term |
|
Interested Directors |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
David Gladstone |
|
|
73 |
|
|
Chairman of the Board and Chief Executive Officer(1)(2)(6) |
|
|
2005 |
|
|
|
2016 |
|
Terry L. Brubaker |
|
|
71 |
|
|
Vice Chairman, Chief Operating Officer and Director(1)(2)(6) |
|
|
2005 |
|
|
|
2015 |
|
David A. R. Dullum |
|
|
67 |
|
|
President and Director(1) |
|
|
2005 |
|
|
|
2015 |
|
Independent Directors |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paul W. Adelgren |
|
|
72 |
|
|
Director(4)(5)(7) |
|
|
2005 |
|
|
|
2016 |
|
Michela A. English |
|
|
65 |
|
|
Director(3)(7) |
|
|
2005 |
|
|
|
2017 |
|
Caren D. Merrick |
|
|
55 |
|
|
Director(3)(7) |
|
|
2014 |
|
|
|
2015 |
|
John H. Outland |
|
|
69 |
|
|
Director(3)(4)(5)(7) |
|
|
2005 |
|
|
|
2016 |
|
Anthony W. Parker |
|
|
69 |
|
|
Director(2)(3)(6)(7) |
|
|
2005 |
|
|
|
2017 |
|
Walter H. Wilkinson, Jr. |
|
|
69 |
|
|
Director(4)(5)(7) |
|
|
2014 |
|
|
|
2015 |
|
(1) |
Interested person as defined in Section 2(a)(19) of the 1940 Act due to the directors position as our officer and/or employment by our Adviser. |
(2) |
Member of the executive committee. |
(3) |
Member of the audit committee. |
(4) |
Member of the ethics, nominating, and corporate governance committee. |
(5) |
Member of the compensation committee. |
(6) |
Member of the offering committee. |
(7) |
Each independent director serves as an alternate member of each committee for which they do not serve as a regular member. Alternate members of the committees serve and participate in meetings of the committees only in
the event of an absence of a regular member of the committee. |
The biographical information for each of our directors includes all of the
public company directorships held by such directors for the past five years.
Independent Directors (in alphabetical order)
Paul W. Adelgren. Mr. Adelgren has served as a director since June 2005. Mr. Adelgren has also served as a
director of Gladstone Commercial since August 2003, Gladstone Capital since January 2003 and Gladstone Land since January 2013. From 1997 to the present, Mr. Adelgren has served as the pastor of Missionary Alliance Church. From 1991 to 1997,
Mr. Adelgren was pastor of New Life Alliance Church. From 1988 to 1991, Mr. Adelgren was the comptroller, treasurer and the vice president-finance and materials for Williams & Watts, Inc., a logistics management and procurement
business located in Fairfield, NJ. Prior to joining Williams & Watts, Mr. Adelgren served in the United States Navy, where he served in a number of capacities, including as the director of the Strategic Submarine Support Department, as
an executive officer at the Naval Supply Center, and as the director of the Joint Uniform Military Pay System. He is a retired Navy Captain. Mr. Adelgren holds an MBA from Harvard Business School and a BA from the University of Kansas.
Mr. Adelgren was selected to serve as an independent director on our Board, due to his strength and experience in ethics, which also led to his appointment to the chairmanship of our Ethics, Nominating & Corporate Governance Committee.
83
Michela A. English. Ms. English has served as a director since June 2005.
Ms. English has served as President and CEO of Fight for Children, a non-profit charitable organization focused on providing high quality education and health care services to underserved youth in Washington, D.C. since June 2006.
Ms. English has also been a director of Gladstone Commercial since August 2003, Gladstone Capital since June 2002 and Gladstone Land since January 2013. From March 1996 to March 2004, Ms. English held several positions with Discovery
Communications, Inc., including president of Discovery Consumer Products, president of Discovery Enterprises Worldwide and president of Discovery.com. From 1991 to 1996, Ms. English served as senior vice president of the National Geographic
Society and was a member of the National Geographic Societys Board of Trustees and Education Foundation Board. Prior to 1991, Ms. English served as vice president, corporate planning and business development for Marriott Corporation and
as a senior engagement manager for McKinsey & Company. Ms. English currently serves as director of the Educational Testing Service (ETS), as a director of D.C. Preparatory Academy, a director of the D.C. Public Education Fund, a
director of the Society for Science and the Public, a trustee of the Corcoran Gallery of Art, and a member of the Virginia Institute of Marine Science Council. Ms. English is an emeritus member of the board of Sweet Briar College.
Ms. English holds a Bachelor of Arts in International Affairs from Sweet Briar College and a Master of Public and Private Management degree from Yale Universitys School of Management. Ms. English was selected to serve as an
independent director on our Board due to her greater than twenty years of senior management experience at various corporations and non-profit organizations as well as her past service on our Board since 2005.
Caren D. Merrick. Ms. Merrick has served as our director and as a director of Gladstone Capital, Gladstone Commercial, and
Gladstone Land since November 2014. Ms. Merrick is the founder of, and since 2014 has served as the chief executive officer of Pocket Mentor, a mobile application and digital publishing company focused on leadership development and career
advancement. Since 2004 she has served as a partner with Bibury Partners, an investment and advisory firm that focuses on enterprise and consumer technology sectors. In addition, Ms. Merrick has served as a board member of WashingtonFirst
Bankshares, Inc. (NASDAQ: WFBI) since May 2015 and has served as a board member of the Metropolitan Washington Airports Authority since 2012. Ms. Merrick co-founded and from 1996 to 2001 served as an executive vice president of, webMethods,
Inc., a company that provides business-to-business enterprise software solution for Global 2000 companies. Ms. Merrick served on the boards of directors of VisualCV, a venture-backed online resume and corporate talent management solution, from
2008 2011, Inova Healthcare Services from 2001 - 2005, and the Northern Virginia Technology Council from 2000 - 2004. Ms. Merrick previously served as a member of the Technology Subgroup on the Virginia Governors Economic
Development and Jobs Creation Commission from 2010 - 2011. Ms. Merrick also was director of AOL.com for America Online from 1996 - 1997, and has also been a consultant for Australia Post, a $5 billion government business enterprise that
provides postal, retail and financial, logistics and fulfillment services across Australia. Ms. Merrick is also a founding investor in Venture Philanthropy Partners, a philanthropic investment organization that mentors nonprofit leaders in
growing programs to improve the lives of children from low income families in the National Capital Region. She has also served on the boards of several Washington, DC area charities, including Greater DC Cares, CharityWorks, the Fairfax
Symphony and the Langley School. She is an active member of ARCS Advancing Science in America - Achievement Awards for College Scientists. She also currently serves on the Board of the Global Good Fund and the Women in Technologys
Leadership Foundry. Ms. Merrick received a BA in political science from the University of California, Los Angeles, and has received a Certificate of Director Education from the National Association of Corporate Directors. Ms. Merrick was
selected to serve as an independent director on our Board due to her knowledge and experience in operating a business and her understanding of the small business area through experiences overseeing the successful growth of her own business and
several large and small businesses, charities and non-profits.
John H. Outland. Mr. Outland has served as a director since
June 2005. Mr. Outland has also served as a director of Gladstone Commercial and Gladstone Capital since December 2003 and Gladstone Land since January 2013. From March 2004 to June 2006, he served as vice president of Genworth Financial, Inc.
From 2002 to March 2004, Mr. Outland served as a managing director for 1789 Capital Advisors, where he provided market and transaction structure analysis and advice on a consulting basis for multifamily commercial mortgage purchase programs.
From 1999 to 2001, Mr. Outland served as vice president of mortgage-backed securities at Financial Guaranty Insurance Company where he was team leader for bond insurance transactions, responsible for sourcing business, coordinating credit, loan
files, due diligence and legal review processes, and negotiating structure and business issues. From 1993 to 1999, Mr. Outland was senior vice president for Citicorp Mortgage Securities, Inc., where he securitized non-conforming mortgage
products. From 1989 to 1993, Mr. Outland was vice president of real estate and mortgage finance for Nomura Securities International, Inc., where he performed due diligence on and negotiated the financing of commercial mortgage packages in
preparation for securitization. Mr. Outland holds an MBA from Harvard Business School and a bachelors degree in Chemical Engineering from Georgia Institute of Technology. Mr. Outland was selected to serve as an independent director
on our Board due to his more than twenty years of experience in the real estate and mortgage industry as well as his past service on our Board since 2005.
Anthony W. Parker. Mr. Parker has served as a director since June 2005. Mr. Parker has also served as a director of Gladstone
Commercial since August 2003, Gladstone Capital since August 2001 and Gladstone Land since January 2013. In January 2011, Mr. Parker was elected as treasurer of the Republican National Committee. In 1997 Mr. Parker founded Parker Tide
Corp., formerly
84
known as Snell Professional Corp. Parker Tide Corp. is a government contracting company providing mission critical solutions to the Federal government. From 1992 to 1996, Mr. Parker was
chairman of Capitol Resource Funding, Inc., a commercial finance company. Mr. Parker practiced corporate and tax law for over 15 years: from 1980 to 1983, he practiced at Verner, Liipfert, Bernhard & McPherson and from 1983 to
1992, in private practice. From 1973 to 1977, Mr. Parker served as executive assistant to the administrator of the U.S. Small Business Administration. Mr. Parker is currently a director of the Naval Sailing Foundation, a 501(c)
organization located in Annapolis, MD. Mr. Parker received his J.D. and Masters in Tax Law from Georgetown Law Center and his undergraduate degree from Harvard College. Mr. Parker was selected to serve as an independent director on our
Board due to his expertise and experience in the field of corporate taxation as well as his past service on our Board since 2005. Mr. Parkers knowledge of corporate tax was instrumental in his appointment to the chairmanship of our Audit
Committee.
Walter H. Wilkinson, Jr. Mr. Wilkinson has served as our director and as a director of Gladstone Capital,
Gladstone Commercial and Gladstone Land since October 2014. Mr. Wilkinson is the founder and general partner of Kitty Hawk Capital, a venture capital firm established in 1980 and based in Charlotte, North Carolina. He served as a director of RF
Micro Devices (NASDAQ: RFMD) from 1992 to January 2015 and served as the Chairman of the board of directors from July 2008 until January 2015 when RF Micro Devices merged with Triquint Semiconductor, Inc. (NASDAQ: TQNT) to form the new company QORVO
(NASDAQ:QRVO) where he currently serves as lead director. He currently serves on the board of the N.C. State University Foundation and has previously served on the boards of other universities and related organizations. He is a past member and
director of the National Venture Capital Association and a past member and Chairman of the National Association of Small Business Investment Companies. He was founding Chairman of the Carolinas Chapter of the National Association of Corporate
Directors (NACD) and is currently on its board and is a NACD Leadership Fellow, having completed the NACDs program for corporate directors. During his career he has helped to start or expand dozens of rapidly growing companies in a
variety of industries. Mr. Wilkinson serves or has served as a director of numerous venture-backed companies, both public and private. He is a graduate of N.C. State University (BS) and the Harvard Graduate School of Business Administration
(MBA). Mr. Wilkinson was selected to serve as an independent director on our Board due to his strong leadership skills and his valuable understanding of our industry from over 35 years of venture capital experience.
Interested Directors
David Gladstone. Mr. Gladstone is our founder and has served as our chief executive officer and chairman of our Board of Directors
since our inception. Mr. Gladstone is also the founder of our Adviser and has served as its chief executive officer and chairman of its board of directors since its inception. Mr. Gladstone also founded and serves as the chief executive
officer and chairman of the boards of directors of our affiliates, Gladstone Capital, Gladstone Commercial and Gladstone Land. Prior to founding the Gladstone Companies, Mr. Gladstone served as either chairman or vice chairman of the board of
directors of American Capital Ltd. (NASDAQ: ACAS), a publicly traded leveraged buyout fund and mezzanine debt finance company, from June 1997 to August 2001. From 1974 to February 1997, Mr. Gladstone held various positions, including chairman
and chief executive officer, with Allied Capital Corporation (NASDAQ: ALD) (a mezzanine debt lender), Allied Capital Corporation II (a subordinated debt lender), Allied Capital Lending Corporation (a small business lending company), Allied
Capital Commercial Corporation (a real estate investment company), and Allied Capital Advisers, Inc., a registered investment adviser that managed the Allied companies. The Allied companies were the largest group of publicly-traded mezzanine debt
funds in the United States and were managers of two private venture capital limited partnerships (Allied Venture Partnership and Allied Technology Partnership) and a private REIT (Business Mortgage Investors). From 1992 to 1997,
Mr. Gladstone served as a director, president and chief executive officer of Business Mortgage Investors, a privately held mortgage REIT managed by Allied Capital Advisors, which invested in loans to small and medium-sized businesses.
Mr. Gladstone is also a past director of Capital Automotive REIT, a real estate investment trust that purchases and net leases real estate to automobile dealerships. Mr. Gladstone served as a director of The Riggs National Corporation (the
parent of Riggs Bank) from 1993 to May 1997 and of Riggs Bank from 1991 to 1993. He has served as a trustee of The George Washington University and currently is a trustee emeritus. He is a past member of the Listings and Hearings Committee of the
National Association of Securities Dealers, Inc. Mr. Gladstone was the founder and managing member of The Capital Investors, LLC, a group of angel investors, and is currently a member emeritus. Mr. Gladstone holds an MBA from the Harvard
Business School, an MA from American University and a BA from the University of Virginia. Mr. Gladstone has co-authored two books on financing for small and medium-sized businesses, Venture Capital Handbook and Venture Capital
Investing. Mr. Gladstone was selected to serve as a director on our Board due to the fact that he is our founder and has greater than thirty years of experience in the industry, including his service as our chairman and chief executive
since our inception.
Terry Lee Brubaker. Mr. Brubaker has been our chief operating officer and vice chairman since our
inception. Mr. Brubaker served as our secretary from our inception through October 2012, when he became assistant secretary. Mr. Brubaker has also served as a director of our Adviser since its inception. He also served as president of our
Adviser from its inception through February 2006, when he assumed the duties of vice chairman and chief operating officer and as secretary from inception through October 2012. He has served as chief operating officer, secretary and as a director of
Gladstone Capital since its inception. He also served as president of Gladstone Capital from May 2001 through April 2004, when he assumed the duties of vice chairman. Mr. Brubaker has also served chief operating officer, secretary and as a
director of Gladstone Commercial since February 2003, and as president from February 2003 through July 2007, when he assumed the duties of vice chairman. Mr. Brubaker has also served as vice chairman and chief
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operating officer of Gladstone Land since April 2007. Mr. Brubaker stepped down as secretary and became assistant secretary of each of Gladstone Capital, Gladstone Commercial, Gladstone Land
and the Adviser in October 2012. In March 1999, Mr. Brubaker founded and, until May 1, 2003, served as chairman of Heads Up Systems, a company providing process industries with leading edge technology. From 1996 to 1999, Mr. Brubaker
served as vice president of the paper group for the American Forest & Paper Association. From 1992 to 1995, Mr. Brubaker served as president of Interstate Resources, a pulp and paper company. From 1991 to 1992, Mr. Brubaker served
as president of IRI, a radiation measurement equipment manufacturer. From 1981 to 1991, Mr. Brubaker held several management positions at James River Corporation, a forest and paper company, including vice president of strategic planning from
1981 to 1982, group vice president of the Groveton Group and Premium Printing Papers from 1982 to 1990, and vice president of human resources development in 1991. From 1976 to 1981, Mr. Brubaker was strategic planning manager and marketing
manager of white papers at Boise Cascade. Previously, Mr. Brubaker was a senior engagement manager at McKinsey & Company from 1972 to 1976. Prior to 1972, Mr. Brubaker was a U.S. Navy fighter pilot. Mr. Brubaker holds an
MBA from the Harvard Business School and a BSE from Princeton University. Mr. Brubaker was selected to serve as a director on our Board due to his more than thirty years of experience in various mid-level and senior management positions at
several corporations as well as his past service on our Board since our inception.
David A. R. Dullum. Mr. Dullum has served
as our president since April 2008 and a director since June 2005. Mr. Dullum has been a senior managing director of our Adviser since February 2008, a director of Gladstone Commercial from August 2003 until May 2015, and a director of Gladstone
Capital from August 2001 until February 2015. From 1995 to 2009, Mr. Dullum had been a partner of New England Partners, a venture capital firm focused on investments in small and medium-sized business in the Mid-Atlantic and New England
regions. From 1976 to 1990, Mr. Dullum was a managing general partner of Frontenac Company, a Chicago-based venture capital firm. Mr. Dullum holds an MBA from Stanford Graduate School of Business and a BME from the Georgia Institute of
Technology. Mr. Dullum was selected to serve as a director on our Board due to his more than thirty years of experience in various areas of the investment industry as well as his past service on our Board since 2005.
Executive Officers Who Are Not Directors
Information regarding our executive officers who are not directors is as follows (the address for each executive officer is c/o Gladstone
Investment Corporation, 1521 Westbranch Drive, Suite 100, McLean, Virginia 22102):
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Name |
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Age |
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Position |
Melissa Morrison |
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42 |
|
Chief Financial Officer and Treasurer |
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Melissa Morrison. Ms. Morrison has served as our chief financial officer and
treasurer since January 2015. She served as chief accounting officer of Gladstone Capital from November 2011 to April 2013 when she was appointed chief financial officer of Gladstone Capital and subsequently was appointed treasurer of Gladstone
Captal in January 2015. Prior to that time, from September 2007 to September 2011, Ms. Morrison served in various positions providing accounting and finance services including accounting and sales finance controller roles to Tandberg,
Inc., which was acquired by Cisco Systems, Inc. in April 2010. Prior to September 2007, Ms. Morrison worked at DynCorp and Ericsson NetQual Inc. in accounting manager, financial reporting manager and assistant controller positions,
respectively. Her career began as an auditor at PricewaterhouseCoopers, LLP. She received a BBA from The College of William and Mary and is a licensed CPA with the Commonwealth of Virginia.
Employment Agreements
We are not a party
to any employment agreements. Messrs. Gladstone and Brubaker have entered into employment agreements with our Adviser, whereby they are direct employees of our Adviser.
Director Independence
As required under
NASDAQ Global Select Market (NASDAQ) listing standards, our Board annually determines each directors independence. The NASDAQ listing standards provide that a director of a business development company is considered to be
independent if he or she is not an interested person of ours, as defined in Section 2(a)(19) of the 1940 Act. Section 2(a)(19) of the 1940 Act defines an interested person to include, among other things, any person
who has, or within the last two years had, a material business or professional relationship with us or our Adviser.
Consistent with these
considerations, after review of all relevant transactions or relationships between each director, or any of his or her family members, and us, our senior management and our independent auditors, the Board has affirmatively determined that the
following four directors are independent directors within the meaning of the applicable NASDAQ listing standards: Messrs. Adelgren, Outland, Parker and Wilkinson and Mmes. English and Merrick. In making this determination, the Board found that
none of these directors had a material or other disqualifying relationship with us. Mr. Gladstone, the chairman of our Board and chief executive officer, Mr. Brubaker, our vice chairman, chief operating officer and assistant secretary, and
Mr. Dullum, our president, are not independent directors by virtue of their positions as our officers and their employment by our Adviser.
Corporate Leadership Structure
Since our
inception, Mr. Gladstone has served as chairman of our Board and our chief executive officer. Our Board believes that our chief executive officer is best situated to serve as chairman because he is the director most familiar with our business
and industry, and most capable of effectively identifying strategic priorities and leading the discussion and execution of strategy. In addition, Mr. Adelgren, one of our independent directors, serves as the lead independent director for all
meetings of our independent directors held in executive session. The lead independent director has the responsibility of presiding at all executive sessions of our Board, consulting with the chairman and chief executive officer on Board and
committee meeting agendas, acting as a liaison between management and the independent directors and facilitating teamwork and communication between the independent directors and management.
Our Board believes the combined role of chairman and chief executive officer, together with a lead independent director, is in the best
interest of stockholders because it provides the appropriate balance between strategic development and independent oversight of risk management.
Committees of Our Board of Directors
Executive Committee. Membership of our executive committee is comprised of Messrs. Gladstone, Brubaker and Parker. The executive
committee has the authority to exercise all powers of our Board of Directors except for actions that must be taken by the full Board of Directors under the Delaware General Corporation Law, including electing our chairman and president.
Mr. Gladstone serves as chairman of the executive committee. The executive committee did not meet during the last fiscal year.
Audit Committee. The members of the audit committee are Messrs. Parker and Outland and Mmes. English and Merrick, who was
appointed in November 2014. Mr. Adelgren and Mr. Wilkinson serve as an alternate members of the committee. The alternate members of the audit committee serve only in the event of an absence of a regular committee member. Mr. Parker
serves as chairman of the audit committee. Each member and alternate member of the audit committee is an independent director as defined by NASDAQ rules and our own standards, and none of the members or alternate members of the audit
committee are interested persons as defined in Section 2(a)(19) of the 1940 Act. The Board has unanimously determined that all members and alternate members of the audit committee are financially literate under current NASDAQ rules
and that each of Messrs. Parker and Outland and Mmes. English and Merrick qualify as an audit committee financial expert within the meaning of the SEC rules and regulations. The audit committee operates pursuant to a written charter and
is primarily responsible for oversight of our financial statements and
87
controls, assessing and ensuring the independence, qualifications and performance of the independent registered public accounting firm, approving the independent registered public accounting firm
services and fees and reviewing and approving our annual audited financial statements before issuance, subject to board approval. The audit committee met eight times during the last fiscal year. Mr. John D. Reilly, a prior independent
director, was a member of the audit committee prior to his passing in August 2014 and Mr. Outland was then appointed to the audit committee to fill the resulting vacancy.
Compensation Committee. The members of the compensation committee are Messrs. Adelgren, Outland and Wilkinson, who was appointed in
October 2014. Mr. Parker and Mmes. English and Merrick serve as alternate members of the committee. The alternate members of the compensation committee serve only in the event of an absence of a regular committee member. Each member and
alternate member of the compensation committee is independent for purposes of the 1940 Act and NASDAQ listing standards. Mr. Outland serves as chairman of the compensation committee. The compensation committee operates pursuant to a written
charter and conducts periodic reviews of our Advisory Agreement and our Administration Agreement to evaluate whether the fees paid to our Adviser under the Advisory Agreement, and the fees paid to our Administrator under the Administration
Agreement, respectively, are in the best interests of us and our stockholders. The committee considers in such periodic reviews, among other things, whether the performance of our Adviser and our Administrator are reasonable in relation to the
nature and quality of services performed and whether the provisions of the Advisory and Administration Agreements are being satisfactorily performed. The compensation committee also reviews with management our Compensation Discussion and Analysis to
consider whether to recommend that it be included in proxy statements and other filings. The compensation committee met four times during the last fiscal year.
Ethics, Nominating, and Corporate Governance Committee. The members of the ethics, nominating, and corporate governance committee are
Messrs. Adelgren, Outland and Wilkinson. Mr. Parker and Mmes. English and Merrick serve as alternate members of the committee. The alternate members of the ethics, nominating and corporate governance committee serve only in the event
of an absence of a regular committee member. Each member and alternate member of the ethics, nominating and corporate governance committee is independent for purposes of the 1940 Act and NASDAQ listing standards. Mr. Adelgren serves as chairman
of the ethics, nominating, and corporate governance committee. The ethics, nominating, and corporate governance committee operates pursuant to a written charter and is responsible for selecting, researching, and nominating directors for election by
our stockholders, selecting nominees to fill vacancies on the Board or a committee of the Board, developing and recommending to the Board a set of corporate governance principles, and overseeing the evaluation of the Board and our management. The
committee is also responsible for our Code of Business Conduct and Ethics. The committee met four times during the last fiscal year.
The
ethics, nominating, and corporate governance committee considers director candidates recommended by stockholders. The ethics, nominating, and corporate governance committee does not alter the manner in which it evaluates candidates, including the
minimum criteria set forth above, based on whether the candidate was recommended by a stockholder or not. Stockholders who wish to recommend individuals for consideration to become nominees for election to our Board may do so by timely delivering a
written recommendation to the committee containing the information required by our Bylaws.
For nominations for election to our Board or
other business to be properly brought before an annual meeting by a stockholder, the stockholder must comply with the advance notice provisions and other requirements of Article III, Section 5 of our Bylaws. These notice provisions require
that nominations for directors for the upcoming fiscal year must be received no earlier than 120 days before the first anniversary of the then-current fiscal years annual meeting of stockholders, and no later than 90 days before the
first anniversary of the then-current fiscal years annual meeting of stockholders. In the event that an annual meeting is advanced or delayed by more than 30 days from the first anniversary of the prior years annual meeting, notice
by the stockholder, to be timely, must be delivered not earlier than the close of business on the 120th day prior to such annual meeting date and not later than the close of business on the later of the 90th day prior to such annual
meeting or the 10th day following the day on which public announcement of the date of such meeting is first made.
Submissions must
include the full name of the proposed nominee, a description of the proposed nominees business experience for at least the previous five years, complete biographical information, a description of the proposed nominees qualifications as a
director and a representation that the nominating stockholder is a beneficial or record owner of our stock. Any such submission must be accompanied by the written consent of the proposed nominee to be named as a nominee and to serve as a director if
elected. To date, the ethics, nominating, and corporate governance committee has not received or rejected a timely director nominee proposal from a stockholder or stockholders.
Offering Committee. The committee, which is comprised of Messrs. Gladstone (Chairman), Brubaker and Parker, with each of our other
current and future directors who meet the independence requirements of NASDAQ serving as alternates for Mr. Parker. The offering committee is responsible for assisting the Board in discharging its responsibilities regarding the offering from
time to time of our securities. The offering committee has all powers of the Board that are necessary or appropriate and may lawfully be delegated to the offering committee in connection with an offering of our securities. Our offering committee was
formed in January 2013, and operates pursuant to a written charter. The offering committee did not meet during the last fiscal year.
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Qualification for our Director Candidates
The ethics, nominating and corporate governance committee believes that candidates for director should have certain minimum qualifications,
including being able to read and understand basic financial statements, being over 21 years of age and having the highest personal integrity and ethics. The ethics, nominating and corporate governance committee also considers such factors as
possessing relevant expertise upon which to be able to offer advice and guidance to management, having sufficient time to devote to our affairs, demonstrated excellence in his or her field, having the ability to exercise sound business judgment and
having the commitment to rigorously represent the long-term interests of our stockholders. However, the ethics, nominating and corporate governance committee retains the right to modify these qualifications from time to time. Candidates for director
nominees are reviewed in the context of the current composition of our Board, our operating requirements and the long-term interests of our stockholders.
Though we have no formal policy addressing diversity, the ethics, nominating and corporate governance committee and Board believe that
diversity is an important attribute of directors and that our Board should be the culmination of an array of backgrounds and experiences and be capable of articulating a variety of viewpoints. Accordingly, the ethics, nominating and corporate
governance committee considers in its review of director nominees factors such as values, disciplines, ethics, age, gender, race, culture, expertise, background and skills, all in the context of an assessment of the perceived needs of us and our
Board at that point in time in order to maintain a balance of knowledge, experience and capability.
In the case of incumbent directors
whose terms of office are set to expire, the ethics, nominating and corporate governance committee reviews such directors overall service to us during their term, including the number of meetings attended, level of participation, quality of
performance, and any transactions of such directors with us during their term. The ethics, nominating and corporate governance committee then uses its network of contacts to compile a list of potential candidates, but may also engage, if it deems
appropriate, a professional search firm. The ethics, nominating and corporate governance committee conducts any appropriate and necessary inquiries into the backgrounds and qualifications of possible candidates after considering the function and
needs of our Board. The ethics, nominating and corporate governance committee meets to discuss and consider such candidates qualifications and then selects a nominee for recommendation to our Board by majority vote. To date, the ethics,
nominating and corporate governance committee has not paid a fee to any third party to assist in the process of identifying or evaluating director candidates.
Nominations made by stockholders must be made by written notice (setting forth the information required by our bylaws) received by the
secretary of our company at least 120 days in advance of an annual meeting or within 10 days of the date on which notice of a special meeting for the election of directors is first given to our stockholders.
Meetings
During the fiscal year ended March 31,
2015, each Board member attended 75% or more of the aggregate of the meetings of the Board and of the committees on which he or she served.
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Oversight of Risk Management
Since September 2007, Jack Dellafiora, Jr. has served as our chief compliance officer and, in that position, Mr. Dellafiora directly
oversees our enterprise risk management function and reports to our chief executive officer, the audit committee and our Board in this capacity. In fulfilling his risk management responsibilities, Mr. Dellafiora works closely with our internal
counsel and members of our executive management including, among others, our chief executive officer, chief financial officer, and chief operating officer.
Our Board, in its entirety, plays an active role in overseeing management of our risks. Our Board regularly reviews information regarding our
credit, liquidity and operations, as well as the risks associated with each. Each of the following committees of our Board plays a distinct role with respect to overseeing management of our risks:
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Audit Committee: Our audit committee oversees the management of enterprise risks. To this end, our audit committee meets at least annually (i) to discuss our risk management guidelines, policies and exposures and
(ii) with our independent registered public accounting firm to review our internal control environment and other risk exposures. |
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Compensation Committee: Our compensation committee oversees the management of risks relating to the fees paid to our Adviser and Administrator under the Advisory Agreement and the Administration Agreement, respectively.
In fulfillment of this duty, the compensation committee meets at least annually to review these agreements. In addition, the compensation committee reviews the performance of our Adviser to determine whether the compensation paid to our Adviser was
reasonable in relation to the nature and quality of services performed and whether the provisions of the Advisory Agreement were being satisfactorily performed. |
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Ethics, Nominating and Corporate Governance Committee: Our ethics, nominating and corporate governance committee manages risks associated with the independence of our Board and potential conflicts of interest.
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While each committee is responsible for evaluating certain risks and overseeing the management of such risks, the
committees each report to our Board on a regular basis to apprise our Board regarding the status of remediation efforts of known risks and of any new risks that may have arisen since the previous report.
Summary of Compensation
Executive Compensation
None of our executive officers receive direct compensation from us. We do not currently have any employees and do not expect to have
any employees in the foreseeable future. The services necessary for the operation of our business are provided to us by our officers and the other employees of our Adviser and Administrator, pursuant to the terms of the Advisory and Administration
Agreements, respectively. Mr. Gladstone, our chairman and chief executive officer, Mr. Brubaker, our vice chairman, chief operating officer and assistant secretary and Mr. Dullum, our president and a director, are all employees of and
compensated directly by our Adviser. Ms. Morrison, our chief financial officer and treasurer is an employee of our Administrator. Mr. David Watson, our former chief financial officer and treasurer, was also an employee of our
Administrator. Mr. Watson resigned in January 2015. Under the Administration Agreement, we reimburse our Administrator for our allocable portion of the salary of our chief financial officer and treasurer. During our last fiscal year, our
allocable portion of Mr. Watsons compensation paid by our Administrator was $33,336 of his salary, $18,311 of his bonus, and $6,562 of the cost of his benefits. During our last fiscal year, our allocable portion of
Ms. Morrisons compensation paid by our Administrator was $11,200 of her salary, $0 of her bonus, and $1,745 of the cost of her benefits.
During the fiscal year ended March 31, 2015, we incurred net fees of approximately $9.7 million to our Adviser under the Advisory
Agreement and $0.9 million to our Administrator under the Administration Agreement. For a discussion of the terms of our Advisory and Administration Agreement, see Certain Transactions.
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Compensation of Directors
The following table shows, for the fiscal year ended March 31, 2015, compensation awarded to or paid to our directors and former directors
who are not executive officers, which we refer to as our non-employee directors, for all services rendered to us during this period. No compensation is paid to directors who are our executive officers for their service on the Board of Directors.
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Name |
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Aggregate Compensation from Fund ($) |
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Total Compensation from Fund and Fund Complex Paid to Directors ($)(1) |
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Paul W. Adelgren |
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$ |
35,000 |
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135,000 |
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Michela A. English |
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34,000 |
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131,000 |
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Caren D. Merrick(2) |
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10,000 |
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74,000 |
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John H. Outland |
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39,000 |
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151,000 |
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Anthony W. Parker |
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37,000 |
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143,000 |
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John D. Reilly(3) |
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26,000 |
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45,000 |
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Walter H. Wilkinson, Jr.(4) |
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16,000 |
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|
98,000 |
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(1) |
Includes compensation the director received from Gladstone Capital, as part of our Fund Complex. Also includes compensation the director received from Gladstone Commercial, our affiliate and a real estate investment
trust, and Gladstone Land, our affiliate real estate investment company, although not part of our Fund Complex. |
(2) |
Ms. Merrick became a director of the Company, Gladstone Capital, Gladstone Commercial and Gladstone Land in November 2014. |
(3) |
Mr. Reilly passed away in August 2014. |
(4) |
Mr. Wilkinson became a director of the Company, Gladstone Capital, Gladstone Commercial and Gladstone Land in November 2014. |
As compensation for serving on our Board, each of our independent directors receives an annual fee of $20,000, an additional $1,000 for each
Board meeting attended, and an additional $1,000 for each committee meeting attended if such committee meeting takes place on a day other than when the full Board meets. In addition, the chairperson of the audit committee receives an annual fee of
$3,000, and the chairpersons of each of the compensation and ethics, nominating and corporate governance committees receive annual fees of $1,000 for their additional services in these capacities. During the fiscal year ended March 31, 2015,
the total cash compensation paid to non-employee directors was $197,000. We also reimburse our directors for their reasonable out-of-pocket expenses incurred in attending Board and committee meetings.
We do not pay any compensation to directors who also serve as our officers, or as officers or directors of our Adviser or our Administrator,
in consideration for their service to us. Our Board may change the compensation of our independent directors in its discretion. None of our independent directors received any compensation from us during the fiscal year ended March 31, 2015
other than for Board or committee service and meeting fees.
Certain Transactions
Investment Advisory and Management Agreement
We are externally managed pursuant to contractual arrangements with our Adviser, under which our Adviser has directly employed our personnel
and paid our payroll, benefits, and general expenses directly. The management services and fees in effect under the Advisory Agreement are described below. In addition, we pay our direct expenses including, but not limited to, directors fees,
legal and accounting fees and stockholder related expenses under the Advisory Agreement.
The principal executive office of the Adviser is
1521 Westbranch Drive, Suite 100, McLean, Virginia 22102.
Management Services
Our Adviser is a Delaware corporation registered as an investment adviser under the Investment Advisers Act of 1940, as amended. Subject to the
overall supervision of our Board, our Adviser provides investment advisory and management services to us. Under the terms of our Advisory Agreement, our Adviser has investment discretion with respect to our capital and, in that regard:
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determines the composition of our portfolio, the nature and timing of the changes to our portfolio, and the manner of implementing such changes; |
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identifies, evaluates, and negotiates the structure of the investments we make (including performing due diligence on our prospective portfolio companies); |
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closes and monitors the investments we make; and |
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makes available on our behalf, and provides if requested, managerial assistance to our portfolio companies. |
Our Advisers services under the Advisory Agreement are not exclusive, and it is free to furnish similar services to other entities,
provided that its services to us are not impaired.
Portfolio Management
Our Adviser takes a team approach to portfolio management; however, the following persons are primarily responsible for the day-to-day
management of our portfolio and comprise our Advisers investment committee: David Gladstone, Terry Lee Brubaker and David Dullum, whom we refer to collectively as the Portfolio Managers. Our investment decisions are made on our behalf by the
investment committee of our Adviser by unanimous decision.
Mr. Gladstone has served as the chairman and the chief executive officer
of the Adviser, since he founded the Adviser in 2002, along with Mr. Brubaker. Mr. Brubaker has served as the vice chairman, chief operating officer of the Adviser since 2002. Mr. Dullum has served as an executive managing director of
the Adviser since 2008. For more complete biographical information on Messrs. Gladstone, Brubaker and Dullum, please see ManagementInterested Directors.
The Portfolio Managers are all officers or directors, or both, of our Adviser and our Administrator. David Gladstone is the controlling
stockholder of the parent company of the Adviser and the Administrator. Although we believe that the terms of the Advisory Agreement are no less favorable to us than those that could be obtained from unaffiliated third parties in arms length
transactions, our Adviser and its officers and its directors have a material interest in the terms of this agreement. Based on an analysis of publicly available information, the Board believes that the terms and the fees payable under the Advisory
Agreement are similar to those of the agreements between other business development companies that do not maintain equity incentive plans and their external investment advisers.
Our Adviser provides investment advisory services to other investment funds in the Gladstone Companies. As such, the Portfolio Managers also
are primarily responsible for the day-to-day management of the portfolios of other pooled investment vehicles in the Gladstone Companies that are managed by the Adviser. As of the date hereof, Messrs. Gladstone, Brubaker and Mr. Robert
Marcotte (the president of Gladstone Capital) are primarily responsible for the day-to-day management of the portfolio of Gladstone Capital, another publicly-traded business development company, Messrs. Gladstone, Brubaker and Cutlip (the
president of Gladstone Commercial) are primarily responsible for the day to day management of Gladstone Commercial, a publicly-traded real estate investment trust and Messrs. Gladstone and Brubaker are primarily responsible for the day to day
management of Gladstone Land, a publicly traded real estate investment trust. As of March 31, 2015, the Adviser had an aggregate of approximately $1.7 billion in total assets under management.
Possible Conflicts of Interest
Our Portfolio Managers provide investment advisory services and serve as officers, directors or principals of certain of the other Gladstone
Companies, which operate in the same or a related line of business as we do. Accordingly, they have corresponding obligations to investors in those entities. For example, Mr. Gladstone, our chairman and chief executive officer, is chairman of
the board and chief executive officer of the Adviser, Gladstone Capital, Gladstone Commercial, and Gladstone Land with management responsibilities for the other affiliated Gladstone Companies, other than Gladstone Securities, where he sits on the
board of managers as an outside non-employee manager. In addition, Mr. Brubaker, our vice chairman and chief operating officer, is vice chairman and chief operating officer of the Adviser, Gladstone Capital, Gladstone Commercial and Gladstone
Land. Mr. Dullum, our president and a director, is also an executive managing director of the Adviser. Ms. Morrison, our chief financial officer and treasurer is also chief financial officer and treasurer of Gladstone Capital and chief
accounting officer of our Adviser. Moreover, the Adviser may establish or sponsor other investment vehicles which from time to time may have potentially overlapping investment objectives with ours and accordingly may invest in, whether principally
or secondarily, asset classes we target. While the Adviser generally has broad authority to make investments on behalf of the investment vehicles that it advises, the Adviser has adopted investment allocation procedures to address these potential
conflicts and intends to direct investment opportunities to the Gladstone affiliate with the investment strategy that most closely fits the investment opportunity. Nevertheless, the management of the Adviser may face conflicts in the allocation of
investment opportunities to other entities managed by the Adviser. As a result, it is possible that we may not be given the opportunity to participate in certain investments made by other funds managed by the Adviser.
In certain circumstances, we may make investments in a portfolio company in which one of our affiliates has or will have an investment,
subject to satisfaction of any regulatory restrictions and, where required, the prior approval of our Board of Directors. As of March 31, 2015, our Board of Directors has approved the following types of co-investment transactions:
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Our affiliate, Gladstone Commercial, may, under certain circumstances, lease property to portfolio companies that we do not control. We may pursue
such transactions only if (i) the portfolio company is not controlled by us or any of our affiliates, (ii) the portfolio company satisfies the tenant underwriting criteria of Gladstone Commercial, and (iii) the
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92
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transaction is approved by a majority of our independent directors and a majority of the independent directors of Gladstone Commercial. We expect that any such negotiations between Gladstone
Commercial and our portfolio companies would result in lease terms consistent with the terms that the portfolio companies would be likely to receive were they not portfolio companies of ours. |
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Additionally, pursuant to an exemptive order granted by the SEC in July 2012, under certain circumstances, we may co-invest with Gladstone Capital and any future BDC or closed-end management investment company that is
advised by the Adviser (or sub-advised by the Adviser if it controls the fund) or any combination of the foregoing subject to the conditions included therein. |
Certain of our officers, who are also officers of the Adviser, may from time to time serve as directors of certain of our portfolio companies.
If an officer serves in such capacity with one of our portfolio companies, such officer will owe fiduciary duties to all stockholders of the portfolio company, which duties may from time to time conflict with the interests of our stockholders.
In the course of our investing activities, we will pay management and incentive fees to the Adviser and will reimburse the Administrator for
certain expenses it incurs. As a result, investors in our common stock will invest on a gross basis and receive distributions on a net basis after expenses, resulting in, among other things, a lower rate of return than one
might achieve through our investors themselves making direct investments. As a result of this arrangement, there may be times when the management team of the Adviser has interests that differ from those of our stockholders, giving rise to a
conflict.
Portfolio Manager Compensation
The Portfolio Managers receive compensation from our Adviser in the form of a base salary plus a bonus. Each of the Portfolio Managers
base salaries is determined by a review of salary surveys for persons with comparable experience who are serving in comparable capacities in the industry. Each Portfolio Managers base salary is set and reviewed yearly. Like all employees of
the Adviser, a Portfolio Managers bonus is tied to the post-tax performance of the Adviser and the entities that it advises. A Portfolio Managers bonus increases or decreases when the Advisers income increases or decreases. The
Advisers income, in turn, is directly tied to the management and performance fees earned in managing its investment funds, including Gladstone Investment. Pursuant to the investment advisory and management agreement between the Adviser and the
Company, the Adviser receives an incentive fee based on net investment income in excess of the hurdle rates and capital gains as set out in the Advisory Agreement. All compensation of the Portfolio Managers from the Adviser takes the form of cash.
Each of the Portfolio Managers may elect to defer some or all of his bonus through the Advisers deferred compensation plan.
Fees
under the Investment Advisory and Management Agreement
In accordance with the Advisory Agreement, we pay our Adviser fees, as
compensation for its services, consisting of a base management fee and an incentive fee.
The base management fee is computed and payable
quarterly and is assessed at an annual rate of 2%. The base management fee is computed on the basis of the average value of our gross assets at the end of the two most recently completed quarters, which are total assets, including investments made
with proceeds of borrowings, less any uninvested cash or cash equivalents resulting from borrowings.
The Adviser may provide services to
our portfolio companies, and receive fees for such services, other than managerial assistance, under other agreements, including, but not limited to: (i) assistance obtaining, sourcing or structuring credit facilities, long term loans or
additional equity from un-affiliated third parties; (ii) negotiating important contractual financial relationships; (iii) consulting services regarding restructuring of the portfolio company and financial modeling as it relates to raising
additional debt and equity capital from unaffiliated third parties; and (iv) primary role in interviewing, vetting and negotiating employment contracts with candidates in connection with adding and retaining key portfolio company management
team members. At the end of each quarter, we credit 100% of these fees against the base management fee that we would otherwise be required to pay to the Adviser; however, a small percentage of certain of such fees, primarily for valuation of the
portfolio company, is retained by the Adviser in the form of reimbursement at cost for certain tasks completed by personnel of the Adviser that are deemed to be fund expenses pursuant to the terms of the Advisory Agreement.
In addition, our Adviser services, administers and collects on the loans held by Business Investment, in return for which our Adviser receives
a 2% annual fee payable monthly by Business Investment based on the monthly aggregate balance of loans held by Business Investment in accordance with the Credit Facility. Since we own these loans, all loan servicing fees paid to our Adviser are
treated as reductions against the 2% base management fee as Business Investments financial statements are consolidated with ours. Overall, the base management fee due to our Adviser cannot exceed 2% of total assets (as reduced by cash and cash
equivalents pledged to creditors) during any given calendar year.
93
The incentive fee consists of two parts: an income-based incentive fee and a capital gains-based
incentive fee. The income-based incentive fee rewards our Adviser if our quarterly net investment income (before giving effect to any incentive fee) exceeds the hurdle rate. We pay our Adviser an income-based incentive fee with respect to our
pre-incentive fee net investment income in each calendar quarter as follows:
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no incentive fee in any calendar quarter in which our pre-incentive fee net investment income does not exceed the hurdle rate (7% annualized); |
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100% of our pre-incentive fee net investment income with respect to that portion of such pre-incentive fee net investment income, if any, that exceeds the hurdle rate but is less than 2.1875% in any calendar quarter
(8.75% annualized); and |
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20% of the amount of our pre-incentive fee net investment income, if any, that exceeds 2.1875% in any calendar quarter (8.75% annualized). |
The second part of the incentive fee is a capital gains-based incentive fee that is determined and payable in arrears as of the end of each
fiscal year (or upon termination of the Advisory Agreement, as of the termination date), and equals 20.0% of our realized capital gains, less any realized capital losses and unrealized depreciation, calculated as of the end of the preceding calendar
year. The capital gains-based incentive fee payable to the Adviser is calculated based on (i) cumulative aggregate realized capital gains since our inception, less (ii) cumulative aggregate realized capital losses since our inception, if
any, less (iii) the entire portfolios aggregate unrealized capital depreciation, if any, as of the date of the calculation. If this number is positive at the applicable calculation date, then the capital gains-based incentive fee for such
year equals 20.0% of such amount, less the aggregate amount of any capital gains-based incentive fees paid in respect of our portfolio in all prior years. For calculation purposes, cumulative aggregate realized capital gains, if any, equals the sum
of the excess between the net sales price of each investment, when sold, and the original cost of such investment since our inception. Cumulative aggregate realized capital losses equals the sum of the deficit between the net sales price of each
investment, when sold, and the original cost of such investment since our inception. The entire portfolios aggregate unrealized capital depreciation, if any, equals the sum of the deficit between the fair value of each investment security as
of the applicable calculation date and the original cost of such investment security. We have not incurred capital gains-based incentive fees from inception through March 31, 2015, as cumulative net unrealized capital depreciation has exceeded
cumulative realized capital gains net of cumulative realized capital losses.
Additionally, in accordance with GAAP, a capital gains-based
incentive fee accrual is calculated using the aggregate cumulative realized capital gains and losses and aggregate cumulative unrealized capital depreciation included in the calculation of the capital gains-based incentive fee plus the aggregate
cumulative unrealized capital appreciation. If such amount is positive at the end of a reporting period, then GAAP requires us to record a capital gains-based incentive fee equal to 20.0% of such amount, less the aggregate amount of actual capital
gains-based incentive fees paid in all prior years. If such amount is negative, then there is no accrual for such reporting period. GAAP requires that the capital gains-based incentive fee accrual consider the cumulative aggregate unrealized capital
appreciation in the calculation, as a capital gains-based incentive fee would be payable if such unrealized capital appreciation were realized. There can be no assurance that any such unrealized capital appreciation will be realized in the future.
There has been no GAAP accrual recorded for a capital gains-based incentive fee since our inception through March 31, 2015.
Our Board of Directors
accepted an unconditional and irrevocable voluntary credit from the Adviser to reduce the income-based incentive fee to the extent net investment income did not cover 100% of the distributions to common stockholders for the year ended March 31,
2013, which credit totaled $0.2 million. For the years ended March 31, 2015 and 2014, there were no such incentive fee credits from the Adviser.
During the fiscal years ended March 31, 2015, 2014 and 2013, we incurred net fees of approximately $9.7 million, $7.9 million, and $6.7
million, respectively, to our Adviser under the Advisory Agreement.
Duration and Termination
Unless terminated earlier as described below, the Advisory Agreement will remain in effect from year to year if approved annually by our Board
of Directors or by the affirmative vote of the holders of a majority of our outstanding voting securities, including, in either case, approval by a majority of our directors who are not interested persons. On July 15, 2014, we renewed the
Advisory Agreement through August 31, 2015. The Board of Directors considered the following factors as the basis for its decision to renew the Advisory Agreement: (1) the nature, extent and quality of services provided by the Adviser to
our stockholders; (2) the investment performance of the Company and the Adviser, (3) the costs of the services to be provided and profits to be realized by the Adviser and its affiliates from the relationship with the Company, (4) the
extent to which economies of scale will be realized as the Company and the Companys affiliates that are managed by the same Adviser (Gladstone Commercial, Gladstone Capital and Gladstone Land) grow and whether the fee level under the Advisory
Agreement reflects the economies of scale for the Companys investors, (5) the fee structure of the advisory and administrative agreements of comparable funds, and (6) indirect profits to the Adviser created through the Company and
(7) in light of the foregoing considerations, the overall fairness of the advisory fee paid under the Advisory Agreement.
94
The Advisory Agreement will automatically terminate in the event of its assignment. The Advisory
Agreement may be terminated by either party without penalty upon 60 days written notice to the other. See Risk FactorsWe are dependent upon our key management personnel and the key management personnel of our Adviser,
particularly David Gladstone, Terry Lee Brubaker and David Dullum, and on the continued operations of our Adviser, for our future success.
Administration Agreement
Pursuant to the Administration Agreement, our Administrator furnishes us with clerical, bookkeeping and record keeping services and our
Administrator also performs, or oversees the performance of, our required administrative services, which include, among other things, being responsible for the financial records which we are required to maintain and preparing reports to our
stockholders and reports filed with the SEC. In addition, our Administrator assists us in determining and publishing our NAV, oversees the preparation and filing of our tax returns, the printing and dissemination of reports to our stockholders, and
generally oversees the payment of our expenses and the performance of administrative and professional services rendered to us by others. Payments under the Administration Agreement are generally equal to an amount based upon our allocable portion of
our Administrators overhead in performing its obligations under the Administration Agreement, including rent and our allocable portion of the salaries and benefits expenses of our chief financial officer, chief compliance officer, controller,
treasurer, general counsel and secretary, who also serves as the president of our Administrator, and their respective staffs. On July 15, 2014, we renewed the Administration Agreement through August 31, 2015.
During the fiscal years ended March 31, 2015, 2014 and 2013, we incurred total fees of approximately $0.9 million, $0.9 million and $0.8
million, respectively, to our Administrator under the Administration Agreement.
Based on an analysis of publicly available information,
the Board believes that the terms and the fees payable under the Administration Agreement are similar to those of the agreements between other business development companies that do not maintain equity incentive plans and their external investment
advisers.
David Gladstone and Terry Lee Brubaker are both officers and directors, of our Adviser and our Administrator. David Gladstone
controls the parent company of our Adviser and our Administrator. Although we believe that the terms of the Advisory Agreement and Administration Agreement are no less favorable to us than those that could be obtained from unaffiliated third parties
in arms length transactions, our Adviser and Administrator and their officers and directors have a material interest in the terms of these agreements.
Indemnification
The Advisory Agreement and the Administration Agreement each provide that, absent willful misfeasance, bad faith, or gross negligence in the
performance of their respective duties or by reason of the reckless disregard of their respective duties and obligations, our Adviser and our Administrator, as applicable, and their respective officers, managers, partners, agents, employees,
controlling persons, members, and any other person or entity affiliated with them are entitled to indemnification from us for any damages, liabilities, costs, and expenses (including reasonable attorneys fees and amounts reasonably paid in
settlement) arising from the rendering of our Advisers services under the Advisory Agreement or otherwise as an investment adviser of us and from the rendering of our Administrators services under the Administration Agreement or
otherwise as an administrator for us, as applicable.
In our certificate of incorporation and bylaws, we have also agreed to indemnify
certain officers and directors by providing, among other things, that we will indemnify such officer or director, under the circumstances and to the extent provided for therein, for expenses, damages, judgments, fines and settlements he or she may
be required to pay in actions or proceedings which he or she is or may be made a party by reason of his or her position as our director, officer or other agent, to the fullest extent permitted under Delaware law and our bylaws. Notwithstanding the
foregoing, the indemnification provisions shall not protect any officer or director from liability to us or our stockholders as a result of any action that would constitute willful misfeasance, bad faith or gross negligence in the performance of
such officers or directors duties, or reckless disregard of his or her obligations and duties.
95
CONTROL PERSONS AND PRINCIPAL STOCKHOLDERS
The following table sets forth, as of May 20, 2015 (unless otherwise indicated), the beneficial ownership of each current director, each
of the executive officers, the executive officers and directors as a group and each stockholder known to our management to own beneficially more than 5% of the outstanding shares of common stock. None of our executive officers or directors own
shares of our Series A Term Preferred Stock, Series B Term Preferred Stock or Series C Term Preferred Stock and, to our knowledge, no person beneficially owns more than 5% of our Series A Term Preferred Stock, Series B Term Preferred Stock or Series
C Term Preferred Stock. Except as otherwise noted, the address of the individuals below is c/o Gladstone Investment Corporation, 1521 Westbranch Drive, Suite 100, McLean, Virginia, 22102.
Beneficial Ownership of Common Stock(1)(2)
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Name and Address |
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Number of Shares |
|
|
Percent of Total |
|
Directors: |
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|
|
|
|
|
|
|
Paul Adelgren |
|
|
4,996 |
|
|
|
* |
|
Terry Lee Brubaker(3) |
|
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215,446 |
|
|
|
* |
|
David A.R. Dullum(4) |
|
|
64,565 |
|
|
|
* |
|
Michela A. English |
|
|
1,388 |
|
|
|
* |
|
David Gladstone |
|
|
368,473 |
|
|
|
1.2 |
% |
Caren D. Merrick |
|
|
0 |
|
|
|
* |
|
John H. Outland |
|
|
2,793 |
|
|
|
* |
|
Anthony W. Parker |
|
|
9,671 |
|
|
|
* |
|
Walter H. Wilkinson, Jr. |
|
|
6,860 |
|
|
|
* |
|
Named Executive Officers (that are not also Directors): |
|
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|
|
|
|
|
|
Melissa Morrison |
|
|
0 |
|
|
|
* |
|
All executive officers and directors as a group (10 persons) |
|
|
674,192 |
|
|
|
2.2 |
% |
|
|
|
5% Stockholders: |
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Van Berkom & Associates Inc.(5) |
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|
2,488,518 |
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7.54 |
% |
1130 Sherbrooke Street West, Suite 1005
Montreal, Quebec H3A 2M8 |
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(1) |
This table is based upon information supplied by officers, directors and principal stockholders. Unless otherwise indicated in the footnotes to this table and subject to community property laws where applicable, we
believe that each of the stockholders named in this table has sole voting and sole investment power with respect to the shares indicated as beneficially owned. Applicable percentages are based on 30,270,958 shares outstanding on May 20,
2015. |
(2) |
Ownership calculated in accordance with Rule 13d-3 of the Exchange Act. |
(3) |
Includes 10,280 shares held by Mr. Brubakers spouse. |
(4) |
Includes 1,349 shares held by Mr. Dullums spouse. |
(5) |
This information has been obtained from a Schedule 13G filed by Van Berkom & Associates Inc., or Van Berkom, on January 23, 2015, according to which Van Berkom has sole voting and sole investment powers
with respect to all 2,488,518 shares reported as beneficially owned. |
The following table sets forth, as of May 20,
2015, the dollar range of equity securities that are beneficially owned by each of our directors in the Company and in Gladstone Capital, our affiliate and a business development company, which is also externally managed by our Adviser.
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Name |
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Dollar Range of Equity Securities of the Company Owned by Directors(1)(2) |
|
Aggregate Dollar Range of Equity Securities in All Funds Overseen or to be Overseen
by Director or Nominee in Family of Investment Companies(1)(2) |
Interested Directors: |
|
|
|
|
David Gladstone |
|
Over $100,000 |
|
Over $100,000 |
Terry Lee Brubaker |
|
Over $100,000 |
|
Over $100,000 |
David A.R. Dullum |
|
Over $100,000 |
|
Over $100,000 |
|
|
|
Independent Directors: |
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|
|
|
Paul W. Adelgren |
|
$10,001-$50,000 |
|
$50,001-$100,000 |
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|
|
|
|
|
Name |
|
Dollar Range of Equity Securities of the Company Owned by Directors(1)(2) |
|
Aggregate Dollar Range of Equity Securities in All Funds Overseen or to be Overseen
by Director or Nominee in Family of Investment Companies(1)(2) |
Michela A. English |
|
$10,001-$50,000 |
|
$10,001-$50,000 |
Caren D. Merrick |
|
$0-$10,000 |
|
$0-$10,000 |
John H. Outland |
|
$10,001-$50,000 |
|
$10,001-$50,000 |
Anthony Parker |
|
$50,001-$100,000 |
|
$50,001-$100,000 |
Walter H. Wilkinson, Jr. |
|
$50,001-$100,000 |
|
Over $100,000 |
(1) |
Ownership is calculated in accordance with Rule 16-1(a)(2) of the Exchange Act. |
(2) |
The dollar range of equity securities beneficially owned is calculated by multiplying the closing price of the respective class as reported on The NASDAQ Global Select Market as of May 20, 2015, times the number of
shares of the respective class so beneficially owned and aggregated accordingly. |
Gladstone Commercial Corporation, our
affiliate and a real estate investment trust, is also managed by our Adviser. The following table sets forth certain information regarding the ownership of the common and preferred stock of Gladstone Commercial as of May 20, 2015, by each
independent director. None of our independent directors owns more than 1% of any respective class of stock of Gladstone Commercial Corporation.
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|
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|
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Name |
|
Number of Common Shares |
|
|
Number of 7.125% Series C Cumulative Term Preferred Stock |
|
|
Number of 7.5% Series B Cumulative Redeemable Preferred Stock |
|
|
Number of 7.75% Series A Cumulative Redeemable Preferred Stock |
|
|
Value of Securities($)(1) |
|
Independent Directors: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paul W. Adelgren |
|
|
6,516 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
$ |
114,884 |
|
Michela A. English |
|
|
2,111 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
$ |
37,218 |
|
Caren D. Merrick |
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
$ |
0 |
|
John H. Outland |
|
|
1,805 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
$ |
31,822 |
|
Anthony Parker |
|
|
22,813 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
$ |
402,196 |
|
Walter H. Wilkinson, Jr. |
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
$ |
0 |
|
(1) |
Ownership calculated in accordance with Rule 16-1(a)(2) of the Exchange Act. The value of securities beneficially owned is calculated by multiplying the closing price of the respective class as reported on The NASDAQ
Global Select Market as of May 20, 2015, times the number of shares of the respective class so beneficially owned and aggregated accordingly. |
Gladstone Land Corporation, our affiliate and a real estate investment company, is also managed by our Adviser. The following table sets forth
certain information regarding the ownership of the common stock of Gladstone Land as of May 20, 2015, by each independent incumbent director and nominee. None of our independent directors owns more than 1% of the common stock of Gladstone
Land Corporation.
|
|
|
|
|
|
|
|
|
Name |
|
Number of Common Shares |
|
|
Value of Securities($)(1) |
|
Independent Directors: |
|
|
|
|
|
|
|
|
Paul W. Adelgren |
|
|
4,958 |
|
|
$ |
54,534 |
|
Michela A. English |
|
|
1,030 |
|
|
$ |
11,331 |
|
Caren D. Merrick |
|
|
0 |
|
|
$ |
0 |
|
John H. Outland |
|
|
1,560 |
|
|
$ |
17,160 |
|
Anthony Parker |
|
|
4,902 |
|
|
$ |
53,927 |
|
Walter H. Wilkinson, Jr. |
|
|
0 |
|
|
$ |
0 |
|
(1) |
Ownership calculated in accordance with Rule 16a-1(a)(2) of the Exchange Act. The value of securities beneficially owned is calculated by multiplying the closing price of the respective class as reported on The NASDAQ
Global Market as of May 20, 2015, times the number of shares of the respective class so beneficially owned and aggregated accordingly. |
97
DIVIDEND REINVESTMENT PLAN
Our transfer agency and services agreement with our transfer agent, Computershare, Inc., or Computershare, authorizes Computershare to provide
a dividend reinvestment plan that allows for reinvestment of our distributions on behalf of our common stockholders upon their election as provided below. As a result, if our Board of Directors authorizes, and we declare, a cash dividend, then our
common stockholders who have opted in to the dividend reinvestment plan will not receive cash dividends but, instead, such cash dividends will automatically be reinvested in additional shares of our common stock.
Pursuant to the dividend reinvestment plan, if your shares of our common stock are registered in your own name you can have all distributions
reinvested in additional shares of our common stock by Computershare, as the plan agent, if you enroll in the dividend reinvestment plan by delivering an enrollment form to the plan agent prior to the corresponding dividend record date, available at
www.computershare.com/investor. The plan agent will effect purchases of our common stock under the dividend reinvestment plan in the open market.
If you do not elect to participate in the dividend reinvestment plan, you will receive all distributions in cash paid by check mailed directly
to you (or if you hold your shares in street or other nominee name, then to your nominee) as of the relevant record date, by the plan agent, as our distribution disbursing agent. If your shares are held in the name of a broker or nominee, you can
transfer the shares into your own name and then enroll in the dividend reinvestment plan or contact your broker or nominee to determine if they offer a dividend reinvestment plan.
The plan agent serves as agent for the holders of our common stock in administering the dividend reinvestment plan. After we declare a
dividend, the plan agent will, as agent for the participants, receive the cash payment and use it to buy common stock on NASDAQ or elsewhere for the participants accounts. The price of the shares will be the weighted average price of all
shares purchased by the plan agent on such trade date or dates.
Participants in the dividend reinvestment plan may withdraw from the
dividend reinvestment plan at any time online at www.computershare.com/investor, via telephone or by mailing a request to Computershare or by selling or transferring all applicable shares. If the plan agent receives a request to withdraw near
a dividend record date, the plan agent, in its sole discretion, may either distribute such dividends in cash or reinvest the shares on behalf of the withdrawing participant. If such dividends are reinvested, the plan agent will process the
withdrawal as soon as practicable, but in no event later than five business days after the reinvestment is completed.
The plan agent will
maintain each participants account in the dividend reinvestment plan and will furnish periodic written confirmations of all transactions in such account, including information needed by the stockholder for personal and tax records. Common
stock in the account of each dividend reinvestment plan participant will be held by the plan agent in non-certificated form in the name of such participant; however participants may request that such shares be certificated in their name. The plan
agent will provide proxy materials relating to our stockholders meetings that will include those shares purchased through the plan agent, as well as shares held pursuant to the dividend reinvestment plan.
We pay the plan agents fees for the handling or reinvestment of dividends and other distributions. Each participant in the dividend
reinvestment plan pays a pro rata share of brokerage commissions incurred with respect to the plan agents open market purchases in connection with the reinvestment of distributions. There are no other charges to participants for reinvesting
distributions.
Distributions are taxable whether paid in cash or reinvested in additional shares, and the reinvestment of distributions
pursuant to the dividend reinvestment plan will not relieve participants of any U.S. federal income tax or state income tax that may be payable or required to be withheld on such distributions. For more information regarding taxes that our
stockholders may be required to pay, see Material U.S. Federal Income Tax Considerations.
98
MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS
RIC Status
To qualify for treatment as a RIC
under Subchapter M of the Code, we must distribute to our stockholders, for each taxable year, at least 90% of our investment company taxable income, which is generally our ordinary income plus the excess of our net short-term capital
gains over net long-term capital losses. We refer to this as the annual distribution requirement. We must also meet several additional requirements, including:
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Business Development Company status. At all times during the taxable year, we must maintain our status as a BDC. |
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Income source requirements. At least 90% of our gross income for each taxable year must be from dividends, interest, payments with respect to securities loans, gains from sales or other dispositions of securities
or other income derived with respect to our business of investing in securities, and net income derived from an interest in a qualified, publicly-traded partnership. |
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Asset diversification requirements. As of the close of each quarter of our taxable year: (1) at least 50% of the value of our assets must consist of cash, cash items, U.S. government securities, the
securities of other regulated investment companies and other securities to the extent that (a) we do not hold more than 10% of the outstanding voting securities of an issuer of such other securities and (b) such other securities of any one
issuer do not represent more than 5% of our total assets (the 50% threshold), and (2) no more than 25% of the value of our total assets may be invested in the securities of one issuer (other than U.S. government securities or the
securities of other regulated investment companies), or of two or more issuers that are controlled by us and are engaged in the same or similar or related trades or businesses or in the securities of one or more qualified, publicly-traded
partnerships. |
Failure to Qualify as a RIC.
If we are unable to qualify for treatment as a RIC, we would be subject to tax on all of our taxable income at regular corporate rates. We would not be able to
deduct distributions to stockholders, nor would we be required to make such distributions. Distributions would be taxable to our stockholders as dividend income to the extent of our current and accumulated earnings and profits. Subject to certain
limitations under the Code, corporate distributees would be eligible for the dividends received deduction. Distributions in excess of our current and accumulated earnings and profits would be treated first as a return of capital to the extent of the
stockholders adjusted tax basis, and then as a gain realized from the sale or exchange of property. If we fail to meet the RIC requirements for more than two consecutive years and then seek to requalify as a RIC, we generally would be subject
to corporate-level federal income tax on any unrealized appreciation with respect to our assets to the extent that any such unrealized appreciation is recognized during a specified period up to ten years.
Qualification as a RIC.
If we qualify as a RIC and
distribute to stockholders each year in a timely manner at least 90% of our investment company taxable income, we will not be subject to federal income tax on the portion of our taxable income and gains we distribute to stockholders. We would,
however, be subject to a 4% nondeductible federal excise tax if we do not distribute, actually or on a deemed basis, an amount at least equal to the sum of (1) 98% of our ordinary income for the calendar year, (2) 98.2% 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 capital gains in excess of capital losses for preceding years that were not distributed during such years.
For the years ended December 31, 2014, 2013 and 2012, we incurred $0.1 million, $0.3 million and $31, respectively, in excise taxes. As of March 31, 2015, our capital loss carryforward totaled $0.3 million.
The 4% federal excise tax applies only to the amount by which the required distributions exceed the amount of income we distribute, actually or on a deemed
basis, to stockholders. We will be subject to regular corporate income tax, currently at rates up to 35%, on any income that is not distributed or deemed to be distributed, including both ordinary income and capital gains. We may retain some or all
of our capital gains, but we generally intend to treat the retained amount as a deemed distribution. In that case, among other consequences, we will pay tax on the retained amount, each stockholder will be required to include its share of the deemed
distribution in income as if it had been actually distributed to the stockholder and the stockholder will be entitled to claim a credit or refund equal to its allocable share of the tax we pay on the retained capital gain. The amount of the deemed
distribution, net of such tax, will be added to the stockholders cost basis for its stock. Since we expect to pay tax on any retained capital gains at our regular corporate capital gain tax rate, and since that rate is in excess of the maximum
rate currently payable by individuals on long-term capital gains, the amount of tax that individual stockholders will be treated as having paid will exceed the tax they owe on the capital gain dividend and such excess may be claimed as a credit or
refund against the stockholders other tax obligations. A stockholder that is not subject to U.S. federal income tax or tax on long-term capital gains would be required to file a U.S. federal income tax return on the appropriate form in
order to claim a refund for the taxes we paid. In order to utilize the deemed distribution approach, we must provide written notice to the stockholders after the close of the relevant tax year. We will also be subject to alternative minimum tax,
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but any tax preference items would be apportioned between us and our stockholders in the same proportion that distributions, other than capital gain dividends, paid to each stockholder bear to
our taxable income determined without regard to the dividends paid deduction. As of March 31, 2015, we have never distributed investment company taxable income as a deemed distribution.
Taxation of Our U.S. Stockholders
Distributions. For any period during which we qualify as a RIC for federal income tax purposes, distributions to our stockholders
attributable to our investment company taxable income generally will be taxable as ordinary income to stockholders to the extent of our current or accumulated earnings and profits. We first allocate our earnings and profits to distributions to our
preferred stockholders and then to distributions to our common stockholders based on priority in our capital structure. Any distributions in excess of our earnings and profits will first be treated as a return of capital to the extent of the
stockholders adjusted basis in his or her shares of stock and thereafter as gain from the sale of shares of our stock. Distributions of our long-term capital gains, reported by us as such, will be taxable to stockholders as long-term capital
gains regardless of the stockholders holding period for its stock and whether the distributions are paid in cash or invested in additional stock. Corporate stockholders are generally eligible for the 70% dividends received deduction with
respect to dividends received from us, other than capital gains dividends, but only to the extent such amount is attributable to dividends received by us from taxable domestic corporations. Any distribution declared by us in October,
November or December of any calendar year, payable to stockholders of record on a specified date in such a month and actually paid during January of the following year, will be treated as if it were paid by us and received by the
stockholders on December 31 of the previous year. In addition, we may elect (in accordance with Section 855(a) of the Code) to relate a distribution back to the prior taxable year if we (1) declare such distribution prior to the later
of the due date for filing our return for that taxable year or the 15th day of the ninth month following the close of the taxable year, (2) make the election in that return, and (3) distribute the amount in the 12-month period following
the close of the taxable year but not later than the first regular distribution payment of the same type following the declaration. Any such election will not alter the general rule that a stockholder will be treated as receiving a distribution in
the taxable year in which the distribution is made, subject to the October, November, December rule described above. As of March 31, 2015, our Section 855(a) distributions were $4.0 million.
In general, the federal income tax rates applicable to our dividends other than dividends designated as capital gain dividends will be the rates applicable to
ordinary income (currently up to 39.6%), and not the rates applicable to qualified dividend income (currently up to 20%). If we distribute dividends that are attributable to actual dividend income received by us that is eligible to be,
and is, designated by us as qualified dividend income, such dividends would be eligible for such lower federal income tax rate. For this purpose, qualified dividend income means dividends received by us from United States corporations
and qualifying foreign corporations, provided that both we and the stockholder recipient of our dividends satisfy certain holding period and other requirements in respect of our shares (in the case of our stockholder) and the stock of such
corporations (in our case). However, we do not anticipate receiving or distributing a significant amount of qualified dividend income.
If a common
stockholder participates in our opt in dividend reinvestment plan, any distributions reinvested under the plan will be taxable to the common stockholder to the same extent, and with the same character, as if the common stockholder had
received the distribution in cash. The common stockholder will have an adjusted basis in the additional common shares purchased through the plan equal to the amount of the reinvested distribution. The additional shares will have a new holding period
commencing on the day following the day on which the shares are credited to the common stockholders account. We do not have a dividend reinvestment plan for our preferred stockholders.
Sale of Our Shares. A U.S. stockholder generally will recognize taxable gain or loss if the U.S. stockholder sells or otherwise disposes
of his, her or its shares of our stock. Any gain arising from such sale or disposition generally will be treated as long-term capital gain or loss if the U.S. stockholder has held his, her or its shares for more than one year. Otherwise, it
will be classified as short-term capital gain or loss. However, any capital loss arising from the sale or disposition of shares of our stock held for six months or less will be treated as long-term capital loss to the extent of the amount of capital
gain dividends received, or undistributed capital gain deemed received, with respect to such shares. Individual U.S. stockholders are subject to a maximum federal income tax rate of 20% on their net capital gain (i.e. the excess of realized net
long-term capital gain over realized net short-term capital loss for a taxable year) including any long-term capital gain derived from an investment in our stock. Such rate is lower than the maximum rate on ordinary income currently payable by
individuals. Corporate U.S. stockholders currently are subject to federal income tax on net capital gain at the same rates applied to their ordinary income (currently up to a maximum of 35%). Capital losses are subject to limitations on use for
both corporate and non-corporate stockholders.
Medicare Tax on Unearned Income. Stockholders that are individuals, estates or trusts and that
have taxable income in excess of certain thresholds are required to pay a 3.8% Medicare tax on net investment income, which includes, among other things, dividends on, and gains from the sale or other disposition of, shares of our stock.
Prospective investors should consult their own tax advisors regarding the impact of this Medicare tax on an investment in our stock.
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Backup Withholding. We may be required to withhold federal income tax, or backup withholding,
currently at a rate of 28%, from all taxable distributions to any non-corporate U.S. stockholder (1) who fails to furnish us with a correct taxpayer identification number or a certificate that such stockholder is exempt from backup
withholding, or (2) with respect to whom the Internal Revenue Service (IRS) notifies us that such stockholder has failed to properly report certain interest and dividend income to the IRS and to respond to notices to that effect. An
individuals taxpayer identification number is generally his or her social security number. Any amount withheld under backup withholding is allowed as a credit against the U.S. stockholders federal income tax liability, provided that
proper information is provided to the IRS.
The Foreign Account Tax Compliance Act imposes a federal withholding tax on certain types of payments made to
foreign financial institutions and certain other non-U.S. entities unless certain due diligence, reporting, withholding, and certification obligation requirements are satisfied. Under delayed effective dates provided for in the Treasury
Regulations and other IRS guidance, such required withholding will not begin until January 1, 2017 with respect to gross proceeds from a sale or other disposition of our stock.
REGULATION AS A BUSINESS DEVELOPMENT COMPANY
We are a closed-end, non-diversified management investment company that has elected to be regulated as a BDC under Section 54 of the 1940 Act. As such,
we are subject to regulation under the 1940 Act. The 1940 Act contains prohibitions and restrictions relating to transactions between BDCs and their affiliates, principal underwriters and affiliates of those affiliates or underwriters and requires
that a majority of the directors be persons other than interested persons, as defined in the 1940 Act. In addition, the 1940 Act provides that we may not change the nature of our business so as to cease to be, or to withdraw our election
as, a BDC unless approved by a majority of our outstanding voting securities, as defined in the 1940 Act.
We intend to conduct our business
so as to retain our status as a BDC. A BDC may use capital provided by public stockholders and from other sources to invest in long-term private investments in businesses. A BDC provides stockholders the ability to retain the liquidity of a
publicly-traded stock while sharing in the possible benefits, if any, of investing in primarily privately owned companies. In general, a BDC must have been organized and have its principal place of business in the United States and must be operated
for the purpose of making investments in qualifying assets, as described in Section 55(a) (1) (3) of the 1940 Act.
Qualifying
Assets
Under the 1940 Act, a BDC may not acquire any asset other than assets of the type listed in Section 55(a) of the 1940 Act, which are
referred to as qualifying assets, unless, at the time the acquisition is made, qualifying assets, other than certain interests in furniture, equipment, real estate, or leasehold improvements (operating assets) represent at least 70% of
the companys total assets, exclusive of operating assets. The types of qualifying assets in which we may invest under the 1940 Act include, but are not limited to, the following:
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Securities purchased in transactions not involving any public offering from the issuer of such securities, which issuer is an eligible portfolio company. An eligible portfolio company is generally defined in the 1940
Act as any issuer which: |
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is organized under the laws of, and has its principal place of business in, any State or States in the United States; |
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is not an investment company (other than a small business investment company wholly owned by the BDC or otherwise excluded from the definition of investment company); and |
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satisfies one of the following: |
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it does not have any class of securities with respect to which a broker or dealer may extend margin credit; |
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it is controlled by the BDC and for which an affiliate of the BDC serves as a director; |
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it has total assets of not more than $4 million and capital and surplus of not less than $2 million; |
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it does not have any class of securities listed on a national securities exchange; or |
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it has a class of securities listed on a national securities exchange, with an aggregate market value of outstanding voting and non-voting equity of less than $250 million. |
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Securities received in exchange for or distributed on or with respect to securities described in (1) above, or pursuant to the exercise of options, warrants or rights relating to such securities. |
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Cash, cash items, government securities or high quality debt securities maturing in one year or less from the time of investment. |
As of March 31, 2015, 98.8% of our assets were qualifying assets.
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Asset Coverage
Pursuant to Section 61(a)(2) of the 1940 Act, we are permitted, under specified conditions, to issue multiple classes of senior securities representing
indebtedness. However, pursuant to Section 18(c) of the 1940 Act, we are permitted to issue only one class of senior securities that is stock. In either case, we may only issue such Senior Securities if such class of Senior Securities, after
such issuance, has an asset coverage, as defined in Section 18(h) of the 1940 Act, of at least 200%.
In addition, our ability to pay dividends or
distributions (other than dividends payable in our stock) to holders of any class of our capital stock would be restricted if our senior securities representing indebtedness fail to have an asset coverage of at least 200% (measured at the time of
declaration of such distribution and accounting for such distribution). The 1940 Act does not apply this limitation to privately arranged debt that is not intended to be publicly distributed, unless this limitation is specifically negotiated by the
lender. In addition, our ability to pay dividends or distributions (other than dividends payable in our common stock) to our common stockholders would be restricted if our senior securities that are stock fail to have an asset coverage of at least
200% (measured at the time of declaration of such distribution and accounting for such distribution). If the value of our assets declines, we might be unable to satisfy these asset coverage requirements. To satisfy the 200% asset coverage
requirement in the event that we are seeking to pay a distribution, we might either have to (i) liquidate a portion of our loan portfolio to repay a portion of our indebtedness or (ii) issue common stock. This may occur at a time when a
sale of a portfolio asset may be disadvantageous, or when we have limited access to capital markets on agreeable terms. In addition, any amounts that we use to service our indebtedness or for offering expenses will not be available for distributions
to our stockholders. If we are unable to regain asset coverage through these methods, we may be forced to suspend the payment of such dividends.
Significant Managerial Assistance
A BDC generally
must make available significant managerial assistance to issuers of its portfolio securities that the BDC counts as a qualifying asset for the 70% test described above. Making available significant managerial assistance means, among other things,
any arrangement whereby the BDC, through its directors, officers or employees, offers to provide, and, if accepted, does so provide, significant guidance and counsel concerning the management, operations or business objectives and policies of a
portfolio company. Significant managerial assistance also may include the exercise of a controlling influence over the management and policies of the portfolio company. However, with respect to certain, but not all such securities, where the BDC
purchases such securities in conjunction with one or more other persons acting together, one of the other persons in the group may make available such managerial assistance, or the BDC may exercise such control jointly.
Investment Policies
We seek to achieve a high
level of current income and capital gains through investments in debt securities and preferred and common stock that we acquired in connection with buyout and other recapitalizations. The following investment policies, along with these investment
objectives, may not be changed without the approval of our Board of Directors:
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We will at all times conduct our business so as to retain our status as a BDC. In order to retain that status, we must operate for the purpose of investing in certain categories of qualifying assets. In addition, we may
not acquire any assets (other than non-investment assets necessary and appropriate to our operations as a BDC or qualifying assets) if, after giving effect to such acquisition, the value of our qualifying assets is less than 70% of the
value of our total assets. We anticipate that the securities we seek to acquire, as well as temporary investments, will generally be qualifying assets. |
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We will at all times endeavor to conduct our business so as to retain our status as a RIC under the Code. To do so, we must meet income source, asset diversification and annual distribution requirements. We may issue
senior securities, such as debt or preferred stock, to the extent permitted by the 1940 Act for the purpose of making investments, to fund share repurchases, or for temporary emergency or other purposes. |
With the exception of our policy to conduct our business as a BDC, these policies are not fundamental and may be changed without stockholder approval.
Code of Ethics
We and all of the Gladstone family
of companies, have adopted a code of ethics and business conduct applicable to all of the officers, directors and employees of such companies that complies with the guidelines set forth in Item 406 of Regulation S-K of the Securities Act of
1933 (the Securities Act) and Rule 17j-1 of the 1940 Act. As required by the 1940 Act, this code establishes procedures for personal investments, restricts certain transactions by such personnel and requires the reporting of certain
transactions and holdings by such personnel. This code of ethics and business conduct is publicly available on our website under Corporate Governance at www.GladstoneInvestment.com or at the SECs Public Reference Room in
Washington, D.C. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-202-942-8090. In addition, this code of ethics and business conduct is attached as an exhibit to the registration statement of which
this prospectus is a part and is also available on the EDGAR Database on
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the SECs website at www.sec.gov. You may also obtain copies of each code of ethics, after paying a duplication fee, by electronic request to publicinfo@sec.gov, or by writing the SECs
Public Reference Section, Washington, D.C. 20549-0102. We intend to provide any required disclosure of any amendments to or waivers of the provisions of this code by posting information regarding any such amendment or waiver to our website within
four days of its effectiveness in a Current Report on Form 8-K.
Compliance Policies and Procedures
We and our Adviser have adopted and implemented written policies and procedures reasonably designed to prevent violation of the federal securities laws, and
our Board of Directors is required to review these compliance policies and procedures annually to assess their adequacy and the effectiveness of their implementation. We have designated a chief compliance officer, John Dellafiora, Jr., who also
serves as chief compliance officer for all of the Gladstone family of companies.
Co-Investment
In an order dated July 26, 2012, the SEC granted us the relief sought in the exemptive application we had previously filed with the SEC that expands our
ability to co-invest with certain affiliates by permitting us, under certain circumstances, to co-invest with Gladstone Capital Corporation and any future business development company or closed-end management investment company that is advised by
our Adviser (or sub-advised by the Adviser if it controls the fund) or any combination of the foregoing.
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DESCRIPTION OF OUR SECURITIES
Our authorized capital stock consists of 100,000,000 shares of common stock, par value $0.001 per share, and 10,000,000 shares of
preferred stock, par value $0.001 per share (our common stock and our preferred stock are collectively referred to as Capital Stock).
The
following description is a summary based on relevant provisions of our certificate of incorporation and bylaws and the Delaware General Corporation Law. This summary does not purport to be complete and is subject to, and qualified in its entirety by
the provisions of our certificate of incorporation and bylaws, as amended, and applicable provisions of the Delaware General Corporation Law.
Common
Stock
As of the date hereof, we have 30,270,958 share of common stock outstanding. All shares of our common stock have equal rights as
to earnings, assets, dividends and voting and, when they are issued, will be duly authorized, validly issued, fully paid and nonassessable. Distributions may be paid to the holders of our common stock if, as and when authorized by our Board of
Directors and declared by us out of funds legally available therefor. Shares of our common stock have no preemptive, exchange, conversion or redemption rights and are freely transferable, except where their transfer is restricted by federal and
state securities laws or by contract. In the event of a liquidation, dissolution or winding up of Gladstone Investment, each share of our common stock would be entitled to share ratably in all of our assets that are legally available for
distribution after we pay all debts and other liabilities and subject to any preferential rights of holders of our preferred stock, if any preferred stock is outstanding at such time. Each share of our common stock is entitled to one vote on all
matters submitted to a vote of stockholders, including the election of directors. Except as provided with respect to any other class or series of stock, the holders of our common stock will possess exclusive voting power. There is no cumulative
voting in the election of directors, which means that holders of a majority of the outstanding shares of common stock can elect all of our directors, and holders of less than a majority of such shares will be unable to elect any director. Our common
stock is listed on NASDAQ under the ticker symbol GAIN.
Preferred Stock
Our certificate of incorporation gives the Board of Directors the authority, without further action by stockholders, to issue up to
10,000,000 shares of preferred stock in one or more series and to fix the rights, preferences, privileges, qualifications and restrictions granted to or imposed upon such preferred stock, including dividend rights, conversion rights, voting
rights, rights and terms of redemption, and liquidation preference, any or all of which may be greater than the rights of the common stock. Thus, the Board of Directors could authorize the issuance of shares of preferred stock with terms and
conditions which could have the effect of delaying, deferring or preventing a transaction or a change in control that might involve a premium price for holders of our common stock or otherwise be in their best interest. The issuance of preferred
stock could adversely affect the voting power of holders of common stock and reduce the likelihood that such holders will receive dividend payments and payments upon liquidation, and could also decrease the market price of our common stock.
You should note, however, that any issuance of preferred stock must comply with the requirements of the 1940 Act. The 1940 Act requires, among
other things, that (1) immediately after issuance and before any dividend or other distribution is made with respect to our common stock and before any purchase of common stock is made, such preferred stock together with all other Senior
Securities must not exceed an amount equal to 50% of our total assets after deducting the amount of such dividend, distribution or purchase price, as the case may be, and (2) the holders of shares of preferred stock, if any are issued, must be
entitled as a class to elect two directors at all times and to elect a majority of the directors if dividends on such preferred stock are in arrears by two years or more. Certain matters under the 1940 Act require the separate vote of the holders of
any issued and outstanding preferred stock. We have no present plans to issue any additional shares of our preferred stock, but believe that the availability for issuance of preferred stock will provide us with increased flexibility in structuring
future financings. If we offer additional preferred stock under this prospectus, we will issue an appropriate prospectus supplement. You should read that prospectus supplement for a description of such preferred stock, including, but not limited to,
whether there will be an arrearage in the payment of dividends or sinking fund installments, if any, restrictions with respect to the declaration of dividends, requirements in connection with the maintenance of any ratio or assets, or creation or
maintenance of reserves, or provisions for permitting or restricting the issuance of additional securities.
Term Preferred Stock
Of the 10,000,000 shares of our capital stock designated as preferred stock, 1,610,000 of such shares are designated as Series A Term
Preferred Stock, 1,656,000 of such shares are designated as Series B Term Preferred Stock and 1,700,000 of such shares are designated as Series C Term Preferred Stock. As of the date hereof, we have 1,600,000 shares of Series A Term Preferred Stock
outstanding, 1,656,000 shares of Series B Term Preferred Stock outstanding and 1,610,000 shares of Series C Term Preferred Stock outstanding. Shares of our Series A Term Preferred Stock, Series B Term Preferred Stock and Series C Term Preferred
Stock are traded on the NASDAQ under the trading symbols GAINP, GAINO, and GAINN, respectively.
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The following is a summary of the material terms of each series of our Term Preferred
Stock. The following summary is qualified in its entirety, with respect to each series, by reference to the Certificate of Designation of the 7.125% Series A Cumulative Term Preferred Stock, the Certificate of Designation of the 6.750% Series B
Cumulative Term Preferred Stock, and the Certificate of Designation of the 6.500% Series C Cumulative Term Preferred Stock, which are each filed as an exhibit to the registration statement of which this prospectus is a part:
Dividend Rights
The
holders of Series A Term Preferred Stock are entitled to monthly dividends in the amount of 7.125% per annum on the stated liquidation preference of Series A Term Preferred Stock, or $0.1484375 per share. The holders of Series B Term
Preferred Stock are entitled to monthly dividends in the amount of 6.750% per annum on the stated liquidation preference of the Series B Term Preferred Stock, or $0.1406250. The holders of Series C Term Preferred Stock are entitled to monthly
dividends in the amount of 6.500% per annum on the stated liquidation preference of the Series C Term Preferred Stock, or $0.1354170. We are prohibited from issuing dividends or making distributions to the holders of our common stock while any
shares of Term Preferred Stock are outstanding, unless all accrued and unpaid dividends on the Term Preferred Stock are paid in their entirety. In the event that we fail to pay dividends on the Series A Term Preferred Stock when required, the
dividend rate on the Series A Term Preferred Stock will increase to 9% per annum until such default is cured. Further, in the event that we fail to redeem the Series A Term Preferred Stock when due, as discussed in
Redemption below, the dividend rate will increase to 11% per annum until such shares are redeemed.
In the
event that we fail to pay dividends on or to redeem the Series B Term Preferred Stock, or Series C Term Preferred Stock, when required, the dividend rate, with respect to such series shall increase by 4% per annum until such default is cured.
Voting Rights
The
holders of the Term Preferred Stock are entitled to one vote per share and do not have cumulative voting. The holders of the Term Preferred Stock generally vote together with the holders of our common stock, except that the holders of the Term
Preferred Stock have the right to elect two of our directors. Furthermore, during any period that we owe accumulated dividends, whether or not earned or declared, on our Term Preferred Stock equal to at least two full years of dividends, the
holders of Term Preferred Stock will have the right to elect a majority of our Board of Directors.
Liquidation Rights
In the event of a dissolution, liquidation or winding up of our affairs, the Term Preferred Stock has a liquidation preference over our common
stock equal to $25 per share, plus all unpaid dividends and distributions accumulated to (but excluding) the date fixed for payment on such shares.
Redemption
The Series A
Term Preferred Stock has a mandatory term redemption date of February 28, 2017. The Series B Term Preferred Stock has a mandatory redemption date of December 31, 2021. The Series C Term Preferred has a mandatory redemption date of
May 31, 2022. However, if we fail to maintain asset coverage as required by the 1940 Act, of at least 200%, we will be required to redeem a portion of the Term Preferred Stock to enable us to meet the required asset coverage at a price per
share equal to the liquidation preference plus all accumulated and unpaid dividends and distributions. In the event of a change of control, we will also be required to redeem the shares of Term Preferred Stock at a price per share equal to the
liquidation preference plus all accumulated and unpaid dividends and distributions.
We have the option to redeem shares of Series A Term
Preferred Stock at any time on or after February 28, 2016, subject to the requirement to pay an optional redemption premium on the amount of shares redeemed if we optionally redeem such shares before February 28, 2017.
We have the option to redeem shares of Series B Term Preferred Stock at any time on or after December 30, 2017, with no redemption
premium.
We have the option to redeem shares of Series C Term Preferred Stock at any time on or after April 1, 2018, with no
redemption premium.
Subscription Rights
General
We may
issue subscription rights to our stockholders to purchase common stock or preferred stock. Subscription rights may be issued independently or together with any other offered security and may or may not be transferable by the person purchasing or
receiving the subscription rights. In connection with any subscription rights offering to our stockholders, we may enter into a standby underwriting arrangement with one or more underwriters pursuant to which such underwriters would purchase any
offered securities remaining unsubscribed after such subscription rights offering to the extent permissible under applicable law. In connection with a subscription rights offering to our stockholders, we would distribute certificates evidencing the
subscription rights and a prospectus supplement to our stockholders on the record date that we set for receiving subscription rights in such subscription rights offering.
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The applicable prospectus supplement would describe the following terms of subscription rights in
respect of which this prospectus is being delivered:
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the period of time the offering would remain open (which in no event would be less than fifteen business days); |
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the title of such subscription rights; |
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the exercise price for such subscription rights; |
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the ratio of the offering (which in no event would exceed one new share of common stock for each three rights held); |
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the number of such subscription rights issued to each stockholder; |
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the extent to which such subscription rights are transferable; |
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if applicable, a discussion of the material U.S. federal income tax considerations applicable to the issuance or exercise of such subscription rights; |
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the date on which the right to exercise such subscription rights shall commence, and the date on which such rights shall expire (subject to any extension); |
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the extent to which such subscription rights include an over-subscription privilege with respect to unsubscribed securities; |
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if applicable, the material terms of any standby underwriting or other purchase arrangement that we may enter into in connection with the subscription rights offering; and |
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any other terms of such subscription rights, including terms, procedures and limitations relating to the exchange and exercise of such subscription rights. |
Exercise of Subscription Rights
Each subscription right would entitle the holder of the subscription right to purchase for cash such amount of shares of common stock, or
preferred stock, at such exercise price as shall in each case be set forth in, or be determinable as set forth in, the prospectus supplement relating to the subscription rights offered thereby. Subscription rights may be exercised at any time up to
the close of business on the expiration date for such subscription rights set forth in the prospectus supplement. After the close of business on the expiration date, all unexercised subscription rights would become void.
Subscription rights may be exercised as set forth in the prospectus supplement relating to the subscription rights offered thereby. Upon
receipt of payment and the subscription rights certificate properly completed and duly executed at the corporate trust office of the subscription rights agent or any other office indicated in the prospectus supplement we will forward, as soon as
practicable, the shares of common stock purchasable upon such exercise. We may determine to offer any unsubscribed offered securities directly to persons other than stockholders, to or through agents, underwriters or dealers or through a combination
of such methods, including pursuant to standby underwriting arrangements, as set forth in the applicable prospectus supplement.
Warrants
The following is a general description of the terms of the warrants we may issue from time to time. Particular terms of any warrants we offer
will be described in the prospectus supplement relating to such warrants.
We may issue warrants to purchase shares of our common or
preferred stock. Such warrants may be issued independently or together with shares of common or preferred stock or other equity or debt securities and may be attached or separate from such securities. We will issue each series of warrants under a
separate warrant agreement to be entered into between us and a warrant agent. The warrant agent will act solely as our agent and will not assume any obligation or relationship of agency for or with holders or beneficial owners of warrants.
A prospectus supplement will describe the particular terms of any series of warrants we may issue, including the following:
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the title of such warrants; |
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the aggregate number of such warrants; |
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the price or prices at which such warrants will be issued; |
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the currency or currencies, including composite currencies, in which the price of such warrants may be payable; |
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if applicable, the designation and terms of the securities with which the warrants are issued and the number of warrants issued with each such security or each principal amount of such security; |
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the number of shares of common or preferred stock purchasable upon exercise of one warrant and the price at which and the currency or currencies, including composite currencies, in which these shares may be purchased
upon such exercise; |
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the date on which the right to exercise such warrants shall commence and the date on which such right will expire; |
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whether such warrants will be issued in registered form or bearer form; |
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if applicable, the minimum or maximum amount of such warrants which may be exercised at any one time; |
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if applicable, the date on and after which such warrants and the related securities will be separately transferable; |
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information with respect to book-entry procedures, if any; |
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the terms of the securities issuable upon exercise of the warrants; |
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if applicable, a discussion of certain U.S. federal income tax considerations; and |
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any other terms of such warrants, including terms, procedures and limitations relating to the exchange and exercise of such warrants. |
We and the warrant agent may amend or supplement the warrant agreement for a series of warrants without the consent of the holders of the
warrants issued thereunder to effect changes that are not inconsistent with the provisions of the warrants and that do not materially and adversely affect the interests of the holders of the warrants.
Prior to exercising their warrants, holders of warrants will not have any of the rights of holders of the securities purchasable upon such
exercise, including the right to receive distributions or dividends, if any, or payments upon our liquidation, dissolution or winding up or to exercise any voting rights.
Under the 1940 Act, we may generally only offer warrants (except for warrants expiring not later than 120 days after issuance and issued
exclusively and ratably to a class of our security holders) on the condition that (1) the warrants expire by their terms within ten years; (2) the exercise or conversion price is not less than the current market value of the securities
underlying the warrants at the date of issuance; (3) our stockholders authorize the proposal to issue such warrants (our stockholders approved such a proposal to issue long-term rights, including warrants, in connection with our 2008 annual
meeting of stockholders) and a required majority of our Board of Directors approves such issuance on the basis that the issuance is in the best interests of Gladstone Investment and our stockholders; and (4) if the warrants are
accompanied by other securities, the warrants are not separately transferable unless no class of such warrants and the securities accompanying them has been publicly distributed. A required majority of our Board of Directors is a vote of
both a majority of our directors who have no financial interest in the transaction and a majority of the directors who are not interested persons of the company. The 1940 Act also provides that the amount of our voting securities that would result
from the exercise of all outstanding warrants, options and subscription rights at the time of issuance may not exceed 25% of our outstanding voting securities.
Debt Securities
Any debt securities that
we issue may be senior or subordinated in priority of payment. We have no present plans to issue any debt securities. If we offer debt securities under this prospectus, we will provide a prospectus supplement that describes the ranking, whether
senior or subordinated, the specific designation, the aggregate principal amount, the purchase price, the maturity, the redemption terms, the interest rate or manner of calculating the interest rate, the time of payment of interest, if any, the
terms for any conversion or exchange, including the terms relating to the adjustment of any conversion or exchange mechanism, the listing, if any, on a securities exchange, the name and address of the trustee and any other specific terms of the debt
securities.
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CERTAIN PROVISIONS OF DELAWARE LAW AND OF OUR
CERTIFICATE OF INCORPORATION AND BYLAWS
The following description of certain provisions of Delaware law and of our certificate of incorporation and bylaws, as amended, is only a
summary. For a complete description, we refer you to the Delaware General Corporation Law, our certificate of incorporation and our bylaws. We have filed our amended and restated certificate of incorporation and bylaws, as amended, as exhibits to
the registration statement of which this prospectus is a part.
Classified Board of Directors
Pursuant to our bylaws, as amended, our Board of Directors is divided into three classes of directors. Each class consists, as nearly as
possible, of one-third of the total number of directors, and each class has a three-year term. The holders of outstanding shares of any preferred stock, including Term Preferred Stock, are entitled, as a class, to the exclusion of the holders of all
other securities and classes of common stock, to elect two of our directors at all times (regardless of the total number of directors serving on the Board of Directors). We refer to these directors as the Preferred Directors. Michela A. English was
elected as a Preferred Director at our annual meeting of stockholders on August 7, 2014 and will serve until our 2017 annual meeting. The other Preferred Directorship is currently vacant due to the unfortunate passing of John D. Reilly in
August 2014 and we have nominated Walter H. Wilkinson, Jr. as a candidate for election to this Preferred Directorship at our 2015 annual meeting of Stockholders to be held on August 6, 2015. The holders of outstanding shares of common stock and
preferred stock, voting together as a single class, elect the balance of our directors. Any director elected to fill a vacancy shall serve for the remainder of the full term of the class in which the vacancy occurred and until a successor is elected
and qualified. We believe that classification of our Board of Directors helps to assure the continuity and stability of our business strategies and policies as determined by our directors. Holders of shares of our stock have no right to cumulative
voting in the election of directors. Consequently, at each annual meeting of our stockholders, the holders of a majority of the combined shares of common stock and preferred stock are able to elect all of the successors to the class of directors
whose term expires at such meeting (other than the Preferred Directors, who will be elected by the holders of a majority of the preferred stock).
Our classified board could have the effect of making the replacement of incumbent directors more time consuming and difficult. Because our
directors may only be removed for cause, at least two annual meetings of stockholders, instead of one, will generally be required to effect a change in a majority of our Board of Directors. Thus, our classified board could increase the likelihood
that incumbent directors will retain their positions. The staggered terms of directors may delay, defer or prevent a tender offer or an attempt to change control of us or another transaction that might involve a premium price for our common stock
that might be in the best interest of our stockholders.
Removal of Directors
Any director may be removed only for cause by the stockholders upon the affirmative vote of at least two-thirds of all the votes entitled to be
cast at a meeting called for the purpose of the proposed removal. The notice of the meeting shall indicate that the purpose, or one of the purposes, of the meeting is to determine if the director shall be removed.
Business Combinations
Section 203
of the Delaware General Corporation Law generally prohibits business combinations between us and an interested stockholder for three years after the date of the transaction in which the person became an interested
stockholder. In general, Delaware law defines an interested stockholder as any entity or person beneficially owning 15% or more of the outstanding voting stock of the corporation and any entity or person affiliated with or controlling, or controlled
by, the entity or person. These business combinations include:
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Any merger or consolidation involving the corporation and the interested stockholder; |
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Any sale, transfer, pledge or other disposition involving the interested stockholder of 10% or more of the assets of the corporation; |
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Subject to exceptions, any transaction that results in the issuance or transfer by the corporation of any stock of the corporation to the interested stockholder; or |
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The receipt by the interested stockholder of the benefit of any loans, advances, guarantees, pledges or other financial benefits provided by or through the corporation. |
Section 203 permits certain exemptions from its provisions for transactions in which:
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Prior to the date of the transaction, the board of directors of the corporation approved either the business combination or the transaction which resulted in the stockholder becoming an interested stockholder;
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The interested stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced, excluding for purposes of determining the number of shares outstanding
(a) shares owned by persons who are directors and also officers, and (b) shares owned by employee stock plans in which employee participants do not have the right to determine confidentially whether shares held subject to the plan will be
tendered in a tender or exchange offer; or |
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On or subsequent to the date of the transaction, the business combination is approved by the board of directors and authorized at an annual or special meeting of stockholders, and not by written consent, by the
affirmative vote of at least 66 2/3% of the outstanding voting stock that is not owned by the interested stockholder. |
Merger;
Amendment of Certificate of Incorporation
Under Delaware law, we will not be able to amend our certificate of incorporation or merge
with another entity unless approved by the affirmative vote of stockholders holding at least a majority of the shares entitled to vote on the matter.
Term and Termination
Our certificate of
incorporation provides for us to have a perpetual existence. Pursuant to our certificate of incorporation, and subject to the provisions of any of our classes or series of stock then outstanding and the approval by a majority of the entire Board of
Directors, our stockholders, at any meeting thereof, by the affirmative vote of a majority of all of the votes entitled to be cast on the matter, may approve a plan of liquidation and dissolution.
Advance Notice of Director Nominations and New Business
Our bylaws provide that, with respect to an annual meeting of stockholders, nominations of persons for election to our Board of Directors and
the proposal of business to be considered by stockholders at the annual meeting may be made only:
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pursuant to our notice of the meeting; |
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by our Board of Directors; or |
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by a stockholder who was a stockholder of record both at the time of the provision of notice and at the time of the meeting who is entitled to vote at the meeting and has complied with the advance notice procedures set
forth in our bylaws. |
With respect to special meetings of stockholders, only the business specified in our notice of meeting
may be brought before the meeting of stockholders and nominations of persons for election to our Board of Directors may be made only:
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pursuant to our notice of the meeting; |
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by our Board of Directors; or |
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provided that our Board of Directors has determined that directors shall be elected at such meeting, by a stockholder who was a stockholder of record both at the time of the provision of notice and at the time of the
meeting who is entitled to vote at the meeting and has complied with the advance notice provisions set forth in our bylaws. |
Possible
Anti-Takeover Effect of Certain Provisions of Delaware Law and of Our Certificate of Incorporation and Bylaws
The business combination
provisions of Delaware law, the provisions of our bylaws regarding the classification of our Board of Directors, the Board of Directors ability to issue preferred stock with terms and conditions that could have a priority as to distributions
and amounts payable upon liquidation over the rights of the holders of our common stock, and the restrictions on the transfer of stock and the advance notice provisions of our bylaws could have the effect of delaying, deferring or preventing a
transaction or a change in the control that might involve a premium price for holders of common stock or otherwise be in their best interest.
Limitation on Liability of Directors and Officers; Indemnification and Advance of Expenses
Our certificate of incorporation eliminates the liability of directors to the maximum extent permitted by Delaware law. In addition, our bylaws
require us to indemnify our directors and executive officers, and allow us to indemnify other employees and agents, to the fullest extent permitted by law, subject to the requirements of the 1940 Act. Our bylaws obligate us to indemnify any present
or former director or officer or any individual who, while a director or officer and at our request, serves or has served another corporation, real estate investment trust, partnership, joint venture, trust, employee benefit plan or other enterprise
as a director, officer, partner or trustee, from and against any claim or liability to which that person may become subject or which that person may incur by reason of his or her status as a present or former director or officer and to pay or
reimburse their reasonable expenses in advance of final disposition of a proceeding. The certificate of incorporation and bylaws also permit us to indemnify and advance expenses to any person who served a predecessor of us in any of the capacities
described above and any of our employees or agents or any employees or agents of our predecessor. In accordance with the 1940 Act, we will not indemnify any person for any liability to which such person would be subject by reason of such
persons willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his or her office.
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Delaware law requires a corporation to indemnify a present or former director or officer who has
been successful, on the merits or otherwise, in the defense of any proceeding to which he or she is made a party by reason of his or her service in that capacity. Delaware law permits a corporation to indemnify its present and former directors and
officers, or any other person who is or was an employee or agent, or is or was serving at the request of a corporation as a director, officer, employee or agent of another entity, against liability for expenses, judgments, fines and amounts paid in
settlement actually and reasonably incurred if such person acted in good faith and in a manner reasonably believed to be in or not opposed to the best interests of the corporation. In the case of a criminal proceeding, Delaware law further requires
that the person to be indemnified have no reasonable cause to believe his or her conduct was unlawful. In the case of an action or suit by or in the right of a corporation to procure a judgment in its favor by reason of such persons service to
the corporation, Delaware law provides that no indemnification shall be made with respect to any claim, issue or matter as to which such person has been adjudged liable to the corporation, unless and only to the extent that the court in which such
an action or suit is brought determines, in view of all the circumstances of the case, that the person is fairly and reasonably entitled to indemnity. Insofar as certain members of our senior management team may from time to time serve, at the
request of our Board of Directors, as directors of one or more of our portfolio companies, we may have indemnification obligations under our bylaws with respect to acts taken by our portfolio companies.
Any payment to an officer or director as indemnification under our governing documents or applicable law or pursuant to any agreement to hold
such person harmless is recoverable only out of our assets and not from our stockholders. Indemnification could reduce the legal remedies available to us and our stockholders against the indemnified individuals. This provision for indemnification of
our directors and officers does not reduce the exposure of our directors and officers to liability under federal or state securities laws, nor does it limit a stockholders ability to obtain injunctive relief or other equitable remedies for a
violation of a directors or an officers duties to us or to our stockholders, although these equitable remedies may not be effective in some circumstances.
In addition to any indemnification to which our directors and officers are entitled pursuant to our certificate of incorporation and bylaws
and the Delaware General Corporation Law, our certificate of incorporation and bylaws provide that we may indemnify other employees and agents to the fullest extent permitted under Delaware law, whether they are serving us or, at our request, any
other entity, including our Adviser and our Administrator.
The general effect to investors of any arrangement under which any person who controls us or
any of our directors, officers or agents is insured or indemnified against liability is a potential reduction in distributions to our stockholders resulting from our payment of premiums associated with liability insurance. In addition,
indemnification could reduce the legal remedies available to us and to our stockholders against our officers, directors and agents. The SEC takes the position that indemnification against liabilities arising under the Securities Act is against
public policy and unenforceable. As a result, indemnification of our directors and officers and of our Adviser or its affiliates may not be allowed for liabilities arising from or out of a violation of state or federal securities laws.
Indemnification will be allowed for settlements and related expenses of lawsuits alleging securities laws violations and for expenses incurred in successfully defending any lawsuit, provided that a court either:
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approves the settlement and finds that indemnification of the settlement and related costs should be made; or |
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dismisses with prejudice or makes a successful adjudication on the merits of each count involving alleged securities law violations as to the particular indemnitee and a court approves the indemnification.
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Conflict with 1940 Act
Our bylaws provide that, if and to the extent that any provision of the Delaware General Corporation Law or any provision of our certificate of
incorporation or bylaws conflicts with any provision of the 1940 Act, the applicable provision of the 1940 Act will control.
SHARE
REPURCHASES
Shares of closed-end investment companies frequently trade at discounts to NAV. We cannot predict whether our shares
will trade above, at or below NAV. The market price of our common stock is determined by, among other things, the supply and demand for our shares, our investment performance and investor perception of our overall attractiveness as an investment as
compared with alternative investments. Our Board of Directors has authorized our officers, in their discretion and subject to compliance with the 1940 Act and other applicable law, to purchase on the open market or in privately negotiated
transactions, outstanding shares of our common stock in the event that our shares trade at a discount to NAV. We cannot assure you that we will ever conduct any open market purchases and if we do conduct open market purchases, we may terminate them
at any time.
In addition, if our shares publicly trade for a substantial period of time at a substantial discount to our then current NAV
per share, our Board of Directors will consider authorizing periodic repurchases of our shares or other actions designed to eliminate the discount. Our Board of Directors would consider all relevant factors in determining whether to take any such
actions, including the effect of such actions on our status as a RIC under the Internal Revenue Code and the availability of cash to finance these repurchases
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in view of the restrictions on our ability to borrow. We cannot assure you that any share repurchases will be made or that if made, they will reduce or eliminate market discount. Should we make
any such repurchases in the future, we expect that we would make them at prices at or below the then current NAV per share. Any such repurchase would cause our total assets to decrease, which may have the effect of increasing our expense ratio. We
may borrow money to finance the repurchase of shares subject to the limitations described in this prospectus. Any interest on such borrowing for this purpose would reduce our net income.
PLAN OF DISTRIBUTION
We may sell the Securities through underwriters or dealers, directly to one or more purchasers, including existing stockholders in a rights
offering, or through agents or through a combination of any such methods of sale. In the case of a rights offering, the applicable prospectus supplement will set forth the number of shares of our common stock issuable upon the exercise of each right
and the other terms of such rights offering. Any underwriter or agent involved in the offer and sale of the Securities will also be named in the applicable prospectus supplement.
The distribution of the Securities may be effected from time to time in one or more transactions at a fixed price or prices, which may be
changed, in at the market offerings within the meaning of Rule 415(a)(4) of the Securities Act, at prevailing market prices at the time of sale, at prices related to such prevailing market prices, or at negotiated prices, provided,
however, that in the case of our common stock, the offering price per share less any underwriting commissions or discounts must equal or exceed the NAV per share of our common stock except (i) in connection with a rights offering to our
existing stockholders, (ii) with the consent of the majority of our common stockholders, or (iii) under such other circumstances as the SEC may permit.
In connection with the sale of the Securities, underwriters or agents may receive compensation from us or from purchasers of the Securities,
for whom they may act as agents, in the form of discounts, concessions or commissions. Underwriters may sell the Securities to or through dealers and such dealers may receive compensation in the form of discounts, concessions or commissions from the
underwriters and/or commissions from the purchasers for whom they may act as agents. Underwriters, dealers and agents that participate in the distribution of the Securities may be deemed to be underwriters under the Securities Act, and any discounts
and commissions they receive from us and any profit realized by them on the resale of the Securities may be deemed to be underwriting discounts and commissions under the Securities Act. Any such underwriter or agent will be identified and any such
compensation received from us will be described in the applicable prospectus supplement. The maximum commission or discount to be received by any FINRA member or independent broker-dealer will not exceed 10%.
We may enter into derivative transactions with third parties, or sell securities not covered by this prospectus to third parties in privately
negotiated transactions. If the applicable prospectus supplement indicates, in connection with those derivatives, the third parties may sell Securities covered by this prospectus and the applicable prospectus supplement, including in short sale
transactions. If so, the third party may use securities pledged by us or borrowed from us or others to settle those sales or to close out any related open borrowings of stock, and may use securities received from us in settlement of those
derivatives to close out any related open borrowings of stock. The third parties in such sale transactions will be underwriters and, if not identified in this prospectus, will be identified in the applicable prospectus supplement (or a
post-effective amendment).
Any of our common stock sold pursuant to a prospectus supplement will be listed on NASDAQ, or another exchange
on which our common stock is traded.
Under agreements into which we may enter, underwriters, dealers and agents who participate in the
distribution of the Securities may be entitled to indemnification by us against certain liabilities, including liabilities under the Securities Act. Underwriters, dealers and agents may engage in transactions with, or perform services for, us in the
ordinary course of business.
If so indicated in the applicable prospectus supplement, we will authorize underwriters or other persons
acting as our agents to solicit offers by certain institutions to purchase the Securities from us pursuant to contracts providing for payment and delivery on a future date. Institutions with which such contracts may be made include commercial and
savings banks, insurance companies, pension funds, investment companies, educational and charitable institutions and others, but in all cases such institutions must be approved by us. The obligations of any purchaser under any such contract will be
subject to the condition that the purchase of the Securities shall not at the time of delivery be prohibited under the laws of the jurisdiction to which such purchaser is subject. The underwriters and such other agents will not have any
responsibility in respect of the validity or performance of such contracts. Such contracts will be subject only to those conditions set forth in the prospectus supplement, and the prospectus supplement will set forth the commission payable for
solicitation of such contracts.
In order to comply with the securities laws of certain states, if applicable, the Securities offered
hereby will be sold in such jurisdictions only through registered or licensed brokers or dealers. In addition, in certain states, the Securities may not be sold unless they have been registered or qualified for sale in the applicable state or an
exemption from the registration or qualification requirement is available and is complied with.
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CUSTODIAN, TRANSFER AND DIVIDEND PAYING AGENT AND REGISTRAR
Our securities are held under a custodian agreement with The Bank of New York Mellon Corp. The address of the custodian is: 500 Ross Street,
Suite 625, Pittsburgh, PA 15262. Our assets are held under bank custodianship in compliance with the 1940 Act. Securities held through our wholly-owned subsidiary, Business Investment, are held under a custodian agreement with The Bank of New York
Mellon Corp., which acts as collateral custodian pursuant to Business Investments credit facility with BB&T and certain other parties. The address of the collateral custodian is 500 Ross Street, Suite 625, Pittsburgh, PA 15262.
Computershare acts as our transfer and dividend paying agent and registrar. The principal business address of Computershare is 250 Royall Street, Canton, MA 02021, telephone number 781-575-2000. Computershare also maintains an internet web site at
www.computershare.com and one specifically for shareholders at www.computershare.com/investor.
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BROKERAGE ALLOCATION AND OTHER PRACTICES
Since we generally acquire and dispose of our investments in privately negotiated transactions, we will infrequently use securities brokers or
dealers in the normal course of our business. Subject to policies established by our Board of Directors, our Adviser will be primarily responsible for ensuring the execution of transactions involving publicly traded securities and the review of
brokerage commissions in respect thereof, if any. In the event that our Adviser ensures the execution such transactions, we do not expect our Adviser to execute transactions through any particular broker or dealer, but we would expect our Adviser to
seek to obtain the best net results for us, taking into account such factors as price (including any applicable brokerage commission or dealer spread), size of order, difficulty of execution, and operational facilities of the broker dealer and the
broker dealers risk and skill in positioning blocks of securities. While we expect that our Adviser generally will seek reasonably competitive trade execution costs, we will not necessarily pay the lowest spread or commission available.
Subject to applicable legal requirements, our Adviser may select a broker dealer based partly upon brokerage or market research services provided to us, our Adviser and any of its other clients, if any. In return for such services, we may pay a
higher commission than other broker dealers would charge if our Adviser determines in good faith that such commission is reasonable in relation to the value of the brokerage and research services provided by such broker dealer viewed in terms either
of the particular transaction or our Advisers overall responsibilities with respect to all of our Advisers clients.
PROXY
VOTING POLICIES AND PROCEDURES
We have delegated our proxy voting responsibility to our Adviser. The proxy
voting policies and procedures of our Adviser are set out below. The guidelines are reviewed periodically by our Adviser and our directors who are not interested persons, and, accordingly, are subject to change.
Introduction
As an investment adviser
registered under the Advisers Act, our Adviser has a fiduciary duty to act solely in our best interests. As part of this duty, our Adviser recognizes that it must vote our securities in a timely manner free of conflicts of interest and in our best
interests.
Our Advisers policies and procedures for voting proxies for its investment advisory clients are intended to comply with
Section 206 of, and Rule 206(4)-6 under, the Advisers Act.
Proxy Policies
Our Adviser votes proxies relating to our portfolio securities in what it perceives to be the best interest of our stockholders. Our Adviser
reviews on a case-by-case basis each proposal submitted to a stockholder vote to determine its effect on the portfolio securities we hold. In most cases our Adviser will vote in favor of proposals that our Adviser believes are likely to increase the
value of the portfolio securities we hold. Although our Adviser will generally vote against proposals that may have a negative effect on our portfolio securities, our Adviser may vote for such a proposal if there exist compelling long-term reasons
to do so.
Our proxy voting decisions are made by our Advisers portfolio managers. To ensure that our Advisers vote is not the
product of a conflict of interest, our Adviser requires that (1) anyone involved in the decision-making process disclose to our Advisers investment committee any potential conflict that he or she is aware of and any contact that he or she
has had with any interested party regarding a proxy vote; and (2) employees involved in the decision-making process or vote administration are prohibited from revealing how our Adviser intends to vote on a proposal in order to reduce any
attempted influence from interested parties. Where conflicts of interest may be present, our Adviser will disclose such conflicts to us, including our independent directors and may request guidance from us on how to vote such proxies.
Proxy Voting Records
You may obtain
information without charge about how the Adviser voted proxies by calling us collect at (703) 287-5893 or by making a written request for proxy voting information to:
Michael LiCalsi, General Counsel and Secretary
c/o Gladstone Investment Corporation
1521 Westbranch
Dr., Suite 100
McLean, VA 22102
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LEGAL MATTERS
The legality of securities offered hereby will be passed upon for us by Bass, Berry & Sims PLC, Nashville, Tennessee. Certain legal
matters will be passed upon for the underwriters, if any, by the counsel named in the accompanying prospectus supplement.
E
XPERTS
The financial statements as of March 31, 2015 and March 31, 2014 and for each of the three years in the period
ended March 31, 2015 and managements assessment of the effectiveness of internal control over financial reporting (which is included in Managements Annual Report on Internal Control over Financial Reporting) as of March 31,
2015 included in this Prospectus have been so included in reliance on the report of PricewaterhouseCoopers LLP, an independent registered public accounting firm, given on the authority of said firm as experts in auditing and accounting. The address
of PricewaterhouseCoopers LLP is 1800 Tysons Boulevard, McLean, Virginia 22102.
The financial statements of Danco Acquisition Corporation
as of and for the years ended December 31, 2012 and 2011, included in this Prospectus have been so included in reliance on the report of Moss Adams LLP, independent auditors, given on the authority of said firm as experts in auditing and
accounting.
The financial statements of Galaxy Tool Holding Corporation as of and for the years ended December 31, 2012 and 2011,
included in this Prospectus have been so included in reliance on the reports of Allen, Gibbs & Houlik, L.C., independent auditors, given on the authority of said firm as experts in auditing and accounting.
The financial statements of SOG Specialty Knives and Tools, LLC as of and for the years ended December 31, 2013 and 2012, included in
this Prospectus have been so included in reliance on the report of Moss Adams LLP, independent auditors, given on the authority of said firm as experts in auditing and accounting.
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GLADSTONE INVESTMENT CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
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Audited Consolidated Financial Statements |
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Managements Annual Report on Internal Control over Financial Reporting |
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F-2 |
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Report of Independent Registered Public Accounting Firm |
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F-3 |
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Consolidated Statements of Assets and Liabilities as of March 31, 2015 and March 31, 2014 |
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F-4 |
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Consolidated Statements of Operations for the years ended March 31, 2015, 2014 and 2013 |
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F-5 |
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Consolidated Statements of Changes in Net Assets for the years ended March 31, 2015, 2014 and
2013 |
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F-6 |
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Consolidated Statements of Cash Flows for the years ended March 31, 2015, 2014 and 2013 |
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F-7 |
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Consolidated Schedules of Investments as of March 31, 2015 and March 31, 2014 |
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F-8 |
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Notes to Consolidated Financial Statements |
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F-15 |
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F-1
Managements Annual Report on Internal Control over Financial
Reporting
To the Stockholders and Board of Directors of Gladstone Investment Corporation:
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) under
the Securities Exchange Act of 1934. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles and include those policies and procedures that: (1) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect our transactions and the dispositions of
our assets; (2) provide reasonable assurance that our transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are
being made only in accordance with appropriate authorizations; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our
financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore,
even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
Under the supervision and with the participation of our management, including our chief executive officer and our chief financial officer and treasurer, we
assessed the effectiveness of our internal control over financial reporting as of March 31, 2015, using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal ControlIntegrated
Framework (2013) . Based on its assessment, management has concluded that our internal control over financial reporting was effective as of March 31, 2015.
The effectiveness of our internal control over financial reporting as of March 31, 2015 has been audited by PricewaterhouseCoopers LLP, an independent
registered public accounting firm, as stated in their report which is included herein.
May 20, 2015
F-2
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors of Gladstone Investment Corporation:
In our opinion, the accompanying consolidated statements of assets and liabilities, including the consolidated schedules of investments, and the related
consolidated statements of operations, of changes in net assets and of cash flows present fairly, in all material respects, the financial position of Gladstone Investment Corporation and its subsidiaries (the Company) as of
March 31, 2015 and 2014, and the results of their operations and their cash flows for each of the three years in the period ended March 31, 2015, in conformity with accounting principles generally accepted in the United States of America.
In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 15(a)(2) presents fairly, in all material respects, the information set forth therein when read in conjunction with the related
consolidated financial statements. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of March 31, 2015, based on criteria established in Internal
ControlIntegrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Companys management is responsible for these financial statements and financial statement schedule,
for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Managements Annual Report on Internal Control over
Financial Reporting. Our responsibility is to express opinions on these financial statements, on the financial statement schedule, and on the Companys internal control over financial reporting based on our integrated audits. We conducted our
audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of
material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting
included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk.
Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits, which included confirmation of securities as of March 31, 2015 by correspondence with the custodian, provide
a reasonable basis for our opinions.
A companys internal control over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A companys internal control over financial reporting includes those
policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations
of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
McLean, VA
May 20, 2015
F-3
GLADSTONE INVESTMENT CORPORATION
CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
|
2015 |
|
|
2014 |
|
ASSETS |
|
|
|
|
|
|
|
|
Investments at fair value |
|
|
|
|
|
|
|
|
Non-Control/Non-Affiliate investments (Cost of $162,598 and $233,895, respectively) |
|
$ |
174,373 |
|
|
$ |
205,440 |
|
Affiliate investments (Cost of $310,628 and $120,010, respectively) |
|
|
271,050 |
|
|
|
87,849 |
|
Control investments (Cost of $32,032 and $29,632 respectively) |
|
|
20,630 |
|
|
|
21,104 |
|
|
|
|
|
|
|
|
|
|
Total investments at fair value (Cost of $505,258 and $383,537, respectively) |
|
|
466,053 |
|
|
|
314,393 |
|
Cash and cash equivalents |
|
|
4,921 |
|
|
|
4,553 |
|
Restricted cash and cash equivalents |
|
|
260 |
|
|
|
5,314 |
|
Interest receivable |
|
|
1,867 |
|
|
|
1,289 |
|
Due from custodian |
|
|
4,512 |
|
|
|
1,704 |
|
Deferred financing costs, net |
|
|
4,529 |
|
|
|
2,355 |
|
Other assets |
|
|
1,379 |
|
|
|
1,086 |
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS |
|
$ |
483,521 |
|
|
$ |
330,694 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES |
|
|
|
|
|
|
|
|
Borrowings: |
|
|
|
|
|
|
|
|
Line of credit at fair value (Cost of $118,800 and $61,250, respectively) |
|
$ |
118,800 |
|
|
$ |
61,701 |
|
Other secured borrowings |
|
|
5,096 |
|
|
|
5,000 |
|
|
|
|
|
|
|
|
|
|
Total borrowings |
|
|
123,896 |
|
|
|
66,701 |
|
Mandatorily redeemable preferred stock, $0.001 par value, $25 liquidation preference; 3,610,000 and 1,610,000 shares authorized,
respectively; 3,256,000 and 1,600,000 shares issued and outstanding, respectively |
|
|
81,400 |
|
|
|
40,000 |
|
Accounts payable and accrued expenses |
|
|
1,271 |
|
|
|
665 |
|
Fees due to Adviser(A) |
|
|
1,502 |
|
|
|
1,225 |
|
Fee due to Administrator(A) |
|
|
262 |
|
|
|
224 |
|
Other liabilities |
|
|
1,761 |
|
|
|
1,042 |
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES |
|
|
210,092 |
|
|
|
109,857 |
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies(B) |
|
|
|
|
|
|
|
|
NET ASSETS |
|
$ |
273,429 |
|
|
$ |
220,837 |
|
|
|
|
|
|
|
|
|
|
ANALYSIS OF NET ASSETS |
|
|
|
|
|
|
|
|
Common stock, $0.001 par value per share, 100,000,000 shares authorized; 29,775,958 and 26,475,958 shares issued and
outstanding, respectively |
|
$ |
30 |
|
|
$ |
26 |
|
Capital in excess of par value |
|
|
309,438 |
|
|
|
287,062 |
|
Cumulative net unrealized depreciation of investments |
|
|
(39,204 |
) |
|
|
(69,144 |
) |
Cumulative net unrealized (depreciation) (appreciation) of other |
|
|
(75 |
) |
|
|
(525 |
) |
Net investment income in excess of distributions |
|
|
3,511 |
|
|
|
3,616 |
|
Accumulated net realized loss |
|
|
(271 |
) |
|
|
(198 |
) |
|
|
|
|
|
|
|
|
|
TOTAL NET ASSETS |
|
$ |
273,429 |
|
|
$ |
220,837 |
|
|
|
|
|
|
|
|
|
|
NET ASSET VALUE PER COMMON SHARE AT END OF YEAR |
|
$ |
9.18 |
|
|
$ |
8.34 |
|
|
|
|
|
|
|
|
|
|
(A) |
Refer to Note 4Related Party Transactions for additional information. |
(B) |
Refer to Note 11Commitments and Contingencies for additional information. |
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
F-4
GLADSTONE INVESTMENT CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31, |
|
|
|
2015 |
|
|
2014 |
|
|
2013 |
|
INVESTMENT INCOME |
|
|
|
|
|
|
|
|
|
|
|
|
Interest income: |
|
|
|
|
|
|
|
|
|
|
|
|
Non-Control/Non-Affiliate investments |
|
$ |
17,541 |
|
|
$ |
21,190 |
|
|
$ |
15,292 |
|
Affiliate investments |
|
|
16,844 |
|
|
|
3,625 |
|
|
|
3,114 |
|
Control investments |
|
|
2,296 |
|
|
|
5,642 |
|
|
|
6,388 |
|
Cash and cash equivalents |
|
|
4 |
|
|
|
3 |
|
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income |
|
|
36,685 |
|
|
|
30,460 |
|
|
|
24,798 |
|
Other income: |
|
|
|
|
|
|
|
|
|
|
|
|
Non-Control/Non-Affiliate investments |
|
|
4,424 |
|
|
|
1,210 |
|
|
|
1,634 |
|
Affiliate investments |
|
|
534 |
|
|
|
1,299 |
|
|
|
|
|
Control investments |
|
|
|
|
|
|
3,295 |
|
|
|
4,106 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income |
|
|
4,958 |
|
|
|
5,804 |
|
|
|
5,740 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment income |
|
|
41,643 |
|
|
|
36,264 |
|
|
|
30,538 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EXPENSES |
|
|
|
|
|
|
|
|
|
|
|
|
Base management fee(A) |
|
|
7,569 |
|
|
|
6,207 |
|
|
|
5,412 |
|
Loan servicing fee(A) |
|
|
4,994 |
|
|
|
4,326 |
|
|
|
3,725 |
|
Incentive fee(A) |
|
|
4,975 |
|
|
|
3,983 |
|
|
|
2,585 |
|
Administration fee(A) |
|
|
932 |
|
|
|
863 |
|
|
|
785 |
|
Interest expense on borrowings |
|
|
3,539 |
|
|
|
2,075 |
|
|
|
1,127 |
|
Dividends on mandatorily redeemable preferred stock |
|
|
3,921 |
|
|
|
2,850 |
|
|
|
2,850 |
|
Amortization of deferred financing costs |
|
|
1,329 |
|
|
|
1,024 |
|
|
|
791 |
|
Professional fees |
|
|
908 |
|
|
|
805 |
|
|
|
541 |
|
Other general and administrative expenses |
|
|
1,421 |
|
|
|
1,459 |
|
|
|
1,287 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses before credits from Adviser |
|
|
29,588 |
|
|
|
23,592 |
|
|
|
19,103 |
|
Credits to base management fee loan servicing fee(A) |
|
|
(4,994 |
) |
|
|
(4,326 |
) |
|
|
(3,725 |
) |
Credits to fees from Adviser - other(A) |
|
|
(2,848 |
) |
|
|
(2,309 |
) |
|
|
(1,328 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses, net of credits to fees |
|
|
21,746 |
|
|
|
16,957 |
|
|
|
14,050 |
|
NET INVESTMENT INCOME |
|
$ |
19,897 |
|
|
$ |
19,307 |
|
|
$ |
16,488 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
REALIZED AND UNREALIZED GAIN (LOSS) |
|
|
|
|
|
|
|
|
|
|
|
|
Net realized (loss) gain: |
|
|
|
|
|
|
|
|
|
|
|
|
Non-Control/Non-Affiliate investments |
|
|
|
|
|
|
(14,834 |
) |
|
|
849 |
|
Affiliate investments |
|
|
|
|
|
|
(1,763 |
) |
|
|
|
|
Control investments |
|
|
(73 |
) |
|
|
24,838 |
|
|
|
(6 |
) |
Other |
|
|
|
|
|
|
(29 |
) |
|
|
(41 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net realized (loss) gain |
|
|
(73 |
) |
|
|
8,212 |
|
|
|
802 |
|
Net unrealized appreciation (depreciation): |
|
|
|
|
|
|
|
|
|
|
|
|
Non-Control/Non-Affiliate investments |
|
|
37,047 |
|
|
|
(6,382 |
) |
|
|
(7,722 |
) |
Affiliate investments |
|
|
(4,233 |
) |
|
|
(1,481 |
) |
|
|
(19,214 |
) |
Control investments |
|
|
(2,874 |
) |
|
|
(21,343 |
) |
|
|
27,740 |
|
Other |
|
|
450 |
|
|
|
358 |
|
|
|
(815 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net unrealized appreciation (depreciation) |
|
|
30,390 |
|
|
|
(28,848 |
) |
|
|
(11 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized and unrealized gain (loss) |
|
|
30,317 |
|
|
|
(20,636 |
) |
|
|
791 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS |
|
$ |
50,214 |
|
|
$ |
(1,329 |
) |
|
$ |
17,279 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BASIC AND DILUTED PER COMMON SHARE: |
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income |
|
$ |
0.75 |
|
|
$ |
0.73 |
|
|
$ |
0.68 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in net assets resulting from operations |
|
$ |
1.88 |
|
|
$ |
(0.05 |
) |
|
$ |
0.71 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED AVERAGE SHARES OF COMMON STOCK OUTSTANDING: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted |
|
|
26,665,821 |
|
|
|
26,475,958 |
|
|
|
24,189,148 |
|
(A) |
Refer to Note 4Related Party Transactions for additional information. |
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
F-5
GLADSTONE INVESTMENT CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS
(IN THOUSANDS)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31, |
|
|
|
2015 |
|
|
2014 |
|
|
2013 |
|
OPERATIONS |
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income |
|
$ |
19,897 |
|
|
$ |
19,307 |
|
|
$ |
16,488 |
|
Net realized (loss) gain on investments |
|
|
(73 |
) |
|
|
8,241 |
|
|
|
843 |
|
Net realized loss on other |
|
|
|
|
|
|
(29 |
) |
|
|
(41 |
) |
Net unrealized appreciation (depreciation) of investments |
|
|
29,940 |
|
|
|
(29,206 |
) |
|
|
804 |
|
Net unrealized depreciation (appreciation) of other |
|
|
450 |
|
|
|
358 |
|
|
|
(815 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in net assets from operations |
|
|
50,214 |
|
|
|
(1,329 |
) |
|
|
17,279 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EQUITY CAPITAL ACTIVITY |
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock |
|
|
24,420 |
|
|
|
|
|
|
|
32,969 |
|
Offering costs for issuance of common stock |
|
|
(1,458 |
) |
|
|
|
|
|
|
(1,954 |
) |
Distributions to common stockholders |
|
|
(20,584 |
) |
|
|
(18,797 |
) |
|
|
(14,547 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in net assets from equity capital activity |
|
|
2,378 |
|
|
|
(18,797 |
) |
|
|
16,468 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL INCREASE (DECREASE) IN NET ASSETS |
|
|
52,592 |
|
|
|
(20,126 |
) |
|
|
33,747 |
|
NET ASSETS AT BEGINNING OF YEAR |
|
|
220,837 |
|
|
|
240,963 |
|
|
|
207,216 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET ASSETS AT END OF YEAR |
|
$ |
273,429 |
|
|
$ |
220,837 |
|
|
$ |
240,963 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
F-6
GLADSTONE INVESTMENT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31, |
|
|
|
2015 |
|
|
2014 |
|
|
2013 |
|
CASH FLOWS FROM OPERATING ACTIVITIES |
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in net assets resulting from operations |
|
$ |
50,214 |
|
|
$ |
(1,329 |
) |
|
$ |
17,279 |
|
Adjustments to reconcile net increase (decrease) in net assets resulting from operations to net cash used in operating
activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of investments |
|
|
(132,902 |
) |
|
|
(132,203 |
) |
|
|
(87,607 |
) |
Principal repayments of investments |
|
|
11,260 |
|
|
|
51,828 |
|
|
|
25,243 |
|
Proceeds from the sale of investments |
|
|
|
|
|
|
31,587 |
|
|
|
3,181 |
|
Increase in investment balance due to paid in kind interest |
|
|
(78 |
) |
|
|
(88 |
) |
|
|
|
|
Net realized loss (gain) on investments |
|
|
73 |
|
|
|
(8,241 |
) |
|
|
(843 |
) |
Net realized loss on other |
|
|
|
|
|
|
29 |
|
|
|
41 |
|
Net unrealized (appreciation) depreciation of investments |
|
|
(29,940 |
) |
|
|
29,206 |
|
|
|
(804 |
) |
Net unrealized (appreciation) depreciation of other |
|
|
(450 |
) |
|
|
(358 |
) |
|
|
815 |
|
Amortization of deferred financing costs |
|
|
1,329 |
|
|
|
1,024 |
|
|
|
791 |
|
Decrease (increase) in restricted cash and cash equivalents |
|
|
4,981 |
|
|
|
(4,688 |
) |
|
|
1,302 |
|
(Increase) decrease in interest receivable |
|
|
(578 |
) |
|
|
20 |
|
|
|
(59 |
) |
Increase in due from custodian |
|
|
(2,808 |
) |
|
|
(27 |
) |
|
|
(150 |
) |
(Increase) decrease in other assets |
|
|
(293 |
) |
|
|
383 |
|
|
|
(867 |
) |
Increase (decrease) in accounts payable and accrued expenses |
|
|
606 |
|
|
|
(345 |
) |
|
|
613 |
|
Increase (decrease) in fees due to Adviser(A) |
|
|
277 |
|
|
|
(842 |
) |
|
|
1,571 |
|
Increase in administration fee payable to Administrator(A) |
|
|
38 |
|
|
|
3 |
|
|
|
3 |
|
Increase (decrease) in other liabilities |
|
|
719 |
|
|
|
429 |
|
|
|
(243 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities |
|
|
(97,552 |
) |
|
|
(33,612 |
) |
|
|
(39,734 |
) |
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES |
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of common stock |
|
|
24,420 |
|
|
|
|
|
|
|
32,969 |
|
Offering costs for issuance of common stock |
|
|
(1,458 |
) |
|
|
|
|
|
|
(1,954 |
) |
Proceeds from short-term loans |
|
|
|
|
|
|
56,514 |
|
|
|
250,063 |
|
Repayments on short-term loans |
|
|
|
|
|
|
(114,530 |
) |
|
|
(268,052 |
) |
Proceeds from line of credit |
|
|
144,549 |
|
|
|
145,350 |
|
|
|
144,000 |
|
Repayments on line of credit |
|
|
(87,000 |
) |
|
|
(115,100 |
) |
|
|
(113,000 |
) |
Proceeds from other secured borrowings |
|
|
96 |
|
|
|
|
|
|
|
5,000 |
|
Proceeds from issuance of mandatorily redeemable preferred stock |
|
|
41,400 |
|
|
|
|
|
|
|
|
|
Purchase of derivatives |
|
|
|
|
|
|
(75 |
) |
|
|
|
|
Payment of deferred financing costs |
|
|
(3,503 |
) |
|
|
(1,101 |
) |
|
|
(387 |
) |
Distributions paid to common stockholders |
|
|
(20,584 |
) |
|
|
(18,797 |
) |
|
|
(14,547 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities |
|
|
97,920 |
|
|
|
(47,739 |
) |
|
|
34,092 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS |
|
|
368 |
|
|
|
(81,351 |
) |
|
|
(5,642 |
) |
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR |
|
|
4,553 |
|
|
|
85,904 |
|
|
|
91,546 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, END OF YEAR |
|
$ |
4,921 |
|
|
$ |
4,553 |
|
|
$ |
85,904 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH PAID DURING YEAR FOR INTEREST |
|
$ |
3,310 |
|
|
$ |
1,952 |
|
|
$ |
1,079 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NON-CASH ACTIVITIES(B) |
|
$ |
|
|
|
$ |
|
|
|
$ |
4,106 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A) |
Refer to Note 4Related Party Transactions for additional information. |
(B) |
In February 2013, we recapitalized our investment in Galaxy Tool Holdings Corp. (Galaxy), converting $8.2 million of Galaxy preferred stock and its related $4.1 million in accrued dividends into a new $12.3
million senior debt investment in a non-cash transaction. We recognized $4.1 million in dividend income on our Consolidated Statements of Operations during the year ended March 31, 2013 related to this recapitalization. |
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
F-7
GLADSTONE INVESTMENT CORPORATION
CONSOLIDATED SCHEDULE OF INVESTMENTS
MARCH 31, 2015
(DOLLAR
AMOUNTS IN THOUSANDS)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company(A) |
|
Industry |
|
Investment(B) |
|
Principal |
|
|
Cost |
|
|
Fair Value |
|
NON-CONTROL/NON-AFFILIATE INVESTMENTS(N): |
|
|
|
|
|
|
|
|
Auto Safety House, LLC |
|
Automobile |
|
Secured Line of Credit, $1,000 available
(7.0%, Due 10/2019)(I)(K) |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
Senior Secured Term Debt (7.0%, Due 10/2019)(I)(K) |
|
|
5,000 |
|
|
|
5,000 |
|
|
|
4,938 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,000 |
|
|
|
4,938 |
|
Cavert II Holding Corp. |
|
Containers, Packaging, and Glass |
|
Preferred Stock (18,446 shares)(C)(F)(L) |
|
|
|
|
|
|
1,845 |
|
|
|
3,265 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,845 |
|
|
|
3,265 |
|
Country Club Enterprises, LLC |
|
Automobile |
|
Senior Subordinated Secured Term Debt (18.7%, Due 5/2017)(L) |
|
|
4,000 |
|
|
|
4,000 |
|
|
|
4,000 |
|
|
|
|
|
Preferred Stock (7,079,792 shares)(C)(F)(L) |
|
|
|
|
|
|
7,725 |
|
|
|
2,863 |
|
|
|
|
|
Guaranty ($2,000)(D) |
|
|
|
|
|
|
|
|
|
|
|
|
Guaranty ($593)(D) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,725 |
|
|
|
6,863 |
|
Drew Foam Company, Inc. |
|
Chemicals, Plastics, and Rubber |
|
Senior Secured Term Debt (13.5%, Due 8/2017)(L) |
|
|
10,913 |
|
|
|
10,913 |
|
|
|
10,913 |
|
|
|
|
|
Preferred Stock (34,045 shares)(C)(F)(L) |
|
|
|
|
|
|
3,375 |
|
|
|
3,532 |
|
|
|
|
|
Common Stock (5,372 shares)(C)(F)(L) |
|
|
|
|
|
|
63 |
|
|
|
2,813 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,351 |
|
|
|
17,258 |
|
Frontier Packaging, Inc. |
|
Containers, Packaging, and Glass |
|
Senior Secured Term Debt (12.0%, Due 12/2017)(L) |
|
|
12,000 |
|
|
|
12,000 |
|
|
|
12,000 |
|
|
|
|
|
Preferred Stock (1,373 shares)(C)(F)(L) |
|
|
|
|
|
|
1,373 |
|
|
|
1,404 |
|
|
|
|
|
Common Stock (152 shares)(C)(F)(L) |
|
|
|
|
|
|
152 |
|
|
|
2,777 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,525 |
|
|
|
16,181 |
|
Funko, LLC(M) |
|
Personal and Non-Durable Consumer Products (Manufacturing Only) |
|
Senior Subordinated Secured Term Debt (9.3%, Due 5/2019)(I)(K) |
|
|
7,500 |
|
|
|
7,500 |
|
|
|
7,734 |
|
|
|
|
|
Senior Subordinated Secured Term Debt (9.3%, Due 5/2019)(I)(K) |
|
|
2,000 |
|
|
|
2,000 |
|
|
|
2,063 |
|
|
|
|
|
Preferred Stock (1,305 shares)(C)(F)(L) |
|
|
|
|
|
|
1,305 |
|
|
|
15,211 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,805 |
|
|
|
25,008 |
|
Ginsey Home Solutions, Inc. |
|
Home and Office Furnishings, Housewares, and Durable |
|
Senior Subordinate Secured Term Debt (13.5%, Due 1/2018)(H)(L) |
|
|
13,300 |
|
|
|
13,300 |
|
|
|
13,300 |
|
|
|
Consumer Products |
|
Preferred Stock (18,898 shares)(C)(F)(L) |
|
|
|
|
|
|
9,583 |
|
|
|
7,176 |
|
|
|
|
|
Common Stock (63,747 shares)(C)(F)(L) |
|
|
|
|
|
|
8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22,891 |
|
|
|
20,476 |
|
Jackrabbit, Inc. |
|
Farming and Agriculture |
|
Senior Secured Term Debt (13.5%, Due 4/2018)(L) |
|
|
11,000 |
|
|
|
11,000 |
|
|
|
11,000 |
|
|
|
|
|
Preferred Stock (3,556 shares)(C)(F)(L) |
|
|
|
|
|
|
3,556 |
|
|
|
4,139 |
|
|
|
|
|
Common Stock (548 shares)(C)(F)(L) |
|
|
|
|
|
|
94 |
|
|
|
2,399 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,650 |
|
|
|
17,538 |
|
Mathey Investments, Inc. |
|
Machinery (Nonagriculture, |
|
Senior Secured Term Debt (10.0%, Due 3/2016)(L) |
|
|
1,375 |
|
|
|
1,375 |
|
|
|
1,375 |
|
|
|
Nonconstruction, Nonelectronic) |
|
Senior Secured Term Debt (12.0%, Due 3/2016)(L) |
|
|
3,727 |
|
|
|
3,727 |
|
|
|
3,727 |
|
|
|
|
|
Senior Secured Term Debt (12.5%, Due 3/2016)(E)(I)(L) |
|
|
3,500 |
|
|
|
3,500 |
|
|
|
3,500 |
|
|
|
|
|
Common Stock (29,102 shares)(C)(F)(L) |
|
|
|
|
|
|
777 |
|
|
|
7,630 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,379 |
|
|
|
16,232 |
|
Mitchell Rubber Products, Inc. |
|
Chemicals, Plastics, and Rubber |
|
Subordinated Secured Term Debt (13.0%, Due 10/2016)(I)(K) |
|
|
13,560 |
|
|
|
13,560 |
|
|
|
8,136 |
|
|
|
|
|
Subordinated Secured Term Debt (13.0%, Due 12/2015)(I)(K) |
|
|
1,500 |
|
|
|
1,500 |
|
|
|
900 |
|
|
|
|
|
Preferred Stock (27,900 shares)(C)(F)(L) |
|
|
|
|
|
|
2,790 |
|
|
|
|
|
|
|
|
|
Common Stock (27,900 shares)(C)(F)(L) |
|
|
|
|
|
|
28 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,878 |
|
|
|
9,036 |
|
Quench Holdings Corp. |
|
Home and Office Furnishings, Housewares, and Durable Consumer Products |
|
Common Stock (4,770,391 shares)(C)(F)(L) |
|
|
|
|
|
|
3,397 |
|
|
|
5,432 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,397 |
|
|
|
5,432 |
|
SBS, Industries, LLC |
|
Machinery (Nonagriculture, |
|
Senior Secured Term Debt (14.0%, Due 8/2016)(L) |
|
|
11,355 |
|
|
|
11,355 |
|
|
|
11,355 |
|
|
|
Nonconstruction, Nonelectronic) |
|
Preferred Stock (19,935 shares)(C)(F)(L) |
|
|
|
|
|
|
1,994 |
|
|
|
2,627 |
|
|
|
|
|
Common Stock (221,500 shares)(C)(F)(L) |
|
|
|
|
|
|
222 |
|
|
|
183 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,571 |
|
|
|
14,165 |
|
F-8
GLADSTONE INVESTMENT CORPORATION
CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)
MARCH 31, 2015
(DOLLAR
AMOUNTS IN THOUSANDS)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company(A) |
|
Industry |
|
Investment(B) |
|
Principal |
|
|
Cost |
|
|
Fair Value |
|
Schylling, Inc. |
|
Leisure, Amusement, Motion |
|
Senior Secured Term Debt (13.0%, Due 8/2018)(L) |
|
$ |
13,081 |
|
|
$ |
13,081 |
|
|
$ |
13,081 |
|
|
|
Pictures, Entertainment |
|
Preferred Stock (4,000 shares)(C)(F)(L) |
|
|
|
|
|
|
4,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,081 |
|
|
|
13,081 |
|
Star Seed, Inc. |
|
Farming and Agriculture |
|
Senior Secured Term Debt (12.5%, Due 5/2018)(E) (K) |
|
|
5,000 |
|
|
|
5,000 |
|
|
|
4,900 |
|
|
|
|
|
Preferred Stock (1,499 shares)(C)(F)(L) |
|
|
|
|
|
|
1,499 |
|
|
|
|
|
|
|
|
|
Common Stock (600 shares)(C)(F)(L) |
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,500 |
|
|
|
4,900 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Non-Control/Non-Affiliate Investments (represents 37.4% of total investments at fair value) |
|
|
|
|
|
$ |
162,598 |
|
|
$ |
174,373 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AFFILIATE INVESTMENTS(O): |
|
|
|
|
|
|
|
|
|
|
|
|
Acme Cryogenics, Inc. |
|
Chemicals, Plastics, and Rubber |
|
Senior Subordinated Secured Term Debt (11.5%, Due 3/2020)(I)(L) |
|
$ |
14,500 |
|
|
$ |
14,500 |
|
|
$ |
14,500 |
|
|
|
|
|
Preferred Stock (965,982 shares)(C)(F)(L) |
|
|
|
|
|
|
7,956 |
|
|
|
8,519 |
|
|
|
|
|
Common Stock (549,908 shares)(C)(F)(L) |
|
|
|
|
|
|
1,197 |
|
|
|
|
|
|
|
|
|
Common Stock Warrants (465,639 shares)(C)(F)(L) |
|
|
|
|
|
|
25 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23,678 |
|
|
|
23,019 |
|
Alloy Die Casting Corp.(M) |
|
Diversified/Conglomerate Manufacturing |
|
Senior Secured Term Debt (13.5%, Due 10/2018)(K) |
|
|
12,215 |
|
|
|
12,215 |
|
|
|
12,154 |
|
|
|
|
|
Preferred Stock (4,064 shares)(C)(F)(L) |
|
|
|
|
|
|
4,064 |
|
|
|
4,122 |
|
|
|
|
|
Common Stock (630 shares)(C)(F)(L) |
|
|
|
|
|
|
41 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,320 |
|
|
|
16,276 |
|
Behrens Manufacturing, LLC(M) |
|
Diversified/Conglomerate Manufacturing |
|
Senior Secured Term Debt (13.0%, Due 12/2018)(L) |
|
|
9,975 |
|
|
|
9,975 |
|
|
|
9,975 |
|
|
|
|
|
Preferred Stock (2,923 shares) (C)(F)(L) |
|
|
|
|
|
|
2,922 |
|
|
|
3,447 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,897 |
|
|
|
13,422 |
|
B-Dry, LLC |
|
Personal, Food and Miscellaneous Services |
|
Secured Line of Credit, $175 available (6.5%, Due 12/2016)(L) |
|
|
2,075 |
|
|
|
2,075 |
|
|
|
1,124 |
|
|
|
|
|
Senior Secured Term Debt (13.5%, Due 12/2019)(L) |
|
|
6,433 |
|
|
|
6,443 |
|
|
|
3,490 |
|
|
|
|
|
Senior Secured Term Debt (13.5%, Due 12/2019)(L) |
|
|
840 |
|
|
|
840 |
|
|
|
455 |
|
|
|
|
|
Preferred Stock (2,250 shares)(C)(F)(L) |
|
|
|
|
|
|
2,250 |
|
|
|
|
|
|
|
|
|
Common Stock (2,250 shares)(C)(F)(L) |
|
|
|
|
|
|
300 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,908 |
|
|
|
5,069 |
|
B+T Group Acquisition Inc.(M) |
|
Telecommunications |
|
Secured Line of Credit, $700 available (10.0%, Due 6/2015)(L) |
|
|
700 |
|
|
|
700 |
|
|
|
700 |
|
|
|
|
|
Senior Secured Term Debt (13.0%, Due 12/2019)(L) |
|
|
14,000 |
|
|
|
14,000 |
|
|
|
14,000 |
|
|
|
|
|
Preferred Stock (12,841 shares)(C)(F)(L) |
|
|
|
|
|
|
4,196 |
|
|
|
4,541 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,896 |
|
|
|
19,241 |
|
Cambridge Sound Management, Inc. |
|
Home and Office Furnishing, |
|
Senior Secured Term Debt (13.0%, Due 9/2019)(L) |
|
|
15,000 |
|
|
|
15,000 |
|
|
|
15,000 |
|
|
|
Housewares and Durable |
|
Preferred Stock (4,500 shares) (C)(F)(L) |
|
|
|
|
|
|
4,500 |
|
|
|
7,198 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer Products |
|
|
|
|
|
|
|
|
19,500 |
|
|
|
22,198 |
|
Channel Technologies Group, LLC |
|
Diversified/Conglomerate |
|
Preferred Stock (2,279 shares)(C)(F)(L) |
|
|
|
|
|
|
2,864 |
|
|
|
2,315 |
|
|
|
Manufacturing |
|
Common Stock (2,279,020 shares)(C)(F)(L) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,864 |
|
|
|
2,315 |
|
Counsel Press, Inc. |
|
Diversified/Conglomerate Services |
|
Secured Line of Credit, $500 available (12.8%, Due 3/2017)(J) |
|
|
1,500 |
|
|
|
1,500 |
|
|
|
1,500 |
|
|
|
|
|
Senior Secured Term Debt (12.8%, Due 3/2020)(J) |
|
|
18,000 |
|
|
|
18,000 |
|
|
|
18,000 |
|
|
|
|
|
Senior Secured Term Debt (14.0%, Due 3/2020)(J) |
|
|
5,500 |
|
|
|
5,500 |
|
|
|
5,500 |
|
|
|
|
|
Preferred Stock (6,995 shares)(C)(F)(J) |
|
|
|
|
|
|
6,995 |
|
|
|
6,995 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31,995 |
|
|
|
31,995 |
|
D.P.M.S., Inc. |
|
Diversified/Conglomerate Manufacturing |
|
Secured Line of Credit, $550 available (4.0%, Due 8/2016)(I)(L) |
|
|
4,000 |
|
|
|
4,000 |
|
|
|
762 |
|
|
|
|
|
Senior Secured Term Debt (4.0%, Due 8/2016)(I)(L) |
|
|
2,575 |
|
|
|
2,575 |
|
|
|
490 |
|
|
|
|
|
Senior Secured Term Debt (4.0%, Due 8/2016)(I)(L) |
|
|
8,795 |
|
|
|
8,795 |
|
|
|
1,674 |
|
|
|
|
|
Senior Secured Term Debt (5.0%, Due 8/2016)(E)(L) |
|
|
1,150 |
|
|
|
1,150 |
|
|
|
219 |
|
|
|
|
|
Preferred Stock (25 shares)(C)(F)(L) |
|
|
|
|
|
|
2,500 |
|
|
|
|
|
|
|
|
|
Common Stock Warrants (1,241 shares)(C)(F)(L) |
|
|
|
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19,023 |
|
|
|
3,145 |
|
F-9
GLADSTONE INVESTMENT CORPORATION
CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)
MARCH 31, 2015
(DOLLAR
AMOUNTS IN THOUSANDS)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company(A) |
|
Industry |
|
Investment(B) |
|
Principal |
|
|
Cost |
|
|
Fair Value |
|
Edge Adhesives Holdings, Inc.(M) |
|
Diversified/Conglomerate Manufacturing |
|
Secured Line of Credit, $10 available (12.5%, Due 8/2015)(K) |
|
$ |
1,490 |
|
|
$ |
1,490 |
|
|
$ |
1,488 |
|
|
|
|
|
Senior Secured Term Debt (12.5%, Due 2/2019)(K) |
|
|
9,300 |
|
|
|
9,300 |
|
|
|
9,300 |
|
|
|
|
|
Senior Subordinated Secured Term Debt (13.8%, Due 2/2019)(K) |
|
|
2,400 |
|
|
|
2,400 |
|
|
|
2,403 |
|
|
|
|
|
Preferred Stock (3,474 shares) (C)(F)(L) |
|
|
|
|
|
|
3,474 |
|
|
|
3,199 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,664 |
|
|
|
16,390 |
|
Head Country Food Products, Inc. |
|
Beverage, Food and Tobacco |
|
Senior Secured Term Debt (12.5%, Due 2/2019)(L) |
|
|
9,050 |
|
|
|
9,050 |
|
|
|
9,050 |
|
|
|
|
|
Preferred Stock (4,000 shares)(C)(F)(L) |
|
|
|
|
|
|
4,000 |
|
|
|
3,931 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,050 |
|
|
|
12,981 |
|
Logo Sportswear, Inc. |
|
Textiles and Leather |
|
Secured Line of Credit, $500 available (10.0%, Due 9/2015)(J) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Secured Term Debt (12.5%, Due 3/2020) (J) |
|
|
9,200 |
|
|
|
9,200 |
|
|
|
9,200 |
|
|
|
|
|
Preferred Stock (1,550 shares)(C)(F) (J) |
|
|
|
|
|
|
1,550 |
|
|
|
1,550 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,750 |
|
|
|
10,750 |
|
Meridian Rack & Pinion, Inc. (M) |
|
Automobile |
|
Senior Secured Term Debt (13.5%, Due 12/2018)(K) |
|
|
9,660 |
|
|
|
9,660 |
|
|
|
9,612 |
|
|
|
|
|
Preferred Stock (3,381 shares)(C)(F)(L) |
|
|
|
|
|
|
3,381 |
|
|
|
3,117 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,041 |
|
|
|
12,729 |
|
NDLI Acquisition, LLC |
|
Cargo Transport |
|
Secured Line of Credit, $50 available (10.5%, Due 1/2016)(L) |
|
|
2,875 |
|
|
|
2,875 |
|
|
|
2,308 |
|
|
|
|
|
Senior Secured Term Debt (11.0%, Due 1/2018)(L) |
|
|
7,227 |
|
|
|
7,227 |
|
|
|
5,803 |
|
|
|
|
|
Senior Secured Term Debt (10.5%, Due 1/2018)(L) |
|
|
3,650 |
|
|
|
3,650 |
|
|
|
2,931 |
|
|
|
|
|
Senior Secured Term Debt (10.5%, Due 1/2018)(E)(L) |
|
|
3,650 |
|
|
|
3,650 |
|
|
|
2,930 |
|
|
|
|
|
Preferred Stock (3,600 shares)(C)(F)(L) |
|
|
|
|
|
|
3,600 |
|
|
|
|
|
|
|
|
|
Common Stock (545 shares)(C)(F)(L) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21,002 |
|
|
|
13,972 |
|
Old World Christmas, Inc. |
|
Home and Office Furnishings, Housewares, and Durable |
|
Senior Secured Term Debt (13.3%, Due 10/2019)(L) |
|
|
15,770 |
|
|
|
15,770 |
|
|
|
15,770 |
|
|
|
|
Preferred Stock (6,180 shares)(C)(F)(L) |
|
|
|
|
|
|
6,180 |
|
|
|
6,657 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer Products |
|
|
|
|
|
|
|
|
21,950 |
|
|
|
22,427 |
|
Precision Southeast, Inc. |
|
Diversified/Conglomerate Manufacturing |
|
Senior Secured Term Debt (14.0%, Due 9/2020)(L) |
|
|
9,617 |
|
|
|
9,617 |
|
|
|
9,617 |
|
|
|
|
Preferred Stock (37,391 shares)(C)(F)(J) |
|
|
|
|
|
|
3,739 |
|
|
|
1,830 |
|
|
|
|
|
Common Stock (90,909 shares)(C)(F)(L) |
|
|
|
|
|
|
91 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,447 |
|
|
|
11,447 |
|
SOG Specialty Knives & Tools, LLC |
|
Leisure, Amusement, Motion Pictures, Entertainment |
|
Senior Secured Term Debt (13.3%, Due 10/2017) (L) |
|
|
6,200 |
|
|
|
6,200 |
|
|
|
6,200 |
|
|
|
|
|
Senior Secured Term Debt (14.8%, Due 10/2017) (L) |
|
|
12,200 |
|
|
|
12,200 |
|
|
|
12,200 |
|
|
|
|
|
Preferred Stock (9,749 shares)(C)(F)(L) |
|
|
|
|
|
|
9,749 |
|
|
|
13,451 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28,149 |
|
|
|
31,851 |
|
Tread Corporation |
|
Oil and Gas |
|
Secured Line of Credit, $853 available (12.5%, Due 2/2018)(G)(L) |
|
|
2,397 |
|
|
|
2,397 |
|
|
|
375 |
|
|
|
|
|
Senior Subordinated Secured Term Debt (12.5%, Due 2/2018)(G)(I)(L) |
|
|
5,000 |
|
|
|
5,000 |
|
|
|
782 |
|
|
|
|
|
Senior Subordinated Secured Term Debt (12.5%, Due 2/2018)(G)(I)(L) |
|
|
2,750 |
|
|
|
2,750 |
|
|
|
430 |
|
|
|
|
|
Senior Subordinated Secured Term Debt (12.5%, Due 2/2018)(G)(I)(L) |
|
|
1,000 |
|
|
|
1,000 |
|
|
|
156 |
|
|
|
|
|
Senior Subordinated Secured Term Debt (12.5%, Due on
Demand)(G)(I)(L) |
|
|
510 |
|
|
|
510 |
|
|
|
80 |
|
|
|
|
|
Preferred Stock (3,332,765 shares)(C)(F)(L) |
|
|
|
|
|
|
3,333 |
|
|
|
|
|
|
|
|
|
Common Stock (7,716,320 shares)(C)(F)(L) |
|
|
|
|
|
|
501 |
|
|
|
|
|
|
|
|
|
Common Stock Warrants (2,372,727 shares)(C)(F)(L) |
|
|
|
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,494 |
|
|
|
1,823 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Affiliate Investments (represents 58.2% of total investments at fair value) |
|
|
|
|
|
$ |
310,628 |
|
|
$ |
271,050 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-10
GLADSTONE INVESTMENT CORPORATION
CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)
MARCH 31, 2015
(DOLLAR
AMOUNTS IN THOUSANDS)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company(A) |
|
Industry |
|
Investment(B) |
|
Principal |
|
|
Cost |
|
|
Fair Value |
|
CONTROL INVESTMENTS(P): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Galaxy Tool Holding Corporation |
|
Aerospace and Defense |
|
Secured Line of Credit, $1,250 available (10.0%, Due 9/2015)(L) |
|
$ |
3,250 |
|
|
$ |
3,250 |
|
|
$ |
3,250 |
|
|
|
|
|
Senior Subordinated Secured Term Debt (13.5%, Due 8/2017)(L) |
|
|
15,520 |
|
|
|
15,520 |
|
|
|
15,520 |
|
|
|
|
|
Preferred Stock (6,039,387 shares)(C)(F)(L) |
|
|
|
|
|
|
11,464 |
|
|
|
|
|
|
|
|
|
Common Stock (88,843 shares)(C)(F)(L) |
|
|
|
|
|
|
48 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30,282 |
|
|
|
18,770 |
|
Roanoke Industries Corp. |
|
Buildings and Real Estate |
|
Senior Secured Term Debt (10.0%, Due 11/2019)(I)(L) |
|
|
1,650 |
|
|
|
1,650 |
|
|
|
1,650 |
|
|
|
|
|
Common Stock (57 shares)(C)(F)(L) |
|
|
|
|
|
|
100 |
|
|
|
210 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,750 |
|
|
|
1,860 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Control Investments (represents 4.4% of total investments at fair value) |
|
|
|
|
|
$ |
32,032 |
|
|
$ |
20,630 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL INVESTMENTS(Q) |
|
|
|
|
|
|
|
$ |
505,258 |
|
|
$ |
466,053 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A) |
Certain of the securities listed are issued by affiliate(s) of the indicated portfolio company. The majority of the securities listed, totaling $435.9 million at fair value, are pledged as collateral to our credit
facility as described further in Note 5Borrowings. Additionally, all of our investments are considered qualifying assets under Section 55 of the Investment Company Act of 1940, as amended, (the 1940 Act) as of
March 31, 2015. |
(B) |
Percentages represent the weighted average cash interest rates in effect at March 31, 2015, and due date represents the contractual maturity date. Unless indicated otherwise, all cash interest rates are indexed to
30-day London Interbank Offered Rate (LIBOR). If applicable, paid-in-kind (PIK) interest rates are noted separately from the cash interest rates. |
(C) |
Security is non-income producing. |
(D) |
Refer to Note 11Commitments and Contingencies for additional information regarding these guaranties. |
(E) |
Last Out Tranche (LOT) of senior secured debt, meaning if the portfolio company is liquidated, the holder of the LOT is paid after the other senior debt but before the senior subordinated debt.
|
(F) |
Where applicable, aggregates all shares of such class of stock owned without regard to specific series owned within such class (some series of which may or may not be voting shares) or aggregates all warrants to
purchase shares of such class of stock owned without regard to specific series of such class of stock such warrants allow us to purchase. |
(G) |
Debt security is on non-accrual status. |
(H) |
$5.1 million of the debt security participated to a third party but accounted for as collateral for a secured borrowing for accounting principles generally accepted in the U.S. (GAAP) purposes as of
March 31, 2015. |
(I) |
Debt security has a fixed interest rate. |
(J) |
New portfolio investment valued at cost, as it was determined that the price paid during the three months ended March 31, 2015 best represents fair value as of March 31, 2015. |
(K) |
Fair value was based on internal yield analysis or on estimates of value submitted by Standard & Poors Securities Evaluations, Inc. (SPSE). |
(L) |
Fair value was based on the total enterprise value of the portfolio company, which is generally allocated to the portfolio companys securities in order of their relative priority in the capital structure.
|
(M) |
One of our affiliated funds, Gladstone Capital Corporation (Gladstone Capital), co-invested with us in this portfolio company pursuant to an exemptive order granted by the Securities and Exchange Commission
(SEC). |
(N) |
Non-Control/Non-Affiliate investments, as defined by the 1940 Act, are those that are neither Control nor Affiliate investments and in which we own less than 5.0% of the issued and outstanding voting securities.
|
(O) |
Affiliate investments, as defined by the 1940 Act, are those that are not Control investments, and in which we own, with the power to vote, between and inclusive of 5.0% and 25.0% of the issued and outstanding voting
securities. |
(P) |
Control investments, as defined by the 1940 Act, are those where we have the power to exercise a controlling influence over the management or policies of the portfolio company, which may include owning, with the power
to vote, more than 25.0% of the issued and outstanding voting securities. |
(Q) |
Cumulative gross unrealized depreciation for federal income tax purposes is $80.6 million; cumulative gross unrealized appreciation for federal income tax purposes is $41.4 million. Cumulative net unrealized
depreciation is $39.2 million, based on a tax cost of $505.6 million. |
F-11
GLADSTONE INVESTMENT CORPORATION
CONSOLIDATED SCHEDULE OF INVESTMENTS
MARCH 31, 2014
(DOLLAR
AMOUNTS IN THOUSANDS)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company(A) |
|
Industry |
|
Investment(B) |
|
Principal |
|
|
Cost |
|
|
Fair Value |
|
NON-CONTROL/NON-AFFILIATE INVESTMENTS(N): |
|
|
|
|
|
|
|
|
|
|
|
|
Acme Cryogenics, Inc. |
|
Chemicals, Plastics, and Rubber |
|
Senior Subordinated Secured Term Debt (11.5%, Due 3/2015)(I)(L) |
|
$ |
14,500 |
|
|
$ |
14,500 |
|
|
$ |
14,500 |
|
|
|
|
|
Preferred Stock (898,814 shares(C)(F)(L) |
|
|
|
|
|
|
6,984 |
|
|
|
11,276 |
|
|
|
|
|
Common Stock (418,072 shares)(C)(F)(L) |
|
|
|
|
|
|
1,045 |
|
|
|
|
|
|
|
|
|
Common Stock Warrants (465,639 shares)(C)(F)(L) |
|
|
|
|
|
|
25 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22,554 |
|
|
|
25,776 |
|
Alloy Die Casting Corp.(M) |
|
Diversified/Conglomerate Manufacturing |
|
Senior Secured Term Debt (13.5%, Due 10/2018)(K) |
|
|
12,215 |
|
|
|
12,215 |
|
|
|
12,261 |
|
|
|
|
|
Preferred Stock (4,064 shares)(C)(F)(L) |
|
|
|
|
|
|
4,064 |
|
|
|
1,948 |
|
|
|
|
|
Common Stock (630 shares)(C)(F)(L) |
|
|
|
|
|
|
41 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,320 |
|
|
|
14,209 |
|
Auto Safety House, LLC(M) |
|
Automobile |
|
Secured Line of Credit, $1,000 available (7.0%, Due 10/2018)(I)(K) |
|
|
5,000 |
|
|
|
5,000 |
|
|
|
4,925 |
|
|
|
|
|
Guaranty ($500)(D) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guaranty ($250)(D) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,000 |
|
|
|
4,925 |
|
B-Dry, LLC |
|
Buildings and Real Estate |
|
Secured Line of Credit, $0 available (6.5%, Due 5/2014)(K) |
|
|
750 |
|
|
|
750 |
|
|
|
566 |
|
|
|
|
|
Senior Secured Term Debt (13.5%, Due 5/2014)(K) |
|
|
6,433 |
|
|
|
6,443 |
|
|
|
4,865 |
|
|
|
|
|
Senior Secured Term Debt (13.5%, Due 5/2014)(K) |
|
|
2,840 |
|
|
|
2,840 |
|
|
|
2,144 |
|
|
|
|
|
Common Stock Warrants (85 shares(C)(F)(L) |
|
|
|
|
|
|
300 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,333 |
|
|
|
7,575 |
|
Cavert II Holding Corp. |
|
Containers, Packaging, and Glass |
|
Preferred Stock (18,446 shares)(C)(F)(L) |
|
|
|
|
|
|
1,845 |
|
|
|
3,023 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,845 |
|
|
|
3,023 |
|
Country Club Enterprises, LLC |
|
Automobile |
|
Senior Subordinated Secured Term Debt (18.6%, Due 11/2014)(L) |
|
|
4,000 |
|
|
|
4,000 |
|
|
|
4,000 |
|
|
|
|
|
Preferred Stock (7,079,792 shares)(C)(F)(L) |
|
|
|
|
|
|
7,725 |
|
|
|
3,670 |
|
|
|
|
|
Guaranty ($2,000)(D) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guaranty ($878)(D) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,725 |
|
|
|
7,670 |
|
Drew Foam Company, Inc. |
|
Chemicals, Plastics, and Rubber |
|
Senior Secured Term Debt (13.5%, Due 8/2017)(L) |
|
|
10,913 |
|
|
|
10,913 |
|
|
|
10,913 |
|
|
|
|
|
Preferred Stock (34,045 shares)(C)(F)(L) |
|
|
|
|
|
|
3,375 |
|
|
|
1,351 |
|
|
|
|
|
Common Stock (5,372 shares)(C)(F)(L) |
|
|
|
|
|
|
63 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,351 |
|
|
|
12,264 |
|
Frontier Packaging, Inc. |
|
Containers, Packaging, and Glass |
|
Senior Secured Term Debt (12.0%, Due 12/2017)(L) |
|
|
12,500 |
|
|
|
12,500 |
|
|
|
12,500 |
|
|
|
|
|
Preferred Stock (1,373 shares)(C)(F)(L) |
|
|
|
|
|
|
1,373 |
|
|
|
1,522 |
|
|
|
|
|
Common Stock (152 shares)(C)(F)(L) |
|
|
|
|
|
|
152 |
|
|
|
843 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,025 |
|
|
|
14,865 |
|
Funko, LLC(M) |
|
Personal and Non-Durable Consumer Products (Manufacturing Only) |
|
Senior Subordinated Secured Term Debt (12.0% and 1.5% PIK, Due
5/2019)(K) |
|
|
7,587 |
|
|
|
7,587 |
|
|
|
7,729 |
|
|
|
|
|
Preferred Stock (1,305 shares) (C)(F)(L) |
|
|
|
|
|
|
1,305 |
|
|
|
2,276 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,892 |
|
|
|
10,005 |
|
Ginsey Home Solutions, Inc. |
|
Home and Office Furnishings, |
|
Senior Subordinate Secured Term Debt (13.5%, Due 1/2018) (H)(L) |
|
|
13,050 |
|
|
|
13,050 |
|
|
|
13,050 |
|
|
|
Housewares, and Durable |
|
Preferred Stock (18,898 shares(C)(F)(L) |
|
|
|
|
|
|
9,393 |
|
|
|
3,082 |
|
|
|
Consumer Products |
|
Common Stock (63,747 shares)(C)(F)(L) |
|
|
|
|
|
|
8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22,451 |
|
|
|
16,132 |
|
Jackrabbit, Inc. |
|
Farming and Agriculture |
|
Secured Line of Credit, $3,000 available (13.5%, Due 4/2014)(L) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Secured Term Debt (13.5%, Due 4/2018)(L) |
|
|
11,000 |
|
|
|
11,000 |
|
|
|
11,000 |
|
|
|
|
|
Preferred Stock (3,556 shares)(C)(F)(L) |
|
|
|
|
|
|
3,556 |
|
|
|
1,963 |
|
|
|
|
|
Common Stock (548 shares)(C)(F)(L) |
|
|
|
|
|
|
94 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,650 |
|
|
|
12,963 |
|
Mathey Investments, Inc. |
|
Machinery (Nonagriculture, |
|
Senior Secured Term Debt (10.0%, Due 3/2016)(L) |
|
|
1,375 |
|
|
|
1,375 |
|
|
|
1,375 |
|
|
|
Nonconstruction, Nonelectronic) |
|
Senior Secured Term Debt (12.0%, Due 3/2016)(L) |
|
|
3,727 |
|
|
|
3,727 |
|
|
|
3,727 |
|
|
|
|
|
Senior Secured Term Debt (12.5%,Due 3/2016)(E)(I)(L) |
|
|
3,500 |
|
|
|
3,500 |
|
|
|
3,500 |
|
|
|
|
|
Common Stock (29,102 shares)(C)(F)(L) |
|
|
|
|
|
|
777 |
|
|
|
4,895 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,379 |
|
|
|
13,497 |
|
F-12
GLADSTONE INVESTMENT CORPORATION
CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)
MARCH 31, 2014
(DOLLAR
AMOUNTS IN THOUSANDS)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company(A) |
|
Industry |
|
Investment(B) |
|
Principal |
|
|
Cost |
|
|
Fair Value |
|
Mitchell Rubber Products, Inc. |
|
Chemicals, Plastics and Rubber |
|
Subordinated Secured Term Debt (13.0%, Due 10/2016)(I)(K) |
|
$ |
13,560 |
|
|
$ |
13,560 |
|
|
$ |
13,628 |
|
|
|
|
|
Preferred Stock (27,900 shares)(C)(F)(L) |
|
|
|
|
|
|
2,790 |
|
|
|
1,086 |
|
|
|
|
|
Common Stock (27,900 shares)(C)(F)(L) |
|
|
|
|
|
|
28 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,378 |
|
|
|
14,714 |
|
Noble Logistics, Inc. |
|
Cargo Transport |
|
Secured Line of Credit, $0 available (10.5%, Due 1/2015)(K) |
|
|
800 |
|
|
|
800 |
|
|
|
204 |
|
|
|
|
|
Senior Secured Term Debt (11.0%, Due 1/2015)(K) |
|
|
7,227 |
|
|
|
7,227 |
|
|
|
1,842 |
|
|
|
|
|
Senior Secured Term Debt (10.5%, Due 1/2015)(K) |
|
|
3,650 |
|
|
|
3,650 |
|
|
|
931 |
|
|
|
|
|
Senior Secured Term Debt (10.5%,Due 1/2015)(E)(K) |
|
|
3,650 |
|
|
|
3,650 |
|
|
|
931 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,327 |
|
|
|
3,908 |
|
Precision Southeast, Inc. |
|
Diversified/Conglomerate |
|
Senior Secured Term Debt (14.0%, Due 12/2015)(L) |
|
|
5,617 |
|
|
|
5,617 |
|
|
|
5,617 |
|
|
|
Manufacturing |
|
Preferred Stock(19,091 shares)(C)(F)(L) |
|
|
|
|
|
|
1,909 |
|
|
|
|
|
|
|
|
|
Common Stock (90,909 shares)(C)(F)(L) |
|
|
|
|
|
|
91 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,617 |
|
|
|
5,617 |
|
Quench Holdings Corp. |
|
Home and Office Furnishings, Housewares, and Durable Consumer Products |
|
Common Stock (4,770,391 shares)(C)(F)(L) |
|
|
|
|
|
|
3,397 |
|
|
|
5,056 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,397 |
|
|
|
5,056 |
|
SBS, Industries, LLC |
|
Machinery (Nonagriculture, |
|
Senior Secured Term Debt (14.0%, Due 8/2016)(L) |
|
|
11,355 |
|
|
|
11,355 |
|
|
|
11,355 |
|
|
|
Nonconstruction, Nonelectronic) |
|
Preferred Stock (19,935 shares)(C)(F)(L) |
|
|
|
|
|
|
1,994 |
|
|
|
1,064 |
|
|
|
|
|
Common Stock (221,500 shares)(C)(F)(L) |
|
|
|
|
|
|
221 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,570 |
|
|
|
12,419 |
|
Schylling, Inc. |
|
Leisure, Amusement, Motion |
|
Senior Secured Term Debt (13.0%, Due 8/2017)(K) |
|
|
13,081 |
|
|
|
13,081 |
|
|
|
13,228 |
|
|
|
Pictures, Entertainment |
|
Preferred Stock (4,000 shares)(C)(F)(L) |
|
|
|
|
|
|
4,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,081 |
|
|
|
13,228 |
|
Star Seed, Inc. |
|
Farming and Agriculture |
|
Senior Secured Term Debt (12.5%, Due 4/2018)(K) |
|
|
7,500 |
|
|
|
7,500 |
|
|
|
7,594 |
|
|
|
|
|
Preferred Stock (1,499 shares)(C)(F)(L) |
|
|
|
|
|
|
1,499 |
|
|
|
|
|
|
|
|
|
Common Stock (600 shares)(C)(F)(L) |
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,000 |
|
|
|
7,594 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Non-Control/Non-Affiliate Investments (represents 65.4% of total investments at fair value) |
|
|
$ |
233,895 |
|
|
$ |
205,440 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AFFILIATE INVESTMENTS(O): |
|
|
|
|
|
|
|
|
|
|
|
|
Behrens Manufacturing, LLC(M) |
|
Diversified/Conglomerate |
|
Senior Secured Term Debt (13.0%, Due 12/2018)(L) |
|
$ |
9,975 |
|
|
$ |
9,975 |
|
|
$ |
9,975 |
|
|
|
Manufacturing |
|
Preferred Stock (2,923 shares) (C)(F)(L) |
|
|
|
|
|
|
2,922 |
|
|
|
2,754 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,897 |
|
|
|
12,729 |
|
Channel Technologies Group, LLC |
|
Diversified/Conglomerate |
|
Preferred Stock (2,279 shares(C)(F)(L) |
|
|
|
|
|
|
2,864 |
|
|
|
3,122 |
|
|
|
Manufacturing |
|
Common Stock (2,279,020 shares)(C)(F)(L) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,864 |
|
|
|
3,122 |
|
D.P.M.S., Inc. |
|
Diversified/Conglomerate |
|
Secured Line of Credit, $700 available (4.0%, Due 8/2015)(I)(K) |
|
|
3,450 |
|
|
|
3,450 |
|
|
|
690 |
|
|
|
Manufacturing |
|
Senior Secured Term Debt (4.0%, Due 8/2015)(I)(K) |
|
|
2,575 |
|
|
|
2,575 |
|
|
|
515 |
|
|
|
|
|
Senior Secured Term Debt (4.0%, Due 8/2015)(I)(K) |
|
|
8,795 |
|
|
|
8,795 |
|
|
|
1,759 |
|
|
|
|
|
Senior Secured Term Debt (5.0%, Due 8/2015)(E)(K) |
|
|
1,150 |
|
|
|
1,150 |
|
|
|
236 |
|
|
|
|
|
Preferred Stock (25 shares)(C)(F)(L) |
|
|
|
|
|
|
2,500 |
|
|
|
|
|
|
|
|
|
Common Stock (1,241 shares)(C)(F)(L) |
|
|
|
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,473 |
|
|
|
3,200 |
|
Edge Adhesives Holdings, Inc.(M) |
|
Diversified/Conglomerate |
|
Secured Line of Credit, $705 available (10.5%, Due 8/2014)(J) |
|
|
795 |
|
|
|
795 |
|
|
|
795 |
|
|
|
Manufacturing |
|
Senior Secured Term Debt (12.5%, Due 2/2019)(J) |
|
|
9,300 |
|
|
|
9,300 |
|
|
|
9,300 |
|
|
|
|
|
Senior Subordinated Secured Term Debt (13.5%, Due 2/2019)(J) |
|
|
2,400 |
|
|
|
2,400 |
|
|
|
2,400 |
|
|
|
|
|
Preferred Stock (3,474 shares) (C)(F)(J) |
|
|
|
|
|
|
3,474 |
|
|
|
3,474 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,969 |
|
|
|
15,969 |
|
Head Country Food Products, Inc. |
|
Beverage, Food and Tobacco |
|
Secured Line of Credit, $500 available (10.0%, Due 8/2014)(J) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Secured Term Debt (12.5%, Due 2/2019)(J) |
|
|
9,050 |
|
|
|
9,050 |
|
|
|
9,050 |
|
|
|
|
|
Preferred Stock (4,000 shares)(C)(F)(J) |
|
|
|
|
|
|
4,000 |
|
|
|
4,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,050 |
|
|
|
13,050 |
|
F-13
GLADSTONE INVESTMENT CORPORATION
CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)
MARCH 31, 2014
(DOLLAR
AMOUNTS IN THOUSANDS)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company(A) |
|
Industry |
|
Investment(B) |
|
Principal |
|
|
Cost |
|
|
Fair Value |
|
Meridian Rack & Pinion, Inc.(M) |
|
Automobile |
|
Senior Secured Term Debt (13.5%, Due 12/2018) (K) |
|
$ |
9,660 |
|
|
$ |
9,660 |
|
|
$ |
9,672 |
|
|
|
|
|
Preferred Stock (3,381 shares) (C)(F)(L) |
|
|
|
|
|
|
3,381 |
|
|
|
3,468 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,041 |
|
|
|
13,140 |
|
SOG Specialty Knives & Tools, LLC. |
|
Leisure, Amusement, Motion |
|
Senior Secured Term Debt (13.3%, Due 8/2016)(L) |
|
|
6,200 |
|
|
|
6,200 |
|
|
|
6,200 |
|
|
|
Pictures, Entertainment |
|
Senior Secured Term Debt (14.8%, Due 8/2016)(L) |
|
|
12,199 |
|
|
|
12,199 |
|
|
|
12,199 |
|
|
|
|
|
Preferred Stock (9,749 shares)(C)(F)(L) |
|
|
|
|
|
|
9,749 |
|
|
|
8,240 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28,148 |
|
|
|
26,639 |
|
Tread Corporation |
|
Oil and Gas |
|
Secured Line of Credit, $779 available (12.5%, Due 6/2014)(L) |
|
|
2,471 |
|
|
|
2,471 |
|
|
|
|
|
|
|
|
|
Senior Subordinated Secured Term Debt (12.5%, Due 2/2015)(I)(L) |
|
|
5,000 |
|
|
|
5,000 |
|
|
|
|
|
|
|
|
|
Senior Subordinated Secured Term Debt (12.5%, Due 2/2015)(I)(L) |
|
|
2,750 |
|
|
|
2,750 |
|
|
|
|
|
|
|
|
|
Senior Subordinated Secured Term Debt (12.5%, Due 2/2015)(I)(L) |
|
|
1,000 |
|
|
|
1,000 |
|
|
|
|
|
|
|
|
|
Senior Subordinated Secured Term Debt (12.5%, Due on Demand)(I)(L) |
|
|
510 |
|
|
|
510 |
|
|
|
|
|
|
|
|
|
Preferred Stock (3,332,765 shares)(C)(F)(L) |
|
|
|
|
|
|
3,333 |
|
|
|
|
|
|
|
|
|
Common Stock (7,716,320 shares)(C)(F)(L) |
|
|
|
|
|
|
501 |
|
|
|
|
|
|
|
|
|
Common Stock Warrants (2,372,727 shares)(C)(F)(L) |
|
|
|
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,568 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Affiliate Investments (represents 27.9% of total investments at fair value) |
|
|
$ |
120,010 |
|
|
$ |
87,849 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONTROL INVESTMENTS(P): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Galaxy Tool Holding Corp. |
|
Aerospace and Defense |
|
Senior Subordinated Secured Term Debt (13.5%, Due 8/2017)(L) |
|
$ |
15,520 |
|
|
$ |
15,520 |
|
|
$ |
15,520 |
|
|
|
|
|
Preferred Stock (6,039,387 shares)(C)(F)(L) |
|
|
|
|
|
|
11,464 |
|
|
|
2,992 |
|
|
|
|
|
Common Stock (88,843 shares)(C)(F)(L) |
|
|
|
|
|
|
48 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27,032 |
|
|
|
18,512 |
|
NDLI Acquisition, LLC |
|
Cargo Transport |
|
Preferred Stock (2,600 shares)(C)(F)(L) |
|
|
|
|
|
|
2,600 |
|
|
|
2,592 |
|
|
|
|
|
Common Stock (545 shares)(C)(F)(L) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,600 |
|
|
|
2,592 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Control Investments (represents 6.7% of total investments at fair value) |
|
|
$ |
29,632 |
|
|
$ |
21,104 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL INVESTMENTS(Q) |
|
|
$ |
383,537 |
|
|
$ |
314,393 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A) |
Certain of the securities listed are issued by affiliate(s) of the indicated portfolio company. The majority of the securities listed, totaling $288.6 million at fair value, are pledged as collateral to our credit
facility as described further in Note 5Borrowings. Additionally, all of our investments are considered qualifying assets under Section 55 of the 1940 Act as of March 31, 2014. |
(B) |
Percentages represent the weighted average cash interest rates in effect at March 31, 2014, and due date represents the contractual maturity date. Unless indicated otherwise, all cash interest rates are indexed to
30-day LIBOR. If applicable, PIK interest rates are noted separately from the cash interest rates. |
(C) |
Security is non-income producing. |
(D) |
Refer to Note 11Commitments and Contingencies for additional information regarding these guaranties. |
(E) |
LOT of senior secured debt, meaning if the portfolio company is liquidated, the holder of the LOT is paid after the other senior debt but before the senior subordinated debt. |
(F) |
Where applicable, aggregates all shares of such class of stock owned without regard to specific series owned within such class (some series of which may or may not be voting shares) or aggregates all warrants to
purchase shares of such class of stock owned without regard to specific series of such class of stock such warrants allow us to purchase. |
(G) |
Debt security is on non-accrual status. |
(H) |
$5.0 million of the debt security participated to a third party but accounted for as collateral for a secured borrowing for GAAP purposes as of March 31, 2014. |
(I) |
Debt security has a fixed interest rate. |
(J) |
New portfolio investment valued at cost, as it was determined that the price paid during the three months ended March 31, 2014 best represents fair value as of March 31, 2014. |
(K) |
Fair value was based on internal yield analysis or on estimates of value submitted by SPSE. |
(L) |
Fair value was based on the total enterprise value of the portfolio company, which is generally allocated to the portfolio companys securities in order of their relative priority in the capital structure.
|
(M) |
One of our affiliated funds, Gladstone Capital, co-invested with us in this portfolio company pursuant to an exemptive order granted by the SEC. |
(N) |
Non-Control/Non-Affiliate investments, as defined by the 1940 Act, are those that are neither Control nor Affiliate investments and in which we own less than 5.0% of the issued and outstanding voting securities.
|
(O) |
Affiliate investments, as defined by the 1940 Act, are those that are not Control investments, and in which we own, with the power to vote, between and inclusive of 5.0% and 25.0% of the issued and outstanding voting
securities. |
(P) |
Control investments, as defined by the 1940 Act, are those where we have the power to exercise a controlling influence over the management or policies of the portfolio company, which may include owning, with the power
to vote, more than 25.0% of the issued and outstanding voting securities. |
(Q) |
Cumulative gross unrealized depreciation for federal income tax purposes is $83.2 million; cumulative gross unrealized appreciation for federal income tax purposes is $13.9 million. Cumulative net unrealized
depreciation is $69.3 million, based on a tax cost of $383.7 million. |
F-14
GLADSTONE INVESTMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2015
(DOLLAR
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA AND AS OTHERWISE INDICATED)
NOTE 1. ORGANIZATION
Gladstone Investment Corporation (Gladstone Investment) was incorporated under the General Corporation Law of the State of Delaware on
February 18, 2005, and completed an initial public offering on June 22, 2005. The terms the Company, we, our and us all refer to Gladstone Investment and its consolidated subsidiaries. We are
an externally advised, 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), and
is applying the guidance of FASB ASC Topic 946 Financial Services-Investment Companies. In addition, we have elected to be treated for tax purposes as a regulated investment company (RIC) under the Internal Revenue Code of 1986,
as amended (the Code). We were established for the purpose of investing in debt and equity securities of established private businesses in the United States (U.S.). Debt investments primarily come in the form of three types
of loans: senior secured term loans, senior subordinated secured loans and junior subordinated secured debt. Equity investments primarily take the form of preferred or common equity (or warrants or options to acquire the foregoing), often in
connection with buyouts and other recapitalizations. Our investment objectives are: (a) to achieve and grow current income by investing in debt securities of established businesses that we believe will provide stable earnings and cash flow to
pay expenses, make principal and interest payments on our outstanding indebtedness and make distributions to stockholders that grow over time, and (b) to provide our stockholders with long-term capital appreciation in the value of our assets by
investing in equity securities of established businesses that we believe can grow over time to permit us to sell our equity investments for capital gains. We aim to maintain a portfolio allocation of approximately 75.0% debt investments and 25.0%
equity investments, at cost.
Gladstone Business Investment, LLC (Business Investment), a wholly-owned subsidiary of ours, was established on
August 11, 2006 for the sole purpose of owning our portfolio of investments in connection with our line of credit. The financial statements of Business Investment are consolidated with those of Gladstone Investment. We also have significant
subsidiaries (as defined under Rule 1-02(w) of the U.S. Securities and Exchange Commissions (SEC) Regulation S-X) whose financial statements are not consolidated with ours. Refer to Note 14Unconsolidated Significant
Subsidiaries for additional information regarding our unconsolidated significant subsidiaries.
We are externally managed by Gladstone Management
Corporation (the Adviser), an affiliate of ours and a SEC registered investment adviser, pursuant to an investment advisory agreement and management agreement. Administrative services are provided by Gladstone Administration, LLC (the
Administrator), an affiliate of ours and the Adviser, pursuant to an administration agreement.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
These
Consolidated Financial Statements and the accompanying notes are prepared in accordance with accounting principles generally accepted in the U.S. (GAAP) and conform to Regulation S-X under the Securities Exchange Act of 1934, as
amended. Management believes it has made all necessary adjustments so that our accompanying Consolidated Financial Statements are presented fairly and that all such adjustments are of a normal recurring nature. Our accompanying
Consolidated Financial Statements include our accounts and the accounts of our wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated.
Consolidation
Under Article 6 of
Regulation S-X under the Securities Act of 1933, as amended, and the authoritative accounting guidance provided by the American Institute of Certified Public Accountants Audit and Accounting Guide for Investment Companies, we are not permitted
to consolidate any subsidiary or other entity that is not an investment company, including those in which we have a controlling interest.
F-15
Use of Estimates
Preparing financial statements requires management to make estimates and assumptions that affect the amounts reported in our accompanying Consolidated
Financial Statements and accompanying notes. Actual results may differ from those estimates.
Revisions
Certain amounts in our prior fiscal years financial statements have been revised to correct the net presentation of certain fees in our results of
operations. The Adviser services, administers and collects on the loans held by Business Investment, in return for which the Adviser receives a 2.0% annual fee from Business Investment. This entire loan servicing fee paid to the Adviser by Business
Investment is voluntarily and irrevocably credited against the base management fee otherwise payable to the Adviser, since Business Investment is a consolidated subsidiary of the Company, and overall, the base management fee (including any loan
servicing fee) cannot exceed 2.0% of total assets (as reduced by cash and cash equivalents pledged to creditors) during any given calendar year pursuant to the Advisory Agreement. Previously, we incorrectly presented the loan servicing fee on a net
basis, which is zero because it is 100.0% credited back to us. We have revised our fee presentation related to these loan servicing fees to reflect the gross fee and related gross credit amounts. Management evaluated this error in presentation and
concluded it was not material to the previously issued consolidated financial statements for the years ended March 31, 2014 and 2013. The impact of the revisions are shown in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31, 2014 |
|
|
Year Ended March 31, 2013 |
|
|
|
As Previously Reported |
|
|
As Revised |
|
|
As Previously Reported |
|
|
As Revised |
|
Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate expenses (not revised) |
|
$ |
19,266 |
|
|
$ |
19,266 |
|
|
$ |
15,378 |
|
|
$ |
15,378 |
|
Loan servicing fee |
|
|
|
|
|
|
4,326 |
|
|
|
|
|
|
|
3,725 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses before credits from Adviser |
|
|
19,266 |
|
|
|
23,592 |
|
|
|
15,378 |
|
|
|
19,103 |
|
Credits to base management fee - loan servicing fee |
|
|
|
|
|
|
(4,326 |
) |
|
|
|
|
|
|
(3,725 |
) |
Credits to fees from Adviser - other |
|
|
(2,309 |
) |
|
|
(2,309 |
) |
|
|
(1,328 |
) |
|
|
(1,328 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Expenses, Net of Credits to Fees |
|
$ |
16,957 |
|
|
$ |
16,957 |
|
|
$ |
14,050 |
|
|
$ |
14,050 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Classification of Investments
In accordance with the BDC regulations in the 1940 Act, we classify portfolio investments on our accompanying Consolidated Statements of Assets and
Liabilities, Consolidated Statements of Operations and Consolidated Schedules of Investments into the following categories:
|
|
Non-Control/Non-Affiliate InvestmentsNon-Control/Non-Affiliate investments are those that are neither control nor affiliate investments and in which we typically own less than 5.0% of the issued and
outstanding voting securities; |
|
|
Affiliate InvestmentsAffiliate investments are those that are not Control investments and in which we own, with the power to vote, between and inclusive of 5.0% and 25.0% of the issued and outstanding
voting securities; and |
|
|
Control InvestmentsControl investments are those where we have the power to exercise a controlling influence over the management or policies of the portfolio company, which may include owning, with the
power to vote, more than 25.0% of the issued and outstanding voting securities. |
Investment Valuation Policy
Accounting Recognition
We record our investments at fair
value in accordance with the Financial Accounting Standards Board (the FASB) Accounting Standards Codification Topic 820, Fair Value Measurements and Disclosures (ASC 820) and the 1940 Act. Investment
transactions are recorded on the trade date. Realized gains or losses are measured by the difference between the net proceeds from the repayment or sale and amortized cost basis of the investment, without regard to unrealized appreciation or
depreciation previously recognized, and include investments charged off during the period, net of recoveries. Unrealized appreciation or depreciation primarily reflects the change in investment fair values, including the reversal of previously
recorded unrealized appreciation or depreciation when gains or losses are realized.
F-16
Board Responsibility
In accordance with the 1940 Act, our Board of Directors has the ultimate responsibility for reviewing and approving, in good faith, the fair value of our
investments based on the Companys investment valuation policy (which has been approved by our Board of Directors) (the Policy). Our Board of Directors reviews valuation recommendations that are provided by professionals of the
Adviser and Administrator with oversight and direction from the chief valuation officer, (the Valuation Team). There is no single standard for determining fair value (especially for privately-held businesses), as fair value depends upon
the specific facts and circumstances of each individual investment. In determining the fair value of our investments, the Valuation Team, led by the chief valuation officer, uses the Policy and each quarter our Board of Directors reviews the Policy
to determine if changes thereto are advisable and also reviews whether the Valuation Team has applied the Policy consistently.
Use of Third Party
Valuation Firms
The Valuation Team engages third party valuation firms to provide independent assessments of fair value of certain of our investments.
Standard & Poors Securities Evaluation, Inc. (SPSE) provides estimates of fair value on our debt investments. The Valuation
Team generally assigns SPSEs estimates of fair value to our debt investments where we do not have the ability to effectuate a sale of the applicable portfolio company. The Valuation Team corroborates SPSEs estimates of fair value using
one or more of the valuation techniques discussed below. The Valuation Teams estimate of value on a specific debt investment may significantly differ from SPSEs. When this occurs, our Board of Directors reviews whether the Valuation Team
has followed the Policy and whether the Valuation Teams recommended fair value is reasonable in light of the Policy and other facts and circumstances and then votes to accept or reject the Valuation Teams recommended fair value.
We may engage other independent valuation firms to provide earnings multiple ranges, as well as other information, and evaluate such information for
incorporation into the total enterprise value of certain of our investments. Generally, at least once per year, we engage an independent valuation firm to value or review the Companys valuation of our significant equity investments, which
includes providing the information noted above. The Valuation Team evaluates such information for incorporation into our total enterprise value, including review of all inputs provided by the independent valuation firm. The Valuation Team then
makes a recommendation to our Board of Directors as to the fair value. Our Board of Directors reviews the recommended fair value and whether it is reasonable in light of the Policy and other relevant facts and circumstances and then votes to
accept or reject the Valuation Teams recommended fair value.
Valuation Techniques
In accordance with ASC 820, the Valuation Team uses the following techniques when valuing our investment portfolio:
|
|
|
Total Enterprise Value In determining the fair value using a total enterprise value (TEV), the Valuation Team first calculates the TEV of the portfolio company by incorporating some or all of
the following factors: the portfolio companys ability to make payments and other specific portfolio company attributes; the earnings of the portfolio company (the trailing or projected twelve month revenue or earnings before interest, taxes,
depreciation and amortization (EBITDA)); EBITDA or revenue multiples obtained from our indexing methodology whereby the original transaction EBITDA or revenue multiple at the time of our closing is indexed to a general subset of
comparable disclosed transactions and EBITDA or revenue multiples from recent sales to third parties of similar securities in similar industries; a comparison to publicly traded securities in similar industries, and other pertinent factors. The
Valuation Team generally references industry statistics and may use outside experts when gathering this information. Once the TEV is determined for a portfolio company, the Valuation Team then generally allocates the TEV to the portfolio
companys securities in order of their relative priority in the capital structure. Generally, the Valuation Team uses TEV to value our equity investments and, in the circumstances where we have the ability to effectuate a sale of a portfolio
company, our debt investments. |
TEV is primarily calculated using EBITDA or revenue multiples; however, TEV may also be
calculated using a discounted cash flow (DCF) analysis whereby future expected cash flows of the portfolio company are discounted to determine a net present value using estimated risk-adjusted discount rates, which incorporate
adjustments for nonperformance and liquidity risks. Generally, the Valuation Team uses the DCF to calculate TEV to corroborate estimates of value for our equity investments where we do not have the ability to effectuate a sale of a portfolio company
or for debt of credit impaired portfolio companies.
F-17
|
|
|
Yield Analysis The Valuation Team generally determines the fair value of our debt investments using the yield analysis, which includes a DCF calculation and the Valuation Teams own assumptions,
including, but not limited to, estimated remaining life, current market yield, current leverage, and interest rate spreads. This technique develops a modified discount rate that incorporates risk premiums including, among other things, increased
probability of default, increased loss upon default and increased liquidity risk. Generally, the Valuation Team uses the yield analysis to corroborate both estimates of value provided by SPSE and market quotes. |
|
|
|
Market Quotes For our investments for which a limited market exists, fair value is generally based on readily available and reliable market quotations which are corroborated by the Valuation Team
(generally by using the yield analysis explained above). In addition, the Valuation Team assesses trading activity for similar investments and evaluates variances in quotations and other market insights to determine if any available quoted prices
are reliable. Typically, the Valuation Team uses the lower indicative bid price (IBP) in the bid-to-ask price range obtained from the respective originating syndication agents trading desk on or near the valuation date. The
Valuation Team may take further steps to consider additional information to validate that price in accordance with the Policy. |
|
|
|
Investments in Funds For equity investments in other funds, where we cannot effectuate a sale, the Valuation Team generally determines the fair value of our uninvested capital at par value and of our
invested capital at the Net Asset Value (NAV) provided by the fund. The Valuation Team may also determine fair value of our investments in other investment funds based on the capital accounts of the underlying entity. |
In addition to the above valuation techniques, the Valuation Team may also consider other factors when determining fair values of our investments, including
but not limited to: the nature and realizable value of the collateral, including external parties guaranties; any relevant offers or letters of intent to acquire the portfolio company; and the markets in which the portfolio company operates.
If applicable, new and follow-on debt and equity investments made during the current reporting quarter (the three months ended March 31, 2015) are generally valued at our original cost basis.
Fair value measurements of our investments may involve subjective judgments and estimates and due to the uncertainty inherent in valuing these securities, the
Advisers determinations of fair value may fluctuate from period to period and may differ materially from the values that could be obtained if a ready market for these securities existed. Our NAV could be materially affected if the
Advisers determinations regarding the fair value of our investments are materially different from the values that we ultimately realize upon our disposal of such securities. Additionally, changes in the market environment and other events that
may occur over the life of the investment may cause the gains or losses ultimately realized on these investments to be different than the valuations currently assigned. Further, such investments are generally subject to legal and other restrictions
on resale or otherwise are less liquid than publicly traded securities. If we were required to liquidate a portfolio investment in a forced or liquidation sale, we could realize significantly less than the value at which it is recorded.
Refer to Note 3Investments for additional information regarding fair value measurements and our application of ASC 820.
Realized Gain or Loss and Unrealized Appreciation or Depreciation of Portfolio Investments
Gains or losses on the sale of investments are calculated by using the specific identification method. A realized gain or loss is recognized at the trade date,
typically when an investment is disposed of, and is computed as the difference between our cost basis in the investment at the disposition date and the net proceeds received from such disposition. Unrealized appreciation or depreciation displays the
difference between the fair value of the investment and the cost basis of such investment. We determine the fair value of each individual investment each reporting period and record changes in fair value as unrealized appreciation or depreciation in
our Consolidated Statement of Operations.
Interest Income Recognition
Interest income, adjusted for amortization of premiums, amendment fees and acquisition costs and 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. Interest payments
received on non-accrual loans may be recognized as income or applied to the cost basis, depending upon managements judgment. Generally, non-accrual loans are restored to accrual status when past-due principal and interest are paid, and, in
managements judgment, are likely to remain current, or due to a restructuring, the interest income is deemed to be collectible. As of March 31, 2015 and 2014, our loans to Tread Corporation (Tread) were on non-accrual status,
with an aggregate debt cost basis at both period ends of $11.7 million, or 3.1% and 4.2% of the cost basis of all debt investments in our portfolio, and an aggregate fair value of $1.8 million and $0, or 0.5% and 0.0% of the fair value of all debt
investments in our portfolio, respectively.
F-18
PIK interest, computed at the contractual rate specified in the loan agreement, is added to the principal balance
of the loan and recorded as interest income over the life of the obligation. As of March 31, 2015, we did not have any loans with a PIK interest component and as of March 31, 2014, we had one loan with a PIK interest component. During the
years ended March 31, 2015 and 2014, we recorded PIK income of $0.1 million. We did not hold any loans in our portfolio that contained a PIK provision during the year ended March 31, 2013. We collected $0.2 million PIK interest in cash
during the year ended March 31, 2015 and no PIK interest in cash during the years ended March 31, 2014 and 2013.
Other Income Recognition
We generally record success fees upon receipt of cash. Typically, success fees are contractually due upon a change of control in a portfolio company.
We recorded an aggregate of $1.4 million of success fees during the year ended March 31, 2015, which resulted from prepayments from Auto Safety House LLC (ASH), Drew Foam Company, Inc. (Drew Foam), Frontier Packaging,
Inc. (Frontier), Mathey Investments, Inc. (Mathey), SOG Specialty Knives and Tools, LLC (SOG), and Star Seed, Inc. (Star Seed). We recorded an aggregate of $4.2 million of success fees during the year
ended March 31, 2014, which resulted from debt exits or prepayments from Cavert II Holding Group (Cavert), Channel Technologies Group LLC (Channel), Frontier, Mathey, SOG, and Venyu Solutions, Inc. (Venyu).
We recorded an aggregate of $0.8 million of success fees during the year ended March 31, 2013, which resulted from prepayments received from Cavert and Mathey.
We accrue dividend income on preferred securities to the extent that such amounts are expected to be collected and if we have the option to collect such
amounts in cash or other consideration. For the year ended March 31, 2015, we recorded an aggregate of $3.5 million in dividend income, which resulted from payments from Drew Foam, Frontier, Funko, LLC (Funko), Mathey, and SOG.
For the year ended March 31, 2014, we recorded $1.4 million in dividend income, which resulted from the exit of Venyu. We recorded an aggregate of $4.8 million in dividend income during the year ended March 31, 2013, which resulted from
payments from Acme Cryogenics, Inc. (Acme) and Galaxy Tool Holding Corporation (Galaxy).
Both dividend and success fee income are
recorded in other income in our accompanying Consolidated Statements of Operations.
Cash and Cash Equivalents
We consider 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. Cash is carried at cost, which approximates fair value. We place our cash with financial institutions, and at times, cash held in checking accounts may exceed the Federal Deposit Insurance Corporation insured limit.
We seek to mitigate this concentration of credit risk by depositing funds with major financial institutions.
Restricted Cash and Cash Equivalents
Restricted cash is cash held in escrow that was generally received as part of an investment exit. Restricted cash is carried at cost, which
approximates fair value.
Deferred Financing Costs
Deferred financing costs consist of costs incurred to obtain financing, including legal fees, origination fees and administration fees. Costs associated with
our line of credit and the issuance of our mandatorily redeemable preferred stock, are deferred and amortized using the straight-line method, which approximates the effective interest method, over the terms of the respective financings. See
Note 5Borrowings and Note 6Mandatorily Redeemable Preferred Stock for further discussion.
Related Party Fees
We have entered into an investment advisory and management agreement (the Advisory Agreement) with the Adviser, which is controlled by our chairman
and chief executive officer. In accordance with the Advisory Agreement, we pay the Adviser fees as compensation for its services, consisting of a base management fee, loan servicing fee, and an incentive fee.
We have entered into an administration agreement (the Administration Agreement) with the Administrator whereby we pay separately for
administrative services. These fees are accrued when the services are performed and generally paid one month in arrears. Refer to Note 4Related Party Transactions for additional information regarding these related party costs and
agreements.
F-19
Federal Income Taxes
We intend to continue to qualify for treatment as a RIC under subchapter M of the Code, which generally allows us to avoid paying corporate income taxes on any
income or gains that we distribute to our stockholders. We intend to continue to distribute sufficient dividends to eliminate taxable income. Refer to Note 10 Federal and State Income Taxes for additional information regarding our RIC
requirements.
We have certain wholly-owned taxable subsidiaries (the Taxable Subsidiaries), each of which holds one or more of our portfolio
investments that are listed on our accompanying Consolidated Schedules of Investments. The purpose of the Taxable Subsidiaries is to permit us to hold certain portfolio companies that are organized as limited liability companies
(LLCs) (or other forms of pass-through entities) while satisfying the RIC tax requirement that at least 90% of the RICs gross revenue for income tax purposes must consist of qualifying investment income. When LLCs (or other
pass-through entities) are owned by the Taxable Subsidiaries, their income is taxed to the Taxable Subsidiaries and does not flow through to the RIC, thereby helping us preserve our RIC status. The Taxable Subsidiaries are not consolidated for
income tax purposes and may generate income tax expense as a result of their ownership of the portfolio companies. This income tax expense is considered immaterial and, therefore, it is not recorded on our accompanying Consolidated Statements of
Operations.
ASC 740, Income Taxes requires the evaluation of tax positions taken or expected to be taken in the course of
preparing our tax returns to determine whether the tax positions are more-likely-than-not of being sustained by the applicable tax authorities. Tax positions not deemed to satisfy the more-likely-than-not threshold would be
recorded as a tax benefit or expense in the current fiscal year. We have evaluated the implications of ASC 740, for all open tax years and in all major tax jurisdictions, and determined that there is no material impact on our accompanying
Consolidated Financial Statements. Our federal tax returns for fiscal years 2014, 2013, and 2012 remain subject to examination by the Internal Revenue Service (IRS).
Distributions
Distributions to stockholders are recorded
on the ex-dividend date. We are required to pay out at least 90% of our investment company taxable income, which is generally our net ordinary income plus the excess of our net short-term capital gains over net long-term capital losses
for each taxable year as a distribution to our stockholders in order to maintain our ability to be taxed as a RIC under Subchapter M of the Code. It is our policy to pay out as a distribution up to 100% of those amounts. The amount to be paid is
determined by our Board of Directors each quarter and is based on the annual earnings estimated by our management. Based on that estimate, a distribution is declared each quarter and is paid out monthly over the course of the respective quarter. At
fiscal year-end, we elected to treat a portion of the first distribution paid after year-end as having been paid in the prior year, in accordance with Section 855(a) of the Code. Additionally, we may pay a special distribution in addition to
the monthly distributions to ensure that we have paid out at least 90% of our investment company taxable income for the year. We typically retain long-term capital gains, if any, and do not pay them out as distributions. If we decide to retain
long-term capital gains, the portion of the retained capital gains, net of any capital loss carryforward, if applicable, will be subject to a 35.0% tax.
Refer to Note 9Distributions to Common Stockholders for further information. We have a dividend reinvestment plan for our common stockholders.
This is an opt in dividend reinvestment plan, meaning that common stockholders may elect to have their cash dividends automatically reinvested in additional shares of our common stock. Common stockholders who do not so elect will receive
their dividends in cash. Common stockholders who receive distributions in the form of stock will be subject to the same federal, state and local tax consequences as stockholders who elect to receive their distributions in cash. The plan agent
purchases shares in the open market in connection with the obligations under the plan. We do not have a dividend reinvestment plan for our preferred stock stockholders.
Recent Accounting Pronouncements
In April 2015, the FASB
issued Accounting Standards Update 2015-03, Simplifying the Presentation of Debt Issuance Costs (ASU-2015-03), which simplifies the presentation of debt issuance costs. We are currently assessing the impact of ASU
2015-03 and do not anticipate a material impact on our financial position, results of operations or cash flows from adopting this standard. ASU 2015-03 is effective for annual reporting periods beginning after December 15, 2015 and interim
periods within those years, with early adoption permitted.
In February 2015, the FASB issued Accounting Standards Update 2015-02, Amendments to
the Consolidation Analysis (ASU-2015-02), which amends or supersedes the scope and consolidation guidance under existing GAAP. The new standard changes the way a reporting entity
evaluates whether a) limited partnerships and similar entities should be consolidated, b) fees paid to decision makers or service provides are variable interests in a variable interest entity (VIE), and c) variable interests in a VIE
held by related parties require the reporting entity to consolidate the VIE. ASU 2015-02 also eliminates the VIE consolidation model based on
F-20
majority exposure to variability that applied to certain investment companies and similar entities. We do not anticipate ASU 2015-02 to have a material impact on our financial position, results
of operations or cash flows. ASU 2015-02 is effective for annual reporting periods beginning after December 15, 2015 and interim periods within those years, with early adoption permitted.
In August 2014, the FASB issued Accounting Standards Update 201415, Presentation of Financial Statements Going Concern (Subtopic 205
40): Disclosure of Uncertainties About an Entitys Ability to Continue as a Going Concern (ASU 2014-15). ASU 2014-15 requires management to evaluate whether there are conditions or events that raise substantial
doubt about the entitys ability to continue as a going concern, and to provide certain disclosures when it is probable that the entity will be unable to meet its obligations as they become due within one year after the date that the financial
statements are issued. Since this guidance is primarily around certain disclosures to the financial statements, we anticipate no impact on our financial position, results of operations or cash flows from adopting this standard. We are currently
assessing the additional disclosure requirements, if any, of ASU 2014-15. ASU 2014-15 is effective for the annual period ending after December 31, 2016 and for annual periods and interim periods thereafter, with early adoption permitted.
In May 2014, the FASB issued Accounting Standards Update 2014-09, Revenue from Contracts with Customers (ASU 2014-09), which
supersedes or replaces nearly all GAAP revenue recognition guidance. The new guidance establishes a new control-based revenue recognition model, changes the basis for deciding when revenue is recognized over time or at a point in time and will
expand disclosures about revenue. We are currently assessing the impact of ASU 2014-09 and anticipate no impact on our financial position, results of operations or cash flows from adopting this standard. ASU 2014-09 is effective for annual reporting
periods that begin after December 15, 2016 and interim periods within those years, with early adoption not permitted.
In June 2013, the FASB issued
Accounting Standards Update 2013-08, Financial Services Investment Companies (Topic 946): Amendments to the Scope, Measurement, and Disclosure Requirements (ASU 2013-08), which amends the criteria that define an
investment company and clarifies the measurement guidance and requires new disclosures for investment companies. Under ASU 2013-08, an entity already regulated under the 1940 Act is automatically an investment company under the new GAAP definition,
so there was no impact from adopting this standard on our financial position or results of operations. We adopted ASU 2013-08 beginning with our quarter ended June 30, 2014, and have increased our disclosure requirements as necessary.
NOTE 3. INVESTMENTS
In accordance with ASC 820, our
investments fair value is determined to be the price that would be received for an investment in a current sale, which assumes an orderly transaction between willing market participants on the measurement date. This fair value definition
focuses on exit price in the principal, or most advantageous, market and prioritizes, within a measurement of fair value, the use of market-based inputs over entity-specific inputs. ASC 820 also establishes the following three-level hierarchy for
fair value measurements based upon the transparency of inputs to the valuation of a financial instrument as of the measurement date.
|
|
Level 1 inputs to the valuation methodology are quoted prices (unadjusted) for identical financial instruments in active markets; |
|
|
Level 2 inputs to the valuation methodology include quoted prices for similar financial instruments in active or inactive markets, and inputs that are observable for the financial instrument, either
directly or indirectly, for substantially the full term of the financial instrument. Level 2 inputs are in those markets for which there are few transactions, the prices are not current, little public information exists or instances where prices
vary substantially over time or among brokered market makers; and |
|
|
Level 3 inputs to the valuation methodology are unobservable and significant to the fair value measurement. Unobservable inputs are those inputs that reflect assumptions that market participants would use
when pricing the financial instrument and can include the Valuation Teams assumptions based upon the best available information. |
When
a determination is made to classify our investments within Level 3 of the valuation hierarchy, such determination is based upon the significance of the unobservable factors to the overall fair value measurement. However, Level 3 financial
instruments typically include, in addition to the unobservable, or Level 3, inputs, observable inputs (or, components that are actively quoted and can be validated to external sources). The level in the fair value hierarchy within which the fair
value measurement falls is determined based on the lowest level input that is significant to the fair value measurement.
As of March 31, 2015 and
2014, all of our investments were valued using Level 3 inputs. We transfer investments in and out of Level 1, 2 and 3 securities as of the beginning balance sheet date, based on changes in the use of observable and unobservable inputs utilized
to perform the valuation for the period. During the years ended March 31, 2015 and 2014, there were no transfers in or out of Level 1, 2 and 3.
F-21
The following table presents the financial assets carried at fair value as of March 31, 2015 and 2014, by
caption on our accompanying Consolidated Statements of Assets and Liabilities and by security type for each of the three applicable levels of hierarchy established by ASC 820 that we used to value our financial assets:
|
|
|
|
|
|
|
|
|
|
|
Total Recurring Fair Value Measurements
Reported in
Consolidated Statements of Assets and Liabilities Using Significant Unobservable Inputs (Level 3)
As of March 31, |
|
|
|
2015 |
|
|
2014 |
|
Non-Control/Non-Affiliate Investments |
|
|
|
|
|
|
|
|
Senior secured debt |
|
$ |
76,789 |
|
|
$ |
109,479 |
|
Senior subordinated secured debt |
|
|
36,133 |
|
|
|
52,907 |
|
Preferred equity |
|
|
40,217 |
|
|
|
32,259 |
|
Common equity/equivalents |
|
|
21,234 |
|
|
|
10,795 |
|
|
|
|
|
|
|
|
|
|
Total Non-Control/Non-Affiliate Investments |
|
|
174,373 |
|
|
|
205,440 |
|
Affiliate Investments |
|
|
|
|
|
|
|
|
Senior secured debt |
|
|
181,452 |
|
|
|
60,391 |
|
Senior subordinated secured debt |
|
|
18,725 |
|
|
|
2,400 |
|
Preferred equity |
|
|
70,873 |
|
|
|
25,058 |
|
|
|
|
|
|
|
|
|
|
Total Affiliate Investments |
|
|
271,050 |
|
|
|
87,849 |
|
Control Investments |
|
|
|
|
|
|
|
|
Senior secured debt |
|
|
4,900 |
|
|
|
|
|
Senior subordinated secured debt |
|
|
15,520 |
|
|
|
15,520 |
|
Preferred equity |
|
|
|
|
|
|
5,584 |
|
Common equity/equivalents |
|
|
210 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Control Investments |
|
|
20,630 |
|
|
|
21,104 |
|
|
|
|
|
|
|
|
|
|
Total Investments and Cash Equivalents |
|
$ |
466,053 |
|
|
$ |
314,393 |
|
|
|
|
|
|
|
|
|
|
In accordance with ASU 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value
Measurement and Disclosure Requirements in U.S. GAAP and International Reporting Standards (IFRS), (ASU 2011-04), the following table provides quantitative information about our Level 3 fair value measurements of our
investments as of March 31, 2015 and 2014. The table below is not intended to be all-inclusive, but rather provides information on the significant Level 3 inputs as they relate to our fair value measurements. The weighted average calculations
in the table below are based on the principal balances for all debt-related calculations and on the cost basis for all equity-related calculations for the particular input.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quantitative Information about Level 3 Fair Value Measurements |
|
|
Fair Value as of March 31, 2015 |
|
|
Fair Value as of March 31, 2014 |
|
|
Valuation
Technique/
Methodology |
|
Unobservable
Input |
|
Range / Weighted Average as of March 31, 2015 |
|
Range / Weighted Average as of March 31, 2014 |
Senior secured debt (A) |
|
$ |
220,750 |
|
|
$ |
115,081 |
|
|
TEV |
|
EBITDA
multiples |
|
4.4x 18.2x / 6.9x |
|
4.6x 7.3x / 5.6x |
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA |
|
$712 - $5,871 / $3,302 |
|
$1,558 $6,230 / $3,609 |
|
|
|
42,391 |
|
|
|
54,789 |
|
|
Yield Analysis |
|
Discount Rate |
|
7.4% - 13.7% /12.6% |
|
7.6% 30.0% / 19.2% |
Senior subordinated secured debt(B) |
|
|
49,142 |
|
|
|
49,470 |
|
|
TEV |
|
EBITDA
multiples |
|
4.2x 7.0x / 5.8x |
|
4.1x 7.3x / 5.0x |
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA |
|
$1,135 - $5,462 / $2,834 |
|
$36 $6,156 / $4,159 |
|
|
|
21,236 |
|
|
|
21,357 |
|
|
Yield Analysis |
|
Discount Rate |
|
5.0% - 20.5% / 14.4% |
|
12.8% 12.8% / 12.8% |
Preferred equity(C) |
|
|
111,090 |
|
|
|
62,901 |
|
|
TEV |
|
EBITDA
multiples |
|
3.6x 18.2x / 6.6x |
|
3.5x 8.5x / 5.1x |
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA |
|
$712 - $29,235 / $3,749 |
|
$36 - $10,621 / $4,266 |
Common equity/equivalents |
|
|
21,444 |
|
|
|
10,795 |
|
|
TEV |
|
EBITDA
multiples |
|
3.6x 18.2x / 9.4x |
|
3.4x 16.0x / 10.5x |
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA |
|
$712 - $15,240 / $9,149 |
|
$36 - $10,621 / $6,008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
466,053 |
|
|
$ |
314,393 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-22
(A) |
March 31, 2015 includes two new proprietary debt investments for a combined $34.2 million, which were valued at cost. March 31, 2014 includes two new proprietary debt investments for a combined $19.1 million,
which were valued at cost. |
(B) |
March 31, 2014 includes one new proprietary debt investment for $2.4 million, which was valued at cost. |
(C) |
March 31, 2015 includes two new proprietary equity investments for a combined $8.5 million, which were valued at cost. March 31, 2014 includes two new proprietary equity investments for a combined $7.4
million, which were valued at cost. |
Fair value measurements can be sensitive to changes in one or more of the valuation inputs. Changes in
market yields, discounts rates, leverage, EBITDA or EBITDA multiples (or revenue or revenue multiples), each in isolation, may change the fair value of certain of our investments. Generally, an increase or decrease in market yields, discount rates
or leverage or a decrease in EBITDA or EBITDA multiples (or revenue or revenue multiples) may result in a corresponding decrease or increase, respectively, in the fair value of certain of our investments.
Changes in Level 3 Fair Value Measurements of Investments
The following tables provide the changes in fair value of our portfolio, broken out by security type, during the years ended March 31, 2015 and 2014 for
all investments for which the Adviser determines fair value using unobservable (Level 3) factors.
Fair Value Measurements Using
Significant Unobservable Inputs (Level 3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Secured Debt |
|
|
Senior Subordinated Secured Debt |
|
|
Preferred Equity |
|
|
Common Equity/ Equivalents |
|
|
Total |
|
Year ended March 31, 2015: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value as of March 31, 2014 |
|
$ |
169,870 |
|
|
$ |
70,827 |
|
|
$ |
62,901 |
|
|
$ |
10,795 |
|
|
$ |
314,393 |
|
Total gain (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized (loss) gain(A) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized appreciation (depreciation)(B) |
|
|
5,056 |
|
|
|
(4,038 |
) |
|
|
18,525 |
|
|
|
10,397 |
|
|
|
29,940 |
|
Reversal of previously-recorded depreciation (appreciation) upon
realization(B) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New investments, repayments and settlements(C): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuances / originations |
|
|
96,693 |
|
|
|
6,661 |
|
|
|
27,724 |
|
|
|
1,902 |
|
|
|
132,980 |
|
Settlements / repayments |
|
|
(8,128 |
) |
|
|
(3,072 |
) |
|
|
(60 |
) |
|
|
|
|
|
|
(11,260 |
) |
Sales |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transfers(D) |
|
|
(350 |
) |
|
|
|
|
|
|
2,000 |
|
|
|
(1,650 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value as of March 31, 2015 |
|
$ |
263,141 |
|
|
$ |
70,378 |
|
|
$ |
111,090 |
|
|
$ |
21,444 |
|
|
$ |
466,053 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Secured Debt |
|
|
Senior Subordinated Secured Debt |
|
|
Preferred Equity |
|
|
Common Equity/ Equivalents |
|
|
Total |
|
Year ended March 31, 2014: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value as of March 31, 2013 |
|
$ |
103,882 |
|
|
$ |
86,811 |
|
|
$ |
82,157 |
|
|
$ |
13,632 |
|
|
$ |
286,482 |
|
Total (loss) gain: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized (loss) gain(A) |
|
|
(2,856 |
) |
|
|
(6,050 |
) |
|
|
18,806 |
|
|
|
(1,659 |
) |
|
|
8,241 |
|
Net unrealized appreciation (depreciation)(B) |
|
|
3,165 |
|
|
|
(660 |
) |
|
|
(25,000 |
) |
|
|
(5,921 |
) |
|
|
(28,416 |
) |
Reversal of previously-recorded depreciation (appreciation) upon
realization(B) |
|
|
2,274 |
|
|
|
5,874 |
|
|
|
(10,644 |
) |
|
|
1,706 |
|
|
|
(790 |
) |
New investments, repayments and settlements(C): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuances / originations |
|
|
88,267 |
|
|
|
11,818 |
|
|
|
32,067 |
|
|
|
139 |
|
|
|
132,291 |
|
Settlements / repayments |
|
|
(24,862 |
) |
|
|
(26,966 |
) |
|
|
|
|
|
|
|
|
|
|
(51,828 |
) |
Sales |
|
|
|
|
|
|
|
|
|
|
(31,535 |
) |
|
|
(52 |
) |
|
|
(31,587 |
) |
Transfers(D) |
|
|
|
|
|
|
|
|
|
|
(2,950 |
) |
|
|
2,950 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value as of March 31, 2014 |
|
$ |
169,870 |
|
|
$ |
70,827 |
|
|
$ |
62,901 |
|
|
$ |
10,795 |
|
|
$ |
314,393 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A) |
Included in net realized gain (loss) on investments on our accompanying Consolidated Statements of Operations for the years ended March 31, 2015 and 2014. |
(B) |
Included in net unrealized appreciation (depreciation) of investments on our accompanying Consolidated Statements of Operations for the years ended March 31, 2015 and 2014. |
(C) |
Includes increases in the cost basis of investments resulting from new portfolio investments, the amortization of discounts, PIK and other non-cash disbursements to portfolio companies; as well as decreases in
the cost basis of investments resulting from principal repayments or sales, the amortization of premiums and acquisition costs, and other cost-basis adjustments. |
(D) |
2015: Transfers represent $2.0 million of senior secured debt of B-Dry, LLC (B-Dry), which was converted into preferred equity, and $1.7 million of common equity of Roanoke Industries Corp.,
which was converted to senior secured term debt.2014: Transfers represent $3.0 million of preferred equity of Quench Holding Corp. (Quench), which was converted into common equity during the quarter ended December 31, 2013.
|
F-23
Investment Activity
During the year ended March 31, 2015, the following significant transactions occurred:
|
|
|
In May 2014, NDLI Acquisition, Inc. (NDLI), one of our portfolio companies, completed the purchase of certain of Noble Logistics, Inc.s (Noble) assets, one of our other portfolio companies,
out of bankruptcy. |
|
|
|
In August 2014, we made a $1.8 million equity investment in Roanoke Industries Corp. (Roanoke), formerly known as Tread Real Estate Corp., which purchased the building owned by another one of our portfolio
companies, Tread Corporation (Tread). This building has subsequently been leased back to Tread. |
|
|
|
In September 2014, we invested $20.2 million in Cambridge Sound Management, Inc. (Cambridge) through a combination of secured debt and equity. Cambridge, based in Waltham, Massachusetts, is the developer of
sound systems and solutions. |
|
|
|
In October 2014, we invested $24.4 million in Old World Christmas, Inc. (Old World) through a combination of secured debt and equity. Old World, headquartered in Spokane, Washington, is a designer and
distributor of an extensive collection of blown glass Christmas ornaments, table top figurines, vintage-style light covers and nostalgic greeting cards into the independent gift channel. |
|
|
|
In December 2014, we invested $19.6 million in B+T Group Acquisition Inc. (B+T) through a combination of secured debt and equity. B+T, headquartered in Tulsa, Oklahoma, is a full-service provider of
structural engineering, construction, and technical services to the wireless tower industry for tower upgrades and modifications. Gladstone Capital Corporation (Gladstone Capital), an affiliated fund of ours, also participated as a
co-investor by providing $8.4 million of debt and equity financing at the same price and terms as our investment. |
|
|
|
In December 2014, B-Dry, LLC (B-Dry) was restructured, resulting in $2.0 million of secured debt being converted into preferred equity. |
|
|
|
In March 2015, we invested $10.8 million in Logo Sportswear, Inc. (Logo) through a combination of secured debt and equity. Logo, headquartered in Cheshire, Connecticut, is an online provider of
user-customized uniforms and apparel for teams, leagues, schools, businesses and organizations. |
|
|
|
In March 2015, we invested $32.0 million in Counsel Press, Inc. (Counsel Press) through a combination of secured debt and equity. Counsel Press, headquartered in New York, New York, provides expert
assistance in preparing, filing, and serving appeals in state and federal appellate courts nationwide and several international tribunals. |
Investment Concentrations
As of March 31, 2015, our
investment portfolio consisted of investments in 34 portfolio companies located in 16 states across 18 different industries with an aggregate fair value of $466.1 million, of which our investments in Counsel Press, SOG, Funko, Acme and Old World,
our five largest portfolio investments at fair value, collectively comprised $134.3 million, or 28.8%, of our total investment portfolio at fair value.
The following table summarizes our investments by security type as of March 31, 2015 and 2014:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2015 |
|
|
March 31, 2014 |
|
|
|
Cost |
|
|
Fair Value |
|
|
Cost |
|
|
Fair Value |
|
Senior secured debt |
|
$ |
284,509 |
|
|
|
56.3 |
% |
|
$ |
263,141 |
|
|
|
56.5 |
% |
|
$ |
196,293 |
|
|
|
51.2 |
% |
|
$ |
169,870 |
|
|
|
54.0 |
% |
Senior subordinated secured debt |
|
|
85,937 |
|
|
|
17.0 |
|
|
|
70,378 |
|
|
|
15.1 |
|
|
|
82,348 |
|
|
|
21.5 |
|
|
|
70,827 |
|
|
|
22.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt |
|
|
370,446 |
|
|
|
73.3 |
|
|
|
333,519 |
|
|
|
71.6 |
|
|
|
278,641 |
|
|
|
72.7 |
|
|
|
240,697 |
|
|
|
76.5 |
|
Preferred equity |
|
|
127,762 |
|
|
|
25.3 |
|
|
|
111,090 |
|
|
|
23.8 |
|
|
|
98,099 |
|
|
|
25.6 |
|
|
|
62,901 |
|
|
|
20.0 |
|
Common equity/equivalents |
|
|
7,050 |
|
|
|
1.4 |
|
|
|
21,444 |
|
|
|
4.6 |
|
|
|
6,797 |
|
|
|
1.7 |
|
|
|
10,795 |
|
|
|
3.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity/equivalents |
|
|
134,812 |
|
|
|
26.7 |
|
|
|
132,534 |
|
|
|
28.4 |
|
|
|
104,896 |
|
|
|
27.3 |
|
|
|
73,696 |
|
|
|
23.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Investments |
|
$ |
505,258 |
|
|
|
100.0 |
% |
|
$ |
466,053 |
|
|
|
100.0 |
% |
|
$ |
383,537 |
|
|
|
100.0 |
% |
|
$ |
314,393 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-24
Investments at fair value consisted of the following industry classifications as of March 31, 2015 and 2014:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2015 |
|
|
March 31, 2014 |
|
|
|
Fair Value |
|
|
Percentage of Total Investments |
|
|
Fair Value |
|
|
Percentage of Total Investments |
|
Home and Office Furnishings, Housewares, and Durable Consumer Products |
|
$ |
70,533 |
|
|
|
15.1 |
% |
|
$ |
21,188 |
|
|
|
6.7 |
% |
Diversified/Conglomerate Manufacturing |
|
|
62,996 |
|
|
|
13.5 |
|
|
|
54,845 |
|
|
|
17.4 |
|
Chemicals, Plastics, and Rubber |
|
|
49,312 |
|
|
|
10.6 |
|
|
|
52,753 |
|
|
|
16.8 |
|
Leisure, Amusement, Motion Pictures, Entertainment |
|
|
44,931 |
|
|
|
9.6 |
|
|
|
39,867 |
|
|
|
12.7 |
|
Diversified/Conglomerate Service |
|
|
31,995 |
|
|
|
6.9 |
|
|
|
|
|
|
|
|
|
Machinery (Non-agriculture, Non-construction, Non-electronic) |
|
|
30,397 |
|
|
|
6.5 |
|
|
|
25,917 |
|
|
|
8.2 |
|
Personal and Non-Durable Consumer Products (Manufacturing Only) |
|
|
25,008 |
|
|
|
5.4 |
|
|
|
10,005 |
|
|
|
3.2 |
|
Automobile |
|
|
24,530 |
|
|
|
5.3 |
|
|
|
25,735 |
|
|
|
8.2 |
|
Farming and Agriculture |
|
|
22,438 |
|
|
|
4.8 |
|
|
|
20,557 |
|
|
|
6.5 |
|
Containers, Packaging, and Glass |
|
|
19,447 |
|
|
|
4.2 |
|
|
|
17,889 |
|
|
|
5.7 |
|
Telecommunications |
|
|
19,241 |
|
|
|
4.1 |
|
|
|
|
|
|
|
|
|
Aerospace and Defense |
|
|
18,770 |
|
|
|
4.0 |
|
|
|
18,512 |
|
|
|
5.9 |
|
Cargo Transport |
|
|
13,972 |
|
|
|
3.0 |
|
|
|
6,500 |
|
|
|
2.1 |
|
Beverage Food and Tobacco |
|
|
12,982 |
|
|
|
2.8 |
|
|
|
13,050 |
|
|
|
4.2 |
|
Textiles and Leather |
|
|
10,750 |
|
|
|
2.3 |
|
|
|
|
|
|
|
|
|
Buildings and Real Estate |
|
|
1,860 |
|
|
|
0.4 |
|
|
|
7,575 |
|
|
|
2.4 |
|
Other < 2.0% |
|
|
6,891 |
|
|
|
1.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Investments |
|
$ |
466,053 |
|
|
|
100.0 |
% |
|
$ |
314,393 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments at fair value were included in the following geographic regions of the U.S. as of March 31, 2015 and 2014:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2015 |
|
|
March 31, 2014 |
|
|
|
Fair Value |
|
|
Percentage of Total Investments |
|
|
Fair Value |
|
|
Percentage of Total Investments |
|
West |
|
$ |
161,444 |
|
|
|
34.6 |
% |
|
$ |
117,781 |
|
|
|
37.5 |
% |
Northeast |
|
|
133,814 |
|
|
|
28.7 |
|
|
|
67,862 |
|
|
|
21.6 |
|
South |
|
|
133,703 |
|
|
|
28.7 |
|
|
|
89,915 |
|
|
|
28.6 |
|
Midwest |
|
|
37,092 |
|
|
|
8.0 |
|
|
|
38,835 |
|
|
|
12.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Investments |
|
$ |
466,053 |
|
|
|
100.0 |
% |
|
$ |
314,393 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The geographic region indicates the location of the headquarters for our portfolio companies. A portfolio company may have
additional business locations in other geographic regions.
Investment Principal Repayments
The following table summarizes the contractual principal repayments and maturity of our investment portfolio for the next five fiscal years and thereafter,
assuming no voluntary prepayments, as of March 31, 2015:
|
|
|
|
|
|
|
|
|
|
|
Amount |
|
For the fiscal years ending March 31: |
|
2016 |
|
$ |
19,567 |
|
|
|
2017 |
|
|
43,861 |
|
|
|
2018 |
|
|
100,316 |
|
|
|
2019 |
|
|
81,681 |
|
|
|
2020 |
|
|
115,403 |
|
|
|
Thereafter |
|
|
9,618 |
|
|
|
|
|
|
|
|
|
|
Total contractual repayments |
|
$ |
370,446 |
|
|
|
Investments in equity securities |
|
|
134,812 |
|
|
|
|
|
|
|
|
|
|
Total Cost Basis of Investments Held as of March 31, 2015: |
|
$ |
505,258 |
|
|
|
|
|
|
|
|
F-25
Receivables from Portfolio Companies
Receivables from portfolio companies represent non-recurring costs that we incurred on behalf of portfolio companies and are included in other assets on our
accompanying Consolidated Statements of Assets and Liabilities. We generally maintain an allowance for uncollectible receivables from portfolio companies when the receivable balance becomes 90 days or more past due or if it is determined,
based upon managements judgment, that the portfolio company is unable to pay its obligations. We charge the accounts receivable to the established allowance when collection efforts have been exhausted and the receivables are deemed
uncollectible. As of March 31, 2015 and 2014, we had gross receivables from portfolio companies of $1.5 million and $1.2 million, respectively. The allowance for uncollectible receivables was $349 and $44 as of March 31, 2015 and 2014,
respectively.
NOTE 4. RELATED PARTY TRANSACTIONS
Investment Advisory and Management Agreement
In
accordance with the Advisory Agreement, we pay the Adviser certain fees as compensation for its services, such fees consisting of a base management fee, loan servicing fee and an incentive fee, each as described below. On July 15, 2014, our
Board of Directors, including a majority of the directors who are not parties to the Advisory Agreement or interested persons of such party, approved the annual renewal of the Advisory Agreement through August 31, 2015.
The following table summarizes the management fees, loan servicing fees, incentive fees and associated voluntary, non-contractual and irrevocable credits
reflected in our accompanying Consolidated Statements of Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31, |
|
|
|
2015 |
|
|
2014 |
|
|
2013 |
|
Average total assets subject to base management fee(A) |
|
$ |
378,450 |
|
|
$ |
310,350 |
|
|
$ |
270,600 |
|
Multiplied by annual base management fee of 2% |
|
|
2.0 |
% |
|
|
2.0 |
% |
|
|
2.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Base management fee(B) |
|
|
7,569 |
|
|
|
6,207 |
|
|
|
5,412 |
|
Credits to fees from Adviser - other(B)(C) |
|
|
(2,848 |
) |
|
|
(2,309 |
) |
|
|
(1,107 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net base management fee |
|
$ |
4,721 |
|
|
$ |
3,898 |
|
|
$ |
4,305 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan servicing fee(B) |
|
|
4,994 |
|
|
|
4,326 |
|
|
|
3,725 |
|
Credits to base management fee - loan servicing fee(B) |
|
|
(4,994 |
) |
|
|
(4,326 |
) |
|
|
(3,725 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loan servicing fee |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incentive fee(B) |
|
|
4,975 |
|
|
|
3,983 |
|
|
|
2,585 |
|
Credits to fees from Adviser - other (B)(D) |
|
|
|
|
|
|
|
|
|
|
(221 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net incentive fee |
|
$ |
4,975 |
|
|
$ |
3,983 |
|
|
$ |
2,364 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A) |
Average total assets subject to the base management fee is defined as total assets, including investments made with proceeds of borrowings, less any uninvested cash or cash equivalents resulting from borrowings,
valued at the end of the applicable quarters within the respective periods and adjusted appropriately for any share issuances or repurchases during the periods. |
(B) |
Reflected as a line item on our accompanying Consolidated Statement of Operations. For the year ended March 31, 2013, the credits to incentive fee and the credits to base management fee are combined
into one line item, Credits to fees from Adviser other, on the accompanying Consolidated Statement of Operations. |
(C) |
Pursuant to the requirements of the 1940 Act, the Adviser makes available significant managerial assistance to our portfolio companies. The Adviser may also provide other services to our portfolio companies under
other agreements and may receive fees for services other than managerial assistance. The Adviser generally credits 100.0% of these fees against the base management fee that we would otherwise be required to pay to the Adviser; however, pursuant to
the terms of the Advisory Agreement, a small percentage of certain of such fees is retained by the Adviser. |
(D) |
Our Board of Directors accepted an unconditional and irrevocable voluntary credit from the Adviser to reduce the income-based incentive fee to the extent net investment income did not 100.0% cover distributions
to common stockholders for the year ended March 31, 2013. |
Base Management Fee
The base management fee is computed and generally payable quarterly to the Adviser and is assessed at an annual rate of 2.0%, computed on the basis of the
value of our average gross assets at the end of the two most recently completed quarters (inclusive of the current quarter), which are total assets, including investments made with proceeds of borrowings, less any uninvested cash or cash equivalents
resulting from borrowings, and adjusted appropriately for any share issuances or repurchases during the period.
Additionally, pursuant to the
requirements of the 1940 Act, the Adviser makes available significant managerial assistance to our portfolio companies. The Adviser may also provide other services to our portfolio companies under other agreements and may receive fees for services
other than managerial assistance. Such services may include, but are not limited to: (i) assistance obtaining, sourcing or structuring credit facilities, long term loans or additional equity from unaffiliated third parties;
(ii) negotiating important contractual financial relationships; (iii) consulting services regarding restructuring of the portfolio company and financial modeling as it relates to
F-26
raising additional debt and equity capital from unaffiliated third parties; and (iv) primary role in interviewing, vetting and negotiating employment contracts with candidates in connection
with adding and retaining key portfolio company management team members. The Adviser generally voluntarily and irrevocably credits 100% of these fees against the base management fee that we would otherwise be required to pay to the Adviser; however,
pursuant to the terms of the Advisory Agreement, a small percentage of certain of such fees, primarily for the valuation of portfolio companies, is retained by the Adviser in the form of reimbursement, at cost, for tasks completed by personnel of
the Adviser.
Loan Servicing Fee
The Adviser also
services the loans held by our wholly-owned subsidiary, Business Investment, in return for which the Adviser receives a 2.0% annual fee based on the monthly aggregate outstanding balance of loans pledged under our revolving line of credit. These
loan servicing fees are 100% credited back to us by the Adviser. Overall, the base management fee, inclusive of the loan servicing 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 calendar year.
Incentive Fee
The incentive fee consists of two parts: an income-based incentive fee and a capital gains-based incentive fee. The income-based incentive fee rewards the
Adviser if our quarterly net investment income (before giving effect to any incentive fee) exceeds 1.75% of our net assets (the hurdle rate). The income-based incentive fee with respect to our pre-incentive fee net investment income is
generally payable quarterly to the Adviser and is computed as follows:
|
|
|
no incentive fee in any calendar quarter in which our pre-incentive fee net investment income does not exceed the hurdle rate (7.0% annualized); |
|
|
|
100.0% of our pre-incentive fee net investment income with respect to that portion of such pre-incentive fee net investment income, if any, that exceeds the hurdle rate but is less than 2.1875% of our net assets in any
calendar quarter (8.75% annualized); and |
|
|
|
20.0% of the amount of our pre-incentive fee net investment income, if any, that exceeds 2.1875% of our net assets in any calendar quarter (8.75% annualized). |
The second part of the incentive fee is a capital gains-based incentive fee that is determined and payable in arrears as of the end of each fiscal year (or
upon termination of the Advisory Agreement, as of the termination date), and equals 20.0% of our realized capital gains, less any realized capital losses and unrealized depreciation, calculated as of the end of the preceding calendar year. The
capital gains-based incentive fee payable to the Adviser is calculated based on (i) cumulative aggregate realized capital gains since our inception, less (ii) cumulative aggregate realized capital losses since our inception, less
(iii) the entire portfolios aggregate unrealized capital depreciation, if any, as of the date of the calculation. If this number is positive at the applicable calculation date, then the capital gains-based incentive fee for such year
equals 20.0% of such amount, less the aggregate amount of any capital gains-based incentive fees paid in respect of our portfolio in all prior years. For calculation purposes, cumulative aggregate realized capital gains, if any, equals the sum of
the excess between the net sales price of each investment, when sold, and the original cost of such investment since our inception. Cumulative aggregate realized capital losses equals the sum of the deficit between the net sales price of each
investment, when sold, and the original cost of such investment since our inception. The entire portfolios aggregate unrealized capital depreciation, if any, equals the sum of deficit between the fair value of each investment security as of
the applicable calculation date and the original cost of such investment security. We have not incurred capital gains-based incentive fees from inception through March 31, 2015, as cumulative net unrealized capital depreciation has exceeded
cumulative realized capital gains net of cumulative realized capital losses.
Additionally, in accordance with GAAP, a capital gains-based incentive fee
accrual is calculated using the aggregate cumulative realized capital gains and losses and aggregate cumulative unrealized capital depreciation included in the calculation of the capital gains-based incentive fee plus the aggregate cumulative
unrealized capital appreciation. If such amount is positive at the end of a reporting period, then GAAP requires us to record a capital gains-based incentive fee equal to 20.0% of such amount, less the aggregate amount of actual capital gains-based
incentive fees paid in all prior years. If such amount is negative, then there is no accrual for such year. GAAP requires that the capital gains-based incentive fee accrual consider the cumulative aggregate unrealized capital appreciation in the
calculation, as a capital gains-based incentive fee would be payable if such unrealized capital appreciation were realized. There can be no assurance that any such unrealized capital appreciation will be realized in the future. There has been no
GAAP accrual recorded for a capital gains-based incentive fee since our inception through March 31, 2015.
F-27
Our Board of Directors accepted an unconditional and irrevocable voluntary credit from the Adviser to reduce the
income-based incentive fee to the extent net investment income did not cover 100% of the distributions to common stockholders for the year ended March 31, 2013, which credit totaled $0.2 million. There have been no incentive fee credits from
the Adviser for the years ended March 31, 2015 and 2014.
Administration Agreement
The Administration Agreement provides for payments equal to our allocable portion of the Administrators expenses incurred while performing services to
us, which are primarily rent and salaries and benefits expenses of the Administrators employees, including our chief financial officer and treasurer, chief accounting officer, chief compliance officer and general counsel and secretary (who
also serves as the Administrators president) and their respective staff. Prior to July 1, 2014, our allocable portion of the expenses were generally derived by multiplying that portion of the Administrators expenses allocable to all
funds managed by the Adviser by the percentage of our total assets at the beginning of each quarter in comparison to the total assets at the beginning of each quarter of all funds managed by the Adviser.
Effective July 1, 2014, our allocable portion of the Administrators expenses are generally derived by multiplying the Administrators total
expenses by the approximate percentage of time during the current quarter the Administrators employees performed services for us in relation to their time spent performing services for all companies serviced by the Administrator. These
administrative fees are accrued at the end of the quarter when the services are performed and recorded on our accompanying Consolidated Statements of Operations and generally paid the following quarter. On July 15, 2014, our Board of
Directors approved the annual renewal of the Administration Agreement through August 31, 2015.
Related Party Fees Due
Amounts due to related parties on our accompanying Consolidated Statements of Assets and Liabilities were as follows:
|
|
|
|
|
|
|
|
|
|
|
As of March 31, |
|
|
|
2015 |
|
|
2014 |
|
Base management fee due to Adviser |
|
$ |
191 |
|
|
$ |
63 |
|
Incentive fee due to Adviser |
|
|
1,249 |
|
|
|
1,161 |
|
Other due to Adviser |
|
|
62 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
Total fees due to Adviser |
|
|
1,502 |
|
|
|
1,225 |
|
Fee due to Administrator |
|
|
262 |
|
|
|
224 |
|
|
|
|
|
|
|
|
|
|
Total Related Party Fees Due |
|
$ |
1,764 |
|
|
$ |
1,449 |
|
|
|
|
|
|
|
|
|
|
Net co-investment expenses payable to Gladstone Capital (for reimbursement purposes) and payables to other affiliates
totaled $305 and $41 as of March 31, 2015 and 2014, respectively. These expenses were paid in full subsequent to fiscal year end and have been included in other liabilities on the accompanying Consolidated Statements of Assets and
Liabilities as of March 31, 2015 and 2014.
NOTE 5. BORROWINGS
Line of Credit
On June 26, 2014, we, through our
wholly-owned subsidiary, Business Investment, entered into Amendment No. 1 to the Fifth Amended and Restated Credit Agreement originally entered into on April 30, 2013, with Key Equipment Finance, a division of KeyBank National Association
(KeyBank), as administrative agent, lead arranger and lender; other lenders; and the Adviser, as servicer, to extend the revolving period and reduce the interest rate of our revolving line of credit (our Credit Facility). The
revolving period was extended 14 months to June 26, 2017, and if not renewed or extended by June 26, 2017, all principal and interest will be due and payable on or before June 26, 2019 (two years after the revolving period end date).
In addition, we have retained the two one-year extension options, to be agreed upon by all parties, which may be exercised on or before June 26, 2015 and 2016, respectively, and upon exercise, the options would extend the revolving period to
June 26, 2018 and 2019 and the maturity date to June 26, 2020 and 2021, respectively. Subject to certain terms and conditions, our Credit Facility can be expanded by up to $145.0 million, to a total facility amount of $250.0 million,
through additional commitments of existing or new committed lenders. Advances under our Credit Facility generally bear interest at 30-day LIBOR, plus 3.25% per annum, down from 3.75% prior to the amendment, and our Credit Facility includes a
fee of 0.50% on undrawn amounts. Once the revolving period ends, the interest rate margin increases to 3.75% for the period from June 26, 2017 to June 26, 2018, and further increases to 4.25% through maturity. We incurred fees of $0.4
million in connection with this amendment, which are being amortized through our Credit Facilitys revolver period end date of June 26, 2017.
F-28
On September 19, 2014, we further increased our borrowing capacity under our Credit Facility from $105.0
million to $185.0 million by entering into Joinder Agreements pursuant to our Credit Facility, by and among Business Investment, KeyBank, the Adviser and other lenders. We incurred fees of $1.3 million in connection with this expansion, which are
being amortized through our Credit Facilitys revolver period end date of June 26, 2017.
The following tables summarize noteworthy information
related to our Credit Facility:
|
|
|
|
|
|
|
|
|
|
|
As of March 31, |
|
|
|
2015 |
|
|
2014 |
|
Commitment amount |
|
$ |
185,000 |
|
|
$ |
105,000 |
|
Borrowings outstanding at cost |
|
|
118,800 |
|
|
|
61,250 |
|
Availability |
|
|
66,200 |
|
|
|
43,750 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended March 31, |
|
|
|
2015 |
|
|
2014 |
|
|
2013 |
|
Weighted average borrowings outstanding |
|
$ |
79,158 |
|
|
$ |
34,632 |
|
|
$ |
15,533 |
|
Effective interest
rate(A) |
|
|
3.98 |
% |
|
|
4.90 |
% |
|
|
5.49 |
% |
Commitment (unused) fees incurred |
|
$ |
347 |
|
|
$ |
318 |
|
|
$ |
225 |
|
(A) |
Excludes the impact of deferred financing fees and includes weighted average unused commitment fees. |
Interest
is payable monthly during the term of our Credit Facility. Available borrowings are subject to various constraints imposed under our Credit Facility, based on the aggregate loan balance pledged by Business Investment, which varies as loans are added
and repaid, regardless of whether such repayments are prepayments or made as contractually required.
Our Credit Facility also requires that any interest
or principal payments on pledged loans be remitted directly by the borrower into a lockbox account with KeyBank and with The Bank of New York Mellon Trust Company, N.A as custodian. KeyBank is also the trustee of the account and generally remits the
collected funds to us once a month.
Among other things, our Credit Facility contains covenants that require Business Investment to maintain its status as
a separate legal entity, prohibit certain significant corporate transactions (such as mergers, consolidations, liquidations or dissolutions) and restrict certain material changes to our credit and collection policies without the lenders
consent. Our Credit Facility also generally seeks to restrict distributions on our common stock to the sum of certain amounts, including, but not limited to, our net investment income, plus net capital gains, plus amounts elected by the Company to
be considered as having been paid during the prior fiscal year in accordance with Section 855(a) of the Code. Business Investment is also subject to certain limitations on the type of loan investments it can apply toward available credit in the
borrowing base, including restrictions on geographic concentrations, sector concentrations, loan size, payment frequency and status, average life and lien property. Our Credit Facility further requires Business Investment to comply with other
financial and operational covenants, which obligate Business Investment to, among other things, maintain certain financial ratios, including asset and interest coverage and a minimum number of obligors required in the borrowing base of the credit
agreement. Additionally, we are subject to a performance guaranty that requires us to maintain (i) a minimum net worth (defined in our Credit Facility to include our mandatory redeemable term preferred stock) of $170 million plus 50% of all
equity and subordinated debt raised minus any equity or subordinated debt redeemed or retired after June 26, 2014, which equates to $202.9 million as of March 31, 2015, (ii) asset coverage with respect to senior
securities representing indebtedness of at least 200%, in accordance with Section 18 of the 1940 Act and (iii) its status as a BDC under the 1940 Act and as a RIC under the Code. As of March 31, 2015, and as defined in the
performance guaranty of our Credit Facility, we had a net worth of $354.8 million, an asset coverage of 229.9% and an active status as a BDC and RIC. Our Credit Facility requires a minimum of 12 obligors in the borrowing base and, as of
March 31, 2015, Business Investment had 27 obligors. As of March 31, 2015, we were in compliance with all covenants under our Credit Facility.
Pursuant to the terms of our Credit Facility, in July 2013, we entered into an interest rate cap agreement with KeyBank that effectively limit the interest
rate on a portion of our borrowings under the line of credit pursuant to the terms of our Credit Facility. The agreement, which expires April 2016, provides that the interest rate on $45.0 million of our borrowings is capped at 6.0%, plus
3.25% per annum, when 30-day LIBOR is in excess of 6.0%. We incurred a premium fee of $75 in conjunction with this agreement, which is recorded in other assets on our accompanying Consolidated Statements of Assets and Liabilities. At
each of March 31, 2015 and 2014, the fair value of our interest rate cap agreement was $0.
F-29
Secured Borrowing
In August 2012, we entered into a participation agreement with a third-party related to $5.0 million of our senior subordinated term debt investment in Ginsey
Home Solutions, Inc. (Ginsey). In May 2014, we amended the agreement with the third-party to include an additional $0.1 million. Accounting Standards Codification Topic 860, Transfers and Servicing (ASC
860) requires us to treat the participation as a financing-type transaction. Specifically, the third-party has a senior claim to our remaining investment in the event of default by Ginsey which, in part, resulted in the loan participation
bearing a rate of interest lower than the contractual rate established at origination. Therefore, our accompanying Consolidated Statements of Assets and Liabilities reflects the entire senior subordinated secured term debt investment in
Ginsey and a corresponding $5.1 million secured borrowing liability. The secured borrowing has a stated interest rate of 7.0% and a maturity date of January 3, 2018.
Fair Value
We elected to apply the fair value option of
ASC 825, Financial Instruments, specifically for our Credit Facility, which was consistent with our application of ASC 820 to our investments. Generally, the fair value of our Credit Facility is determined using a yield analysis
which includes a DCF calculation and also takes into account the Valuation Teams own assumptions, including, but not limited to, the estimated remaining life, counterparty credit risk, current market yield and interest rate spreads of similar
securities as of the measurement date. At each of March 31, 2015 and 2014, the discount rate used to determine the fair value of our Credit Facility was 3.7% and 4.2%, respectively. Generally, an increase or decrease in the discount rate used
in the DCF calculation may result in a corresponding increase or decrease, respectively, in the fair value of our Credit Facility. At each of March 31, 2015 and 2014, our Credit Facility was valued using Level 3 inputs and any changes in its
fair value are recorded in net unrealized depreciation (appreciation) of other on our accompanying Consolidated Statements of Operations.
The
following tables present our Credit Facility carried at fair value as of March 31, 2015 and 2014, by caption on our accompanying Consolidated Statements of Assets and Liabilities for Level 3 of the hierarchy established by ASC 820 and a
roll-forward of the changes in fair value during the years ended March 31, 2015 and 2014:
|
|
|
|
|
|
|
|
|
|
|
Total Recurring Fair Value Measurement Reported in Consolidated Statements of
Assets and Liabilities Using Significant Unobservable Inputs (Level 3) As of March 31, |
|
|
|
|
|
|
|
2015 |
|
|
2014 |
|
Credit Facility |
|
$ |
118,800 |
|
|
$ |
61,701 |
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements of Borrowings Using Significant Unobservable Inputs (Level 3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-Term Loan |
|
|
Credit Facility |
|
|
Total Fair Value Reported in Consolidated Statements of Assets and Liabilities |
|
Year ended March 31, 2015: |
|
|
|
|
|
|
|
|
|
|
|
|
Fair value as of March 31, 2014 |
|
$ |
|
|
|
$ |
61,701 |
|
|
$ |
61,701 |
|
Borrowings |
|
|
|
|
|
|
144,549 |
|
|
|
144,549 |
|
Repayments |
|
|
|
|
|
|
(87,000 |
) |
|
|
(87,000 |
) |
Net unrealized
depreciation(A) |
|
|
|
|
|
|
(450 |
) |
|
|
(450 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value as of March 31, 2015 |
|
$ |
|
|
|
$ |
118,800 |
|
|
$ |
118,800 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended March 31, 2014: |
|
|
|
|
|
|
|
|
|
|
|
|
Fair value as of March 31, 2013 |
|
$ |
58,016 |
|
|
$ |
31,854 |
|
|
$ |
89,870 |
|
Borrowings |
|
|
56,514 |
|
|
|
145,350 |
|
|
|
201,864 |
|
Repayments |
|
|
(114,530 |
) |
|
|
(115,100 |
) |
|
|
(229,630 |
) |
Net unrealized
depreciation(A) |
|
|
|
|
|
|
(403 |
) |
|
|
(403 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value as of March 31, 2014 |
|
$ |
|
|
|
$ |
61,701 |
|
|
$ |
61,701 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A) |
Included in net unrealized (depreciation) appreciation on our accompanying Consolidated Statement of Operations for the years ended March 31, 2015 and 2014. |
The fair value of the collateral under our Credit Facility was $435.9 million and $288.6 million as of March 31, 2015 and 2014, respectively.
F-30
NOTE 6. MANDATORILY REDEEMABLE PREFERRED STOCK
In November 2014, we completed a public offering of 1,656,000 shares of 6.75% Series B Cumulative Term Preferred Stock (our Series B
Term Preferred Stock) at a public offering price of $25.00 per share. Gross proceeds totaled $41.4 million and net proceeds, after deducting underwriting discounts and offering expenses borne by us, were $39.7 million. We incurred $1.7 million
in total offering costs related to these transactions, which have been recorded as deferred financing costs on our accompanying Consolidated Statements of Assets and Liabilities and are being amortized over the period ending December 31,
2021, the mandatory redemption date.
The shares of Series B Term Preferred Stock are traded under the ticker symbol GAINO on the NASDAQ Global Select
Market (NASDAQ). Our Series B Term Preferred Stock is not convertible into our common stock or any other security. Our Series B Term Preferred Stock provides for a fixed dividend equal to 6.75% per year, payable monthly. We are
required to redeem all shares of our outstanding Series B Term Preferred Stock on December 31, 2021, for cash at a redemption price equal to $25.00 per share, plus an amount equal to accumulated but unpaid dividends, if any, to, but excluding,
the date of redemption. In addition, two other potential mandatory redemption triggers are as follows: (1) upon the occurrence of certain events that would constitute a change in control of us, we would be required to redeem all of our
outstanding Series B Term Preferred Stock, (2) if we fail to maintain an asset coverage ratio of at least 200%, we are required to redeem a portion of our outstanding Series B Term Preferred Stock or otherwise cure the ratio redemption trigger.
We may also voluntarily redeem all or a portion of our Series B Term Preferred Stock at our sole option at the redemption price in order to have an asset coverage ratio of up to and including 215.0% and at any time on or after December 31,
2017.
In March 2012, we completed a public offering of 1,600,000 shares of 7.125% Series A Cumulative Term Preferred Stock (our Series A Term
Preferred Stock) at a public offering price of $25.00 per share. Gross proceeds totaled $40.0 million and net proceeds, after deducting underwriting discounts and offering expenses borne by us, were $38.0 million. We incurred $2.0 million in total
offering costs related to these transactions, which have been recorded as deferred financing costs on our accompanying Consolidated Statements of Assets and Liabilities and will be amortized over the redemption period ending February 28,
2017, the mandatory redemption date.
The Series A Term Preferred Stock has a redemption date of February 28, 2017, and is traded under the ticker
symbol GAINP on the NASDAQ Global Select Market. The Series A Term Preferred Stock is not convertible into our common stock or any other security. The Series A Term Preferred Stock provides for a fixed dividend equal to 7.125% per year, payable
monthly. We are required to redeem all of the outstanding shares of our Series A Term Preferred Stock on February 28, 2017, for cash at a redemption price equal to $25.00 per share, plus an amount equal to accumulated but unpaid dividends, if
any, to, but excluding, the date of redemption. In addition, three other potential redemption triggers are as follows: (1) upon the occurrence of certain events that would constitute a change in control of us, we would be required to redeem all
of the outstanding Series A Term Preferred Stock, (2) if we fail to maintain an asset coverage ratio of at least 200%, we are required to redeem a portion of the outstanding Series A Term Preferred Stock or otherwise cure the ratio redemption
trigger and (3) at our sole option, at any time on or after February 28, 2016, we may redeem some or all of the Series A Term Preferred Stock.
For the years ended March 31, 2015, 2014, and 2013 our Board of Directors declared and we paid a monthly dividend of $0.1484375 per share, or $1.78125
per share in aggregate, to holders of our Series A Term Preferred Stock. For the year ended March 31, 2015, our Board of Directors declared and we paid dividends for the pro-rated month of November 2014 (based on the number of days between the
issuance date and November 30, 2014) and all full months from December 2014 through March 2015, that totaled $0.703125 per share to holders of our Series B Term Preferred Stock. The tax character of dividends paid by us to preferred
stockholders generally constitute ordinary income to the extent of our current and accumulated earnings and profits.
In accordance with ASC 480,
Distinguishing Liabilities from Equity, mandatorily redeemable financial instruments should be classified as liabilities in the balance sheet and we have recorded our mandatorily redeemable term preferred stock at cost as of
March 31, 2015 and 2014. The related distribution payments to preferred stockholders are treated as dividend expense on our statement of operations as of the ex-dividend date. For disclosure purposes, the fair value of our Series A Term
Preferred Stock, which we consider to be a Level 1 liability within the fair value hierarchy, based on the last reported closing sale price as of March 31, 2015 and 2014, was $41.5 million and $42.4 million, respectively. The fair value of our
Series B Term Preferred Stock, which we consider to be a Level 1 liability within the fair value hierarchy, based on the last reported closing sale price as of March 31, 2015, was $42.2 million.
Refer to Note 15 Subsequent Events for information regarding the recent offering of our newly designated and issued 6.50% Series C Cumulative
Term Preferred Stock (Series C Term Preferred Stock) subsequent to March 31, 2015.
F-31
NOTE 7. COMMON STOCK
Registration Statement
We filed a
registration statement on Form N-2 (File No. 333-181879) with the SEC on June 4, 2012, and subsequently filed a Pre-Effective Amendment No. 1 to the registration statement on July 17, 2012, which the SEC declared effective
on July 26, 2012. On June 7, 2013, we filed Post-Effective Amendment No. 2 to the registration statement, which the SEC declared effective on July 26, 2013. On June 3, 2014, we filed Post-Effective Amendment No. 3 to
the registration statement, and subsequently filed a Post-Effective Amendment No. 4 to the registration statement on September 2, 2014, which the SEC declared effective on September 4, 2014. The registration statement permits us to
issue, through one or more transactions, up to an aggregate of $300.0 million in securities, consisting of common stock, preferred stock, subscription rights, debt securities and warrants to purchase common or preferred stock, including through a
combined offering of two or more of such securities. We currently have the ability to issue up to $117.3 million in securities under the registration statement.
On March 13, 2015, we completed a public offering of 3.3 million shares of our common stock at a public offering price of $7.40 per share, which was
below our then current NAV per share. Gross proceeds totaled $24.4 million and net proceeds, after deducting underwriting discounts and offering expenses borne by us, were approximately $23.0 million, which was used to repay borrowings under our
Credit Facility. Refer to Note 15 Subsequent Events for additional information regarding shares issued pursuant to the underwriters overallotment option occurring subsequent to March 31, 2015.
On October 5, 2012, we completed a public offering of 4.0 million shares of our common stock at a public offering price of $7.50 per share, which
was below our then current NAV per share. Gross proceeds totaled $30.0 million and net proceeds, after deducting underwriting discounts and offering expenses borne by us, were approximately $28.3 million, which was used to repay borrowings under our
Credit Facility. In connection with the offering, the underwriters exercised their option to purchase an additional 395,825 shares at the public offering price to cover over-allotments, which resulted in gross proceeds of $3.0 million and net
proceeds, after deducting underwriting discounts, of approximately $2.8 million.
NOTE 8. NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS PER COMMON SHARE
The following table sets forth the computation of basic and diluted net increase (decrease) in net assets resulting from operations per
common share for the years ended March 31, 2015, 2014, and 2013:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31, |
|
|
|
2015 |
|
|
2014 |
|
|
2013 |
|
Numerator for basic and diluted-net increase (decrease) in net assets resulting from operations per common share |
|
$ |
50,214 |
|
|
$ |
(1,329 |
) |
|
$ |
17,279 |
|
Denominator for basic and diluted-weighted average common shares |
|
|
26,665,821 |
|
|
|
26,475,958 |
|
|
|
24,189,148 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net increase (decrease) in net assets resulting from operations per common share |
|
$ |
1.88 |
|
|
$ |
(0.05 |
) |
|
$ |
0.71 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 9. DISTRIBUTIONS TO COMMON STOCKHOLDERS
To qualify to be taxed as a RIC, we are required to distribute to our common stockholders 90% of our investment company taxable income. The
amount to be paid out as distributions to our stockholders is determined by our Board of Directors quarterly and is based on managements estimate of the investment company taxable income. Based on that estimate, our Board of Directors declares
three monthly common distributions each quarter.
The federal income tax characteristics of all distributions (including preferred stock dividends) will
be reported to stockholders on the Internal Revenue Service Form 1099 at the end of each calendar year. For calendar years ended December 31, 2014, 2013 and 2012, 100% of our common distributions during these periods were deemed to be paid from
ordinary income for 1099 stockholder reporting purposes.
F-32
We paid the following monthly distributions to common stockholders for the years ended March 31, 2015 and
2014:
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year |
|
Declaration Date |
|
Record Date |
|
Payment Date |
|
Distribution per Common Share |
|
2015 |
|
April 16, 2014 |
|
April 21, 2014 |
|
April 30, 2014 |
|
$ |
0.060 |
|
|
|
May 16, 2014 |
|
May 20, 2014 |
|
May 30, 2014 |
|
|
0.060 |
|
|
|
June 17, 2014 |
|
June 19, 2014 |
|
June 30, 2014 |
|
|
0.060 |
|
|
|
July 23, 2014 |
|
July 25, 2014 |
|
August 5, 2014 |
|
|
0.060 |
|
|
|
August 18, 2014 |
|
August 20, 2014 |
|
August 29, 2014 |
|
|
0.060 |
|
|
|
September 17, 2014 |
|
September 19, 2014 |
|
September 30, 2014 |
|
|
0.060 |
|
|
|
October 20, 2014 |
|
October 22, 2014 |
|
October 31, 2014 |
|
|
0.060 |
|
|
|
November 13, 2014 |
|
November 17, 2014 |
|
November 26, 2014 |
|
|
0.060 |
|
|
|
December 17, 2014 |
|
December 19, 2014 |
|
December 31, 2014 |
|
|
0.050 |
(A) |
|
|
December 17, 2014 |
|
December 19, 2014 |
|
December 31, 2014 |
|
|
0.060 |
|
|
|
January 21, 2015 |
|
January 23, 2015 |
|
February 3, 2015 |
|
|
0.060 |
|
|
|
February 13, 2015 |
|
February 18. 2015 |
|
February 27, 2015 |
|
|
0.060 |
|
|
|
March 18, 2015 |
|
March 20, 2015 |
|
March 31, 2015 |
|
|
0.060 |
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31, 2015: |
|
$ |
0.770 |
|
|
|
|
|
|
|
|
|
|
|
|
2014 |
|
April 9, 2013 |
|
April 22, 2013 |
|
April 30, 2013 |
|
$ |
0.050 |
|
|
|
April 9, 2013 |
|
May 20, 2013 |
|
May 31, 2013 |
|
|
0.050 |
|
|
|
April 9, 2013 |
|
June 19, 2013 |
|
June 28, 2013 |
|
|
0.050 |
|
|
|
July 9, 2013 |
|
July 17, 2013 |
|
July 31, 2013 |
|
|
0.050 |
|
|
|
July 9, 2013 |
|
August 19, 2013 |
|
August 30, 2013 |
|
|
0.050 |
|
|
|
July 9, 2013 |
|
September 16, 2013 |
|
September 30, 2013 |
|
|
0.050 |
|
|
|
October 8, 2013 |
|
October 22, 2013 |
|
October 31, 2013 |
|
|
0.060 |
|
|
|
October 8, 2013 |
|
November 14, 2013 |
|
November 29, 2013 |
|
|
0.060 |
|
|
|
October 8, 2013 |
|
November 18, 2013 |
|
November 29, 2013 |
|
|
0.050 |
(A) |
|
|
October 8, 2013 |
|
December 16, 2013 |
|
December 31, 2013 |
|
|
0.060 |
|
|
|
January 7, 2014 |
|
January 22, 2014 |
|
January 31, 2014 |
|
|
0.060 |
|
|
|
January 7, 2014 |
|
February 19. 2014 |
|
February 28, 2014 |
|
|
0.060 |
|
|
|
January 7, 2014 |
|
March 17, 2014 |
|
March 31, 2014 |
|
|
0.060 |
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31, 2014: |
|
$ |
0.710 |
|
|
|
|
|
|
|
|
|
|
|
|
(A) |
A special distribution on our common stock of $0.05 per share was declared by our Board of Directors. |
Aggregate distributions declared and paid to our common stockholders for the years ended March 31, 2015 and 2014 were $20.6 million and $18.8
million, respectively, and were declared based on estimates of net investment income for the respective fiscal years. For each of the years ended March 31, 2015 and 2014, taxable income available for common distributions exceeded distributions
declared and paid, and, in accordance with Section 855(a) of the Code, we elected to treat $4.0 million and $3.9 million, respectively, of the first common distributions paid in fiscal year 2016 and 2015, respectively, as having been paid in
the respective prior year.
The components of our net assets on a tax basis were as follows:
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31, |
|
|
|
2015 |
|
|
2014 |
|
Common stock |
|
$ |
30 |
|
|
$ |
26 |
|
Capital in excess of par value |
|
|
309,438 |
|
|
|
287,062 |
|
Cumulative unrealized depreciation of investments |
|
|
(39,204 |
) |
|
|
(69,283 |
) |
Cumulative unrealized (depreciation) (appreciation) of other |
|
|
(75 |
) |
|
|
(525 |
) |
Undistributed ordinary income |
|
|
4,002 |
|
|
|
3,918 |
|
Capital loss carryforward |
|
|
(288 |
) |
|
|
(216 |
) |
Other temporary differences |
|
|
(490 |
) |
|
|
(163 |
) |
Other |
|
|
16 |
|
|
|
18 |
|
|
|
|
|
|
|
|
|
|
Net Assets |
|
$ |
273,429 |
|
|
$ |
220,837 |
|
|
|
|
|
|
|
|
|
|
F-33
We generally intend to retain some or all of our realized gains first to the extent we have available capital
loss carryforwards and second, through a deemed distribution. As of March 31, 2015, we had $0.3 million of capital loss carryforwards that expire in 2018. We had no deemed distributions during the years ended March 31, 2015, 2014, and
2013.
For the years ended March 31, 2015 and 2014, we recorded the following adjustments for permanent book-tax differences to reflect tax
character. Results of operations, net assets, and cash flows were not affected by these adjustments.
|
|
|
|
|
|
|
|
|
|
|
Tax Year Ended March 31, |
|
|
|
2015 |
|
|
2014 |
|
Undistributed net investment income |
|
$ |
584 |
|
|
$ |
416 |
|
Accumulated net realized gain |
|
|
|
|
|
|
235 |
|
Paid-in-capital |
|
|
(584 |
) |
|
|
(651 |
) |
The tax character of distributions paid by us to common stockholders for the years ended March 31, 2015, 2014 and 2013
were 100.0% from ordinary income.
NOTE 10. FEDERAL AND STATE INCOME TAXES
We intend to continue to maintain our qualifications as a RIC for federal income tax purposes. As a RIC, we are not subject to federal
income tax on the portion of our taxable income and gains that we distribute to stockholders. To maintain our qualification as a RIC, we must meet certain source-of-income and asset diversification requirements. In addition, in order to qualify to
be taxed as a RIC, we must also meet certain annual stockholder distribution requirements. To satisfy the RIC annual distribution requirement, we must distribute to stockholders at least 90% of our investment company taxable income. Our policy
generally is to make distributions to our stockholders in amount up to 100% of our investment company taxable income. Because we have distributed more than 90% of our investment company taxable income, no income tax provisions have been recorded for
the years ended March 31, 2015, 2014, and 2013.
In an effort to limit certain federal excise taxes imposed on RICs, we generally 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) 98.2% 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 capital gains in excess of capital losses for preceding years that were not distributed during such years. We incurred an excise tax of $0.1 million, $0.3 million, and $31 for the calendar years ended
December 31, 2014, 2013 and 2012, respectively.
Under the RIC Modernization Act (the RIC Act), we are permitted to carry forward capital
losses incurred in taxable years beginning after September 30, 2011, for an unlimited period. However, any losses incurred during those future taxable years will be required to be utilized prior to the losses incurred in pre-enactment taxable
years, which carry an expiration date. As a result of this ordering rule, pre-enactment capital loss carryforwards may be more likely to expire unused. Additionally, post-enactment capital loss carryforwards will retain their character as either
short-term or long-term capital losses rather than being considered all short-term as permitted under the Treasury regulations applicable to pre-enactment capital losses. Our capital loss carryforward balance as of March 31, 2015 and 2014 was
$0.3 million and $0.2 million, respectively.
NOTE 11. COMMITMENTS AND CONTINGENCIES
Legal Proceedings
We are party to
certain legal proceedings incidental to the normal course of our business, including the enforcement of our rights under contracts with our portfolio companies. We are required to establish reserves for litigation matters where those matters present
loss contingencies that are both probable and estimable. When loss contingencies are not both probable and estimable, we do not establish reserves. Based on current knowledge, we do not believe that loss contingencies, if any, arising from pending
investigations, litigation or regulatory matters will have a material adverse effect on our financial condition, results of operation or cash flows. Additionally, based on our current knowledge, we do not believe such loss contingencies are both
probable and estimable and therefore, as of as of March 31, 2015, we have not established reserves for such loss contingencies.
Escrow Holdbacks
From time to time, we will enter into arrangements as it relates to exits of certain investments whereby specific amounts of the proceeds are held in
escrow in order to be used to satisfy potential obligations as stipulated in the sales agreements. We record escrow amounts in restricted cash and cash equivalents on our accompanying Consolidated Statements of Assets and Liabilities. We
establish a contingent liability against the escrow amounts if we determine that it is probable and estimable that a portion of the escrow amounts will not be ultimately received at the end of the escrow period. The aggregate contingent liability
recorded against the escrow amounts was $0 and $35 as of March 31, 2015 and 2014, respectively.
F-34
Financial Commitments and Obligations
We have lines of credit and other uncalled capital commitments to certain of our portfolio companies that have not been fully drawn. Since these lines of
credit and other uncalled capital commitments have expiration dates and we expect many will never be fully drawn, the total line of credit and other uncalled capital commitment amounts do not necessarily represent future cash requirements. In
February 2015, we executed a capital call commitment with Tread and its senior credit facility lender, which expires in February 2018. Under the terms of the agreement, we may be required to fund additional capital up to $10.0 million in Tread, but
in all cases limited to the actual amount outstanding under Treads senior credit facility. The actual amount outstanding under Treads senior credit facility as of March 31, 2015 was $4.4 million. We estimate the fair value of the
combined unused line of credit and other uncalled capital commitments as of March 31, 2015 and 2014 to be minimal.
In addition to the lines of
credit and other uncalled capital commitments to our portfolio companies, we have also extended certain guaranties on behalf of some our portfolio companies. During the years ended March 31, 2015, 2014 and 2013, we have not been required to
make any payments on any of the guaranties, and we consider the credit risks to be remote and the fair value of the guaranties to be minimal.
As of
March 31, 2015, the following guaranties were outstanding:
|
|
|
In February 2010, we executed a guarantee of a wholesale financing facility agreement (the Floor Plan Facility) between Agricredit Acceptance, LLC (Agricredit) and Country Club Enterprises, LLC
(CCE). The Floor Plan Facility provides CCE with financing of up to $2.0 million to bridge the time and cash flow gap between the order and delivery of golf carts to customers. The guarantee was renewed in February 2012, 2013, 2014, and
2015 and will expire in February 2016, unless it is renewed again by us, CCE and Agricredit. |
|
|
|
In April 2010, we executed a guarantee of vendor recourse for up to $0.6 million in individual customer transactions (the Recourse Facility) between Wells Fargo Financial Leasing, Inc. and CCE. The Recourse
Facility provides CCE with the ability to provide vendor recourse up to a limit of $0.6 million on transactions with long-time customers who lack the financial history to qualify for third-party financing. The terms to maturity of these individual
transactions range from October 2015 to October 2016. |
As of March 31, 2014, the following guaranties were outstanding:
|
|
|
In October 2008, we executed a guarantee of a vehicle finance facility agreement (the Ford Finance Facility) between Ford Motor Credit Company (Ford) and ASH. The Ford Finance Facility
provides ASH with a line of credit of up to $0.5 million for component Ford parts used by ASH to build truck bodies under a separate contract. Ford retains title and ownership of the parts. The guarantee of the Ford Finance Facility will expire
upon termination of the separate parts supply contract with Ford or upon replacement of us as guarantor. |
|
|
|
In February 2010, we executed the Floor Plan Facility between Agricredit and CCE. The Floor Plan Facility provides CCE with financing of up to $2.0 million to bridge the time and cash flow gap between the order and
delivery of golf carts to customers. The guarantee was renewed in February 2012, 2013 and 2014. |
|
|
|
In April 2010, we executed the Recourse Facility for up to $2.0 million in individual customer transactions between Wells Fargo Financial Leasing, Inc. and CCE. The Recourse Facility provides CCE with the ability to
provide vendor recourse up to a limit of $2.0 million on transactions with long-time customers who lack the financial history to qualify for third-party financing. The terms to maturity of these individual transactions ranged from October 2014 to
October 2016. |
|
|
|
In October 2013, we executed a guarantee of a vehicle finance facility agreement (the Compass Finance Facility) between Compass Bank and ASH. The Compass Finance Facility provides ASH with a line of
credit of up to $0.3 million for component Ram parts used by ASH to build truck bodies under a separate contract. The guarantee expired upon maturity of the Compass Finance Facility on October 16, 2014. |
F-35
The following table summarizes the dollar balance of unused line of credit and other uncalled capital commitments
and guaranties as of March 31, 2015 and 2014:
|
|
|
|
|
|
|
|
|
|
|
As of March 31, |
|
|
|
2015 |
|
|
2014 |
|
Unused line of credit and other uncalled capital commitments |
|
$ |
10,031 |
|
|
$ |
6,684 |
|
Guaranties |
|
|
2,593 |
|
|
|
3,628 |
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
12,624 |
|
|
$ |
10,312 |
|
|
|
|
|
|
|
|
|
|
F-36
NOTE 12. FINANCIAL HIGHLIGHTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and for the Year Ended March 31, |
|
|
|
2015 |
|
|
2014 |
|
|
2013 |
|
|
2012 |
|
|
2011 |
|
Per Common Share Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net asset value, beginning of year (A) |
|
$ |
8.34 |
|
|
$ |
9.10 |
|
|
$ |
9.38 |
|
|
$ |
9.00 |
|
|
$ |
8.74 |
|
Income from investment operations(B) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income |
|
|
0.75 |
|
|
|
0.73 |
|
|
|
0.68 |
|
|
|
0.62 |
|
|
|
0.73 |
|
Net realized gain on investments and other |
|
|
|
|
|
|
0.31 |
|
|
|
0.03 |
|
|
|
0.23 |
|
|
|
1.06 |
|
Net unrealized appreciation (depreciation) on investments and other |
|
|
1.13 |
|
|
|
(1.09 |
) |
|
|
|
|
|
|
0.14 |
|
|
|
(1.05 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total from investment operations |
|
|
1.88 |
|
|
|
(0.05 |
) |
|
|
0.71 |
|
|
|
0.99 |
|
|
|
0.74 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of equity capital activity (B) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash distributions to common stockholders(C) |
|
|
(0.77 |
) |
|
|
(0.71 |
) |
|
|
(0.60 |
) |
|
|
(0.61 |
) |
|
|
(0.48 |
) |
Shelf registration offering costs |
|
|
(0.03 |
) |
|
|
|
|
|
|
(0.08 |
) |
|
|
|
|
|
|
|
|
Net dilutive effect of equity offering(D) |
|
|
(0.22 |
) |
|
|
|
|
|
|
(0.31 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total from equity capital activity |
|
|
(1.02 |
) |
|
|
(0.71 |
) |
|
|
(0.99 |
) |
|
|
(0.61 |
) |
|
|
(0.48 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other, net(B)(E) |
|
|
(0.02 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net asset value at end of year(A) |
|
$ |
9.18 |
|
|
$ |
8.34 |
|
|
$ |
9.10 |
|
|
$ |
9.38 |
|
|
$ |
9.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per common share market value at beginning of year |
|
$ |
8.27 |
|
|
$ |
7.31 |
|
|
$ |
7.57 |
|
|
$ |
7.79 |
|
|
$ |
6.01 |
|
Per common share market value at end of year |
|
|
7.40 |
|
|
|
8.27 |
|
|
|
7.31 |
|
|
|
7.57 |
|
|
|
7.76 |
|
Total return(F) |
|
|
11.96 |
% |
|
|
24.26 |
% |
|
|
4.73 |
% |
|
|
5.58 |
% |
|
|
38.56 |
% |
Common stock outstanding at end of year(A) |
|
|
29,775,958 |
|
|
|
26,475,958 |
|
|
|
26,475,958 |
|
|
|
22,080,133 |
|
|
|
22,080,133 |
|
|
|
|
|
|
|
Statement of Assets and Liabilities Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net assets at end of year |
|
$ |
273,429 |
|
|
$ |
220,837 |
|
|
$ |
240,963 |
|
|
$ |
207,216 |
|
|
$ |
198,829 |
|
Average net assets(G) |
|
|
229,350 |
|
|
|
231,356 |
|
|
|
216,751 |
|
|
|
204,595 |
|
|
|
192,893 |
|
|
|
|
|
|
|
Senior Securities Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total borrowings, at cost |
|
$ |
123,896 |
|
|
$ |
66,250 |
|
|
$ |
94,016 |
|
|
$ |
76,005 |
|
|
$ |
40,000 |
|
Mandatorily redeemable preferred stock |
|
|
81,400 |
|
|
|
40,000 |
|
|
|
40,000 |
|
|
|
40,000 |
|
|
|
|
|
Asset coverage ratio(H) |
|
|
230 |
% |
|
|
298 |
% |
|
|
272 |
% |
|
|
268 |
% |
|
|
534 |
% |
Average coverage per unit(I) |
|
$ |
2,301 |
|
|
$ |
2,978 |
|
|
$ |
2,725 |
|
|
$ |
2,676 |
|
|
$ |
5,344 |
|
|
|
|
|
|
|
Ratios/Supplemental Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio of expenses to average net assets(J) |
|
|
12.90 |
% |
|
|
10.20 |
% |
|
|
8.81 |
% |
|
|
5.71 |
% |
|
|
6.90 |
% |
Ratio of net expenses to average net assets(K)(L) |
|
|
9.48 |
|
|
|
7.33 |
|
|
|
6.48 |
|
|
|
3.67 |
|
|
|
5.13 |
|
Ratio of net investment income to average net assets(M) |
|
|
8.68 |
|
|
|
8.35 |
|
|
|
7.61 |
|
|
|
6.72 |
|
|
|
8.38 |
|
(A) |
Based on actual shares outstanding at the end of the corresponding year. |
(B) |
Based on weighted average per basic common share data. |
(C) |
Distributions are determined based on taxable income calculated in accordance with income tax regulations, which may differ from amounts determined under GAAP. |
(D) |
In fiscal years ended March 31, 2015 and 2013, the dilution is the result of issuing common shares at a price below then current NAV. |
(E) |
Represents the impact of the different share amounts (weighted average shares outstanding during the fiscal year and shares outstanding at the end of the fiscal year) in the per share data calculations and rounding
impacts. |
(F) |
Total return equals the change in the market value of our common stock from the beginning of the year, taking into account dividends reinvested in accordance with the terms of our dividend reinvestment plan. Total
return does not take into account distributions that may be characterized as a return of capital. For further information on the estimated character of our distributions to common stockholders, please refer to Note 9Distributions to Common
Stockholders. |
(G) |
Calculated using the average balance of net assets at the end of each month of the reporting year. |
(H) |
As a BDC, we are generally required to maintain an asset coverage ratio (as defined in Section 18(h) of the 1940 Act) of at least 200% on our senior securities representing indebtedness and our senior securities
that are stock. Our mandatorily redeemable preferred stock is a senior security that is stock. |
(I) |
Asset coverage per unit is the asset coverage ratio expressed in terms of dollar amounts per one thousand dollars of indebtedness. |
(J) |
Ratio of expenses to average net assets is computed using expenses before credits from the Adviser. The ratio of expenses to average net assets for the twelve months ended March 31, 2014, 2013, 2012, and 2011 were
revised from the previously reported ratios, which were 8.33%, 7.09%, 4.23%, and 5.48%, respectively. Refer to Note 2 Summary of Significant Accounting Policies for additional information on the revision. |
(K) |
Ratio of net expenses to average net assets is computed using total expenses, net of credits to the base management fee for the loan servicing fee and other credits from the Adviser. |
(L) |
Had we not received any voluntary credits of fees due to the Adviser, the ratio of net expenses to average net assets would have been 12.90%, 10.20 %, 8.81%, 6.14%, and 7.75% for the fiscal years ended
March 31, 2015, 2014, 2013, 2012, and 2011, respectively. |
(M) |
Had we not received any voluntary credits of fees due to the Adviser, the ratio of net investment income to average net assets would have been 5.26%, 5.48%, 5.28%, 4.25%, and 5.76% for the fiscal years ended
March 31, 2015, 2014, 2013, 2012, and 2011, respectively. |
F-37
NOTE 13. SELECTED QUARTERLY DATA (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended |
|
Year ended March 31, 2015 |
|
June 30, 2014 |
|
|
September 30, 2014 |
|
|
December 31, 2014 |
|
|
March 31, 2015 |
|
Total investment income |
|
$ |
9,837 |
|
|
$ |
9,071 |
|
|
$ |
11,562 |
|
|
$ |
11,173 |
|
Net investment income |
|
|
4,859 |
|
|
|
4,204 |
|
|
|
5,839 |
|
|
|
4,995 |
|
Net increase in net assets resulting from operations |
|
|
10,770 |
|
|
|
2,697 |
|
|
|
7,589 |
|
|
|
29,158 |
|
Net increase in net assets resulting from operations per weighted average common share basic & diluted |
|
$ |
0.41 |
|
|
$ |
0.10 |
|
|
$ |
0.29 |
|
|
$ |
1.08 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended |
|
Year ended March 31, 2014 |
|
June 30, 2013 |
|
|
September 30, 2013 |
|
|
December 31, 2013 |
|
|
March 31, 2014 |
|
Total investment income |
|
$ |
7,398 |
|
|
$ |
11,359 |
|
|
$ |
8,696 |
|
|
$ |
8,811 |
|
Net investment income |
|
|
4,033 |
|
|
|
6,228 |
|
|
|
4,402 |
|
|
|
4,644 |
|
Net (decrease) increase in net assets resulting from operations |
|
|
(6,519 |
) |
|
|
14,939 |
|
|
|
(10,686 |
) |
|
|
937 |
|
Net (decrease) increase in net assets resulting from operations per weighted average common share basic &
diluted |
|
$ |
(0.25 |
) |
|
$ |
0.57 |
|
|
$ |
(0.40 |
) |
|
$ |
0.03 |
|
NOTE 14. UNCONSOLIDATED SIGNIFICANT SUBSIDIARIES
In accordance with the SECs Regulation S-X and GAAP, we are not permitted to consolidate any subsidiary or other entity that is not an
investment company, including those in which we have a controlling interest. We had three unconsolidated subsidiaries, D.P.M.S., Inc. (d/b/a Danco Acquisition Corporation), Galaxy, and SOG, which met at least one of the significance conditions under
Rule 1-02(w) of the SECs Regulation S-X during at least one of the years ended March 31, 2015, 2014 and 2013. Accordingly, audited and unaudited financial statements, as applicable, for these subsidiaries have been included as exhibits to
this registration statement. In addition, we had one unconsolidated subsidiary, Venyu, which met at least one of the significance conditions under Rule 1-02(w) of the SECs Regulation S-X for the years ended March 31, 2014 and 2013.
Accordingly, summarized, comparative financial information is presented below for Venyu, which is a leader in commercial-grade, customizable solutions for data protection, data hosting, and disaster recovery.
|
|
|
|
|
|
|
|
|
Income Statement |
|
For the Five Months Ended August 30, 2013(A) |
|
|
For the Year Ended March 31, 2013 |
|
Net sales |
|
$ |
10,120 |
|
|
$ |
23,905 |
|
Gross profit |
|
|
5,254 |
|
|
|
12,861 |
|
Net loss |
|
|
(294 |
) |
|
|
(329 |
) |
(A) |
Venyu was exited in August 2013 and is no longer in our portfolio as of March 31, 2015 or 2014. Rule 4-08(g) information is being provided herein in lieu of Rule 3-09 separate financial statements pursuant
to relief provided by the Staff of the SECs Office of Chief Accountant in the Division of Investment Management. |
NOTE 15. SUBSEQUENT EVENTS
Common stock offering
In connection
with the March 13, 2015 common stock offering, the underwriters exercised their option in April 2015 to purchase an additional 495,000 shares at the public offering price of $7.40 per share to cover over-allotments, which resulted in gross
proceeds of $3.7 million and net proceeds, after deducting underwriting discounts, of approximately $3.5 million.
Term preferred stock offering
In May 2015, we completed a public offering of 1,610,000 shares of our Series C Term Preferred Stock at a public offering price of $25.00 per share.
Gross proceeds totaled $40.3 million and net proceeds, after deducting underwriting discounts and offering expenses borne by us, were approximately $38.6 million.
F-38
Distributions and dividends
In April 2015, our Board of Directors declared the following monthly distributions to common stockholders and dividends to holders of our Series A and B Term
Preferred Stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Record Date |
|
Payment Date |
|
Distribution per Common Share |
|
|
Dividend per Series A Term Preferred Share |
|
|
Dividend per Series B Term Preferred Share |
|
April 24, 2015 |
|
April 30, 2014 |
|
$ |
0.0625 |
|
|
$ |
0.1484375 |
|
|
$ |
0.140625 |
|
May 19, 2015 |
|
May 29, 2015 |
|
|
0.0625 |
|
|
|
0.1484375 |
|
|
|
0.140625 |
|
June 19, 2015 |
|
June 30, 2015 |
|
|
0.0625 |
|
|
|
0.1484375 |
|
|
|
0.140625 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total for the Quarter: |
|
|
|
$ |
0.1875 |
|
|
$ |
0.4453125 |
|
|
$ |
0.421875 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In May 2015, our Board of Directors declared the following combined cash dividend (for a prorated month of May 2015, based
upon the issuance date, and a full month of June 2015) to holders of our Series C Term Preferred Stock:
|
|
|
|
|
|
|
|
|
Record Date |
|
Payment Date |
|
|
Dividend per Series C Term Preferred Share |
|
June 19, 2015 |
|
|
June 30, 2015 |
|
|
$ |
0.221181 |
|
|
|
|
|
|
|
|
|
|
Total for the Quarter: |
|
|
|
|
|
$ |
0.221181 |
|
|
|
|
|
|
|
|
|
|
F-39
SCHEDULE 12-14
GLADSTONE INVESTMENT CORPORATION
INVESTMENTS IN AND ADVANCES TO AFFILIATES
(AMOUNTS IN THOUSANDS)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Name of Issuer(A) |
|
Title of Issue or Nature of Indebtedness(B) |
|
Amount of Investment Income(C) |
|
|
Value as of March 31, 2014 |
|
|
Gross Additions(D) |
|
|
Gross Reductions(E) |
|
|
Value as of March 31, 2015 |
|
CONTROL INVESTMENTS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Galaxy Tool Holding |
|
Secured Line of Credit |
|
$ |
103 |
|
|
$ |
|
|
|
$ |
3,250 |
|
|
$ |
|
|
|
$ |
3,250 |
|
Corporation |
|
Senior Subordinated Secured Term Debt |
|
|
2,124 |
|
|
|
15,520 |
|
|
|
|
|
|
|
|
|
|
|
15,520 |
|
|
|
Preferred Stock |
|
|
|
|
|
|
2,992 |
|
|
|
|
|
|
|
(2,992 |
) |
|
|
|
|
|
|
Common Stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,227 |
|
|
|
18,512 |
|
|
|
3,250 |
|
|
|
(2,992 |
) |
|
|
18,770 |
|
|
|
|
|
|
|
|
Roanoke Industries Corp. |
|
Senior Secured Term Debt |
|
|
69 |
|
|
|
|
|
|
|
1,650 |
|
|
|
|
|
|
|
1,650 |
|
|
|
Common Stock |
|
|
|
|
|
|
|
|
|
|
1,860 |
|
|
|
(1,650 |
) |
|
|
210 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
69 |
|
|
|
|
|
|
|
3,510 |
|
|
|
(1,650 |
) |
|
|
1,860 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL CONTROL INVESTMENTS |
|
$ |
2,296 |
|
|
$ |
18,512 |
|
|
$ |
6,760 |
|
|
$ |
(4,642 |
) |
|
$ |
20,630 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AFFILIATE INVESTMENTS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acme Cryogenics, Inc. |
|
Senior Subordinated Secured Term Debt |
|
$ |
1,269 |
|
|
$ |
14,500 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
14,500 |
|
|
|
Preferred Stock |
|
|
|
|
|
|
11,276 |
|
|
|
972 |
|
|
|
(3,729 |
) |
|
|
8,519 |
|
|
|
Common Stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock Warrants |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,269 |
|
|
|
25,776 |
|
|
|
972 |
|
|
|
(3,729 |
) |
|
|
23,019 |
|
|
|
|
|
|
|
|
Alloy Die Casting Corp. |
|
Senior Secured Term Debt |
|
|
1,255 |
|
|
|
12,261 |
|
|
|
|
|
|
|
(107 |
) |
|
|
12,154 |
|
|
|
Preferred Stock |
|
|
|
|
|
|
1,948 |
|
|
|
2,174 |
|
|
|
|
|
|
|
4,122 |
|
|
|
Common Stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,255 |
|
|
|
14,209 |
|
|
|
2,174 |
|
|
|
(107 |
) |
|
|
16,276 |
|
|
|
|
|
|
|
|
Behrens Manufacturing, LLC |
|
Senior Secured Term Debt |
|
|
1,315 |
|
|
|
9,975 |
|
|
|
|
|
|
|
|
|
|
|
9,975 |
|
|
|
Preferred Stock |
|
|
|
|
|
|
2,754 |
|
|
|
693 |
|
|
|
|
|
|
|
3,447 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,315 |
|
|
|
12,729 |
|
|
|
693 |
|
|
|
|
|
|
|
13,422 |
|
|
|
|
|
|
|
|
B-Dry, LLC |
|
Secured Line of Credit |
|
|
39 |
|
|
|
566 |
|
|
|
1,325 |
|
|
|
(767 |
) |
|
|
1,124 |
|
|
|
Senior Secured Term Debt |
|
|
440 |
|
|
|
4,865 |
|
|
|
|
|
|
|
(1,375 |
) |
|
|
3,490 |
|
|
|
Senior Secured Term Debt |
|
|
122 |
|
|
|
2,144 |
|
|
|
|
|
|
|
(1,689 |
) |
|
|
455 |
|
|
|
Common Stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
601 |
|
|
|
7,575 |
|
|
|
1,325 |
|
|
|
(3,831 |
) |
|
|
5,069 |
|
|
|
|
|
|
|
|
B+T Group Acquisition, Inc. |
|
Secured Line of Credit |
|
|
22 |
|
|
|
|
|
|
|
700 |
|
|
|
|
|
|
|
700 |
|
|
|
Senior Secured Term Debt |
|
|
521 |
|
|
|
|
|
|
|
14,000 |
|
|
|
|
|
|
|
14,000 |
|
|
|
Preferred Stock |
|
|
|
|
|
|
|
|
|
|
4,541 |
|
|
|
|
|
|
|
4,541 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
543 |
|
|
|
|
|
|
|
19,241 |
|
|
|
|
|
|
|
19,241 |
|
|
|
|
|
|
|
|
Cambridge Sound |
|
Secured Line of Credit |
|
|
14 |
|
|
|
|
|
|
|
675 |
|
|
|
(675 |
) |
|
|
|
|
Management, Inc. |
|
Senior Secured Term Debt |
|
|
991 |
|
|
|
|
|
|
|
15,000 |
|
|
|
|
|
|
|
15,000 |
|
|
|
Preferred Equity |
|
|
|
|
|
|
|
|
|
|
4,500 |
|
|
|
2,698 |
|
|
|
7,198 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,005 |
|
|
|
|
|
|
|
20,175 |
|
|
|
2,023 |
|
|
|
22,198 |
|
|
|
|
|
|
|
|
Channel Technologies |
|
Preferred Stock |
|
|
|
|
|
|
3,122 |
|
|
|
|
|
|
|
(807 |
) |
|
|
2,315 |
|
Group, LLC |
|
Common Stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,122 |
|
|
|
|
|
|
|
(807 |
) |
|
|
2,315 |
|
|
|
|
|
|
|
|
Counsel Press, Inc. |
|
Secured Line of Credit |
|
|
1 |
|
|
|
|
|
|
|
1,500 |
|
|
|
|
|
|
|
1,500 |
|
|
|
Senior Secured Term Debt |
|
|
6 |
|
|
|
|
|
|
|
18,000 |
|
|
|
|
|
|
|
18,000 |
|
|
|
Senior Secured Term Debt |
|
|
2 |
|
|
|
|
|
|
|
5,500 |
|
|
|
|
|
|
|
5,500 |
|
|
|
Preferred Equity |
|
|
|
|
|
|
|
|
|
|
6,995 |
|
|
|
|
|
|
|
6,995 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9 |
|
|
|
|
|
|
|
31,995 |
|
|
|
|
|
|
|
31,995 |
|
F-40
GLADSTONE INVESTMENT CORPORATION
INVESTMENTS IN AND ADVANCES TO AFFILIATES (Continued)
(AMOUNTS IN THOUSANDS)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Name of Issuer(A) |
|
Title of Issue or Nature of Indebtedness(B) |
|
Amount of Investment Income(C) |
|
|
Value as of March 31, 2014 |
|
|
Gross Additions(D) |
|
|
Gross Reductions(E) |
|
|
Value as of March 31, 2015 |
|
D.P.M.S., Inc. |
|
Secured Line of Credit |
|
$ |
161 |
|
|
$ |
690 |
|
|
$ |
550 |
|
|
$ |
(478 |
) |
|
$ |
762 |
|
|
|
Senior Secured Term Debt |
|
|
104 |
|
|
|
515 |
|
|
|
|
|
|
|
(25 |
) |
|
|
490 |
|
|
|
Senior Secured Term Debt |
|
|
357 |
|
|
|
1,759 |
|
|
|
|
|
|
|
(85 |
) |
|
|
1,674 |
|
|
|
Senior Secured Term Debt |
|
|
58 |
|
|
|
236 |
|
|
|
|
|
|
|
(17 |
) |
|
|
219 |
|
|
|
Preferred Stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock Warrants |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
680 |
|
|
|
3,200 |
|
|
|
550 |
|
|
|
(605 |
) |
|
|
3,145 |
|
|
|
|
|
|
|
|
Edge Adhesives Holdings, Inc. |
|
Secured Line of Credit |
|
|
130 |
|
|
|
795 |
|
|
|
1,590 |
|
|
|
(897 |
) |
|
|
1,488 |
|
|
|
Senior Secured Term Debt |
|
|
1,179 |
|
|
|
9,300 |
|
|
|
|
|
|
|
|
|
|
|
9,300 |
|
|
|
Senior Secured Term Debt |
|
|
39 |
|
|
|
|
|
|
|
877 |
|
|
|
(877 |
) |
|
|
|
|
|
|
Senior Subordinated Term Debt |
|
|
335 |
|
|
|
2,400 |
|
|
|
3 |
|
|
|
|
|
|
|
2,403 |
|
|
|
Preferred Stock |
|
|
|
|
|
|
3,474 |
|
|
|
|
|
|
|
(275 |
) |
|
|
3,199 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,683 |
|
|
|
15,969 |
|
|
|
2,470 |
|
|
|
(2,049 |
) |
|
|
16,390 |
|
|
|
|
|
|
|
|
Head Country Food Products, Inc. |
|
Secured Line of Credit |
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Secured Term Debt |
|
|
1,147 |
|
|
|
9,050 |
|
|
|
|
|
|
|
|
|
|
|
9,050 |
|
|
|
Preferred Stock |
|
|
|
|
|
|
4,000 |
|
|
|
|
|
|
|
(69 |
) |
|
|
3,931 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,149 |
|
|
|
13,050 |
|
|
|
|
|
|
|
(69 |
) |
|
|
12,981 |
|
|
|
|
|
|
|
|
Logo Sportswear, Inc. |
|
Secured Line of Credit |
|
|
1 |
|
|
|
|
|
|
|
250 |
|
|
|
(250 |
) |
|
|
|
|
|
|
Senior Secured Term Debt |
|
|
83 |
|
|
|
|
|
|
|
9,200 |
|
|
|
|
|
|
|
9,200 |
|
|
|
Preferred Stock |
|
|
|
|
|
|
|
|
|
|
1,550 |
|
|
|
|
|
|
|
1,550 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
84 |
|
|
|
|
|
|
|
11,000 |
|
|
|
(250 |
) |
|
|
10,750 |
|
|
|
|
|
|
|
|
Meridian Rack & Pinion, Inc. |
|
Senior Secured Term Debt |
|
|
1,322 |
|
|
|
9,672 |
|
|
|
|
|
|
|
(60 |
) |
|
|
9,612 |
|
|
|
Preferred Stock |
|
|
|
|
|
|
3,468 |
|
|
|
|
|
|
|
(351 |
) |
|
|
3,117 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,322 |
|
|
|
13,140 |
|
|
|
|
|
|
|
(411 |
) |
|
|
12,729 |
|
|
|
|
|
|
|
|
NDLI Acquisition, LLC |
|
Secured Line of Credit |
|
|
163 |
|
|
|
|
|
|
|
2,875 |
|
|
|
(567 |
) |
|
|
2,308 |
|
|
|
Senior Secured Term Debt |
|
|
840 |
|
|
|
|
|
|
|
7,227 |
|
|
|
(1,424 |
) |
|
|
5,803 |
|
|
|
Senior Secured Term Debt |
|
|
405 |
|
|
|
|
|
|
|
3,650 |
|
|
|
(719 |
) |
|
|
2,931 |
|
|
|
Senior Secured Term Debt |
|
|
405 |
|
|
|
|
|
|
|
3,650 |
|
|
|
(720 |
) |
|
|
2,930 |
|
|
|
Preferred Stock |
|
|
|
|
|
|
2,592 |
|
|
|
1,000 |
|
|
|
(3,592 |
) |
|
|
|
|
|
|
Common Stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,813 |
|
|
|
2,592 |
|
|
|
18,402 |
|
|
|
(7,022 |
) |
|
|
13,972 |
|
|
|
|
|
|
|
|
Old World Christmas, Inc. |
|
Secured Line of Credit |
|
|
79 |
|
|
|
|
|
|
|
2,430 |
|
|
|
(2,430 |
) |
|
|
|
|
|
|
Senior Secured Term Debt |
|
|
981 |
|
|
|
|
|
|
|
15,770 |
|
|
|
|
|
|
|
15,770 |
|
|
|
Preferred Stock |
|
|
|
|
|
|
|
|
|
|
6,657 |
|
|
|
|
|
|
|
6,657 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,060 |
|
|
|
|
|
|
|
24,857 |
|
|
|
(2,430 |
) |
|
|
22,427 |
|
|
|
|
|
|
|
|
Precision Southeast, Inc. |
|
Senior Secured Term Debt |
|
|
399 |
|
|
|
5,617 |
|
|
|
4,000 |
|
|
|
|
|
|
|
9,617 |
|
|
|
Preferred Stock |
|
|
|
|
|
|
|
|
|
|
1,830 |
|
|
|
|
|
|
|
1,830 |
|
|
|
Common Stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
399 |
|
|
|
5,617 |
|
|
|
5,830 |
|
|
|
|
|
|
|
11,447 |
|
SOG Specialty Knives & Tools, LLC |
|
Senior Secured Term Debt |
|
|
833 |
|
|
|
6,200 |
|
|
|
|
|
|
|
|
|
|
|
6,200 |
|
|
|
Senior Secured Term Debt |
|
|
1,824 |
|
|
|
12,199 |
|
|
|
1 |
|
|
|
|
|
|
|
12,200 |
|
|
|
Preferred Stock |
|
|
534 |
|
|
|
8,240 |
|
|
|
5,211 |
|
|
|
|
|
|
|
13,451 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,191 |
|
|
|
26,639 |
|
|
|
5,212 |
|
|
|
|
|
|
|
31,851 |
|
F-41
GLADSTONE INVESTMENT CORPORATION
INVESTMENTS IN AND ADVANCES TO AFFILIATES (Continued)
(AMOUNTS IN THOUSANDS)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Name of Issuer(A) |
|
Title of Issue or Nature of Indebtedness(B) |
|
Amount of Investment Income(C) |
|
|
Value as of March 31, 2014 |
|
|
Gross Additions(D) |
|
|
Gross Reductions(E) |
|
|
Value as of March 31, 2015 |
|
Tread Corporation |
|
Secured Line of Credit (F) |
|
$ |
|
|
|
$ |
|
|
|
$ |
3,282 |
|
|
$ |
(2,907 |
) |
|
$ |
375 |
|
|
|
Senior Subordinated Secured Term Debt (F) |
|
|
|
|
|
|
|
|
|
|
782 |
|
|
|
|
|
|
|
782 |
|
|
|
Senior Subordinated Secured Term Debt (F) |
|
|
|
|
|
|
|
|
|
|
430 |
|
|
|
|
|
|
|
430 |
|
|
|
Senior Subordinated Secured Term Debt (F) |
|
|
|
|
|
|
|
|
|
|
156 |
|
|
|
|
|
|
|
156 |
|
|
|
Senior Subordinated Secured Term Debt (F) |
|
|
|
|
|
|
|
|
|
|
80 |
|
|
|
|
|
|
|
80 |
|
|
|
Preferred Stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock Warrants |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,730 |
|
|
|
(2,907 |
) |
|
|
1,823 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL AFFILIATE INVESTMENTS |
|
$ |
17,378 |
|
|
$ |
143,618 |
|
|
$ |
149,626 |
|
|
$ |
(22,194 |
) |
|
$ |
271,050 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A) |
Certain of the listed securities are issued by affiliate(s) of the indicated portfolio company. |
(B) |
Common stock, warrants, options and, in some cases, preferred stock are generally non-income-producing and restricted. The principal amount of debt and the number of shares of common stock and preferred stock are
shown in the accompanying Consolidated Schedule of Investments as of March 31, 2015. |
(C) |
Represents the total amount of interest or other investment income credited to income for the portion of the year an investment was a control investment or affiliate investment, as appropriate. |
(D) |
Gross additions include increases in investments resulting from new portfolio investments, paid-in-kind interest or dividends, the amortization of discounts and fees and the exchange of one or more existing
securities for one or more new securities. Gross additions also include net increases in unrealized appreciation or decreases in unrealized depreciation. |
(E) |
Gross reductions include decreases in investments resulting from principal collections related to investment repayments or sales, the amortization of premiums and acquisition costs and the exchange of one or more
existing securities for one or more new securities. Gross reductions also include net increases in unrealized depreciation or decreases in unrealized appreciation. |
(F) |
Debt security is on non-accrual status and, therefore, is considered non-income producing. |
** |
Information related to the amount of equity in the net profit and loss for the period for the investments listed has not been included in this schedule. This information is not considered to be meaningful due to
the complex capital structures of the portfolio companies, with different classes of equity securities outstanding with different preferences in liquidation. These investments are not consolidated, nor are they accounted for under the equity method
of accounting. |
F-42
Part C OTHER INFORMATION
Item 25. |
Financial Statements and Exhibits |
The following financial statements of Gladstone Investment
Corporation (the Company or the Registrant) are included in the Registration Statement in Part A: Information Required in a Prospectus:
GLADSTONE INVESTMENT CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
Audited Consolidated Financial Statements |
|
|
|
|
Managements Annual Report on Internal Control over Financial Reporting |
|
|
F-2 |
|
Report of Independent Registered Public Accounting Firm |
|
|
F-3 |
|
Consolidated Statements of Assets and Liabilities as of March 31, 2015 and March 31, 2014 |
|
|
F-4 |
|
Consolidated Statements of Operations for the years ended March 31, 2015, March 31, 2014 and March 31, 2013 |
|
|
F-5 |
|
Consolidated Statements of Changes in Net Assets for the years ended March 31, 2015, March 31, 2014 and March 31,
2013 |
|
|
F-6 |
|
Consolidated Statements of Cash Flows for the years ended March 31, 2015, March 31, 2014 and March 31, 2013 |
|
|
F-7 |
|
Consolidated Schedules of Investments as of March 31, 2015 and 2014 |
|
|
F-8 |
|
Notes to Consolidated Financial Statements |
|
|
F-16 |
|
C-1
|
|
|
Exhibit Number |
|
Description |
|
|
2.a.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. |
|
|
2.a.2 |
|
Certificate of Designation of 7.125% Series A Cumulative Term Preferred Stock of Gladstone Investment Corporation, incorporated by reference to Exhibit 2.a.2 to Post-Effective Amendment No. 5 to the Registration Statement on Form
N-2 (File No. 333-160720) filed February 29, 2012. |
|
|
2.a.3 |
|
Certificate of Designation of 6.75% Series B Cumulative Term Preferred Stock of Gladstone Investment Corporation, incorporated by reference to Exhibit 3.3 to the Registration Statement on Form 8-A (File No. 001-34007), filed
November 7, 2014. |
|
|
2.a.4 |
|
Certificate of Designation of 6.50% Series C Cumulative Term Preferred Stock of Gladstone Investment Corporation, incorporated by reference to Exhibit 3.4 to Registration Statement on Form 8-A (File No. 001-34007), filed May 11,
2015. |
|
|
2.b.1 |
|
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. |
|
|
2.b.2 |
|
First Amendment to Amended and Restated Bylaws, incorporated by reference to Exhibit 99.1 to the Current Report on Form 8-K (File No. 814-00704), filed July 10, 2007. |
|
|
2.c |
|
Not applicable. |
|
|
2.d.1 |
|
Specimen Stock Certificate, incorporated by reference to Exhibit 99.d to Pre-Effective Amendment No. 3 to the Registration Statement on Form N-2 (File No. 333-123699), filed June 21, 2005. |
|
|
2.d.2 |
|
Form of Senior Indenture, incorporated by reference to Exhibit 2.d.2 to the Registration Statement on Form N-2 (File No. 333-138008), filed October 16, 2006. |
|
|
2.d.3 |
|
Form of Subordinated Indenture, incorporated by reference to Exhibit 2.d.3 to the Registration Statement on Form N-2 (File No. 333-138008), filed October 16, 2006. |
|
|
2.d.4 |
|
Specimen 7.125% Series A Cumulative Term Preferred Stock Certificate, incorporated by reference to Exhibit 2.d.4 to Post-Effective Amendment No. 5 to the Registration Statement on Form N-2 (File No. 333-160720), filed
February 29, 2012. |
|
|
2.d.5 |
|
Specimen 6.75% Series B Cumulative Term Preferred Stock Certificate, incorporated by reference to Exhibit 4.3 to the Registration Statement on Form 8-A (File No. 001-34007), filed November 7, 2014. |
|
|
2.d.6 |
|
Specimen 6.50% Series C Cumulative Term Preferred Stock Certificate, incorporated by reference to Exhibit 4.4 to the Registration Statement on Form 8-K (File No.001-34007), filed May 11, 2015. |
|
|
2.d.7 |
|
Form of Common Stock Subscription Form and Subscription Certificate, incorporated by reference to Exhibit 2.d.5 to Pre-Effective Amendment No. 1 to the Registration Statement on Form N-2 (File No. 333-181879), filed July 17,
2012. |
|
|
2.d.8 |
|
Form of Preferred Stock Subscription Form and Subscription Certificate, incorporated by reference to Exhibit 2.d.6 to Pre-Effective Amendment No. 1 to the Registration Statement on Form N-2 (File No. 333-181879), filed July 17,
2012. |
|
|
2.d.9 |
|
Form of Common Stock Warrant Agreement and Warrant Certificate, incorporated by reference to Exhibit 2.d.7 to Pre-Effective Amendment No. 1 to the Registration Statement on Form N-2 (File No. 333-181879), filed July 17,
2012. |
|
|
2.d.10 |
|
Form of Preferred Stock Warrant Agreement and Warrant Certificate, incorporated by reference to Exhibit 2.d.8 to Pre-Effective Amendment No. 1 to the Registration Statement on Form N-2 (File No. 333-181879), filed July 17,
2012. |
|
|
2.d.11 |
|
Form T-1 Statement of Eligibility of U.S. Bank National Association, as Trustee, with respect to the Form of Senior and Subordinated Indentures. |
|
|
2.f |
|
Not applicable. |
|
|
2.g |
|
Investment Advisory and Management Agreement between the Registrant and Gladstone Management Corporation, incorporated by reference to Exhibit 10.1 to the Annual Report on Form 10-K (File No. 814-00704), filed
June 14, 2006(renewed July 15, 2014). |
C-2
|
|
|
Exhibit Number |
|
Description |
|
|
2.h** |
|
Form of Underwriting Agreement. |
|
|
2.i |
|
Not applicable. |
|
|
2.j.1 |
|
Custody Agreement between the Registrant and The Bank of New York, incorporated by reference to Exhibit 99.j to Pre-Effective Amendment No. 3 to the Registration Statement on Form N-2 (File No. 333-123699), filed
June 21, 2005. |
|
|
2.j.2 |
|
Custodial Agreement by and among Gladstone Business Investment, LLC, the Registrant, Gladstone Management Corporation, The Bank of New York Trust Company, N.A. and Deutsche Bank AG, New York Branch, dated October 10, 2006,
incorporated by reference to Exhibit 2.j.2 to Post-Effective Amendment No. 2 to the Registration Statement on Form N-2 (File No. 333-181879), filed June 7, 2013.. |
|
|
2.j.3 |
|
Amendment No. 1 to Custodial Agreement by and among Gladstone Business Investment, LLC, the Registrant, Gladstone Management Corporation, The Bank of New York Trust Company, N.A. and Deutsche Bank AG, New York Branch, dated April
14, 2009, incorporated by reference to Exhibit 2.j.3 to Post-Effective Amendment No. 2 to the Registration Statement on Form N-2 (File No. 333-181879), filed June 7, 2013.. |
|
|
2.k.1 |
|
Administration Agreement between the Registrant and Gladstone Administration, LLC, dated June 22, 2005, incorporated by reference to Exhibit 10.2 to the Annual Report on Form 10-K (File No. 814-00704), filed June 14,
2006 (renewed July 15, 2014). |
|
|
2.k.2 |
|
Stock Transfer Agency Agreement between the Registrant and The Bank of New York, incorporated by reference to Exhibit k.1 to Pre-Effective Amendment No. 1 to the Registration Statement on Form N-2 (File
No. 333-123699), filed May 13, 2005. |
|
|
2.k.3 |
|
Fifth Amended and Restated Credit Agreement, dated as of April 30, 2013, by and among Gladstone Business Investment, LLC, as Borrower, Gladstone Management Corporation, as servicer, the financial institutions as party thereto,
as Lenders and Managing Agents, and Key Equipment Finance, Inc., as Administrative Agent and Lead Arranger, incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K (File No. 814-00704), filed May 2, 2013. |
|
|
2.k.4 |
|
Joinder Agreement, dated as of June 12, 2013, by and among the Gladstone Business Investment, LLC, Gladstone Management Corporation, Key Equipment Finance Inc. and Everbank Commercial Finance, Inc., incorporated by reference to
Exhibit 10.1 of the Current Report on Form 8-K (File No. 814-00704), filed June 17, 2013. |
|
|
2.k.5 |
|
Joinder Agreement, dated as of June 12, 2013, by and among the Gladstone Business Investment, LLC, Gladstone Management Corporation, Key Equipment Finance Inc. and Alostar Bank of Commerce, incorporated by reference to Exhibit
10.2 of the Current Report on Form 8-K (File No. 814-00704), filed June 17, 2013. |
|
|
2.k.6 |
|
Amendment No. 1 to Fifth Amended and Restated Credit Agreement, dated as of June 26, 2014, by and among Gladstone Business Investment, LLC, as Borrower, Gladstone Management Corporation, as Servicer, the Financial Institutions as
party thereto, as Lenders and Managing Agents, and Key Equipment Finance, a division of KeyBank National Association, as Administrative Agent, incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K (File No. 814-00704), filed
June 30, 2014. |
|
|
2.k.7 |
|
Joinder Agreement, dated as of September 19, 2014, by and among Gladstone Business Investment, LLC, Gladstone Management Corporation, Key Equipment Finance, a division of KeyBank National Association, and East West Bank,
incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K (File No. 814-00704), filed September 22, 2014. |
|
|
2.k.8 |
|
Joinder Agreement, dated as of September 19, 2014, by and among Gladstone Business Investment, LLC, Gladstone Management Corporation, Key Equipment Finance, a division of KeyBank National Association, and Manufacturers and Traders
Trust, incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K (File No. 814-00704), filed September 22, 2014. |
|
|
2.k.9 |
|
Joinder Agreement, dated as of September 19, 2014, by and among Gladstone Business Investment, LLC, Gladstone Management Corporation, Key Equipment Finance, a division of KeyBank National Association, and Customers Bank,
incorporated by reference to Exhibit 10.3 to the Current Report on Form 8-K (File No. 814-00704), filed September 22, 2014. |
|
|
2.k.10 |
|
Joinder Agreement, dated as of September 19, 2014, by and among Gladstone Business Investment, LLC, Gladstone Management Corporation, Key Equipment Finance, a division of KeyBank National Association, and Talmer Bank and Trust,
incorporated by reference to Exhibit 10.4 to the Current Report on Form 8-K (File No. 814-00704), filed September 22, 2014. |
|
|
2.l |
|
Opinion of Bass, Berry & Sims PLC. |
C-3
|
|
|
Exhibit Number |
|
Description |
|
|
2.m |
|
Not applicable. |
|
|
2.n.1 |
|
Consent of Bass, Berry & Sims PLC (included in Exhibit 2.l). |
|
|
2.n.2 |
|
Consent of PricewaterhouseCoopers LLP. |
|
|
2.n.3 |
|
Report of Independent Registered Public Accounting Firm. |
|
|
2.n.4 |
|
Consent of Moss Adams LLP. |
|
|
2.n.5 |
|
Consent of Allen, Gibbs & Houlik, L.C. |
|
|
2.n.6 |
|
Consent of Moss Adams LLP. |
|
|
2.o |
|
Not applicable. |
|
|
2.p |
|
Founder Stock Purchase Agreement between the Registrant and David Gladstone, incorporated by reference to Exhibit p to the Registration Statement on Form N-2 (File No. 333-123699), filed March 31, 2005. |
|
|
2.q |
|
Not applicable. |
|
|
2.r |
|
Code of Ethics and Business Conduct, incorporated by reference to Exhibit 2.r to Post-Effective Amendment No. 2 to the Registration Statement on Form N-2 (File No. 333-181879), filed June 7, 2013. |
|
|
2.s.1 |
|
Power of Attorney (included in the signature page hereto). |
|
|
2.s.2 |
|
Computation of Ratio of Earnings to Combined Fixed Charges and Preferred Dividends. |
|
|
2.s.3 |
|
Financial Statements of Danco Acquisition Corporation as of and for the years ended December 31, 2014 and 2013 (unaudited). |
|
|
2.s.4 |
|
Financial Statements of Danco Acquisition Corporation as of and for the years ended December 31, 2012 and 2011. |
|
|
2.s.5 |
|
Financial Statements of Galaxy Tool Holding Corporation and Subsidiary as of and for the years ended December 31, 2014 and 2013 (unaudited). |
|
|
2.s.6 |
|
Financial Statements of Galaxy Tool Holding Corporation and Subsidiary as of and for the years ended December 31, 2012 and 2011. |
|
|
2.s.7 |
|
Financial Statements of SOG Specialty Knives and Tools, LLC as of and for the years ended December 31, 2014 and 2013 (unaudited). |
|
|
2.s.8 |
|
Financial Statements of SOG Specialty Knives and Tools, LLC as of and for the years ended December 31, 2013 and 2012. |
|
|
2.s.9 |
|
Form of Prospectus Supplement for Common Stock Offerings. |
|
|
2.s.10 |
|
Form of Prospectus Supplement for Preferred Stock Offering. |
|
|
2.s.11 |
|
Form of Prospectus Supplement for Rights Offering of Common Stock. |
|
|
2.s.12 |
|
Form of Prospectus Supplement for Rights Offering of Preferred Stock. |
|
|
2.s.13 |
|
Form of Prospectus Supplement for Notes. |
|
|
2.s.14 |
|
Form of Prospectus Supplement for Senior Notes. |
|
|
2.s.15 |
|
Form of Prospectus Supplement for Warrants for Common Stock. |
|
|
2.s.16 |
|
Form of Prospectus Supplement for Warrants for Preferred Stock. |
** |
To be filed by post-effective amendment. |
C-4
Item 26. |
Marketing Arrangements |
The information contained under the heading
Plan of Distribution in the prospectus is incorporated herein by reference, and any information concerning any underwriters will be contained in the accompanying prospectus supplement, if any.
Item 27. |
Other Expenses of Issuance and Distribution |
|
|
|
|
|
Commission registration fee |
|
$ |
34,860 |
|
FINRA fee |
|
|
21,905 |
|
Accounting fees and expenses |
|
|
50,000 |
* |
Legal fees and expenses |
|
|
150,000 |
* |
Printing and engraving |
|
|
75,000 |
* |
Miscellaneous fees and expenses |
|
|
15,000 |
* |
|
|
|
|
|
Total |
|
$ |
346,795 |
* |
|
|
|
|
|
* |
These amounts are estimates. |
All of the expenses set forth above shall be borne by the
Registrant.
Item 28. |
Persons Controlled by or Under Common Control |
The following list
sets forth each of the companies considered to be controlled by the Registrant as defined by the Investment Company Act of 1940, as of March 31, 2015:
|
|
|
Gladstone Business Investment, LLC, a Delaware limited liability company, controlled by the Registrant, through 100% of the voting securities. (1) |
|
|
|
Galaxy Tool Holding Corporation, incorporated in Delaware, and its subsidiary, controlled by the Registrant, through 63% of the voting securities
(2) |
|
|
|
Roanoke Industries Corporation, a Delaware corporation, controlled by the Registrant, through 100% of the voting securities. (3) |
|
|
|
Gladstone Investment Advisers, Inc., a Delaware corporation, controlled by the Registrant, through 100% of the voting securities. (1) |
(1) Subsidiary is included in the Registrants consolidated financial statements.
(2) The Registrant filed separate unaudited financial statements for Galaxy Tool Holding Corporation and its subsidiary as an exhibit to its
Annual Report on Form 10-K for the fiscal year ended March 31, 2015, on May 20, 2015.
(3) Subsidiary is not a significant
subsidiary as such term is defined in Rule 1-02(w) of Regulation S-X.
We may also be deemed to be under common control with
the following entities: Gladstone Capital Corporation, a Maryland corporation; Gladstone Commercial Corporation, a Maryland corporation; and Gladstone Land Corporation, a Maryland corporation; by virtue of the fact that they are advised by our
Adviser, Gladstone Management Corporation, as well as Gladstone Lending Corporation, a Maryland corporation, and Gladstone Participation Fund, LLC, a Delaware limited liability company, because 100% of the voting securities of each are owned by our
Adviser.
C-5
Item 29. |
Number of Holders of Securities |
The following table sets forth the
approximate number of record holders of our common stock at May 19, 2015.
|
|
|
|
|
Title of Class |
|
Number of Record Holders |
|
Common Stock, par value $0.001 per share |
|
|
22 |
|
7.125% Series A Cumulative Term Preferred Stock, par value $0.001 per share |
|
|
1 |
|
6.750% Series B Cumulative Term Preferred Stock, par value $0.001 per share |
|
|
1 |
|
6.500% Series C Cumulative Term Preferred Stock, par value $0.001 per share |
|
|
1 |
|
Subject to the Investment Company
Act of 1940 as amended, or the 1940 Act, or any valid rule, regulation or order of the Securities and Exchange Commission, or the SEC, thereunder, our amended and restated certificate of incorporation and bylaws provide that we will indemnify any
person who was or is a party or is threatened to be made a party to any threatened action, suit or proceeding whether civil, criminal, administrative or investigative, by reason of the fact that he is or was our director or officer, or is or was
serving at our request as a director, officer, partner or trustee of another corporation, real estate investment trust, partnership, joint venture, trust, employee benefit plan or other enterprise to the maximum extent permitted by Section 145
of the Delaware General Corporation Law. The 1940 Act provides that a company may not indemnify any director or officer against liability to it or its security holders to which he or she might otherwise be subject by reason of his or her willful
misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his or her office unless a determination is made by final decision of a court, by vote of a majority of a quorum of directors who are
disinterested, non-party directors or by independent legal counsel that the liability for which indemnification is sought did not arise out of the foregoing conduct. In addition to any indemnification to which our directors and officers are entitled
pursuant to our certificate of incorporation and bylaws and the Delaware General Corporation Law, our certificate of incorporation and bylaws permit us to indemnify our other employees and agents to the fullest extent permitted by the Delaware
General Corporation Law, whether such employees or agents are serving us or, at our request, any other entity.
In addition, the
investment advisory and management agreement between us and our Adviser, as well as the administration agreement between us and our Administrator, each provide that, absent willful misfeasance, bad faith, or gross negligence in the performance of
their respective duties or by reason of the reckless disregard of their respective duties and obligations, our Adviser and our Administrator, as applicable, and their respective officers, managers, partners, agents, employees, controlling persons,
members, and any other person or entity affiliated with them are entitled to indemnification from us for any damages, liabilities, costs, and expenses (including reasonable attorneys fees and amounts reasonably paid in settlement) arising from
the rendering of our Advisers services under the investment advisory and management agreement or otherwise as our investment adviser, or the rendering of our Administrators services under the administration agreement, or otherwise as an
administrator for us, as applicable.
Item 31. |
Business and Other Connections of Investment Adviser |
A description
of any other business, profession, vocation or employment of a substantial nature in which our Adviser, and each director or executive officer of our Adviser, is or has been during the past two fiscal years, engaged in for his or her own account or
in the capacity of director, officer, employee, partner or trustee, is set forth in Part A of this Registration Statement in the section entitled Management. Additional information regarding our Adviser and its officers and
directors is set forth in its Form ADV, as filed with the SEC, and is incorporated herein by reference.
Item 32. |
Location of Accounts and Records |
All accounts, books or other
documents required to be maintained by Section 31(a) of the 1940 Act and the rules thereunder are maintained at the offices of:
(1) the Registrant, Gladstone Investment Corporation, 1521 Westbranch Drive, Suite 100, McLean, VA 22102;
(2) the Transfer Agent, Computershare, 250 Royall Street, Canton, MA 02021;
(3) the Adviser, Gladstone Management Corporation, 1521 Westbranch Drive, Suite 100, McLean, VA 22102;
(4) the Custodian, The Bank of New York Mellon Corp., 500 Ross Street, Suite 625, Pittsburgh, PA 15262; and
(5) the Collateral Custodian, The Bank of New York Mellon Corp., 500 Ross Street, Suite 625 Pittsburgh, PA 15262.
Item 33. |
Management Services |
Not applicable.
C-6
1. We hereby undertake to suspend the offering of shares until the
prospectus is amended if,
(i) subsequent to the effective date of this registration statement, our net asset value declines more than ten
percent from our net asset value as of the effective date of the registration statement; or
(ii) the net asset value increases to an
amount greater than our net proceeds as stated in the prospectus.
2. We hereby undertake:
(a) to file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement:
(i) to include any prospectus required by Section 10(a)(3) of the Securities Act of 1933, as amended, or the
Securities Act;
(ii) to reflect in the prospectus any facts or events after the effective date of the registration
statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement; and
(iii) to include any material information with respect to the plan of distribution not previously disclosed in the
registration statement or any material change to such information in the registration statement;
(b) that, for the purpose of
determining any liability under the Securities Act, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of those securities at that time shall be deemed
to be the initial bona fide offering thereof;
(c) to remove from registration by means of a post-effective amendment any of
the securities being registered which remain unsold at the termination of the offering;
(d) that, for the purpose of determining
liability under the Securities Act to any purchaser, if the Registrant is subject to Rule 430C: Each prospectus filed pursuant to Rule 497(b), (c), (d) or (e) under the Securities Act as part of a registration statement relating
to an offering, other than prospectuses filed in reliance on Rule 430A under the Securities Act, shall be deemed to be part of and included in the registration statement as of the date it is first used after effectiveness. Provided,
however, that no statement made in a registration statement or prospectus that is part of the registration statement or made in a document incorporated or deemed incorporated by reference into the registration statement or prospectus that is
part of the registration statement will, as to a purchaser with a time of contract of sale prior to such first use, supersede or modify any statement that was made in the registration statement or prospectus that was part of the registration
statement or made in any such document immediately prior to such date of first use;
(e) that for the purpose of determining
liability of the Registrant under the Securities Act to any purchaser in the initial distribution of securities: The undersigned Registrant undertakes that in a primary offering of securities of the undersigned Registrant pursuant to this
registration statement, regardless of the underwriting method used to sell the securities to the purchaser, if the securities are offered or sold to such purchaser by means of any of the following communications, the undersigned Registrant will be a
seller to the purchaser and will be considered to offer or sell such securities to the purchaser:
(i) any preliminary
prospectus or prospectus of the undersigned Registrant relating to the offering required to be filed pursuant to Rule 497 under the Securities Act;
(ii) the portion of any advertisement pursuant to Rule 482 under the Securities Act relating to the offering
containing material information about the undersigned Registrant or its securities provided by or on behalf of the undersigned Registrant; and
(iii) any other communication that is an offer in the offering made by the undersigned Registrant to the purchaser;
(f) To file a post-effective amendment to the registration statement, and to suspend any offers or sales pursuant the registration
statement until such post-effective amendment has been declared effective under the Securities Act, in the event the shares of the Registrant are trading below its net asset value and either (i) the Registrant receives, or has been advised by
its independent registered accounting firm that it will receive, an audit report reflecting substantial doubt regarding the Registrants ability to continue as a going concern or (ii) the Registrant has concluded that a material adverse
change has occurred in its financial position or results of operations that has caused the financial statements and other disclosures on the basis of which the offering would be made to be materially misleading;
(g) to file a post-effective amendment to the registration statement in respect of any one or more offerings of the Registrants shares
(including warrants and/or rights to purchase the shares) below net asset value that will result in greater than 15% dilution, in the aggregate, to existing net asset value per share;
(h) to file a post-effective amendment to the registration statement in connection with any rights offering; and
C-7
(i) to file a post-effective amendment to the registration statement in connection with any
combined offering of securities.
3. We hereby undertake that:
(a) for the purpose of determining any liability under the Securities Act, the information omitted from the form of
prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by us under Rule 497(h) under the Securities Act shall be deemed to be part of this registration statement as of
the time it was declared effective; and
(b) for the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of the securities at that time shall be deemed to be the initial
bona fide offering thereof.
4. We hereby undertake to send by first class mail or other means designed to ensure equally prompt
deliver, within two business days of receipt of a written or oral request, any Statement of Additional Information.
C-8
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment Company Act of 1940, the Registrant has duly caused this
Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of McLean and the Commonwealth of Virginia, on the 16th day of June, 2015.
|
|
|
GLADSTONE INVESTMENT CORPORATION |
|
|
By: |
|
/s/ DAVID GLADSTONE |
|
|
David Gladstone |
|
|
Chairman of the Board and Chief Executive Officer |
KNOW ALL MEN BY THESE PRESENT, each person whose signature appears below hereby constitutes and appoints
David Gladstone and Melissa Morrison and each of them, his or her true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him or her and in his or her name, place, and stead, in any and all
capacities, to sign any and all amendments to this Registration Statement and any registration statement filed pursuant to Rule 462(b) under the Securities Act of 1933, as amended, and to file the same, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he or she might
or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended, this Registration Statement has been signed below by the following
persons in the capacities and on the date indicated:
|
|
|
By: |
|
/s/ DAVID GLADSTONE |
|
|
David Gladstone |
|
|
Chief Executive Officer and Chairman of the Board of Directors (principal executive officer) |
|
|
By: |
|
/s/ MELISSA MORRISON |
|
|
Melissa Morrison |
|
|
Chief Financial Officer and Treasurer (principal financial and accounting officer) |
|
|
By: |
|
/s/ TERRY L. BRUBAKER |
|
|
Terry L. Brubaker |
|
|
Vice Chairman, Chief Operating Officer, and Director |
|
|
By: |
|
/s/ DAVID A.R. DULLUM |
|
|
David A.R. Dullum |
|
|
President and Director |
|
|
By: |
|
/s/ ANTHONY W. PARKER |
|
|
Anthony W. Parker |
|
|
Director |
|
|
By: |
|
/s/ MICHELA A. ENGLISH |
|
|
Michela A. English |
|
|
Director |
|
|
By: |
|
/s/ PAUL W. ADELGREN |
|
|
Paul W. Adelgren |
|
|
Director |
C-9
|
|
|
By: |
|
/s/ JOHN H. OUTLAND |
|
|
John H. Outland |
|
|
Director |
|
|
By: |
|
/s/ CAREN D. MERRICK |
|
|
Caren D. Merrick |
|
|
Director |
|
|
By: |
|
/s/ WALTER H. WILKINSON, JR. |
|
|
Walter H. Wilkinson, Jr. |
|
|
Director |
C-10
Exhibit List
|
|
|
Exhibit Number |
|
Description |
|
|
2.a.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. |
|
|
2.a.2 |
|
Certificate of Designation of 7.125% Series A Cumulative Term Preferred Stock of Gladstone Investment Corporation , incorporated by reference to Exhibit 2.a.2 to Post-Effective Amendment No. 5 to the Registration Statement
on Form N-2 (File No. 333-160720) filed February 29, 2012. |
|
|
2.a.3 |
|
Certificate of Designation of 6.75% Series B Cumulative Term Preferred Stock of Gladstone Investment Corporation, incorporated by reference to Exhibit 3.3 to the Registration Statement on Form 8-A (File No. 001-34007),
filed November 7, 2014. |
|
|
2.a.4 |
|
Certificate of Designation of 6.50% Series C Cumulative Term Preferred Stock of Gladstone Investment Corporation, incorporated by reference to Exhibit 3.4 to Registration Statement on Form 8-A (File No. 001-34007), filed May 11,
2015. |
|
|
2.b.1 |
|
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. |
|
|
2.b.2 |
|
First Amendment to Amended and Restated Bylaws, incorporated by reference to Exhibit 99.1 to the Current Report on Form 8-K (File No. 814-00704), filed July 10, 2007. |
|
|
2.c |
|
Not applicable. |
|
|
2.d.1 |
|
Specimen Stock Certificate, incorporated by reference to Exhibit 99.d to Pre-Effective Amendment No. 3 to the Registration Statement on Form N-2 (File No. 333-123699), filed June 21, 2005. |
|
|
2.d.2 |
|
Form of Senior Indenture, incorporated by reference to Exhibit 2.d.2 to the Registration Statement on Form N-2 (File No. 333-138008), filed October 16, 2006. |
|
|
2.d.3 |
|
Form of Subordinated Indenture, incorporated by reference to Exhibit 2.d.3 to the Registration Statement on Form N-2 (File No. 333-138008), filed October 16, 2006. |
|
|
2.d.4 |
|
Specimen 7.125% Series A Cumulative Term Preferred Stock Certificate, incorporated by reference to Exhibit 2.d.4 to Post-Effective Amendment No. 5 to the Registration Statement on Form N-2 (File No. 333-160720), filed
February 29, 2012. |
|
|
2.d.5 |
|
Specimen 6.75% Series B Cumulative Term Preferred Stock Certificate, incorporated by reference to Exhibit 4.3 to the Registration Statement on Form 8-A (File No. 001-34007), filed November 7, 2014. |
|
|
2.d.6 |
|
Specimen 6.50% Series C Cumulative Term Preferred Stock Certificate, incorporated by reference to Exhibit 4.4 to the Registration Statement on Form 8-A (File No.001-34007), filed May 11, 2015. |
|
|
2.d.7 |
|
Form of Common Stock Subscription Form and Subscription Certificate, incorporated by reference to Exhibit 2.d.5 to Pre-Effective Amendment No. 1 to the Registration Statement on Form N-2 (File No. 333-181879), filed July 17,
2012. |
|
|
2.d.8 |
|
Form of Preferred Stock Subscription Form and Subscription Certificate, incorporated by reference to Exhibit 2.d.6 to Pre-Effective Amendment No. 1 to the Registration Statement on Form N-2 (File No. 333-181879), filed July 17,
2012. |
|
|
2.d.9 |
|
Form of Common Stock Warrant Agreement and Warrant Certificate, incorporated by reference to Exhibit 2.d.7 to Pre-Effective Amendment No. 1 to the Registration Statement on Form N-2 (File No. 333-181879), filed July 17,
2012. |
|
|
2.d.10 |
|
Form of Preferred Stock Warrant Agreement and Warrant Certificate, incorporated by reference to Exhibit 2.d.8 to Pre-Effective Amendment No. 1 to the Registration Statement on Form N-2 (File No. 333-181879), filed July 17,
2012. |
|
|
2.d.11 |
|
Form T-1 Statement of Eligibility of U.S. Bank National Association, as Trustee, with respect to the Form of Senior and Subordinated Indentures. |
|
|
2.f |
|
Not applicable. |
|
|
2.g |
|
Investment Advisory and Management Agreement between the Registrant and Gladstone Management Corporation, incorporated by reference to Exhibit 10.1 to the Annual Report on Form 10-K (File No. 814-00704), filed
June 14, 2006 (renewed July 15, 2014). |
|
|
|
Exhibit Number |
|
Description |
|
|
2.h* |
|
Form of Underwriting Agreement. |
|
|
2.i |
|
Not applicable. |
|
|
2.j.1 |
|
Custody Agreement between the Registrant and The Bank of New York, incorporated by reference to Exhibit 99.j to Pre-Effective Amendment No. 3 to the Registration Statement on Form N-2 (File No. 333-123699), filed
June 21, 2005. |
|
|
2.j.2 |
|
Custodial Agreement by and among Gladstone Business Investment, LLC, the Registrant, Gladstone Management Corporation, The Bank of New York Trust Company, N.A. and Deutsche Bank AG, New York Branch, dated October 10, 2006,
incorporated by reference to Exhibit 2.j.2 to Post-Effective Amendment No. 2 to the Registration Statement on Form N-2 (File No. 333-181879), filed June 7, 2013. |
|
|
2.j.3 |
|
Amendment No. 1 to Custodial Agreement by and among Gladstone Business Investment, LLC, the Registrant, Gladstone Management Corporation, The Bank of New York Trust Company, N.A. and Deutsche Bank AG, New York Branch, dated April
14, 2009, incorporated by reference to Exhibit 2.j.3 to Post-Effective Amendment No. 2 to the Registration Statement on Form N-2 (File No. 333-181879), filed June 7, 2013. |
|
|
2.k.1 |
|
Administration Agreement between the Registrant and Gladstone Administration, LLC, dated June 22, 2005, incorporated by reference to Exhibit 10.2 to the Annual Report on Form 10-K (File No. 814-00704), filed June 14,
2006 (renewed July 15, 2014). |
|
|
2.k.2 |
|
Stock Transfer Agency Agreement between the Registrant and The Bank of New York, incorporated by reference to Exhibit k.1 to Pre-Effective Amendment No. 1 to the Registration Statement on Form N-2 (File
No. 333-123699), filed May 13, 2005. |
|
|
2.k.3 |
|
Fifth Amended and Restated Credit Agreement, dated as of April 30, 2013, by and among Gladstone Business Investment, LLC, as Borrower, Gladstone Management Corporation, as servicer, the financial institutions as party thereto,
as Lenders and Managing Agents, and Key Equipment Finance, Inc., as Administrative Agent and Lead Arranger, incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K (File No. 814-00704), filed May 2, 2013. |
|
|
2.k.4 |
|
Joinder Agreement, dated as of June 12, 2013, by and among the Gladstone Business Investment, LLC, Gladstone Management Corporation, Key Equipment Finance Inc. and Everbank Commercial Finance, Inc., incorporated by reference to
Exhibit 10.1 of the Current Report on Form 8-K (File No. 814-00704), filed June 17, 2013. |
|
|
2.k.5 |
|
Joinder Agreement, dated as of June 12, 2013, by and among the Gladstone Business Investment, LLC, Gladstone Management Corporation, Key Equipment Finance Inc. and Alostar Bank of Commerce, incorporated by reference to Exhibit 10.2
of the Current Report on Form 8-K (File No. 814-00704), filed June 17, 2013. |
|
|
2.k.6 |
|
Amendment No. 1 to Fifth Amended and Restated Credit Agreement, dated as of June 26, 2014, by and among Gladstone Business Investment, LLC, as Borrower, Gladstone Management Corporation, as Servicer, the Financial Institutions as
party thereto, as Lenders and Managing Agents, and Key Equipment Finance, a division of KeyBank National Association, as Administrative Agent, incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K (File No. 814-00704), filed
June 30, 2014. |
|
|
2.k.7 |
|
Joinder Agreement, dated as of September 19, 2014, by and among Gladstone Business Investment, LLC, Gladstone Management Corporation, Key Equipment Finance, a division of KeyBank National Association, and East West Bank,
incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K (File No. 814-00704), filed September 22, 2014. |
|
|
2.k.8 |
|
Joinder Agreement, dated as of September 19, 2014, by and among Gladstone Business Investment, LLC, Gladstone Management Corporation, Key Equipment Finance, a division of KeyBank National Association, and Manufacturers and Traders
Trust, incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K (File No. 814-00704), filed September 22, 2014. |
|
|
2.k.9 |
|
Joinder Agreement, dated as of September 19, 2014, by and among Gladstone Business Investment, LLC, Gladstone Management Corporation, Key Equipment Finance, a division of KeyBank National Association, and Customers Bank,
incorporated by reference to Exhibit 10.3 to the Current Report on Form 8-K (File No. 814-00704), filed September 22, 2014. |
|
|
2.k.10 |
|
Joinder Agreement, dated as of September 19, 2014, by and among Gladstone Business Investment, LLC, Gladstone Management Corporation, Key Equipment Finance, a division of KeyBank National Association, and Talmer Bank and Trust,
incorporated by reference to Exhibit 10.4 to the Current Report on Form 8-K (File No. 814-00704), filed September 22, 2014. |
|
|
2.l |
|
Opinion of Bass, Berry & Sims PLC. |
|
|
2.m |
|
Not applicable. |
|
|
|
Exhibit Number |
|
Description |
|
|
2.n.1 |
|
Consent of Bass, Berry & Sims PLC (included in Exhibit 2.l). |
|
|
2.n.2 |
|
Consent of PricewaterhouseCoopers LLP. |
|
|
2.n.3 |
|
Report of Independent Registered Public Accounting Firm. |
|
|
2.n.4 |
|
Consent of Moss Adams LLP. |
|
|
2.n.5 |
|
Consent of Allen, Gibbs & Houlik, L.C. |
|
|
2.n.6 |
|
Consent of Moss Adams LLP. |
|
|
2.o |
|
Not applicable. |
|
|
2.p |
|
Founder Stock Purchase Agreement between the Registrant and David Gladstone, incorporated by reference to Exhibit p to the Registration Statement on Form N-2 (File No. 333-123699), filed March 31, 2005. |
|
|
2.q |
|
Not applicable. |
|
|
2.r |
|
Code of Ethics and Business Conduct, incorporated by reference to Exhibit r to Post-Effective Amendment No. 2 to the Registration Statement on Form N-2 (File No. 333-181879), filed June 7, 2013.. |
|
|
2.s.1 |
|
Power of Attorney (included in the signature page hereto). |
|
|
2.s.2 |
|
Computation of Ratio of Earnings to Combined Fixed Charges and Preferred Dividends. |
|
|
2.s.3 |
|
Financial Statements of Danco Acquisition Corporation as of and for the years ended December 31, 2014 and 2013 (unaudited). |
|
|
2.s.4 |
|
Financial Statements of Danco Acquisition Corporation as of and for the years ended December 31, 2012 and 2011. |
|
|
2.s.5 |
|
Financial Statements of Galaxy Tool Holding Corporation and Subsidiary as of and for the years ended December 31, 2014 and 2013 (unaudited). |
|
|
2.s.6 |
|
Financial Statements of Galaxy Tool Holding Corporation and Subsidiary as of and for the years ended December 31, 2012 and 2011. |
|
|
2.s.7 |
|
Financial Statements of SOG Specialty Knives and Tools, LLC as of and for the years ended December 31, 2014 and 2013 (unaudited). |
|
|
2.s.8 |
|
Financial Statements of SOG Specialty Knives and Tools, LLC as of and for the years ended December 31, 2013 and 2012. |
|
|
2.s.9 |
|
Form of Prospectus Supplement for Common Stock Offerings. |
|
|
2.s.10 |
|
Form of Prospectus Supplement for Preferred Stock Offering. |
|
|
2.s.11 |
|
Form of Prospectus Supplement for Rights Offering of Common Stock. |
|
|
2.s.12 |
|
Form of Prospectus Supplement for Rights Offering of Preferred Stock. |
|
|
2.s.13 |
|
Form of Prospectus Supplement for Notes. |
|
|
2.s.14 |
|
Form of Prospectus Supplement for Senior Notes. |
|
|
2.s.15 |
|
Form of Prospectus Supplement for Warrants for Common Stock. |
|
|
2.s.16 |
|
Form of Prospectus Supplement for Warrants for Preferred Stock. |
** |
To be filed by post-effective amendment. |
Exhibit 2.d.11
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM T-1
STATEMENT OF ELIGIBILITY
UNDER THE TRUST INDENTURE ACT OF 1939
OF A CORPORATION DESIGNATED TO ACT AS TRUSTEE
¨ |
Check if an Application to Determine Eligibility of a Trustee Pursuant to Section 305(b)(2) |
U.S. BANK
NATIONAL ASSOCIATION
(Exact name of Trustee as specified in its charter)
31-0841368
I.R.S.
Employer Identification No.
|
|
|
800 Nicollet Mall
Minneapolis, Minnesota |
|
55402 |
(Address of principal executive offices) |
|
(Zip Code) |
Wally Jones
U.S. Bank National Association
333 Commerce Street, Suite 800
Nashville, TN 37201
(615) 251-0733
(Name,
address and telephone number of agent for service)
Gladstone
Investment Corporation
(Issuer with respect to the Securities)
|
|
|
Delaware |
|
83-0423116 |
(State or other jurisdiction of
incorporation or organization) |
|
(I.R.S. Employer
Identification No.) |
|
|
|
1521 Westbranch Drive, Suite 100
McLean, Virginia |
|
22102 |
(Address of Principal Executive Offices) |
|
(Zip Code) |
Debt Securities
(Title
of the Indenture Securities)
FORM T-1
Item 1. |
GENERAL INFORMATION. Furnish the following information as to the Trustee. |
|
a) |
Name and address of each examining or supervising authority to which it is subject. |
Comptroller of the Currency
Washington, D.C.
|
b) |
Whether it is authorized to exercise corporate trust powers. |
Yes
Item 2. |
AFFILIATIONS WITH OBLIGOR. If the obligor is an affiliate of the Trustee, describe each such affiliation. |
None
Items 3-15 |
Items 3-15 are not applicable because to the best of the Trustees knowledge, the obligor is not in default under any Indenture for which the Trustee acts as Trustee. |
Item 16. |
LIST OF EXHIBITS: List below all exhibits filed as a part of this statement of eligibility and qualification. |
|
1. |
A copy of the Articles of Association of the Trustee.* |
|
2. |
A copy of the certificate of authority of the Trustee to commence business, attached as Exhibit 2. |
|
3. |
A copy of the certificate of authority of the Trustee to exercise corporate trust powers, attached as Exhibit 3. |
|
4. |
A copy of the existing bylaws of the Trustee.** |
|
5. |
A copy of each Indenture referred to in Item 4. Not applicable. |
|
6. |
The consent of the Trustee required by Section 321(b) of the Trust Indenture Act of 1939, attached as Exhibit 6. |
|
7. |
Report of Condition of the Trustee as of March 31, 2015 published pursuant to law or the requirements of its supervising or examining authority, attached as Exhibit 7. |
* |
Incorporated by reference to Exhibit 25.1 to Amendment No. 2 to registration statement on S-4, Registration Number 333-128217 filed on November 15, 2005.
|
** |
Incorporated by reference to Exhibit 25.1 to registration statement on form S-3ASR, Registration Number 333-199863 filed on November 5, 2014. |
2
SIGNATURE
Pursuant to the requirements of the Trust Indenture Act of 1939, as amended, the Trustee, U.S. BANK NATIONAL ASSOCIATION, a national banking
association organized and existing under the laws of the United States of America, has duly caused this statement of eligibility and qualification to be signed on its behalf by the undersigned, thereunto duly authorized, all in the City of
Nashville, State of Tennessee on the 12th of June, 2015.
|
|
|
By: |
|
/s/ Wally Jones |
|
|
Wally Jones |
|
|
Vice President |
3
Exhibit 2
|
|
|
|
|
Office of the Comptroller of the Currency
Washington, DC 20219 |
CERTIFICATE OF CORPORATE EXISTENCE
I, Thomas J. Curry, Comptroller of the Currency, do hereby certify that:
1. The Comptroller of the Currency, pursuant to Revised Statutes 324, et seq, as amended, and 12 USC 1, et seq, as amended, has possession, custody, and
control of all records pertaining to the chartering, regulation, and supervision of all national banking associations.
2. U.S. Bank National
Association, Cincinnati, Ohio (Charter No. 24), is a national banking association formed under the laws of the United States and is authorized thereunder to transact the business of banking on the date of this certificate.
IN TESTIMONY WHEREOF, today,
January 21, 2015, I have hereunto
subscribed my name and caused my seal
of office to be affixed to these presents at
the U.S. Department of the Treasury, in
the City of Washington, District of
Columbia.
|
|
|
|
|
|
|
Comptroller of the
Currency |
4
Exhibit 3
|
|
|
|
|
Office of the Comptroller of the Currency
Washington, DC 20219 |
CERTIFICATION OF FIDUCIARY POWERS
I, Thomas J. Curry, Comptroller of the Currency, do hereby certify that:
I. The Office of the Comptroller of the Currency, pursuant to Revised Statutes 324, et seq, as amended, and 12 USC 1, et seq, as amended, has possession,
custody, and control of all records pertaining to the chartering, regulation, and supervision of all national banking associations.
2. U.S. Bank
National Association, Cincinnati, Ohio (Charter No. 24), was granted, under the hand and seal of the Comptroller, the right to act in all fiduciary capacities authorized under the provisions of the Act of Congress approved September 28, 1962,
76 Stat. 668, 12 USC 92a, and that the authority so granted remains in full force and effect on the date of this certificate.
IN
TESTIMONY WHEREOF, today,
January 21, 2015, I have hereunto
subscribed my name and caused my seal of
office to be affixed to these presents at the
U.S. Department of the Treasury, in the City
of Washington, District of Columbia.
|
|
|
|
|
|
|
Comptroller of the
Currency |
5
Exhibit 6
CONSENT
In accordance
with Section 321(b) of the Trust Indenture Act of 1939, the undersigned, U.S. BANK NATIONAL ASSOCIATION hereby consents that reports of examination of the undersigned by Federal, State, Territorial or District authorities may be furnished by
such authorities to the Securities and Exchange Commission upon its request therefor.
Dated: June 12, 2015
|
|
|
By: |
|
/s/ Wally Jones |
|
|
Wally Jones |
|
|
Vice President |
6
Exhibit 7
U.S. Bank National Association
Statement of Financial Condition
As of 3/31/2015
($000s)
|
|
|
|
|
|
|
3/31/2015 |
|
Assets |
|
|
|
|
Cash and Balances Due From |
|
$ |
14,048,386 |
|
Depository Institutions |
|
|
|
|
Securities |
|
|
101,980,067 |
|
Federal Funds |
|
|
48,958 |
|
Loans & Lease Financing Receivables |
|
|
248,152,881 |
|
Fixed Assets |
|
|
4,794,618 |
|
Intangible Assets |
|
|
12,898,132 |
|
Other Assets |
|
|
23,440,131 |
|
|
|
|
|
|
Total Assets |
|
$ |
405,363,173 |
|
|
|
Liabilities |
|
|
|
|
Deposits |
|
$ |
297,444,787 |
|
Fed Funds |
|
|
1,856,185 |
|
Treasury Demand Notes |
|
|
0 |
|
Trading Liabilities |
|
|
1,179,175 |
|
Other Borrowed Money |
|
|
46,898,693 |
|
Acceptances |
|
|
0 |
|
Subordinated Notes and Debentures |
|
|
3,650,000 |
|
Other Liabilities |
|
|
12,682,543 |
|
|
|
|
|
|
Total Liabilities |
|
$ |
363,711,383 |
|
|
|
Equity |
|
|
|
|
Common and Preferred Stock |
|
|
18,200 |
|
Surplus |
|
|
14,266,400 |
|
Undivided Profits |
|
|
26,511,651 |
|
Minority Interest in Subsidiaries |
|
|
855,539 |
|
|
|
|
|
|
Total Equity Capital |
|
$ |
41,651,790 |
|
|
|
Total Liabilities and Equity Capital |
|
$ |
405,363,173 |
|
7
Exhibit 2.l
150 Third Avenue South, Suite 2800
Nashville, TN 37201
(615) 742-6200
June 16, 2015
Gladstone Investment
Corporation
1521 Westbranch Drive
Suite 200
McLean, VA 22102
|
Re: |
Registration Statement on Form N-2 |
Ladies and Gentlemen:
We are acting as counsel to Gladstone Investment Corporation, a Delaware corporation (the Company), in connection
with the Companys registration statement on Form N-2 (the Registration Statement), filed with the Securities and Exchange Commission (the Commission) under the Securities Act of 1933, as
amended (the Act), relating to the registration and proposed public offering of up to $300,000,000 in aggregate amount of one or more series of the following securities (collectively, the
Securities): (i) shares of common stock, $0.001 par value per share, of the Company (the Common Stock); (ii) shares of preferred stock, $0.001 par value per share, of the Company (the
Preferred Stock); (iii) senior debt securities, in one or more series (the Senior Debt Securities), which may be issued pursuant to an indenture to be dated on or about the date of first
issuance of Senior Debt Securities thereunder, by and between a trustee to be selected by the Company (the Trustee) and the Company in the form filed as Exhibit 2.d.2 to the Registration Statement, as such indenture
may be supplemented from time to time (the Senior Indenture); (iv) subordinated debt securities, in one or more series (the Subordinated Debt Securities and, together with the Senior Debt
Securities, the Debt Securities), which may be issued pursuant to an indenture to be dated on or about the date of the first issuance of Subordinated Debt Securities thereunder, by and between the Trustee and the Company,
in the form filed as Exhibit 2.d.3 to the Registration Statement, as such indenture may be supplemented from time to time (the Subordinated Indenture and, collectively with the Senior Indenture, an
Indenture); (v) subscription rights to purchase Common Stock or Preferred Stock (the Subscription Rights), which may be evidenced by subscription certificates and administered by a
subscription agent to be selected by the Company (the Subscription Agent), such certificates in the forms filed as Exhibits 2.d.7 and 2.d.8 to the Registration Statement (each, a Subscription
Certificate); and (vi) warrants to purchase Common Stock or Preferred Stock (the Warrants) which may be issued under warrant agreements, to be dated on or about the date of the first issuance of the
applicable Warrants thereunder, by and between a warrant agent to be selected by the Company (the Warrant Agent) and the Company in the forms filed as Exhibits 2.d.9 and 2.d.10 to the Registration Statement (each, a
Warrant Agreement). The Securities may be sold from time to time and on a delayed or continuous basis as set forth in the prospectus that forms a part of the Registration Statement, and as to be set forth in one or more
supplements to such prospectus. In connection with the Registration Statement, you have requested our opinion with respect to the matters set forth below.
For purposes of this opinion letter, we have examined copies of such agreements, instruments and documents as we have deemed relevant and
necessary to form a basis on which to render the opinions hereinafter expressed. In such examination, we have assumed the legal capacity of all natural persons, the legal power and authority of all persons signing on behalf of other parties, the
genuineness of all signatures, the authenticity of all documents submitted to us as originals, the conformity to original documents of all documents submitted to us as certified, facsimile, conformed, digitally scanned or photostatic copies and the
authenticity of the originals of such latter documents. In making our examination of documents executed or to be executed, we have assumed that the parties thereto other than the Company had or will have the power, corporate or other, to enter into
and perform all obligations thereunder and have also assumed the due authorization by all requisite action, corporate or other, and execution and delivery by such parties of such documents and the validity and binding effect of such documents on
such parties. As to facts material to the opinions, statements and assumptions expressed herein, we have, with your consent, relied upon oral or written statements and representations of officers and other representatives of the Company, public
officials and others. We have not independently verified such factual matters.
Gladstone Investment Corporation
Page 2
June 16, 2015
In expressing the opinions set forth below, we have assumed that:
1. the issuance, sale, amount and terms of any Securities of the Company to be offered from time to time will have been duly authorized and
established by proper action of the Board of Directors of the Company or a duly authorized committee thereof (Board Action) consistent with the procedures and terms described in the Registration Statement and in accordance
with the Companys Amended and Restated Certificate of Incorporation (Certificate of Incorporation) and Amended and Restated Bylaws (Bylaws) and applicable provisions of Delaware law, in a
manner that does not violate any law, government or court-imposed order or restriction or agreement or instrument then binding on the Company or otherwise impair the legal or binding nature of the obligations represented by the applicable Securities
and such Board Action shall remain in effect and unchanged at all times during which such Securities are offered by the Company;
2. at
the time of offer, issuance and sale of any Securities, the Registration Statement will be effective under the Act, a prospectus supplement with respect to such Securities will have been filed with the Commission and no stop order suspending its
effectiveness will have been issued and remain in effect;
3. upon the issuance of Common Stock, including Common Stock that may be issued
upon conversion or exercise of any other Securities convertible into or exercisable for Common Stock, the total number of shares of Common Stock issued and outstanding will not exceed the total number of shares of Common Stock that the Company is
then authorized to issue under the Companys Certificate of Incorporation;
4. upon the issuance of Preferred Stock, including
Preferred Stock that may be issued upon conversion or exercise of any other Securities convertible into or exercisable for Preferred Stock, the total number of shares of Preferred Stock issued and outstanding, and the total number of issued and
outstanding shares of the applicable class or series of Preferred Stock designated pursuant to the Companys Certificate of Incorporation, will not exceed the total number of shares of Preferred Stock or the number of shares of such class or
series of Preferred Stock that the Company is then authorized to issue under the Companys Certificate of Incorporation.
5. prior to
any issuance of Preferred Stock, an appropriate certificate of designation shall be filed for recordation with the Delaware Secretary of State;
6. any Warrants will be issued under a Warrant Agreement between the Company and a Warrant Agent;
7. any Subscription Rights will be issued under a Subscription Certificate between the Company and a Subscription Agent;
8. any Debt Securities will be issued under an Indenture between the Company and a Trustee and such Trustee is qualified to act as Trustee
under the Indenture, the Company has filed respective Forms T-1 for the Trustee with the Commission and the Indenture has been duly qualified under the Trust Indenture Act of 1939, as amended;
9. the interest rate on the Debt Securities will not be greater than the maximum rate permitted from time to time by applicable law;
10. any Securities convertible into or exercisable for any other Securities will be duly converted or exercised in accordance with their
terms;
11. if being sold by the issuer thereof, the Securities will be delivered against payment of valid consideration therefor and in
accordance with the terms of the applicable Board Action authorizing such sale and any applicable underwriting agreement, purchase agreement, distribution agreement or similar agreement and as contemplated by the Registration Statement and/or the
applicable prospectus supplement;
12. the laws of the State of New York will be the governing law under any Indenture, Warrant Agreement
or Subscription Certificate; and
13. the Company will remain a Delaware corporation.
2
Gladstone Investment Corporation
Page 3
June 16, 2015
To the extent that the obligations of the Company with respect to the Securities may be
dependent upon such matters, we assume for purposes of this opinion letter that any Trustee, Warrant Agent or Subscription Agent is duly organized, validly existing and in good standing under the laws of its jurisdiction of organization; that such
Trustee, Warrant Agent or Subscription Agent will be duly qualified to engage in the activities contemplated by such Indenture, Warrant Agreement or Subscription Certificate, as applicable; that such Indenture, Warrant Agreement or Subscription
Certificate, as applicable, will have been duly authorized, executed and delivered by such Trustee, Warrant Agent or Subscription Agent, as applicable, and will constitute the legal, valid and binding obligation of such party enforceable against
such party in accordance with its terms; that such Trustee, Warrant Agent or Subscription Agent will be in compliance with respect to performance of its obligations under such Indenture, Warrant Agreement or Subscription Certificate, as applicable,
with all applicable laws and regulations; and that such Trustee, Warrant Agent or Subscription Agent will have the requisite organizational and legal power and authority to perform its obligations under such Indenture, Warrant Agreement or
Subscription Certificate, as applicable.
This opinion letter is based as to matters of law solely on the applicable provisions of the
federal laws of the United States, the Delaware General Corporation Law and, as to the Debt Securities, the Warrants and the Subscription Rights constituting valid and legally binding obligations of the Company, the laws of the State of New York
(but not including any laws, statutes, ordinances, administrative decisions, rules or regulations of any political subdivision of the State of New York). We express no opinion herein as to any other laws, statutes, ordinances, rules, or regulations
(and in particular, we express no opinion as to any effect that such laws, statutes, ordinances, rules, or regulations may have on the opinions expressed herein).
Based upon the foregoing, and subject to the assumptions, limitations and qualifications stated herein, it is our opinion that:
(a) The Common Stock and associated Subscription Rights (including any shares of Common Stock and associated Subscription Rights duly issued
upon the exchange or conversion of convertible Debt Securities or shares of Preferred Stock that are exchangeable for or convertible into Common Stock, or upon the exercise of Warrants for the purchase of shares of Common Stock and receipt by the
Company of any additional consideration payable upon such conversion, exchange or exercise), upon due execution and delivery of a Subscription Certificate relating to the Subscription Rights associated with the Common Stock on behalf of the Company
and the Subscription Agent named therein, will be validly issued, and the Common Stock will be fully paid and nonassessable.
(b) The
Preferred Stock and associated Subscription Rights (including any shares of Preferred Stock and associated Subscription Rights duly issued upon the exercise of Warrants for the purchase of shares of Preferred Stock and receipt by the Company of any
additional consideration payable upon such exercise), upon due execution and delivery of a Subscription Certificate relating to the Subscription Rights associated with the Preferred Stock on behalf of the Company and the Subscription Agent named
therein, will be validly issued, and the Preferred Stock will be fully paid and nonassessable.
(c) The Warrants, upon due execution and
delivery of a Warrant Agreement relating thereto on behalf of the Company and the Warrant Agent named therein and due authentication of the Warrants by such Warrant Agent, and upon due execution and delivery of the Warrants on behalf of the Company,
will constitute valid and binding obligations of the Company.
(d) The Debt Securities, upon due execution and delivery of an Indenture
relating thereto on behalf of the Company and the Trustee named therein and due authentication of the Debt Securities by such Trustee, and upon due execution and delivery of the Debt Securities on behalf of the Company, will constitute valid and
binding obligations of the Company.
The opinions expressed in paragraphs (c) and (d) above with respect to the valid and
binding nature of obligations may be limited by the following exceptions, limitations and qualifications: (i) the effect of bankruptcy, insolvency, reorganization, receivership, moratorium or other laws affecting creditors rights
(including, without limitation, the effect of statutory and other law regarding fraudulent conveyances, fraudulent transfers and preferential transfers); (ii) the exercise of judicial discretion and the application of principles of equity, good
faith,
3
Gladstone Investment Corporation
Page 4
June 16, 2015
fair dealing, reasonableness, conscionability and materiality (regardless of whether the Securities are considered in a proceeding in equity or at law); (iii) the unenforceability under
certain circumstances under law or court decisions of provisions providing for the indemnification of or contribution to a party with respect to a liability where such indemnification or contribution is contrary to public policy; and (iv) we
express no opinion with respect to the enforceability of provisions relating to choice of law, choice of venue, jurisdiction or waivers of jury trial.
It should be understood that the opinions in paragraphs (a) and (b) above concerning the Subscription Rights does not address the
determination a court of competent jurisdiction may make regarding whether the Board of Directors of the Company would be required to redeem or terminate, or take other action with respect to, the Subscription Rights at some future time based on the
facts and circumstances existing at that time and that our opinions in paragraphs (a) and (b) above address the Subscription Rights and the Subscription Certificate in their entirety and not any particular provision of the Subscription
Rights or the Subscription Certificate and that it is not settled whether the invalidity of any particular provision of a Subscription Certificate or of Subscription Rights issued thereunder would result in invalidating in their entirety such
Subscription Rights.
This opinion is furnished to you in connection with the Registration Statement and may not be relied upon for any
other purpose without our express written consent. No opinion may be implied or inferred beyond the opinion expressly stated. This opinion is given as of the date hereof, and we assume no obligation to advise you of any changes in applicable law or
any facts or circumstances that come to our attention after the date hereof that may affect the opinions contained herein.
We hereby
consent to the filing of this opinion as an exhibit to the Registration Statement and to the reference to our firm contained under the heading Legal Matters. In giving this consent, we do not admit that we are in the category of persons
whose consent is required by Section 7 of the Act, or the rules and regulations promulgated thereunder by the Commission.
|
Very truly yours, |
|
/s/ Bass, Berry & Sims PLC |
4
Exhibit 2.n.2
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the use in this Registration Statement on Form N-2 of Gladstone Investment Corporation of our reports dated May 20, 2015 relating to
the financial statements, financial statement schedules and senior securities table, and the effectiveness of internal control over financial reporting of Gladstone Investment Corporation, which appears in such Registration Statement. We also
consent to the reference to us under the headings Senior Securities and Experts in such Registration Statement.
|
/s/ PricewaterhouseCoopers LLP |
McLean, Virginia
June 16, 2015
Exhibit 2.n.3
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors of Gladstone Investment Corporation:
We have audited the consolidated financial statements of Gladstone Investment Corporation (the Company) as of March 31, 2015 and 2014 and for
each of the three years in the period ended March 31, 2015 and the effectiveness of the Companys internal control over financial reporting as of March 31, 2015 referred to in our report dated May 20, 2015 appearing in the
accompanying registration statement on Form N-2. We have also previously audited the consolidated financial statements of the Company as of and for the years ended March 31, 2013, 2012, 2011, 2010, 2009, 2008 and 2007 (not presented herein)
appearing under Item 8 of the Companys 2013, 2012, 2011, 2010, 2009, 2008 and 2007 Annual Reports on Form 10-K, respectively, and we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the senior
securities table of Gladstone Investment Corporation for each of the years ended March 31, 2015, 2014, 2013, 2012, 2011, 2010, 2009, 2008 and 2007 appearing on page 61 of this form N-2 presents fairly, in all material respects, the information
set forth therein when read in conjunction with the related consolidated financial statements.
|
/s/ PricewaterhouseCoopers LLP |
McLean, Virginia
May 20,
2015
Exhibit 2.n.4
CONSENT OF INDEPENDENT AUDITORS
We
hereby consent to the use in this Registration Statement (Form N-2) of Gladstone Investment Corporation of our report dated May 24, 2013, relating to the consolidated financial statements of Danco Acquisition Corporation as of December 31,
2012 and 2011, and for the years then ended, and to the reference to us under the heading Experts in the Prospectus, which is part of this Registration Statement.
San Francisco, California
June
16, 2015
Exhibit 2.n.5
Consent Of Independent Auditors
We
hereby consent to the use in this Registration Statement on Form N-2, including post-effective amendments thereto, of Gladstone Investment Corporation of our report dated April 5, 2013, relating to our audits of the consolidated financial
statements of Galaxy Tool Holding Corporation and Subsidiary as of and for the years ended December 31, 2012 and 2011, which appear in such Registration Statement. We also consent to the reference to us under the heading Experts in
such registration statement.
/s/ Allen, Gibbs & Houlik, L.C.
Wichita, Kansas
June 16, 2015
Exhibit 2.n.6
CONSENT OF INDEPENDENT AUDITORS
We
consent to the use in this Registration Statement (Form N-2) of Gladstone Investment Corporation of our report dated May 12, 2014, relating to the financial statements of SOG Specialty Knives and Tools, LLC as of December 31, 2013 and
2012, and for the years then ended, and to the reference to us under the heading Experts in the Prospectus, which is part of this Registration Statement.
/s/ Moss Adams LLP
Everett, Washington
June 16, 2015
Exhibit 2.s.2
Statements re: computation of ratios
(Dollars in Thousands, Except Ratios)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended March 31, |
|
|
|
2015 |
|
|
2014 |
|
|
2013 |
|
|
2012 |
|
|
2011 |
|
Net investment income |
|
$ |
19,897 |
|
|
$ |
19,307 |
|
|
$ |
16,488 |
|
|
$ |
13,743 |
|
|
$ |
16,171 |
|
Add: fixed charges and preferred dividends |
|
|
8,799 |
|
|
|
5,959 |
|
|
|
4,779 |
|
|
|
1,435 |
|
|
|
1,191 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings |
|
$ |
28,696 |
|
|
$ |
25,266 |
|
|
$ |
21,267 |
|
|
$ |
15,178 |
|
|
$ |
17,362 |
|
Fixed charges and preferred dividends: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
3,539 |
|
|
|
2,075 |
|
|
|
1,127 |
|
|
|
768 |
|
|
|
690 |
|
Amortization of deferred financing fees |
|
|
1,329 |
|
|
|
1,024 |
|
|
|
791 |
|
|
|
459 |
|
|
|
491 |
|
Estimated interest component of rent |
|
|
10 |
|
|
|
10 |
|
|
|
11 |
|
|
|
10 |
|
|
|
10 |
|
Preferred dividends |
|
|
3,921 |
|
|
|
2,850 |
|
|
|
2,850 |
|
|
|
198 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed charges and preferred dividends |
|
|
8,799 |
|
|
|
5,959 |
|
|
|
4,779 |
|
|
|
1,435 |
|
|
|
1,191 |
|
Ratio of earnings to combined fixed charges and preferred dividends |
|
|
3.3x |
|
|
|
4.2x |
|
|
|
4.5x |
|
|
|
10.6x |
|
|
|
14.6x |
|
The calculation of the ratio of earnings to combined fixed charges and preferred dividends is above. Earnings
consist of net investment income before fixed charges and preferred dividends. Fixed charges and preferred dividends consist of interest expense on borrowings, dividend expense on our Series A and Series B Term Preferred Stock,
amortization of deferred financing fees and the portion of operating lease expense that represents interest. The portion of operating lease expense that represents interest is calculated by dividing the amount of rent expense, allocated to us by our
Adviser as part of the administration fee payable under the Advisory Agreement, by three. Our Series C Term Preferred Stock is not included in the calculation above because we issued our Series C Term Preferred Stock subsequent to March 31,
2015
Exhibit 2.s.3
DANCO ACQUISITION CORPORATION
FINANCIAL STATEMENTS
FOR
THE YEARS ENDED
DECEMBER 31, 2014 AND 2013
(unaudited)
DANCO ACQUISITION CORPORATION
CONTENTS
December 31,
2014 and 2013
|
|
|
|
|
Page |
CONSOLIDATED FINANCIAL STATEMENTS |
|
|
|
|
Balance Sheets |
|
1 |
|
|
Statements of Operations |
|
2 |
|
|
Statements of Stockholders Deficit |
|
3 |
|
|
Statements of Cash Flows |
|
4 |
|
|
Notes to Financial Statements |
|
5 21 |
DANCO ACQUISITION CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31, 2014 and 2013
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
2014 |
|
|
2013 |
|
ASSETS |
|
Current assets |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
252,398 |
|
|
$ |
169,505 |
|
Accounts receivable less allowance for doubtful accounts of $14,622 and $14,507, respectively |
|
|
1,928,689 |
|
|
|
1,921,695 |
|
Inventory, net |
|
|
1,698,564 |
|
|
|
2,010,681 |
|
Prepaid expenses |
|
|
153,655 |
|
|
|
85,164 |
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
4,033,306 |
|
|
|
4,187,045 |
|
Property and equipment, net |
|
|
2,054,926 |
|
|
|
2,127,753 |
|
Intangible assets, net |
|
|
|
|
|
|
253,535 |
|
Other assets |
|
|
35,148 |
|
|
|
35,148 |
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
6,123,380 |
|
|
$ |
6,603,481 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS DEFICIT |
|
Current liabilities |
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
737,526 |
|
|
$ |
897,039 |
|
Accrued liabilities |
|
|
1,514,373 |
|
|
|
1,458,726 |
|
Current portioncapital leases |
|
|
162,916 |
|
|
|
162,916 |
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
2,414,815 |
|
|
|
2,518,681 |
|
Line of credit |
|
|
4,000,000 |
|
|
|
3,150,000 |
|
Capital leases, net of current portion |
|
|
387,475 |
|
|
|
179,195 |
|
Long-term debt |
|
|
14,520,514 |
|
|
|
14,520,514 |
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
21,322,804 |
|
|
|
20,368,390 |
|
|
|
|
|
|
|
|
|
|
Commitments and Contingencies (Note 14) |
|
|
|
|
|
|
|
|
Stockholders deficit |
|
|
|
|
|
|
|
|
Preferred stock, $0.0001 par value; 2,000 shares authorized, 42 shares issued and outstanding as of December 31, 2014 and
2013 |
|
|
3,791,735 |
|
|
|
3,791,735 |
|
Common stock, $0.0001 par value; 10,000 shares authorized, 1,287 and 1,241 shares issued and outstanding as of December 31, 2014
and 2013, respectively |
|
|
9,595 |
|
|
|
9,549 |
|
Accumulated deficit |
|
|
(19,000,754 |
) |
|
|
(17,566,193 |
) |
|
|
|
|
|
|
|
|
|
Total stockholders deficit |
|
|
(15,199,424 |
) |
|
|
(13,764,909 |
) |
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders deficit |
|
$ |
6,123,380 |
|
|
$ |
6,603,481 |
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial statements
1
DANCO ACQUISITION CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
December 31, 2014 and 2013
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
2014 |
|
|
2013 |
|
Sales |
|
$ |
11,866,581 |
|
|
$ |
13,152,961 |
|
Cost of sales |
|
|
9,545,084 |
|
|
|
11,393,283 |
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
2,321,497 |
|
|
|
1,759,678 |
|
General and administrative expenses |
|
|
2,857,016 |
|
|
|
3,062,554 |
|
|
|
|
|
|
|
|
|
|
Operating loss |
|
|
(535,519 |
) |
|
|
(1,302,876 |
) |
|
|
|
|
|
|
|
|
|
Other income (expense) |
|
|
|
|
|
|
|
|
Interest expense |
|
|
(924,573 |
) |
|
|
(846,692 |
) |
Other income, net |
|
|
27,131 |
|
|
|
9,930 |
|
|
|
|
|
|
|
|
|
|
|
|
|
(897,442 |
) |
|
|
(836,762 |
) |
|
|
|
|
|
|
|
|
|
Net loss before income taxes |
|
|
(1,432,961 |
) |
|
|
(2,139,638 |
) |
Provision for income taxes |
|
|
(1,600 |
) |
|
|
(1,600 |
) |
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(1,434,561 |
) |
|
$ |
(2,141,238 |
) |
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial statements
2
DANCO ACQUISITION CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS DEFICIT
December 31, 2014 and 2013
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred Stock |
|
|
Common Stock |
|
|
Acummulated |
|
|
Total
Stockholders |
|
|
|
Shares |
|
|
Amount |
|
|
Shares |
|
|
Amount |
|
|
Deficit |
|
|
Deficit |
|
Balance as of December 31, 2012 |
|
|
42 |
|
|
$ |
3,791,735 |
|
|
|
580 |
|
|
$ |
8,300 |
|
|
$ |
(15,424,955 |
) |
|
$ |
(11,624,920 |
) |
Repurchase of Class A common stock at $1.00 per share |
|
|
|
|
|
|
|
|
|
|
(580 |
) |
|
|
(580 |
) |
|
|
|
|
|
|
(580 |
) |
Exercise of warrants and conversion into Class A common stock |
|
|
|
|
|
|
|
|
|
|
1,241 |
|
|
|
1,829 |
|
|
|
|
|
|
|
1,829 |
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,141,238 |
) |
|
|
(2,141,238 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2013 |
|
|
42 |
|
|
|
3,791,735 |
|
|
|
1,241 |
|
|
|
9,549 |
|
|
|
(17,566,193 |
) |
|
|
(13,764,909 |
) |
Purchase of Class A common stock at $1.00 per share |
|
|
|
|
|
|
|
|
|
|
46 |
|
|
|
46 |
|
|
|
|
|
|
|
46 |
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,434,561 |
) |
|
|
(1,434,561 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2014 |
|
|
42 |
|
|
$ |
3,791,735 |
|
|
|
1,287 |
|
|
$ |
9,595 |
|
|
$ |
(19,000,754 |
) |
|
$ |
(15,199,424 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial statements
3
DANCO ACQUISITION CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
December 31, 2014 and 2013
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
2014 |
|
|
2013 |
|
Cash flows from operating activities |
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(1,434,561 |
) |
|
$ |
(2,141,238 |
) |
Adjustments to reconcile net loss to net cash used in operating activities |
|
|
|
|
|
|
|
|
Depreciation expense |
|
|
559,388 |
|
|
|
537,969 |
|
Amortization expense |
|
|
253,535 |
|
|
|
320,255 |
|
Amortization of debt issuance costs |
|
|
|
|
|
|
148,722 |
|
Provision for doubtful accounts |
|
|
115 |
|
|
|
539 |
|
Provision for obsolete inventory |
|
|
(349,965 |
) |
|
|
(223,863 |
) |
Non cash interest expense |
|
|
16,821 |
|
|
|
|
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
(7,109 |
) |
|
|
(173,920 |
) |
Inventory |
|
|
662,082 |
|
|
|
302,353 |
|
Prepaid expenses and other assets |
|
|
(68,491 |
) |
|
|
9,515 |
|
Accounts payable and accrued liabilities |
|
|
(103,866 |
) |
|
|
548,071 |
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities |
|
|
(472,051 |
) |
|
|
(671,597 |
) |
|
|
|
|
|
|
|
|
|
Cash flows from investing activities |
|
|
|
|
|
|
|
|
Payments for the purchase of fixed assets |
|
|
(98,283 |
) |
|
|
(86,600 |
) |
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(98,283 |
) |
|
|
(86,600 |
) |
|
|
|
|
|
|
|
|
|
Cash flows from financing activities |
|
|
|
|
|
|
|
|
Principal payments on note payable |
|
|
|
|
|
|
(81,659 |
) |
Net proceeds from line of credit |
|
|
850,000 |
|
|
|
981,659 |
|
Payments on capital leases |
|
|
(196,819 |
) |
|
|
(166,752 |
) |
Proceeds from exercise of warrants |
|
|
|
|
|
|
1,829 |
|
Proceeds from purchase of common stock |
|
|
46 |
|
|
|
|
|
Repurchase of common stock |
|
|
|
|
|
|
(580 |
) |
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
653,227 |
|
|
|
734,497 |
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
|
82,893 |
|
|
|
(23,700 |
) |
Cash and cash equivalents, beginning of year |
|
|
169,505 |
|
|
|
193,205 |
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of year |
|
$ |
252,398 |
|
|
$ |
169,505 |
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information |
|
|
|
|
|
|
|
|
Interest expense paid |
|
$ |
673,881 |
|
|
$ |
629,664 |
|
Income taxes paid |
|
|
1,600 |
|
|
|
1,600 |
|
Income taxes refunds received |
|
|
|
|
|
|
|
|
Non-cash investing and financing activities |
|
|
|
|
|
|
|
|
Property and equipment purchased under capital lease |
|
$ |
388,279 |
|
|
$ |
103,694 |
|
Conversion of 1,237.43 shares Class A voting common stock into Class B non-voting common stock |
|
$ |
1,238 |
|
|
$ |
|
|
The accompanying notes are an integral part of these financial statements
4
DANCO ACQUISITION CORPORATION
NOTES TO FINANCIAL STATEMENTS
December 31, 2014 and 2013
(unaudited)
NOTE 1 SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
DPMS, Inc. dba Danco Machine DPMS (the Company or Danco) was founded in 1979 to meet the challenge of providing
competitively priced, quality prototype machining services to the emerging high-tech industries of the Silicon Valley.
On October 17,
2007, the Company was acquired by Danco Acquisition Corporation, an entity created by a group of private equity firms to facilitate their acquisition of the Company. The transaction was effected so that Danco would have the necessary financial and
managerial resources available to continue to strategically grow. These financial statements contain the consolidated results of Danco Acquisition Corporation and its wholly owned subsidiary DPMS, Inc.
Liquidity and Managements Plans
The Company has experienced recurring operating losses and recurring operating cash flow deficits. Management has plans to return the Company
to profitability and positive cash flows. Management is closely monitoring its demand, and if demand does not increase as expected, management may implement cost-cutting measures. If strategies to improve margins and reduce operating costs are not
successful, and the Company is not able to meet its debt obligations, then the Company will need to further reduce expenses or raise additional capital through other sources.
The Company also has $14,520,514 of notes payable and a line of credit balance of $4,000,000 which mature in 2016. These balances are payable
to a lender who is an affiliated entity of the majority stockholder of the Company. This stockholder has demonstrated continued support of its investment in the Company. If the Company is unable to improve the cash flow from operations, the Company
will need to seek additional capital from the stockholders or other sources. However, there is no assurance that the stockholders will continue to provide capital to the Company or that the Company will be able to obtain additional capital from
other sources.
The consolidated financial statements do not include any adjustments to reflect the possible future effects on the
recoverability and classification of assets or the amounts and classifications of liabilities that may result should the Company be unable to continue as a going concern.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with original maturity of three months or less to be cash equivalents.
5
DANCO ACQUISITION CORPORATION
NOTES TO FINANCIAL STATEMENTS
December 31, 2014 and 2013
(unaudited)
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Revenue Recognition and Allowance for Doubtful Accounts
The Company recognizes revenue when (i) delivery of product has occurred, (ii) there is persuasive evidence of a sale arrangement,
(iii) selling prices are fixed or determinable, and (iv) collectability from the customers is reasonably assured. Revenue is recorded when the risk and rewards of ownership are transferred to the Companys customers, which generally
occurs upon shipment of the product. Accounts receivable is stated at an amount that management believes to be collectible. Historically, bad debts have been within managements expectations.
Inventory
Inventory is
stated at the lower of standard cost (which approximates actual cost on a first-in, first-out basis) or market. The Company evaluates the valuation of all inventory, including raw materials, work-in-process, finished goods and spare parts on a
periodic basis. Obsolete inventory or inventory in excess of managements estimated usage is written down to its estimated market value less costs to sell, if less than its cost. Inherent in the estimates of market value are managements
estimates related to economic trends, future demand for products and technological obsolescence of the Companys products.
Property and Equipment
Property and equipment are recorded at cost and include improvements that significantly add to productive capacity or extend useful life.
Depreciation is computed using the straight-line method over the estimated useful lives of the assets, which range from three to fifteen years. Repair and maintenance costs that do not increase the useful lives and/or enhance the value of the assets
are charged to operations as incurred. Leasehold improvements are stated at cost and amortized over the lesser of the terms of the respective leases or the assets useful lives.
The Company evaluates its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. Long-lived assets consist primarily of property and equipment. Recoverability of assets is measured by a comparison of the carrying amount of an asset group to future net cash flows expected to be generated by the asset
group. If such assets are considered to be impaired, the impairment charge is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying
amount or fair value, less cost to sell. The Company did not recognize any impairment charges associated with long-lived assets during the years ended December 31, 2014 and 2013.
6
DANCO ACQUISITION CORPORATION
NOTES TO FINANCIAL STATEMENTS
December 31, 2014 and 2013
(unaudited)
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Intangible Assets
Intangible assets are accounted for in accordance with Financial Accounting Standards Board (FASB) Accounting Standards
Codification (ASC) Topic No. 350, IntangiblesGoodwill and Other Intangible Assets. Intangible assets are amortized on a straight-line basis over the period of expected benefit with a weighted-average useful life of
approximately 5.4 years with no calculated residual value. The estimated useful lives of identifiable intangible assets are as follows:
|
|
|
|
|
Covenants not to compete |
|
|
5 years |
|
Customer lists |
|
|
7 years |
|
Intangible assets were fully amortized during the year ended December 31, 2014.
Debt Issuance Costs
The
Company amortizes debt issuance costs using the effective interest method over the term of the related notes payable.
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the
estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax
rates in effect for the year in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment
date. A valuation allowance is established when necessary to reduce deferred tax assets to the amounts expected to be realized.
Significant judgment is required in determining any valuation allowance recorded against deferred tax assets. In assessing the need for a
valuation allowance, the Company considers all available evidence, including past operating results, estimates of future taxable income and the feasibility of tax planning strategies. In the event that the Company changes its determination as to the
amount of deferred tax assets that is more likely than not to be realized, the Company will adjust its valuation allowance with a corresponding impact to the provision for income taxes in the period in which such determination is made.
7
DANCO ACQUISITION CORPORATION
NOTES TO FINANCIAL STATEMENTS
December 31, 2014 and 2013
(unaudited)
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Income Taxes (Continued)
The Company follows the authoritative guidance regarding uncertain tax positions. This guidance requires that realization of an uncertain
income tax position must be more likely than not (i.e., greater than 50% likelihood of receiving a benefit) before it can be recognized in the financial statements. The guidance further prescribes the benefit to be realized assumes a review by tax
authorities having all relevant information and applying current conventions. The Company recognizes potential accrued interest and penalties related to unrecognized tax benefits as income tax expense.
Shipping and Handling
Shipping and handling charges billed to customers are included in sales. The costs of shipping to customers are included in cost of sales in
the Companys consolidated statement of operations.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America
(GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of
revenues and expenses during the reporting period. Actual results could differ from those estimates.
The Companys most significant
estimates relate to the allowance for doubtful accounts and inventory reserves.
Concentration of Credit Risk
The Company has a concentration of credit risk with respect to its trade receivables. The Company provides unsecured and interest-free credit,
in the normal course of business, to its customers, and trade receivables are considered past due based on payment terms with customers. Management performs ongoing credit evaluations of its customers and monitors the trade receivable balances on a
regular basis. An allowance for doubtful accounts is recorded based on managements evaluation of outstanding trade receivables. Trade receivables are written off when all methods of collection have been exhausted and such write-offs have been
within the range of managements expectations. Management believes its credit acceptance, billing and collection policies are adequate to minimize potential credit risk.
The Company has a concentration of credit risk with respect to the volume of business transacted with certain customers. Four customers
accounted for approximately 76% and two customers accounted for approximately 54% of the Companys sales for the years ended December 31, 2014 and 2013, respectively. Three customers represented approximately 76% and 75% of the
Companys trade accounts receivable as of December 31, 2014 and 2013, respectively.
8
DANCO ACQUISITION CORPORATION
NOTES TO FINANCIAL STATEMENTS
December 31, 2014 and 2013
(unaudited)
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Fair Value of Financial Instruments
FASB ASC Topic No. 820 Fair Value Measurements and Disclosures defines fair value, establishes a consistent framework for
measuring fair value and expands disclosure requirements about fair value measurements. The statement, among other things, requires the Company to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair
value. This includes applying the fair value concept to (i) nonfinancial assets and liabilities initially measured at fair value in business combinations, (ii) reporting units or nonfinancial assets and liabilities measured at fair value
in conjunction with goodwill impairment testing, (iii) other nonfinancial assets and liabilities measured at fair value in conjunction with impairment assessments and (iv) asset retirement obligations initially measured at fair value.
The statement established a hierarchal disclosure framework associated with the level of pricing observability utilized in measuring fair
value. This framework defined three levels of inputs to the fair value measurement process and requires that each fair value measurement be assigned to a level corresponding to the lowest level input that is significant to the fair value measurement
in its entirety. The three broad levels of inputs defined by the hierarchy are as follows:
|
|
|
Level 1 Inputs quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date, |
|
|
|
Level 2 Inputs inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. If the asset or liability has a specified (contractual) term,
a Level 2 input must be observable for substantially the full-term of the asset or liability and |
|
|
|
Level 3 Inputs unobservable inputs for the asset or liability. These unobservable inputs reflect the entitys own assumptions about the assumptions that market participants would use in pricing the asset or
liability and are developed based on the best information available in the circumstances (which might include the reporting entitys own data). |
Financial instruments for which disclosure only of fair value is required consist of the following:
|
|
|
Cash and cash equivalents carrying value approximates fair value due to the short time to maturity. |
|
|
|
Notes payable and line of credit due to the related party nature of these obligations, the Company is unable to make a reasonable estimate of fair value. |
9
DANCO ACQUISITION CORPORATION
NOTES TO FINANCIAL STATEMENTS
December 31, 2014 and 2013
(unaudited)
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Recent Accounting Pronouncements
In May 2014, the FASB issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers
(ASU 2014-09), which supersedes the revenue recognition requirements in Revenue Recognition (Topic 605), and requires entities to recognize revenue in a way that depicts the transfer of promised goods or services to customers
in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2017, and interim periods
within annual periods beginning after December 15, 2018, and is to be applied retrospectively, with early application permitted with the annual reporting periods beginning after December 15, 2016, including interim periods within that
reporting period. Management is currently evaluating the new standard.
In August 2014, the FASB issued ASU No. 2014-15,
Presentation of Financial StatementsGoing Concern: Disclosure of Uncertainties about an Entitys Ability to Continue as a Going Concern, which includes guidance about managements responsibility to evaluate whether there
is substantial doubt about an entitys ability to continue as a going concern within one year after the date that the financial statements are issued (or within one year after the date that the financial statements are available to be issued
when applicable) and to provide related footnote disclosures. The amendments in this Update are effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. Early application is
permitted. Management is currently evaluating the new standard.
NOTE 2 INVENTORY
Inventory consists of the following as of December 31:
|
|
|
|
|
|
|
|
|
|
|
2014 |
|
|
2013 |
|
Raw materials and work in progress |
|
$ |
982,947 |
|
|
$ |
1,256,000 |
|
Finished goods |
|
|
1,617,763 |
|
|
|
2,006,792 |
|
|
|
|
|
|
|
|
|
|
|
|
|
2,600,710 |
|
|
|
3,262,792 |
|
Less inventory reserve |
|
|
(902,146 |
) |
|
|
(1,252,111 |
) |
|
|
|
|
|
|
|
|
|
Total inventory |
|
$ |
1,698,564 |
|
|
$ |
2,010,681 |
|
|
|
|
|
|
|
|
|
|
10
DANCO ACQUISITION CORPORATION
NOTES TO FINANCIAL STATEMENTS
December 31, 2014 and 2013
(unaudited)
NOTE 3 PROPERTY AND EQUIPMENT
Property and equipment consists of the following as of December 31:
|
|
|
|
|
|
|
|
|
|
|
2014 |
|
|
2013 |
|
Machinery and equipment |
|
$ |
5,247,632 |
|
|
$ |
4,808,770 |
|
Software |
|
|
219,474 |
|
|
|
190,531 |
|
Office equipment |
|
|
92,088 |
|
|
|
77,346 |
|
Leasehold improvements |
|
|
18,857 |
|
|
|
18,857 |
|
Automobile |
|
|
17,714 |
|
|
|
13,701 |
|
|
|
|
|
|
|
|
|
|
|
|
|
5,595,765 |
|
|
|
5,109,205 |
|
Less accumulated depreciation |
|
|
(3,540,839 |
) |
|
|
(2,981,452 |
) |
|
|
|
|
|
|
|
|
|
Total |
|
$ |
2,054,926 |
|
|
$ |
2,127,753 |
|
|
|
|
|
|
|
|
|
|
The Company recorded $559,388 and $537,969 in total depreciation expense for the years ended December 31,
2014 and 2013, respectively. Of these amounts, depreciation expense related to assets acquired under capital leases was $214,719 and $177,585 for the years ended December 31, 2014 and 2013, respectively. Total cost of assets under capital
leases at December 31, 2014 and 2013 was $1,254,066 and $788,743, respectively. Accumulated depreciation related to assets acquired under capital leases was $666,518 and $451,799 as of December 31, 2014 and 2013, respectively.
NOTE 4 INTANGIBLE ASSETS
Intangible assets consist of the following as of December 31:
|
|
|
|
|
|
|
|
|
|
|
2014 |
|
|
2013 |
|
Customer relationships |
|
$ |
2,241,784 |
|
|
$ |
2,241,784 |
|
Covenant not to compete |
|
|
500,000 |
|
|
|
500,000 |
|
|
|
|
|
|
|
|
|
|
Gross intangible assets |
|
|
2,741,784 |
|
|
|
2,741,784 |
|
Less accumulated amortization |
|
|
(2,741,784 |
) |
|
|
(2,488,249 |
) |
|
|
|
|
|
|
|
|
|
Total intangible assets |
|
$ |
|
|
|
$ |
253,535 |
|
|
|
|
|
|
|
|
|
|
The aggregate amortization expense for the years ended December 31, 2014 and 2013 was $253,535 and
$320,255, respectively.
11
DANCO ACQUISITION CORPORATION
NOTES TO FINANCIAL STATEMENTS
December 31, 2014 and 2013
(unaudited)
NOTE 5 ACCRUED LIABILITIES
Accrued liabilities consisted of the following at December 31:
|
|
|
|
|
|
|
|
|
|
|
2014 |
|
|
2013 |
|
Accrued interest |
|
$ |
1,017,805 |
|
|
$ |
823,301 |
|
Employee-related liabilities |
|
|
322,040 |
|
|
|
441,937 |
|
Other accrued liabilities |
|
|
174,528 |
|
|
|
193,488 |
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,514,373 |
|
|
$ |
1,458,726 |
|
|
|
|
|
|
|
|
|
|
NOTE 6 DEBT ISSUANCE COSTS
Debt issuance costs are capitalized on the balance sheet resulting from financing arrangements as part of the acquisition of the Company by
Danco Acquisition Corporation on October 17, 2007. The aggregate amortization expense for the year ended December 31, 2013 was $148,722 and such costs were fully amortized as of December 31, 2013.
NOTE 7 NOTES PAYABLE
Notes
payable consist of the following as of December 31, 2014 and 2013:
|
|
|
|
|
|
|
|
|
|
|
2014 |
|
|
2013 |
|
Note A Note payable to affiliated entity of a majority equity holder in the Company, secured by substantially all assets of the
Company. In March 2013, the note was modified to allow the Company to request interest on the note to be calculated at 4.0% instead of the stated interest rate of the greater of 10.0% or the LIBOR rate plus 4.0%, payable monthly (actual rate was
4.0% as of December 31, 2014 and 2013, respectively). This note is subject to certain financial performance related covenants, which were waived subsequent to the year ended December 31, 2014. Interest is due and payable monthly, in
arrears, commencing on September 1, 2012. In February 2015, the notes maturity date was extended to August 2016. |
|
$ |
2,575,000 |
|
|
$ |
2,575,000 |
|
|
|
|
(continued on next page) |
|
|
|
|
|
|
|
|
12
DANCO ACQUISITION CORPORATION
NOTES TO FINANCIAL STATEMENTS
December 31, 2014 and 2013
(unaudited)
NOTE 7 NOTES PAYABLE (Continued)
(continued from previous page)
|
|
|
|
|
|
|
|
|
|
|
2014 |
|
|
2013 |
|
Note B Note payable to affiliated entity of a majority equity holder in the Company, secured by substantially all assets of the
Company. In March 2013, the note was modified to allow the Company to request interest on the note to be calculated at 4.0% instead of the stated interest rate of the greater of 6.25% or the LIBOR rate plus 3.125%, payable monthly (actual rate was
4.0% as of December 31, 2014 and 2013, respectively). This note is subject to certain financial performance related covenants, which were waived subsequent to the year ended December 31, 2014. Interest is due and payable monthly, in
arrears, commencing on September 1, 2012. In February 2015, the notes maturity date was extended to August 2016. |
|
|
8,795,514 |
|
|
|
8,795,514 |
|
|
|
|
(continued on next page) |
|
|
|
|
|
|
|
|
|
|
|
Note C Note payable to affiliated entity of a majority equity holder in the Company, secured by substantially all assets of the
Company. In March 2013, the note was modified to allow the Company to request interest on the note to be calculated at 5.0% instead of the stated interest rate of the greater of 5.0% or the LIBOR rate plus 4.75%, payable monthly (actual rate was
5.0% as of December 31, 2014 and 2013, respectively). This note is subject to certain financial performance related covenants, which were waived subsequent to the year ended December 31, 2014. Interest is due and payable monthly, in
arrears, commencing on September 1, 2012. In February 2015, the notes maturity date was extended to August 2016. |
|
|
1,150,000 |
|
|
|
1,150,000 |
|
|
|
|
(continued on next page) |
|
|
|
|
|
|
|
|
13
DANCO ACQUISITION CORPORATION
NOTES TO FINANCIAL STATEMENTS
December 31, 2014 and 2013
(unaudited)
NOTE 7 NOTES PAYABLE (Continued)
(continued from previous page)
|
|
|
|
|
|
|
|
|
|
|
2014 |
|
|
2013 |
|
Note payable to former stockholder, subordinated to all other debt held by the Company. Bears interest at 7.0%, compounded semiannually
and payable quarterly. The note was previously amended to suspend interest payments until the Company meets certain financial measurements. At December 31, 2014 and 2013, accrued interest related to this note was $963,566 and $769,184,
respectively (and is included in accrued liabilities in the balance sheet). Principal payments are equal to the amount that annual earnings before interest, taxes, depreciation and amortization (EBITA) exceeds $4,500,000, and requires
the approval of the senior debt holders for payment. The note matures the later of February 2016 or six months after maturity of the senior notes. |
|
|
2,000,000 |
|
|
|
2,000,000 |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
14,520,514 |
|
|
$ |
15,520,514 |
|
|
|
|
|
|
|
|
|
|
Interest expense on related party loans for the years ended December 31 2014 and 2013 was $670,648 and
$630,099, respectively. $54,239 and $54,117 remained payable at December 31, 2014 and 2013, respectively.
Minimum annual payments are
as follows:
|
|
|
|
|
Year Ending
December 31, |
|
|
|
2015 |
|
$ |
|
|
2016 |
|
|
12,520,514 |
|
2017 |
|
|
2,000,000 |
|
|
|
|
|
|
Total minimum annual payments |
|
$ |
14,520,514 |
|
|
|
|
|
|
14
DANCO ACQUISITION CORPORATION
NOTES TO FINANCIAL STATEMENTS
December 31, 2014 and 2013
(unaudited)
NOTE 7 NOTES PAYABLE (Continued)
As part of the March 2013 amendment to the Notes A, B and C discussed above and the line of credit discussed in Note 8, Exit Fees were added,
which are summarized as follows:
|
|
|
For Note A and the line of credit, the Exit Fee is equal to the sum of the Differential Amounts on each interest payment date from the date of amendment through the date of a Change of Control, with the Differential
Amount being the difference between the maximum interest rate and the minimum interest rate. The Exit Fee is payable upon occurrence of a Change of Control. |
|
|
|
For Note B, the Exit Fee is equal to the sum of a) for the period from October 16, 2007 through and including June 30, 2012, 2.50% per annum on the greater of (i) the outstanding principal amount of
the Note (Original Note and the Prior Note) and (ii) 75% of the original principal amount of the Original Note, plus b) for the period from July 1, 2012 through and including the Maturity Date, 8.75% per annum on the greater of
(i) 75% of the original principal amount of the Note and (ii) 75% of the original principal amount of the Original Note, plus c) the sum of the Differential Amounts on each Interest Payment Date from the date of amendment through the date
of a Change of Control, with the Differential Amount being the difference between the maximum interest rate and the minimum interest rate. The Exit Fee is payable upon occurrence of a Change of Control. |
|
|
|
For Note C, the Exit Fee is equal to the amount accrued at a rate of 20% per annum on the outstanding principal of the Original Notes, from the date of issuance thereof upon earlier of a) a Change of Control or b)
the repayment of Obligations (other than Exit Fee) and no obligation to advance. Obligations includes the Term A, B and Revolving Note exit fees as defined in the Note Purchase Agreement. The Exit Fee is payable upon the earlier of an occurrence of
a Change of Control or repayment of Obligations. |
As the exit fees for Note A, B and line of credit are contingent upon a
Change of Control and for Note C contingent upon either a Change of Control or repayment of all Obligations (including the exit fees of the other Notes), they are considered contingent interest payments. As they are contingent, the Company has
assessed the probability of payment of the exit fees and has determined it is not likely. A change of control is uncertain and, as a result, no amounts have been accrued for the exit fees. As of December 31, 2014, the contingent interest
payment liabilities related to these exit fees are as follows:
|
|
|
|
|
Note A |
|
$ |
271,751 |
|
Note B |
|
|
3,136,716 |
|
Note C |
|
|
541,315 |
|
Line of credit |
|
|
350,178 |
|
|
|
|
|
|
Total |
|
$ |
4,299,960 |
|
|
|
|
|
|
15
DANCO ACQUISITION CORPORATION
NOTES TO FINANCIAL STATEMENTS
December 31, 2014 and 2013
(unaudited)
NOTE 8 LINE OF CREDIT
The Company has an outstanding line of credit with an affiliated entity of a majority stockholder. The line of credit bears interest at the
greater of 10.0% or the LIBOR rate plus 4.0% or the Company may request the interest to be calculated at 4.0% per year.
During the
year ended December 31, 2012, the line of credit agreement with an affiliated entity of a majority equity holder was amended. The amendment to the Companys outstanding line of credit increased the line of credit to $2,250,000 from
$1,500,000. In March 2013, in conjunction with the amendments to the Companys notes payable amendments as discussed in Note 7, the line of credit was amended and restated to increase the facility size to $3,150,000 and to extend the maturity
date to August 1, 2015. In August 2014, the facility size was further increased to $4,550,000. In February 2015, the maturity date was extended to August 2016.
At December 31, 2014 and 2013, the Company had outstanding borrowings under this agreement of $4,000,000 and $3,150,000, respectively. The
Company drew down $850,000 and $981,659 on this line during the years ended December 31, 2014 and 2013, respectively. The interest rate at December 31, 2014 and 2013 was 4%. Interest payments are due monthly, and all amounts outstanding on
the line are due as of the maturity date of August 1, 2016. The line is secured by substantially all assets of the Company.
NOTE 9 SERIES
A PREFERRED STOCK
As part of the acquisition of the Company on October 17, 2007, the Company issued 42 shares of Series A
preferred stock for total consideration of $4,200,000. These shares entitle the holder to cumulative annual dividends at a rate of 8% accrued through February 26, 2013. On February 26, 2013, the Company modified its articles of
incorporation related to the preferences of the Companys preferred stock, whereby the preferred stock no longer accrue dividends effective February 26, 2013. As of December 31, 2014 and 2013, no dividends were declared by the
Companys board of directors or payable by the Company. At December 31, 2014 and 2013, the Series A preferred stock had a total liquidation preference of $6,121,689.
For so long as any shares of Series A Preferred Stock shall be outstanding, no dividend or distribution shall be paid or declared on any junior
Security. Additionally, in the event of liquidation, dissolution or winding down, no payment shall be made on any Junior Security unless, in each case, all outstanding shares of Series A Preferred Stock shall be redeemed and paid in full. Dividends
payable in additional shares of Junior Securities on any series of Junior Securities shall be permitted.
16
DANCO ACQUISITION CORPORATION
NOTES TO FINANCIAL STATEMENTS
December 31, 2014 and 2013
(unaudited)
NOTE 10 COMMON STOCK
The Company issued a fully vested common stock warrant pursuant to the Companys acquisition agreement dated October 17, 2007. The
holder of this common stock warrant has the right to purchase 420 shares of the Companys common stock for a total exercise price of $1. In conjunction with the $700,000 notes payable issued in September 2012, the Company modified the warrant
to increase the number of common stock available to be purchased to 920 shares. The value of the common stock warrant was not significant at the date of modification.
In conjunction with the issuance of the $350,000 and $100,000 notes payable issued during the year ended December 31, 2012, the Company
issued warrants which allow the holder the right to purchase 250 and 71.43 common shares, respectively, for an exercise price of $0.50 and $0.14, respectively. The value of the common stock warrants was not significant at the date of issuance.
On February 26, 2013, all warrants were exercised for total proceeds of $1,829. Also on February 26, 2013, a stockholder sold common
shares to the Company at $1.00 per share for a cash payment of $580. These shares were then retired by the Company.
On March 31,
2014, the majority stockholder of the Company exchanged 1,237.43 shares of Class A voting common stock for an equal number of shares of the Companys Class B nonvoting common stock. In addition, members of the Companys management
team purchased 46 shares of the Companys Class A voting common stock at a price of $1 per share.
NOTE 11 RESTRICTED STOCK GRANT
During the year ended December 31, 2008, the Company issued 61.5 restricted stock grants of the Companys Series A common
stock. These stock grants vest accordingly: (1) 50% of these grants will vest over a five-year period, cliff vesting 20% each year from the anniversary of the grant date, and (2) 50% of these options will vest if certain performance
targets for shareholder return are met upon a change in control or liquidation event. The Company has determined that the fair value of these stock grants and the related stock compensation expense is not significant.
During 2013, the Company issued 7.02 restricted stock grants of the Companys Series A common stock. These grants have the same vesting
terms at the 2008 grants. The Company has determined that the fair value of these stock grants and the related stock compensation expense is not significant. During 2013, 17.29 restricted stock grants were forfeited and reverted to the Company. The
number of restricted stock grants outstanding for the years ended December 31, 2014 and 2013 was 51.23 and 51.23, respectively.
17
DANCO ACQUISITION CORPORATION
NOTES TO FINANCIAL STATEMENTS
December 31, 2014 and 2013
(unaudited)
NOTE 12 EMPLOYEE BENEFIT PLANS
The Company maintains a qualified deferred compensation plan under Section 401(k) of the Internal Revenue Code (the Code).
Under the plan, domestic employees may elect to defer up to 25% of their salaries subject to the Internal Revenue Service limits. The Company did not make any discretionary matching contributions to the plan during the years ended December 31,
2014 and 2013.
NOTE 13 INCOME TAXES
The federal and state income tax provision is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
2014 |
|
|
2013 |
|
Current |
|
|
|
|
|
|
|
|
Federal |
|
$ |
|
|
|
$ |
|
|
State |
|
|
1,600 |
|
|
|
1,600 |
|
|
|
|
|
|
|
|
|
|
Total current tax expense |
|
|
1,600 |
|
|
|
1,600 |
|
|
|
|
|
|
|
|
|
|
Deferred |
|
|
|
|
|
|
|
|
Federal |
|
|
|
|
|
|
|
|
State |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total tax expense |
|
$ |
1,600 |
|
|
$ |
1,600 |
|
|
|
|
|
|
|
|
|
|
18
DANCO ACQUISITION CORPORATION
NOTES TO FINANCIAL STATEMENTS
December 31, 2014 and 2013
(unaudited)
NOTE 13 INCOME TAXES (Continued)
The tax effects of significant items comprising the Companys deferred taxes as of December 31, 2014 and 2013 are as follows:
|
|
|
|
|
|
|
|
|
|
|
2014 |
|
|
2013 |
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
Net operating losses |
|
$ |
5,011,248 |
|
|
$ |
4,066,276 |
|
Inventory reserve |
|
|
379,787 |
|
|
|
498,771 |
|
Intangibles |
|
|
566,411 |
|
|
|
538,478 |
|
General business credits |
|
|
279,210 |
|
|
|
242,287 |
|
Accruals |
|
|
112,146 |
|
|
|
116,006 |
|
Unicap inventory |
|
|
|
|
|
|
25,621 |
|
State tax accrual difference |
|
|
|
|
|
|
544 |
|
Goodwill |
|
|
2,284,668 |
|
|
|
2,572,705 |
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets |
|
|
8,633,470 |
|
|
|
8,060,688 |
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
Prepaids |
|
|
(61,208 |
) |
|
|
(33,924 |
) |
Fixed assets |
|
|
(605,427 |
) |
|
|
(665,591 |
) |
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities |
|
|
(666,635 |
) |
|
|
(699,515 |
) |
|
|
|
|
|
|
|
|
|
Valuation allowance |
|
|
(7,966,835 |
) |
|
|
(7,361,173 |
) |
|
|
|
|
|
|
|
|
|
Net deferred taxes |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
FASB ASC Topic No. 740, Income Taxes, requires that the tax benefit of net operating losses
(NOL), temporary differences and credit carryforwards be recorded as an asset to the extent that management assesses that realization is more likely than not. Realization of the future tax benefits is dependent on the
Companys ability to generate sufficient taxable income within the carryforward period. Because of the Companys recent history of operating losses, management believes that recognition of the deferred tax assets arising from the
above-mentioned future tax benefits is currently not likely to be realized and, accordingly, has provided a valuation allowance. The valuation allowance increased by $605,662 and $855,933 during the years ended December 31, 2014 and 2013,
respectively.
19
DANCO ACQUISITION CORPORATION
NOTES TO FINANCIAL STATEMENTS
December 31, 2014 and 2013
(unaudited)
NOTE 13 INCOME TAXES (Continued)
Net operating losses and tax credit carryforwards as of December 31, 2014 are as follows:
|
|
|
|
|
|
|
|
|
|
|
Amount |
|
|
Expiration Years |
|
Net operating losses, federal |
|
$ |
12,492,128 |
|
|
|
20292034 |
|
Net operating losses, state |
|
|
13,093,452 |
|
|
|
20182034 |
|
Federal tax credits |
|
|
199,155 |
|
|
|
20272034 |
|
State tax credits |
|
|
121,295 |
|
|
|
no expiration |
|
The effective tax rate of the Companys provision for income taxes differs from the federal statutory rate
for December 31, 2014 and 2013 principally due to increases in the valuation allowance.
Utilization of the NOL and tax credit
carryforwards may be subject to a substantial annual limitation due to ownership change limitations that may have occurred or that could occur in the future, as required by the Code, as amended, as well as similar state provisions. In general, an
ownership change as defined by the Code results from a transaction or series of transactions over a three-year period resulting in an ownership change of more than 50 percentage points of the outstanding stock of a company by certain
stockholders or public groups. Since the Companys formation, the Company has raised capital through the issuance of capital stock on several occasions which, combined with the purchasing stockholders subsequent disposition of those
shares, may have resulted in such an ownership change, or could result in an ownership change in the future upon subsequent disposition. The annual limitation may result in the expiration of NOL and tax credit carryforwards before utilization.
The Company has not completed a study to assess whether an ownership change has occurred or whether there have been multiple ownership changes
since the Companys formation due to the complexity and costs associated with such a study and the fact that there may be additional ownership changes in the future. If the Company has experienced an ownership change at any time since its
formation, utilization of the NOL or tax credit carryforwards to offset future taxable income and taxes, respectively, would be subject to an annual limitation under the Code, which is determined by first multiplying the value of the Companys
stock at the time of the ownership change by the applicable long-term, tax-exempt rate and then could be subject to additional adjustments, as required. Any limitation may result in expiration of all or a portion of the NOL carryforwards before
utilization.
Due to the existence of the valuation allowance, future changes in the Companys unrecognized tax benefits and
recognizable deferred tax benefits after the completion of an ownership change analysis is not expected to impact its effective tax rate.
The Companys tax years 2007 2014 will remain open for examination by federal and state authorities.
20
DANCO ACQUISITION CORPORATION
NOTES TO FINANCIAL STATEMENTS
December 31, 2014 and 2013
(unaudited)
NOTE 14 COMMITMENTS AND CONTINGENCIES
The Company has on-going litigation with a former employee regarding a threatened wage claim. Management estimates any settlement is immaterial
to the financial statements and should be covered by employment practices liability insurance.
The Company has agreements under
noncancelable leases for office, production and warehouse facilities owned by a former stockholder through April 2015 with escalating rent payments. The Company also leases certain equipment under capital leases. The leases are collateralized by the
underlying assets. At December 31, 2014 and 2013, property and equipment with a cost of $1,254,066 and $788,743, respectively, were subject to such financing arrangements. The minimum annual rental commitments and future minimum payments under
capital lease and equipment financing arrangements are as follows:
|
|
|
|
|
|
|
|
|
Years Ending
December 31, |
|
Capital Leases |
|
|
Operating Leases |
|
2015 |
|
$ |
226,087 |
|
|
$ |
99,318 |
|
2016 |
|
|
167,347 |
|
|
|
|
|
2017 |
|
|
118,708 |
|
|
|
|
|
2018 |
|
|
92,800 |
|
|
|
|
|
2019 |
|
|
49,494 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total minimum future lease payments |
|
|
654,436 |
|
|
$ |
99,318 |
|
|
|
|
|
|
|
|
|
|
Less: amount representing interest |
|
|
(104,045 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Present value of minimum future lease payments |
|
$ |
550,391 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental expense under these agreements for the years ended December 31, 2014 and 2013 amounted to $294,586
and $290,578, respectively.
NOTE 15 SUBSEQUENT EVENTS
The Company has evaluated subsequent events for potential recognition and disclosure from January 1, 2015 through April 6, 2015, the
date the financial statements were available to be issued. The Company identified one subsequent event that required disclosure in these financial statements.
In February 2015, the Company extended the maturity date for Notes A, B and C to August 2016, as disclosed in Note 7.
21
Exhibit 2_s_4
Report of Independent Auditors and
Consolidated Financial Statements
Danco Acquisition Corporation
December 31, 2012 and 2011
CONTENTS
|
|
|
|
|
|
|
PAGE |
|
REPORT OF INDEPENDENT AUDITORS |
|
|
1 |
|
|
|
CONSOLIDATED FINANCIAL STATEMENTS |
|
|
|
|
Balance sheets |
|
|
2 |
|
Statements of operations |
|
|
3 |
|
Statements of changes in stockholders equity (deficit) |
|
|
4 |
|
Statements of cash flows |
|
|
5 |
|
Notes to financial statements |
|
|
6 |
|
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors
Danco Acquisition Corporation
Report on Consolidated Financial Statements
We have
audited the accompanying consolidated financial statements of Danco Acquisition Corporation (the Company), which comprise the balance sheets as of December 31, 2012 and 2011, and the related statements of operations,
stockholders equity, and cash flows for the years then ended, and the related notes to the consolidated financial statements.
Managements Responsibility for the Consolidated Financial Statements
Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting principles
generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material
misstatement, whether due to fraud or error.
Auditors Responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing
standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures
selected depend on the auditors judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal
control relevant to the entitys preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the entitys internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by
management, as well as evaluating the overall presentation of the consolidated financial statements.
We believe that the audit evidence obtained is
sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Danco Acquisition
Corporation as of December 31, 2012 and 2011, and the results of their operations and their cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America.
/s/ Moss Adams LLP
San Francisco, California
May 24, 2013
Page 1
DANCO ACQUISITION CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31, 2012 and
2011
|
|
|
|
|
|
|
|
|
|
|
2012 |
|
|
2011 |
|
ASSETS |
|
|
|
|
|
|
|
|
CURRENT ASSETS |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
193,205 |
|
|
$ |
320,275 |
|
Accounts receivable less allowance for doubtful accounts of $14,061 and $11,812 as of December 31, 2012 and 2011,
respectively |
|
|
1,748,314 |
|
|
|
1,450,930 |
|
Inventory |
|
|
2,089,171 |
|
|
|
1,852,519 |
|
Prepaid expenses |
|
|
94,679 |
|
|
|
129,100 |
|
Deferred income taxes |
|
|
|
|
|
|
208,855 |
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
4,125,369 |
|
|
|
3,961,679 |
|
FIXED ASSETS, net |
|
|
2,475,429 |
|
|
|
2,976,299 |
|
GOODWILL |
|
|
|
|
|
|
11,006,573 |
|
DEBT ISSUANCE COSTS, net |
|
|
148,722 |
|
|
|
340,157 |
|
INTANGIBLE ASSETS, net |
|
|
573,790 |
|
|
|
973,211 |
|
OTHER ASSETS |
|
|
35,148 |
|
|
|
35,148 |
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
7,358,458 |
|
|
$ |
19,293,067 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT) |
|
|
|
|
|
|
|
|
CURRENT LIABILITIES |
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
549,437 |
|
|
$ |
230,939 |
|
Accrued liabilities |
|
|
1,258,258 |
|
|
|
830,652 |
|
Line of credit |
|
|
|
|
|
|
1,500,000 |
|
Current portion - capital leases |
|
|
139,093 |
|
|
|
139,092 |
|
Current portion - long-term debt |
|
|
|
|
|
|
2,621,106 |
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
1,946,788 |
|
|
|
5,321,789 |
|
LINE OF CREDIT |
|
|
2,250,000 |
|
|
|
|
|
CAPITAL LEASES, net of current portion |
|
|
266,076 |
|
|
|
405,168 |
|
LONG-TERM DEBT, net of current portion |
|
|
14,520,514 |
|
|
|
10,845,364 |
|
DEFERRED INCOME TAXES |
|
|
|
|
|
|
1,079,691 |
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
18,983,378 |
|
|
|
17,652,012 |
|
|
|
|
|
|
|
|
|
|
COMMITMENTS (Note 13) |
|
|
|
|
|
|
|
|
STOCKHOLDERS EQUITY (DEFICIT) |
|
|
|
|
|
|
|
|
Preferred stock, $0.0001 par value; 2,000 shares authorized 42 shares issued and outstanding |
|
|
3,791,735 |
|
|
|
3,791,735 |
|
Common stock, $0.0001 par value; 10,000 shares authorized 580 shares issued and outstanding |
|
|
8,300 |
|
|
|
8,300 |
|
Accumulated deficit |
|
|
(15,424,955 |
) |
|
|
(2,158,980 |
) |
|
|
|
|
|
|
|
|
|
Total stockholders equity (deficit) |
|
|
(11,624,920 |
) |
|
|
1,641,055 |
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity (deficit) |
|
$ |
7,358,458 |
|
|
$ |
19,293,067 |
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
Page 2
DANCO ACQUISITION CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31, 2012 and 2011
|
|
|
|
|
|
|
|
|
|
|
2012 |
|
|
2011 |
|
SALES |
|
$ |
11,550,385 |
|
|
$ |
12,442,718 |
|
COST OF SALES |
|
|
10,440,689 |
|
|
|
10,506,879 |
|
|
|
|
|
|
|
|
|
|
GROSS PROFIT |
|
|
1,109,696 |
|
|
|
1,935,839 |
|
GENERAL AND ADMINISTRATIVE EXPENSES |
|
|
2,608,245 |
|
|
|
2,440,388 |
|
GOODWILL IMPAIRMENT |
|
|
11,006,573 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING LOSS |
|
|
(12,505,122 |
) |
|
|
(504,549 |
) |
|
|
|
|
|
|
|
|
|
OTHER INCOME (EXPENSE) |
|
|
|
|
|
|
|
|
Interest expense |
|
|
(1,728,071 |
) |
|
|
(1,929,722 |
) |
Interest income |
|
|
46 |
|
|
|
266 |
|
Other income, net |
|
|
97,898 |
|
|
|
41,980 |
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,630,127 |
) |
|
|
(1,887,476 |
) |
|
|
|
|
|
|
|
|
|
NET LOSS BEFORE INCOME TAXES |
|
|
(14,135,249 |
) |
|
|
(2,392,025 |
) |
(PROVISION FOR) BENEFIT FROM INCOME TAXES |
|
|
869,274 |
|
|
|
(743,805 |
) |
|
|
|
|
|
|
|
|
|
NET LOSS |
|
$ |
(13,265,975 |
) |
|
$ |
(3,135,830 |
) |
|
|
|
|
|
|
|
|
|
See accompanying notes.
Page 3
DANCO ACQUISITION CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY (DEFICIT)
For the Years Ended December 31, 2012 and 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred Stock |
|
|
Common Stock |
|
|
Accumulated (Deficit) Retained |
|
|
Total Stockholders |
|
|
|
Shares |
|
|
Amount |
|
|
Shares |
|
|
Amount |
|
|
Earnings |
|
|
Equity (Deficit) |
|
Balance as of December 31, 2010 |
|
|
42 |
|
|
$ |
3,791,735 |
|
|
|
580 |
|
|
$ |
8,300 |
|
|
$ |
976,850 |
|
|
$ |
4,776,885 |
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,135,830 |
) |
|
|
(3,135,830 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2011 |
|
|
42 |
|
|
|
3,791,735 |
|
|
|
580 |
|
|
|
8,300 |
|
|
|
(2,158,980 |
) |
|
|
1,641,055 |
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(13,265,975 |
) |
|
|
(13,265,975 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2012 |
|
|
42 |
|
|
$ |
3,791,735 |
|
|
|
580 |
|
|
$ |
8,300 |
|
|
$ |
(15,424,955 |
) |
|
$ |
(11,624,920 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
Page 4
DANCO ACQUISITION CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years
Ended December 31, 2012 and 2011
|
|
|
|
|
|
|
|
|
|
|
2012 |
|
|
2011 |
|
CASH FLOWS FROM OPERATING ACTIVITIES |
|
|
|
|
|
|
|
|
NET LOSS |
|
$ |
(13,265,975 |
) |
|
$ |
(3,135,830 |
) |
ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH FROM OPERATING ACTIVITIES |
|
|
|
|
|
|
|
|
Depreciation expense |
|
|
595,996 |
|
|
|
521,007 |
|
Amortization expense |
|
|
399,421 |
|
|
|
420,255 |
|
Amortization of debt issuance costs |
|
|
191,435 |
|
|
|
220,788 |
|
Deferred income taxes |
|
|
(870,836 |
) |
|
|
724,392 |
|
Allowance for doubtful accounts |
|
|
(2,249 |
) |
|
|
20,411 |
|
Gain on disposal of fixed assets |
|
|
(84,828 |
) |
|
|
(22,185 |
) |
Goodwill impairment |
|
|
11,006,573 |
|
|
|
|
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
(295,135 |
) |
|
|
574,437 |
|
Inventory |
|
|
(236,652 |
) |
|
|
909,701 |
|
Prepaid expenses and other assets |
|
|
34,421 |
|
|
|
57,622 |
|
Accounts payable and accrued liabilities |
|
|
609,857 |
|
|
|
(200,342 |
) |
Accrued interest |
|
|
136,247 |
|
|
|
160,753 |
|
|
|
|
|
|
|
|
|
|
Total adjustments |
|
|
11,484,250 |
|
|
|
3,386,839 |
|
|
|
|
|
|
|
|
|
|
Net cash from operating activities |
|
|
(1,781,725 |
) |
|
|
251,009 |
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES |
|
|
|
|
|
|
|
|
Payments for the purchase of fixed assets |
|
|
(97,398 |
) |
|
|
(97,165 |
) |
Proceeds from sale of fixed assets on disposal |
|
|
87,100 |
|
|
|
36,000 |
|
|
|
|
|
|
|
|
|
|
Net cash from investing activities |
|
|
(10,298 |
) |
|
|
(61,165 |
) |
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES |
|
|
|
|
|
|
|
|
Principal payments on note payable |
|
|
(95,956 |
) |
|
|
(779,713 |
) |
Proceeds for notes payable |
|
|
1,150,000 |
|
|
|
|
|
Net proceeds from line of credit |
|
|
750,000 |
|
|
|
400,000 |
|
Payments on capital leases |
|
|
(139,091 |
) |
|
|
(221,145 |
) |
|
|
|
|
|
|
|
|
|
Net cash from financing activities |
|
|
1,664,953 |
|
|
|
(600,858 |
) |
|
|
|
|
|
|
|
|
|
NET DECREASE IN CASH AND CASH EQUIVALENTS |
|
|
(127,070 |
) |
|
|
(411,014 |
) |
CASH AND CASH EQUIVALENTS, beginning of year |
|
|
320,275 |
|
|
|
731,289 |
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, end of year |
|
$ |
193,205 |
|
|
$ |
320,275 |
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION |
|
|
|
|
|
|
|
|
Interest expense paid |
|
$ |
1,400,389 |
|
|
$ |
1,551,188 |
|
Income taxes paid |
|
$ |
1,509 |
|
|
$ |
1,600 |
|
Income taxes refunds received |
|
$ |
144,958 |
|
|
$ |
|
|
Non-cash investing and financing activities |
|
|
|
|
|
|
|
|
Property and equipment purchased under capital lease |
|
$ |
|
|
|
$ |
472,511 |
|
See accompanying notes.
Page 5
DANCO ACQUISITION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of business DPMS, Inc. dba Danco Machine DPMS (the Company or Danco) was founded in 1979 to meet the challenge of
providing competitively priced, quality prototype machining services to the emerging high-tech industries of the Silicon Valley.
On October 17,
2007, the Company was acquired by Danco Acquisition Corporation, an entity created by a group of private equity firms to facilitate their acquisition of the Company. The transaction was effected so that Danco would have the necessary financial and
managerial resources available to continue to strategically grow. These financial statements contain the consolidated results of Danco Acquisition Corporation and its wholly owned subsidiary DPMS, Inc.
Liquidity and managements plans The Company experienced losses during 2011 and 2012 due to a reduction in demand for machining services
from the Companys existing customers. Management has plans to return the Company to profitability and positive cash flows. Subsequent to year-end, the Company has made changes in certain senior management positions as part of its strategy to
move toward positive cash flows. Management is closely monitoring its demand, and if demand does not increase as expected, management may implement cost-cutting measures, including reductions of its labor force. If strategies to improve margins and
reduce operating costs are not successful, and the Company is not able to meet its debt obligations, then the Company will need to further reduce expenses or raise additional capital through other sources.
The Company also has $11,370,514 of notes payable and a line of credit balance of $2,250,000 that were extended during 2012 to mature in 2014 and 2015. These
balances are payable to a lender who is an affiliated entity of a stockholder of the Company. This stockholder has demonstrated continued support for its investment in the Company. Subsequent to year-end, this stockholder increased their preexisting
ownership stake and is currently the majority common stockholder of the Company. If the Company is unable to improve the cash flow from operations, the Company will need to seek additional capital from the stockholders or other sources. However,
there is no assurance that the stockholders will continue to provide capital to the Company or that the Company will be able to obtain additional capital from other sources.
The consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets
or the amounts and classifications of liabilities that may result should it be unable to continue as a going concern.
Cash and cash
equivalents The Company considers all highly liquid investments purchased with original maturity of three months or less to be cash equivalents.
Revenue recognition and allowance for doubtful accounts Revenue from the sale of products is recognized when the products are shipped in
accordance with contract terms. Accounts receivable is stated at an amount that management believes to be collectible. Historically, bad debts have been within managements expectations.
Inventory Inventory is stated at the lower of standard cost (which approximates actual cost on a first-in, first-out basis) or market. The
Company evaluates the valuation of all inventory, including raw materials, work-in-process, finished goods and spare parts on a periodic basis. Obsolete inventory or inventory in excess of managements estimated usage is written-down to its
estimated market value less costs to sell, if less than its cost. Inherent in the estimates of market value are managements estimates related to economic trends, future demand for products, and technological obsolescence of the Companys
products.
Property and equipment Property and equipment are recorded at cost and include improvements that significantly add to productive
capacity or extend useful life. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, which range from three to fifteen years. Repair and maintenance costs that do not increase the useful lives and/or
enhance the value of the assets are charged to operations as incurred. Leasehold improvements are stated at cost and amortized over the lesser of the terms of the respective leases or the assets useful lives.
The Company evaluates their long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. Long-lived assets consist primarily of property and equipment. Recoverability of assets is measured by a comparison of the carrying amount of an asset group to future net cash flows expected to be generated by the asset group. If
such assets are considered to be impaired, the impairment charge is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or
fair value, less cost to sell. The Company did not recognize any impairment charges associated with long-lived assets for the years ended December 31, 2012 and 2011.
Page 6
DANCO ACQUISITION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Goodwill and other intangible assets Goodwill and other intangible assets are accounted for in
accordance with ASC 350, Goodwill and Other Intangible Assets. Goodwill represents the excess of cost over the estimated fair value of net assets acquired by the Company. Other intangible assets are amortized on a straight-line basis over the
period of expected benefit with a weighted-average useful life of approximately 5.4 years with no calculated residual value. The estimated useful lives of identifiable intangible assets are as follows:
|
|
|
|
|
Description |
|
Period |
|
Covenants not to compete |
|
|
5 years |
|
Customer lists |
|
|
7 years |
|
The Company assesses the impairment of goodwill on an annual basis on December 31. Goodwill is also tested for impairment
whenever events or changes in circumstances indicate the carrying amount of the asset may not be recoverable.
Due to the Companys losses from
operations over the past two years, the Company concluded that the goodwill balance was likely fully impaired. As such, the Company recorded an impairment loss of $11,006,573 in its statement of operations during the year ended December 31,
2012.
Debt issuance costs The Company amortizes debt issuance costs using the effective interest method over the term of the related notes
payable.
Income taxes Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are
recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date. A valuation allowance is established when necessary to reduce deferred tax assets to the amounts expected to be realized.
Shipping and handling Shipping and handling charges billed to customers are included in sales. The costs of shipping to customers are included
in cost of sales in the Companys consolidated statement of operations.
Use of estimates The preparation of financial statements in
conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Concentration of credit risk The Company has a concentration of credit risk with respect to its trade receivables. The Company provides
unsecured and interest-free credit, in the normal course of business, to its customers, and receivables are considered past due based on payment terms with customers. Management performs ongoing credit evaluations of its customers and monitors the
receivable balances on a regular basis. An allowance for doubtful accounts is recorded based on managements evaluation of outstanding receivables. Receivables are written off when all methods of collection have been exhausted and have been
within the range of managements expectations. Management believes its credit acceptance, billing, and collection policies are adequate to minimize potential credit risk.
The Company has a concentration of credit risk with respect to the volume of business transacted with certain customers. Two customers accounted for
approximately 71%, and 73% of the Companys sales for the years ended December 31, 2012 and 2011, respectively. Three customers represented approximately 79%, and two customers represented approximately 85% of the Companys accounts
receivable as of December 31, 2012 and 2011, respectively.
The Company has a concentration of credit risk with respect to financial instruments,
which consist of cash deposits in excess of federally insured limits. The Company maintains its cash with high-credit, quality financial institutions.
Subsequent events Subsequent events are events or transactions that occur after the balance sheet date but before financial statements are
issued or are available to be issued. The Company recognizes in the consolidated financial statements the effects of all subsequent events that provide additional evidence about conditions that existed at the date of the consolidated balance sheet,
including the estimates inherent in the process of preparing the consolidated financial statements. The Companys consolidated financial statements do not recognize subsequent events that provide evidence about conditions that did not exist at
the date of the consolidated balance sheet but arose after the consolidated balance sheet date and before the consolidated financial statements are issued or are available to be issued.
Page 7
DANCO ACQUISITION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company has evaluated subsequent events through May 24, 2013, which is the date the consolidated
financial statements were available to be issued.
NOTE 2 INVENTORY
Inventory consists of the following as of December 31, 2012 and 2011:
|
|
|
|
|
|
|
|
|
|
|
2012 |
|
|
2011 |
|
Raw materials and work in progress |
|
$ |
1,267,386 |
|
|
$ |
855,293 |
|
Finished goods |
|
|
2,297,758 |
|
|
|
2,343,504 |
|
|
|
|
|
|
|
|
|
|
|
|
|
3,565,144 |
|
|
|
3,198,797 |
|
Less inventory reserve |
|
|
(1,475,973 |
) |
|
|
(1,346,278 |
) |
|
|
|
|
|
|
|
|
|
Total inventory |
|
$ |
2,089,171 |
|
|
$ |
1,852,519 |
|
|
|
|
|
|
|
|
|
|
NOTE 3 FIXED ASSETS
Fixed assets consist of the following as of December 31, 2012 and 2011:
|
|
|
|
|
|
|
|
|
|
|
2012 |
|
|
2011 |
|
Machinery and equipment |
|
$ |
4,666,529 |
|
|
$ |
4,676,765 |
|
Software |
|
|
161,215 |
|
|
|
154,458 |
|
Office equipment |
|
|
58,609 |
|
|
|
58,609 |
|
Leasehold improvements |
|
|
18,857 |
|
|
|
18,857 |
|
Automobile |
|
|
13,701 |
|
|
|
13,701 |
|
|
|
|
|
|
|
|
|
|
|
|
|
4,918,911 |
|
|
|
4,922,390 |
|
Less: accumulated depreciation |
|
|
(2,443,482 |
) |
|
|
(1,946,091 |
) |
|
|
|
|
|
|
|
|
|
Total fixed assets |
|
$ |
2,475,429 |
|
|
$ |
2,976,299 |
|
|
|
|
|
|
|
|
|
|
The Company recorded $595,996 and $521,007 in total depreciation expense for the years ended December 31, 2012 and 2011,
respectively. Of these amounts, depreciation expense related to assets acquired under capital leases was $179,003 and $92,807 for the years ended December 31, 2012 and 2011, respectively. Accumulated depreciation related to assets acquired
under capital leases was $320,120 and $141,117 as of December 31, 2012 and 2011, respectively.
NOTE 4 INTANGIBLE ASSETS
Intangible assets consist of the following as of December 31, 2012 and 2011:
|
|
|
|
|
|
|
|
|
|
|
2012 |
|
|
2011 |
|
Customer relationships |
|
$ |
2,241,784 |
|
|
$ |
2,241,784 |
|
Covenant not to compete |
|
|
500,000 |
|
|
|
500,000 |
|
|
|
|
|
|
|
|
|
|
Gross intangible assets |
|
|
2,741,784 |
|
|
|
2,741,784 |
|
Less: accumulated amortization |
|
|
(2,167,994 |
) |
|
|
(1,768,573 |
) |
|
|
|
|
|
|
|
|
|
Total intangible assets |
|
$ |
573,790 |
|
|
$ |
973,211 |
|
|
|
|
|
|
|
|
|
|
Page 8
DANCO ACQUISITION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The aggregate amortization expense for the years ended December 31, 2012 and 2011 was $399,421 and
$420,255, respectively. The estimated aggregate amortization expense for each of the two succeeding years is as follows:
|
|
|
|
|
Year Ending December 31, |
|
|
|
2013 |
|
$ |
320,255 |
|
2014 |
|
|
253,535 |
|
|
|
|
|
|
Total future amortization expenses |
|
$ |
573,790 |
|
|
|
|
|
|
NOTE 5 DEBT ISSUANCE COSTS
Debt issuance costs are capitalized on the balance sheet resulting from entering into financing arrangements as part of the acquisition of the Company by Danco
Acquisition Corporation on October 17, 2007. The aggregate amortization expense for the years ended December 31, 2012 and 2011 was $191,435 and $220,788, respectively. The estimated aggregate expense of these costs is as follows:
|
|
|
|
|
Year Ending December 31, |
|
|
|
2013 |
|
$ |
148,722 |
|
|
|
|
|
|
Total debt issuance costs |
|
$ |
148,722 |
|
|
|
|
|
|
NOTE 6 NOTES PAYABLE
Notes payable consist of the following as of December 31, 2012 and 2011:
|
|
|
|
|
|
|
|
|
|
|
2012 |
|
|
2011 |
|
Note payable to affiliated entity of a majority equity holder in the Company, secured by substantially all assets of the Company. The
interest rate is stated as the greater of 10% or the libor rate plus 4%, payable monthly (actual rate was 10% as of December 31, 2012 and 2011, respectively). This note is subject to certain financial performance related covenants, which were
waived as a part of an amendment to the note subsequent to the year ended December 31, 2012. As a part of the amendments of the note subsequent to the year ending December 31, 2012, the timing of the principal payments were modified. The
notes maturity date is August 2015. |
|
$ |
2,575,000 |
|
|
$ |
2,575,000 |
|
Note payable to affiliated entity of a majority equity holder in the Company, secured by substantially all assets of the Company. As
part of an amendment to the note during the year ended December 31, 2012, the interest rate is stated as the greater of 6.5% or the libor rate plus 3.125%, payable monthly (actual rate was 6.5% as of December 31, 2012. For the year ended
December 31, 2011, the interest rate was stated as the greater of 12.5% or the libor rate plus 6.25%, payable monthly (actual rate was 12.5% as of December 31, 2011). This note is subject to certain financial performance related covenants,
which were waived as a part of an amendment to the note subsequent to the year ended December 31, 2012. As a part of the amendments of the note subsequent to the year ending December 31, 2012, the timing of the principal payments were
modified. The notes maturity date is August 2015. |
|
|
8,795,514 |
|
|
|
8,891,470 |
|
Note payable to affiliated entity of a majority equity holder in the Company, secured by substantially all assets of the Company. The
interest rate is stated as the greater of 5% or the libor rate plus 4.75%, payable monthly (actual rate was 5% as of December 31, 2012). This note is subject to certain financial performance related covenants, which were waived as a part of an
amendment to the note subsequent to the year ended December 31, 2012. Interest is due and payable monthly, in arrears, commencing on September 1, 2012. The notes maturity date is August 2015. |
|
|
700,000 |
|
|
|
|
|
Page 9
DANCO ACQUISITION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
|
|
|
2012 |
|
|
2011 |
|
Note payable to affiliated entity of a majority equity holder in the Company, secured by substantially all assets of the Company. The
interest rate is stated as the greater of 5% or the libor rate plus 4.75%, payable monthly (actual rate was 5% as of December 31, 2012). This note is subject to certain financial performance related covenants, which were waived as a part of an
amendment to the note subsequent to the year ended December 31, 2012. Interest is due and payable monthly, in arrears, commencing on October 1, 2012. The notes maturity date in August 2015. |
|
|
350,000 |
|
|
|
|
|
Note payable to affiliated entity of a majority equity holder in the Company, secured by substantially all assets of the Company. The
interest rate is stated as the greater of 5% or the libor rate plus 4.75%, payable monthly (actual rate was 5% as of December 31, 2012). This note is subject to certain financial performance related covenants, which were waived as a part of an
amendment to the note subsequent to the year ended December 31, 2012. Interest is due and payable monthly, in arrears, commencing on January 1, 2013. The notes maturity date in August 2015. |
|
|
100,000 |
|
|
|
|
|
Note payable to affiliated entity of a majority equity holder in the Company, subordinated to all other debt held by the Company. Bears
interest at 7.0%, compounded semi-annually and payable quarterly. The note was previously amended to suspend interest payments until the Company meets certain financial measurements. At December 31, 2012 and 2011, accrued interest related to
this note was $584,092 and $411,372, respectively. Principal payments are equal to the amount that annual earnings before interest, taxes, deprecation, and amortization (EBITDA) exceeds $4,500,000, which require the approval of the
senior debt holders for payment. The note matures in February 2016. |
|
|
2,000,000 |
|
|
|
2,000,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
14,520,514 |
|
|
|
13,466,470 |
|
Less current portion |
|
|
|
|
|
|
2,621,106 |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
14,520,514 |
|
|
$ |
10,845,364 |
|
|
|
|
|
|
|
|
|
|
Interest expense on related party loans for the year ended December 31 2012, and 2011 was $1,338,520 and $1,532,340,
respectively. $93,795 and $130,269 remained payable at December 31, 2012 and 2011, respectively.
Minimum annual payments are as follows:
|
|
|
|
|
Years Ending December 31, |
|
|
|
2013 |
|
$ |
|
|
2014 |
|
|
|
|
2015 |
|
|
12,520,514 |
|
2016 |
|
|
2,000,000 |
|
|
|
|
|
|
Total minimum annual payments |
|
$ |
14,520,514 |
|
|
|
|
|
|
NOTE 7 LINE OF CREDIT
The Company has an outstanding line of credit with an affiliated entity of a majority equity holder. The line of credit bears interest at the greater of 10.0%
or LIBOR rate plus 4.0%, per year.
During the year ended December 31, 2012, the line of credit agreement with an affiliated entity of a
majority equity holder was amended in conjunction with the amendments to the Companys notes payable amendments as discussed in Note 6. The amendment to the Companys outstanding line of credit increased the line of credit to $2,250,000
from $1,500,000. Subsequent to December 31, 2012, the line of credit was amended and restated to increase the facility size to $3,150,000 and to extend the maturity date to August 1, 2015.
Page 10
DANCO ACQUISITION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At December 31, 2012 and 2011, the Company had outstanding borrowings under this agreement of $2,250,000
and $1,500,000, respectively. The Company drew down $750,000 and $400,000 on this line during the years ended December 31, 2012 and 2011, respectively. The interest rate at both December 31, 2012 and 2011 was 10%. Interest payments are due
monthly, and all amounts outstanding on the line are due as of the lines maturity date of August 1, 2015. The line is secured by substantially all assets of the Company.
NOTE 8 SERIES A PREFERRED STOCK
As part of the
acquisition of the Company on October 17, 2007, the Company issued 42 shares of Series A preferred stock for total consideration of $4,200,000. These shares entitle the holder to cumulative annual dividends at a rate of 8% accrued through
February 26, 2013. On February 26, 2013, the Company modified its articles of incorporation related to the preferences of the Companys preferred stock, whereby the preferred stock no longer accrue dividends effective
February 26, 2013. As of December 31, 2012, no dividends were declared by the Companys Board of Directors or payable by the Company. At December 31, 2012 and 2011, the Series A preferred stock had a total liquidity preference of
$6,065,689 and $5,634,533 in the event of a liquidity event, respectively.
For so long as any shares of Series A Preferred Stock shall be outstanding, no
dividend or distribution shall be paid or declared on any Junior Security. Additionally, in the event of liquidation, dissolution or winding down, no payment shall be made on any Junior Security unless, in each case, all outstanding shares of Series
A Preferred Stock shall be redeemed and paid in full. Dividends payable in additional shares of Junior Securities on any series of Junior Securities shall be permitted.
NOTE 9 COMMON STOCK WARRANTS
The Company issued a
fully vested common stock warrant pursuant to the Companys acquisition agreement dated October 17, 2007. The holder of this common stock warrant has the right to purchase 420 shares of the Companys common stock for a total exercise
price of $1. In conjunction with the $700,000 notes payable issued in September 2012 (Note 6), the Company modified the warrant to increase the number of common stock available to be purchased to 920 shares. The value of the common stock warrant was
not significant at the date of modification.
In conjunction with the issuance of the $350,000 and $100,000 notes payable issued during the year ended
December 31, 2012 (Note 6), the Company issued warrants which allow the holder to the right to purchase 250 and 71.43, respectively, for an exercise price of $0.50 and $0.14, respectively. The value of the common stock warrants was not
significant at the date of issuance.
On February 26, 2013, all warrants were exercised, as discussed in Note 14.
NOTE 10 RESTRICTED STOCK GRANT
During the year
ended December 31, 2008, the Company issued 61.5 restricted stock grants of the Companys Series A common stock. These stock grants vest accordingly: (1) 50% of these grants will vest over a five year period, cliff vesting 20% each
year from the anniversary of the grant date, and (2) 50% of these options will vest if certain performance targets for shareholder return are met upon a change in control or liquidation event. The Company has determined that the fair value of
these stock grants and the related stock compensation expense is not significant. During 2012, 25 restricted stock grants were forfeited and reverted to the Company. The number of restricted stock grants outstanding for the years ended
December 31, 2012 and 2011 was 26.5 and 51.5, respectively.
NOTE 11 EMPLOYEE BENEFIT PLANS
The Company maintains a qualified deferred compensation plan under Section 401(k) of the Internal Revenue Code. Under the plan, domestic employees may
elect to defer up to 25% of their salaries subject to the Internal Revenue Service limits. The Company did not make any discretionary matching contributions to the plan during the years ended December 31, 2012 and 2011.
Page 11
DANCO ACQUISITION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 INCOME TAXES
The federal and state income tax provision is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
2012 |
|
|
2011 |
|
Current |
|
|
|
|
|
|
|
|
Federal |
|
$ |
|
|
|
$ |
17,813 |
|
State |
|
|
1,561 |
|
|
|
1,600 |
|
|
|
|
|
|
|
|
|
|
Total current tax expense |
|
|
1,561 |
|
|
|
19,413 |
|
|
|
|
|
|
|
|
|
|
Deferred |
|
|
|
|
|
|
|
|
Federal |
|
|
(709,594 |
) |
|
|
522,923 |
|
State |
|
|
(161,241 |
) |
|
|
201,469 |
|
|
|
|
|
|
|
|
|
|
Total deferred tax expense |
|
|
(870,835 |
) |
|
|
724,392 |
|
|
|
|
|
|
|
|
|
|
Total tax (benefit) expense |
|
$ |
(869,274 |
) |
|
$ |
743,805 |
|
|
|
|
|
|
|
|
|
|
Deferred income taxes reflect the net tax effects of (a) temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for income tax purposes, and (b) operating losses and tax credit carry forwards.
The tax effects of significant items comprising the Companys deferred taxes as of December 31, 2012 and 2011 are as follows:
|
|
|
|
|
|
|
|
|
|
|
2012 |
|
|
2011 |
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
Net operating losses |
|
$ |
3,005,509 |
|
|
$ |
1,594,239 |
|
Inventory reserve |
|
|
587,945 |
|
|
|
536,282 |
|
Intangibles |
|
|
439,899 |
|
|
|
369,398 |
|
General business credits |
|
|
212,881 |
|
|
|
191,530 |
|
Accruals |
|
|
138,798 |
|
|
|
95,914 |
|
Unicap inventory |
|
|
27,996 |
|
|
|
23,538 |
|
State tax accrual difference |
|
|
544 |
|
|
|
544 |
|
Goodwill |
|
|
2,860,743 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets |
|
|
7,274,315 |
|
|
|
2,811,445 |
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
Intangibles |
|
|
|
|
|
|
|
|
Prepaids |
|
|
(37,433 |
) |
|
|
(30,569 |
) |
Fixed assets |
|
|
(731,641 |
) |
|
|
(695,956 |
) |
Goodwill |
|
|
|
|
|
|
(1,169,987 |
) |
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities |
|
|
(769,074 |
) |
|
|
(1,896,512 |
) |
|
|
|
|
|
|
|
|
|
Valuation allowance |
|
|
(6,505,241 |
) |
|
|
(1,785,769 |
) |
|
|
|
|
|
|
|
|
|
Net deferred taxes |
|
$ |
|
|
|
$ |
(870,836 |
) |
|
|
|
|
|
|
|
|
|
ASC 740 requires that the tax benefit of net operating losses, temporary differences and credit carryforwards be recorded as
an asset to the extent that management assesses that realization is more likely than not. Realization of the future tax benefits is dependent on the Companys ability to generate sufficient taxable income within the carryforward
period. Because of the Companys recent history of operating losses, management believes that recognition of the deferred tax assets arising from the above-mentioned future tax benefits is currently not likely to be realized and, accordingly,
has provided a valuation allowance. The valuation allowance increased by $4,719,472 and $1,785,769 during the years ended December 31, 2012 and 2011, respectively. The net deferred tax liability as of December 31, 2011 was eliminated
through a current year tax benefit as a result of the full impairment of the goodwill as of December 31, 2012. The amount of the valuation allowance for deferred tax assets associated with excess tax deduction from stock based compensation
arrangement that is allocated to contributed capital if the future tax benefits are subsequently recognized is $0.
Page 12
DANCO ACQUISITION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Net operating losses and tax credit carryforwards as of December 31, 2012 are as follows:
|
|
|
|
|
|
|
|
|
Amount |
|
|
Expiration Years |
Net operating losses, federal |
|
$ |
7,447,370 |
|
|
2029-2032 |
Tax credits, federal |
|
|
142,771 |
|
|
2027-2032 |
Tax credits, state |
|
|
106,228 |
|
|
No expiration |
The effective tax rate of the Companys provision for income taxes differs from the federal statutory rate for
December 31, 2012 and 2011 as follows:
|
|
|
|
|
|
|
|
|
|
|
2012 |
|
|
2011 |
|
Statutory rate |
|
|
34.0 |
% |
|
|
34.0 |
% |
State tax |
|
|
6.0 |
% |
|
|
8.0 |
% |
Various permanent differences |
|
|
-1.0 |
% |
|
|
0.0 |
% |
General business credit |
|
|
0.0 |
% |
|
|
3.0 |
% |
Other |
|
|
0.0 |
% |
|
|
-1.0 |
% |
Change in valuation allowance |
|
|
-33.0 |
% |
|
|
-75.0 |
% |
|
|
|
|
|
|
|
|
|
Total |
|
|
6.0 |
% |
|
|
-31.0 |
% |
|
|
|
|
|
|
|
|
|
NOTE 13 COMMITMENTS
The Company has agreements under noncancelable leases for office, production, and warehouse facilities owned by a former stockholder through April 2014 with
escalating rent payments. The Company also leases certain equipment under capital leases. The leases are collateralized by the underlying assets. At December 31, 2012 and 2011, property and equipment with a cost of $886,567, respectively, were
subject to such financing arrangements. The minimum annual rental commitments and future minimum payments under capital lease and equipment financing arrangements are as follows:
|
|
|
|
|
|
|
|
|
Year Ending December 31, |
|
Capital Leases |
|
|
Operating Leases |
|
2013 |
|
$ |
164,412 |
|
|
$ |
291,230 |
|
2014 |
|
|
164,412 |
|
|
|
97,550 |
|
2015 |
|
|
113,293 |
|
|
|
|
|
2016 |
|
|
62,118 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total minimum future lease payments |
|
|
504,235 |
|
|
$ |
388,780 |
|
|
|
|
|
|
|
|
|
|
Less: amount representing interest |
|
|
(99,066 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Present value of minimum future lease payments |
|
|
405,169 |
|
|
|
|
|
Less: current portion |
|
|
(139,093 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncurrent portion of minimum future lease payments |
|
$ |
266,076 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental expense under these agreements for the years ended December 31, 2012 and 2011 amounted to $258,247 and $251,732,
respectively. At December 31, 2012 and 2011, deferred rent was $865 and $10,126, respectively.
NOTE 14 SUBSEQUENT EVENTS
On February 26, 2013, a stockholder sold His or Her common equity to the Company. These shares were then retired by the Company. Concurrently, the holder
common of the stock warrants (Note 9) exercised their right to purchase 1,241.43 shares of the Companys common stock.
Page 13
DANCO ACQUISITION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On February 27, 2013, Danco Acquisition entered into an agreement with Galaxy Technologies, Inc.,
whereby Galaxy Technologies, Inc., shall provide management services to the Company. Under the agreement Danco Acquisition grants the exclusive rights for Galaxy Technologies, Inc., to acquire the Company. The option is exercisable between
February 27, 2015, and February 27, 2018. Further, Galaxy Technologies holds a right of first refusal in the event of the sale of the Company, which expires on February 27, 2023.
On March 29, 2013, the notes payable to an affiliated entity of a majority equity holder were modified to allow the Company to request interest on the
notes to be calculated at 4% instead of the stated rates in the notes each month. The rate change will be approved at the sole discretion of the lender. For January, February, March and April 2013 the Company requested the 4% rate, and the lender
approved the rate change.
Page 14
Exhibit 2.s.5
GALAXY TOOL HOLDING CORPORATION
AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2014 AND 2013
(UNAUDITED)
GALAXY TOOL HOLDING CORPORATION
AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2014 and 2013
TABLE OF CONTENTS
|
|
|
|
|
|
|
Page |
|
Consolidated Financial Statements: |
|
|
|
|
|
|
Consolidated Balance Sheets |
|
|
1 |
|
|
|
Consolidated Statements of Income |
|
|
3 |
|
|
|
Consolidated Statements of Stockholders Equity |
|
|
4 |
|
|
|
Consolidated Statements of Cash Flows |
|
|
5 |
|
|
|
Notes to Consolidated Financial Statements |
|
|
6 - 15 |
|
GALAXY TOOL HOLDING CORPORATION
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31, 2014 and 2013
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
2014 |
|
|
2013 |
|
ASSETS |
|
|
|
|
|
|
|
|
CURRENT ASSETS |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
469,549 |
|
|
$ |
1,937,968 |
|
Accounts receivable less allowance for doubtful accounts of $10,000 |
|
|
4,106,108 |
|
|
|
4,496,129 |
|
Inventories |
|
|
3,404,041 |
|
|
|
4,280,123 |
|
Income taxes receivable |
|
|
71,076 |
|
|
|
64,000 |
|
Prepaid expenses |
|
|
98,201 |
|
|
|
92,796 |
|
Deferred income taxes |
|
|
1,210,000 |
|
|
|
135,000 |
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
9,358,975 |
|
|
|
11,006,016 |
|
|
|
|
|
|
|
|
|
|
PROPERTY, PLANT AND EQUIPMENT |
|
|
|
|
|
|
|
|
Land |
|
|
9,000 |
|
|
|
9,000 |
|
Buildings and improvements |
|
|
7,224,922 |
|
|
|
3,402,270 |
|
Machinery and equipment |
|
|
13,951,851 |
|
|
|
10,027,999 |
|
Computer hardware and software |
|
|
670,987 |
|
|
|
491,574 |
|
Office furniture and fixtures |
|
|
158,054 |
|
|
|
93,159 |
|
Installations in progress |
|
|
|
|
|
|
3,090,561 |
|
|
|
|
|
|
|
|
|
|
|
|
|
22,014,814 |
|
|
|
17,114,563 |
|
Less accumulated depreciation |
|
|
6,264,924 |
|
|
|
4,553,717 |
|
|
|
|
|
|
|
|
|
|
Net property and equipment |
|
|
15,749,890 |
|
|
|
12,560,846 |
|
|
|
|
|
|
|
|
|
|
OTHER ASSETS |
|
|
|
|
|
|
|
|
Goodwill |
|
|
8,679,091 |
|
|
|
8,679,091 |
|
Customer list, net |
|
|
833,284 |
|
|
|
1,563,535 |
|
|
|
|
|
|
|
|
|
|
|
|
|
9,512,375 |
|
|
|
10,242,626 |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
34,621,240 |
|
|
$ |
33,809,488 |
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
2014 |
|
|
2013 |
|
LIABILITIES AND STOCKHOLDERS EQUITY |
|
|
|
|
|
|
|
|
CURRENT LIABILITIES |
|
|
|
|
|
|
|
|
Current maturities of long-term debt |
|
$ |
1,163,485 |
|
|
$ |
920,754 |
|
Construction lines-of-credit |
|
|
2,413,779 |
|
|
|
1,781,885 |
|
Revolving line-of-credit |
|
|
2,050,250 |
|
|
|
|
|
Accounts payable |
|
|
3,039,602 |
|
|
|
2,217,019 |
|
Accrued expenses |
|
|
1,581,294 |
|
|
|
1,893,968 |
|
Deferred revenue |
|
|
828,585 |
|
|
|
1,759,401 |
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
11,076,995 |
|
|
|
8,573,027 |
|
LONG-TERM LIABILITIES |
|
|
|
|
|
|
|
|
Long-term debt, less current maturities |
|
|
20,099,627 |
|
|
|
18,832,335 |
|
Deferred income taxes |
|
|
1,767,000 |
|
|
|
2,348,000 |
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
32,943,622 |
|
|
|
29,753,362 |
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS EQUITY |
|
|
|
|
|
|
|
|
Preferred stock, Series A, par value $.01 per share; 5,000,000 shares authorized and 4,111,907 shares issued and outstanding, total
liquidation preference of outstanding shares of $10,026,708 |
|
|
4,028,707 |
|
|
|
4,028,707 |
|
Preferred stock, Series B, par value $.01 per share; 5,000,000 shares authorized and 4,438,093 shares issued and outstanding, total
liquidation preference of outstanding shares of $6,432,086 |
|
|
4,138,093 |
|
|
|
4,138,093 |
|
Preferred stock, Series C, par value $.01 per share; 1,000,000 shares authorized and 927,480 shares issued and outstanding, total
liquidation preference of outstanding shares of $5,964,377 |
|
|
3,246,178 |
|
|
|
3,246,178 |
|
Preferred stock, Series D, par value $.01 per share; 1,000,000 shares authorized and 1,000,000 shares issued and outstanding, total
liquidation preference of outstanding shares of $6,865,242 |
|
|
4,105,731 |
|
|
|
4,105,731 |
|
Common stock, Class A, par value $.01 per share; 200,000 shares authorized and 92,657 share issued and outstanding |
|
|
927 |
|
|
|
927 |
|
Common stock, Class B, par value $.01 per share; 50,000 shares authorized and 48,093 shares issued and outstanding |
|
|
481 |
|
|
|
481 |
|
Common stock, Class C, par value $.01 per share; 1,000 shares authorized and 1,000 shares issued and outstanding; issued for no
consideration |
|
|
|
|
|
|
|
|
Additional paid-in capital |
|
|
99,000 |
|
|
|
99,000 |
|
Retained earnings (deficit) |
|
|
(6,890,021 |
) |
|
|
(4,511,513 |
) |
Excess of consideration paid over consideration contributed by continuing stockholder interests |
|
|
(7,051,478 |
) |
|
|
(7,051,478 |
) |
|
|
|
|
|
|
|
|
|
Total stockholders equity |
|
|
1,677,618 |
|
|
|
4,056,126 |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
34,621,240 |
|
|
$ |
33,809,488 |
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part
of these consolidated financial statements.
2
GALAXY TOOL HOLDING CORPORATION
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended December 31, 2014 and 2013
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
2014 |
|
|
2013 |
|
Net Sales |
|
$ |
27,059,611 |
|
|
$ |
34,675,926 |
|
Cost of goods sold |
|
|
24,999,893 |
|
|
|
25,962,117 |
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
2,059,718 |
|
|
|
8,713,809 |
|
General and administrative expenses |
|
|
3,550,214 |
|
|
|
4,674,257 |
|
|
|
|
|
|
|
|
|
|
Operating (loss) profit |
|
|
(1,490,496 |
) |
|
|
4,039,552 |
|
Interest expense |
|
|
2,548,917 |
|
|
|
2,094,454 |
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
|
(4,039,413 |
) |
|
|
1,945,098 |
|
Income tax (benefit) expense |
|
|
(1,660,905 |
) |
|
|
574,000 |
|
|
|
|
|
|
|
|
|
|
Net (loss) income |
|
$ |
(2,378,508 |
) |
|
$ |
1,371,098 |
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part
of these consolidated financial statements.
3
GALAXY TOOL HOLDING CORPORATION
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
For the Years Ended December 31, 2014 and 2013
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Excess of |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consideration Paid Over |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consideration |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
Retained |
|
|
Contributed by Continuing |
|
|
|
|
|
|
Preferred Stock |
|
|
Common Stock |
|
|
Paid-in |
|
|
Earnings |
|
|
Stockholder |
|
|
|
|
|
|
Series A |
|
|
Series B |
|
|
Series C |
|
|
Series D |
|
|
Class A |
|
|
Class B |
|
|
Capital |
|
|
(Deficit) |
|
|
Interests |
|
|
Total |
|
Balance, December 31, 2012 |
|
$ |
4,028,707 |
|
|
$ |
4,138,093 |
|
|
$ |
3,246,178 |
|
|
$ |
12,300,000 |
|
|
$ |
927 |
|
|
$ |
481 |
|
|
$ |
99,000 |
|
|
$ |
(1,776,880 |
) |
|
$ |
(7,051,478 |
) |
|
$ |
14,985,028 |
|
Equity to debt conversion |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,194,269 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,194,269 |
) |
Non-cash distribution in equity to debt conversion |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,105,731 |
) |
|
|
|
|
|
|
(4,105,731 |
) |
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,371,098 |
|
|
|
|
|
|
|
1,371,098 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2013 |
|
|
4,028,707 |
|
|
|
4,138,093 |
|
|
|
3,246,178 |
|
|
|
4,105,731 |
|
|
|
927 |
|
|
|
481 |
|
|
|
99,000 |
|
|
|
(4,511,513 |
) |
|
|
(7,051,478 |
) |
|
|
4,056,126 |
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,378,508 |
) |
|
|
|
|
|
|
(2,378,508 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2014 |
|
$ |
4,028,707 |
|
|
$ |
4,138,093 |
|
|
$ |
3,246,178 |
|
|
$ |
4,105,731 |
|
|
$ |
927 |
|
|
$ |
481 |
|
|
$ |
99,000 |
|
|
$ |
(6,890,021 |
) |
|
$ |
(7,051,478 |
) |
|
$ |
1,677,618 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part
of these consolidated financial statements.
4
GALAXY TOOL HOLDING CORPORATION
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2014 and 2013
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
2014 |
|
|
2013 |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
Net (loss) income |
|
$ |
(2,378,508 |
) |
|
$ |
1,371,098 |
|
Adjustments to reconcile net (loss) income to net cash from operating activities: |
|
|
|
|
|
|
|
|
Depreciation |
|
|
1,722,438 |
|
|
|
1,391,072 |
|
Amortization |
|
|
730,251 |
|
|
|
751,827 |
|
Deferred income tax (benefit) expense |
|
|
(1,656,000 |
) |
|
|
112,000 |
|
(Gain) loss on sale of equipment |
|
|
(795 |
) |
|
|
5,914 |
|
Change in operating assets and liabilities: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
390,021 |
|
|
|
1,026,912 |
|
Prepaid expenses |
|
|
(5,405 |
) |
|
|
(18,748 |
) |
Inventories |
|
|
876,082 |
|
|
|
(1,466,754 |
) |
Income taxes |
|
|
(7,076 |
) |
|
|
(304,000 |
) |
Accounts payable and accrued expenses |
|
|
509,909 |
|
|
|
601,736 |
|
Deferred revenue |
|
|
(930,816 |
) |
|
|
1,396,271 |
|
|
|
|
|
|
|
|
|
|
Net cash from operating activities |
|
|
(749,899 |
) |
|
|
4,867,328 |
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Purchase of property, plant and equipment |
|
|
(4,919,510 |
) |
|
|
(6,727,905 |
) |
Proceeds from sale of property, plant and equipment |
|
|
8,823 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash from investing activities |
|
|
(4,910,687 |
) |
|
|
(6,727,905 |
) |
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Net borrowings on revolving credit agreement |
|
|
2,050,250 |
|
|
|
|
|
Borrowings on long-term debt |
|
|
3,131,894 |
|
|
|
3,856,622 |
|
Principal payments on long-term debt |
|
|
(989,977 |
) |
|
|
(531,733 |
) |
|
|
|
|
|
|
|
|
|
Net cash from financing activities |
|
|
4,192,167 |
|
|
|
3,324,889 |
|
|
|
|
|
|
|
|
|
|
Change in cash |
|
|
(1,468,419 |
) |
|
|
1,464,312 |
|
Cash at beginning of year |
|
|
1,937,968 |
|
|
|
473,656 |
|
|
|
|
|
|
|
|
|
|
Cash at end of year |
|
$ |
469,549 |
|
|
$ |
1,937,968 |
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information: |
|
|
|
|
|
|
|
|
Interest paid |
|
$ |
2,541,700 |
|
|
$ |
2,055,401 |
|
|
|
|
|
|
|
|
|
|
Equity to debt conversion |
|
$ |
|
|
|
$ |
12,300,000 |
|
|
|
|
|
|
|
|
|
|
Taxes |
|
$ |
|
|
|
$ |
771,000 |
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part
of these consolidated financial statements.
5
GALAXY TOOL HOLDING CORPORATION
AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. |
BUSINESS OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
Business
OperationsGalaxy Tool Holding Corporation and Subsidiary (d/b/a Galaxy Technologies) is in the business of manufacturing and designing precision tools and parts, fabricating steel and aluminum assemblies, and producing secondary equipment
for the customers in the aerospace industry. Additionally, the Company serves customers in the plastic products industry with manufacturing and repairing injection and blow molds and designing component parts and secondary equipment. The
Companys customers are located throughout the United States and internationally. The Company is headquartered in Winfield, Kansas, where it has a manufacturing facility.
Principles of ConsolidationThe accompanying consolidated financial statements include the accounts of Galaxy Tool Holding
Corporation and its wholly-owned subsidiary, Galaxy Technologies, Inc. (the Company). All material intercompany related party balances and transactions have been eliminated in the consolidation.
Use of EstimatesThe preparation of financial statements in conformity with accounting principles generally accepted in the United
States of America requires management to make estimates and assumptions that affect: (1) the reported amounts of assets and liabilities, (2) disclosures such as contingencies, and (3) the reported amounts of revenues and expenses
included in such financial statements. Actual results could differ from those estimates.
Cash and Cash EquivalentsFor
purposes of reporting the statements of cash flows, the Company considers all cash accounts, which are not subject to withdrawal restrictions or penalties, and all highly liquid debt instruments purchased with a maturity of three months or less, to
be cash equivalents. The Company maintains its cash in bank deposit accounts that, at times, may exceed federally insured limits. The Company has not experienced any losses in such accounts.
Accounts Receivable, TradeTrade receivables are carried at original invoice amount less an estimate made for doubtful receivables
based on a review of all outstanding amounts on a monthly basis. Management determines the allowance for doubtful accounts by regularly evaluating individual customer receivables and considering a customers financial condition, credit history,
and current economic conditions. Trade receivables are written off when deemed uncollectible. Recoveries of trade receivables previously written off are recorded when received.
A trade receivable is considered to be past due if any portion of the receivable balance is outstanding for more than 30 to 60 days, depending
on the customer. Interest is not charged on past due accounts.
InventoriesInventories are stated at the lower of cost or
market, with cost determined by the first-in, first-out (FIFO) method. Work-in-process includes material, labor, and allocable factory overhead costs.
Property, Plant and EquipmentProperty, plant and equipment are carried at cost. Depreciation is computed using the straight-line
method, using estimated useful lives. When assets are retired or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts, and any resulting gain or loss is recognized in income for the period. The cost of
maintenance and repairs is charged to income as incurred; significant renewals and betterments are capitalized. Deduction is made for retirements resulting from renewals or betterments.
6
GALAXY TOOL HOLDING CORPORATION
AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. |
BUSINESS OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) |
Customer ListThe Company is amortizing its customer list, using a straight-line method, over a
7 1⁄2 year period.
GoodwillGoodwill
is not amortized, but is subject to an annual impairment test, as well as when an event triggering impairment may have occurred. The Company has elected to perform its annual analysis during the fourth quarter. No indicators of impairment were
identified for the years ended December 31, 2014 and 2013.
Impairment of Long-Lived AssetsLong-lived assets are reviewed
for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimate
future net cash flows (undiscounted and without interest charges) expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the
assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. There were no impairment losses recognized for the years ending December 31, 2014 or 2013.
Deferred RevenueDeferred revenue represents deposits and progress billings on jobs in progress.
Income TaxesDeferred tax assets and liabilities are recognized for temporary differences and loss carryforwards. Temporary
differences are the differences between the reported amounts of assets and liabilities and their tax bases. When applicable, deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that
some portion of all the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.
The Company recognizes the financial statement effects of a tax position only when it believes it can more likely than not sustain the position
upon an examination by the relevant tax authority. Tax years that remain subject to examination in the Companys major tax jurisdictions (Federal and State of Kansas) are 2011, 2012, 2013 and 2014.
Revenue RecognitionRevenue is recognized upon shipment of goods. Shipping and handling charges are included in revenue. Shipping
and handling costs are included in cost of goods sold.
Advertising CostsThe Company expenses costs of advertising as they are
incurred. Advertising expense for the years ended December 31, 2014 and 2013 was $27,694 and $45,974, respectively.
Subsequent
EventsSubsequent events have been evaluated through March 17, 2015, which is the date the financial statements were available to be issued.
7
GALAXY TOOL HOLDING CORPORATION
AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
On August 22, 2008, the Company acquired 100% of the stock of
Galaxy Tool Corporation and its subsidiary, Encompass Tool & Machine, Inc., under the terms of a stock purchase agreement. The stock purchase transaction was accounted for in accordance with EITF Issue No. 88-16, Basis in Leveraged
Buyout Transactions, and EITF Issue No. 90-12, Allocating Basis in Individual Assets and Liabilities for Transactions Within the Scope of EITF Issue No. 88-16. The aggregate purchase price was allocated to the assets and
liabilities of the Company based upon an allocation of their respective carryover and fair market values. The carryover interest on the transaction was 38.6%. The portion of the acquisition recognized at fair value was 61.4%. The caption
consideration paid over consideration contributed by continuing stockholder interests within the equity section of the accompanying balance sheets represents the difference between the fair value and the carrying value of the 38.6%
carryover interest.
Inventories consist of the following at December 31:
|
|
|
|
|
|
|
|
|
|
|
2014 |
|
|
2013 |
|
Raw materials |
|
$ |
266,991 |
|
|
$ |
322,947 |
|
Work-in-process parts and labor |
|
|
3,137,050 |
|
|
|
3,957,176 |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
3,404,041 |
|
|
$ |
4,280,123 |
|
|
|
|
|
|
|
|
|
|
4. |
INSTALLATIONS IN PROGRESS |
During 2013, the Company started an expansion project to
expand capabilities of the Company. The expansion consists of new equipment and a new building to house the equipment. The total expected cost of the expansion project for the building and equipment was estimated at $5 million. Included in
installations in progress at December 31, 2013, are costs of $3,090,561 ($1,784,084 for the building and $1,306,477 for the equipment). These costs have been financed through construction lines of credit (see Note 7). This project was completed
and the respective assets were placed in service during 2014. The construction line of credit related to the new building was converted to an amortizing term note during 2014, and the construction line of credit related to the new equipment was
converted to a term note subsequent to December 31, 2014 (see Note 7).
Depreciation expense for the years ended December 31, 2014 and 2013,
based on useful lives shown below, consists of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2014 |
|
|
2013 |
|
|
Useful Lives |
|
Building and improvements |
|
$ |
100,776 |
|
|
$ |
92,060 |
|
|
|
40 years |
|
Machinery and equipment |
|
|
1,528,938 |
|
|
|
1,214,675 |
|
|
|
3 to 10 years |
|
Computer hardware and software |
|
|
84,660 |
|
|
|
77,000 |
|
|
|
3 to 10 years |
|
Office furniture and equipment |
|
|
8,064 |
|
|
|
7,337 |
|
|
|
3 to 10 years |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,722,438 |
|
|
$ |
1,391,072 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8
GALAXY TOOL HOLDING CORPORATION
AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
The net values for intangible assets at December 31, 2014 and
2013 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2014 |
|
|
2013 |
|
|
|
Gross Carrying Amount |
|
|
Accumulated Amortization |
|
|
Net Carrying Value |
|
|
Gross Carrying Amount |
|
|
Accumulated Amortization |
|
|
Net Carrying Value |
|
Customer list |
|
$ |
5,476,880 |
|
|
$ |
(4,643,596 |
) |
|
$ |
833,284 |
|
|
$ |
5,476,880 |
|
|
$ |
(3,913,345 |
) |
|
$ |
1,563,535 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense of the customer list for the years ended December 31, 2014 and 2013 was $730,251.
Estimated amortization expense for each of the following years is:
|
|
|
|
|
2015 |
|
$ |
730,251 |
|
2016 |
|
|
103,033 |
|
|
|
|
|
|
|
|
$ |
833,284 |
|
|
|
|
|
|
Goodwill of $8,679,091 was recognized with the acquisition as described in Note 2 and there were no changes in
its carrying amount for the years ended December 31, 2014 and 2013.
7. |
REVOLVING LINES-OF-CREDIT AND LONG-TERM DEBT |
Revolving Lines-of-CreditThe
Company has a revolving line of credit agreement with a shareholder of the Company that expires on September 30, 2015. Under the agreement, the Company may borrow up to $2,500,000. The unpaid principal balance carries an interest rate of LIBOR
plus 8% with a minimum interest rate of 10% per annum. The interest rate as of December 31, 2014 was 10%. This revolving line-of-credit is also subject to an unused revolving commitment fee of 1% each month prior to the maturity date, as
well as the terms and conditions that are outlined in the security agreement applicable to the subordinated notes payable shown below. At December 31, 2014, $2,050,250 was drawn on the line and $499,750 was available. Subsequent to year end,
this line was extended to allow the Company to borrow up to $4,500,000. All other terms remained the same.
Under terms of the revolving
line-of-credit agreement with a bank, which expired November 2014 and was not renewed, the Company was able to borrow up to $1,000,000, limited to 70% of eligible accounts receivable, 50% of the book value of eligible inventory (inventory is limited
to 50% of eligible accounts receivable). The interest rate at December 31, 2013 was 5.75%. The agreement was secured by substantially all of the Companys accounts receivable, inventories, and equipment. The agreement and other long-term
debt with the same bank contain certain restrictive covenants common to these types of agreements. At December 31, 2013, the full line was available to be drawn on.
Construction Lines-of-CreditUnder terms of two construction line-of-credit agreements with a bank, the Company was able to borrow
up to $2.5 million in relation to construction of a new building and $2.2 million for costs associated with the addition of new equipment. The interest rate for both lines-of-credit at December 31, 2013 was 4.5%. Payments of interest only were
required on the outstanding balances until the asset completion dates.
9
GALAXY TOOL HOLDING CORPORATION
AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
7. |
REVOLVING LINES-OF-CREDIT AND LONG-TERM DEBT (CONTINUED) |
During 2014, the construction line-of-credit of $2.5 million in relation to the construction of a new building was completed and the Company
converted the construction line of credit to long-term debt, outlined below. Additional costs in excess of the original $2.2 million on the new equipment were incurred in 2014 and a new construction line of credit, subject to the same terms noted
above, was created for an additional $214,000. The total amount drawn on the equipment lines as of December 31, 2014 was $2,413,779.
Subsequent to year end, the Company converted the construction lines-of-credit related to the equipment to a note payable to a bank; due in
monthly payment of $33,680 including interest at 4.50% through maturity in February of 2020. The loan is collateralized by equipment.
Long-term debt at December 31, 2014 and 2013 consists of the following:
|
|
|
|
|
|
|
|
|
|
|
2014 |
|
|
2013 |
|
Subordinated notes payable to a stockholder of the Company; interest at the greater of 13.5% or a floating rate equal to the LIBOR plus
9.5% (the rate was 13.5% at December 31, 2014); due in full in August 2017. The loan is collateralized by substantially all assets of the Company. The note is subordinated to the revolving credit agreement, construction lines-of-credit and term
loans disclosed above. Under the terms of the subordinated note payable agreement, the Company is subject to certain restrictions, which include, but are not limited to, making equity distributions; limitations on indebtedness, capital expenditures,
management fees and leases; and restrictions on investments. The Company is also required to comply with certain financial covenants; including minimum EBITDA levels and a fixed charge coverage ratio. The subordinated note payable agreement contains
a prepayment premium clause that requires the Company to pay a premium for prepayments on or prior to the maturity date. The dates and percentages related to this clause are 3% of principal prepaid in year one, 2% in year two, and 1% in year three
from the anniversary of August 2010. The note also contains a clause that, as permitted under the subordination agreement, requires the Company to prepay the outstanding amount based on excess cash flow, as defined in the agreement. The note also
provides for an exit fee of $1,939,532 plus 8.6% per annum of the greater of the outstanding principal balance or $11,640,000, payable upon any charge of control that occurs prior to the payoff of the amounts due under the note. |
|
$ |
15,520,000 |
|
|
$ |
15,520,000 |
|
Note payable to a bank, converted from a construction line-of-credit; due in monthly payments of $26,005 including interest at 4.50%
through maturity in October of 2019. The loan is collateralized by a building. |
|
|
2,468,562 |
|
|
|
|
|
10
GALAXY TOOL HOLDING CORPORATION
AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
7. |
REVOLVING LINES-OF-CREDIT AND LONG-TERM DEBT (CONTINUED) |
|
|
|
|
|
|
|
|
|
|
|
2014 |
|
|
2013 |
|
Note payable to a bank; due in monthly payments of $28,017 including interest at 4.50% through maturity in December of 2018. The loan
is collateralized by equipment, accounts receivable, and inventory. |
|
$ |
1,227,097 |
|
|
$ |
1,501,030 |
|
Note payable to a bank; due in monthly payments of $38,681 including interest at 5.95% through maturity in April of 2017. The loan is
collateralized by equipment, accounts receivable, and inventory. |
|
|
1,007,968 |
|
|
|
1,398,653 |
|
Note payable to a bank; due in monthly payments of $16,164 including interest at 5.95% through September 2016 and prime plus 2%
thereafter, through maturity in September 2018. The loan is collateralized by equipment, accounts receivable, and inventory. |
|
|
649,516 |
|
|
|
799,519 |
|
Note payable to a bank; due in monthly payments of $9,448 including interest at 4.50% through maturity in September of 2018. The loan
is collateralized by equipment, accounts receivable, and inventory. |
|
|
389,969 |
|
|
|
483,019 |
|
Financed vehicle payable to dealer; due in monthly payments of $1,159 including interest at 6.35%. The loan was collateralized by the
vehicle and paid in full during 2014. |
|
|
|
|
|
|
50,868 |
|
|
|
|
|
|
|
|
|
|
|
|
|
21,263,112 |
|
|
|
19,753,089 |
|
Less current maturities |
|
|
1,163,485 |
|
|
|
920,754 |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
20,099,627 |
|
|
$ |
18,832,335 |
|
|
|
|
|
|
|
|
|
|
Annual maturities of long-term debt at December 31, 2014, are as follows:
|
|
|
|
|
Year ending December 31, |
|
|
|
2015 |
|
$ |
1,163,485 |
|
2016 |
|
|
1,225,527 |
|
2017 |
|
|
16,495,367 |
|
2018 |
|
|
783,246 |
|
2019 |
|
|
1,595,487 |
|
|
|
|
|
|
|
|
$ |
21,263,112 |
|
|
|
|
|
|
11
GALAXY TOOL HOLDING CORPORATION
AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Deferred Income TaxesNet deferred tax assets (liabilities)
consist of the following at December 31, 2014 and 2013:
|
|
|
|
|
|
|
|
|
|
|
2014 |
|
|
2013 |
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
$ |
4,000 |
|
|
$ |
4,000 |
|
Accrued expenses |
|
|
86,000 |
|
|
|
90,000 |
|
State net operating loss and credit carryforwards (expires starting 2021) |
|
|
414,000 |
|
|
|
41,000 |
|
Federal net operating loss carryforward (expires 2034) |
|
|
1,714,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax assets |
|
|
2,218,000 |
|
|
|
135,000 |
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
Property, plant and equipment |
|
|
(2,442,000 |
) |
|
|
(1,723,000 |
) |
Customer list |
|
|
(333,000 |
) |
|
|
(625,000 |
) |
|
|
|
|
|
|
|
|
|
Deferred tax liabilities |
|
|
(2,775,000 |
) |
|
|
(2,348,000 |
) |
|
|
|
|
|
|
|
|
|
Net deferred tax liabilities |
|
$ |
(557,000 |
) |
|
$ |
(2,213,000 |
) |
|
|
|
|
|
|
|
|
|
Deferred tax assets and (liabilities) are classified on the balance sheet as follows:
|
|
|
|
|
|
|
|
|
|
|
2014 |
|
|
2013 |
|
Short-term asset |
|
$ |
1,210,000 |
|
|
$ |
135,000 |
|
Long-term liability |
|
|
(1,767,000 |
) |
|
|
(2,348,000 |
) |
|
|
|
|
|
|
|
|
|
Net deferred tax liabilities |
|
$ |
(557,000 |
) |
|
$ |
(2,213,000 |
) |
|
|
|
|
|
|
|
|
|
Income Tax Expense (Benefit)Income tax expense (benefit) for the years ended December 31,
2014 and 2013 is comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
2014 |
|
|
2013 |
|
Current |
|
$ |
(4,905 |
) |
|
$ |
462,000 |
|
Deferred |
|
|
(1,656,000 |
) |
|
|
112,000 |
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
(1,660,905 |
) |
|
$ |
574,000 |
|
|
|
|
|
|
|
|
|
|
The income tax provision differs from the amount of income tax determined by applying the U.S. federal income
tax rate to pretax income from operations because of state taxes, nondeductible expenses, and tax credits.
12
GALAXY TOOL HOLDING CORPORATION
AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
The Company has a defined contribution plan covering all
employees meeting the eligibility requirements of the plan. The Company contributes a discretionary percentage of employee contributions as determined annually by the Board of Directors. Retirement plan matching expense for the years ended
December 31, 2014 and 2013 was $121,550 and $121,290, respectively.
The Company leases equipment under operating leases expiring in the
years 2015 through 2018. Total rent expense under all operating leases amounted to $313,681 and $290,683 for the years ended December 31, 2014 and 2013, respectively.
The following is a schedule of future minimum rental payments required under the operating leases as of December 31, 2014:
|
|
|
|
|
Year Ending December 31, |
|
|
|
2015 |
|
$ |
269,294 |
|
2016 |
|
|
212,642 |
|
2017 |
|
|
134,924 |
|
2018 |
|
|
26,506 |
|
|
|
|
|
|
|
|
$ |
643,366 |
|
|
|
|
|
|
11. |
COMMON AND PREFERRED STOCK |
Common stock consists of Class A, B and C shares.
Class A and B shares are voting. Class C shares are non-voting. Upon a triggering event, such as a letter of intent to sell the Company, failure to meet certain EBITDA levels, or a default under the loan agreements, the Class B shares may
become Class A shares at the option of the holder. Upon corporate liquidation or dissolution, after preferred shareholders receive their liquidation value, the remaining proceeds are divided between Class A and B shares, except that the
proceeds allocated to Class B shares are allocated in part to Class C shares based on certain internal rates of return earned by one of the principal stockholders on his preferred and common stock investment in the Company.
Preferred stock consists of series A, B, C, and D shares carried at the original issue price of $1 per share for Series A and B, $3.50 for
Series C and $12.30 for Series D. All shares are designated as nonvoting. However, a majority of Series A, C and D shareholders must approve certain corporate matters of significance, including amendments to the Articles of Incorporation, share
issuances or redemptions, asset or stock sales or mergers, hiring of a Chief Executive Officer and change in number of board members. Dividends on the shares are payable when and if declared by the board. Dividends compound annually and are
cumulative. Dividend rates are 15% on Series A shares, 6% on Series B, 15% on Series C and 6% on Series D (prior to February 28, 2013 the dividend rate was 17.5% on Series D). Series D shares have first priority in liquidation or dissolution,
receiving their original issuance
13
GALAXY TOOL HOLDING CORPORATION
AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
11. |
COMMON AND PREFERRED STOCK (CONTINUED) |
price plus unpaid dividends. Series C shares have second priority receiving 1.5 times their original issuance price plus unpaid dividends;
followed by Series A shares and lastly Series B shares, both of which receive their original issue price plus unpaid dividends. Dividend payments receive the same priority with Series C dividends payable only if Series D accumulated dividends have
been paid, Series A after Series C dividends are paid and Series B after Series A dividends are paid.
All shares may be redeemed at
the holders option after six years from the date of issuance. The redemption dates are August 2014 for Series A and B shares and August 2016 for Series C or D shares, or after satisfaction of all amounts due under loans extended to the
Company by the holders (see Note 7). Redemption is mandatory in the case of a qualified public offering of the Companys common stock.
The agreement between the stockholders also provides for various rights of electing the members of the Companys Board of Directors and
requires consents as to the sale of the Company.
In connection with the acquisition discussed in Note 2, the Company issued warrants to an
outside entity for investment banker services to allow the entity to purchase 5,389 Class A common shares for $1 per share. No value was ascribed to the warrants. The warrants expire in August 2020.
During 2013, $8.2 million of preferred D stock was redeemed and a dividend of $4.1 million was paid on these shares through conversion into
debt for the Company.
Sales to major customers and accounts receivable balances for the years
ended December 31, 2014 and 2013 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2014 |
|
|
2013 |
|
|
|
Percent of Revenues |
|
|
Percent of Accounts Receivable at December 31 |
|
|
Percent of Revenues |
|
|
Percent of Accounts Receivable at December 31 |
|
Customer A |
|
|
10 |
% |
|
|
28 |
% |
|
|
3 |
% |
|
|
5 |
% |
Customer B |
|
|
4 |
% |
|
|
13 |
% |
|
|
11 |
% |
|
|
10 |
% |
Customer C |
|
|
17 |
% |
|
|
3 |
% |
|
|
10 |
% |
|
|
20 |
% |
14
GALAXY TOOL HOLDING CORPORATION
AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
The Company pays a management services fee to a stockholder. In August
2010 an agreement deferring payment until 2017 of the fee was entered into with the stockholder. The fee continues to accrue. Total expense for the years ended December 31, 2014 and 2013 was $225,000. Included in accrued expenses at
December 31, 2014 and 2013 are fees of $1,008,750 and $783,750, respectively, that remain payable.
As discussed in Note 7, the
Company has a line-of-credit and debt agreement with the same stockholder. Interest expense for the years ended December 31, 2014 and 2013 was $1,994,329 and $1,856,775, respectively.
15
Exhibit 2.s.6
GALAXY TOOL HOLDING CORPORATION
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2012 AND 2011
AND
INDEPENDENT AUDITORS
REPORT
GALAXY TOOL HOLDING CORPORATION
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2012 and 2011
TABLE OF CONTENTS
|
|
|
|
|
|
|
Page |
|
Independent Auditors Report |
|
|
1 - 2 |
|
|
|
Consolidated Financial Statements: |
|
|
|
|
Consolidated Balance Sheets |
|
|
3 |
|
Consolidated Statements of Income |
|
|
5 |
|
Consolidated Statements of Stockholders Equity |
|
|
6 |
|
Consolidated Statements of Cash Flows |
|
|
7 |
|
Notes to Consolidated Financial Statements |
|
|
8 - 16 |
|
This is a copy of the Companys annual financial statements reproduced
from an electronic file. An original copy of this document
is available at the Companys office.
INDEPENDENT AUDITORS REPORT
To the Board of Directors
Galaxy Tool Holding Corporation
Winfield, KS
Report on the Financial Statements
We have audited the accompanying consolidated financial statements of Galaxy Tool Holding Corporation and its Subsidiaries, which comprise the consolidated
balance sheet as of December 31, 2012, and the related consolidated statements of income, stockholders equity and cash flows for the year then ended and the related notes to the financial statements.
Managements Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting principles
generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material
misstatement, whether due to fraud or error.
Auditors Responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with auditing
standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures
selected depend on the auditors judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal
control relevant to the entitys preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the entitys internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by
management, as well as evaluating the overall presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained
is sufficient and appropriate to provide a reasonable basis for our audit opinion.
Opinion
In
our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Galaxy Tool Holding Corporation and its Subsidiaries as of December 31, 2012, and the results of its
operations and its cash flows for the year then ended in accordance with accounting principles generally accepted in the United States of America.
Other Matter
The financial statements of Galaxy Tool
Holding Corporation and Subsidiaries, as of and for the year ended December 31, 2011, were audited by other auditors whose report, dated April 13, 2012, expressed an unmodified opinion on those statements.
CERTIFIED PUBLIC
ACCOUNTANTS
April 5, 2013
Wichita, KS
2
GALAXY TOOL HOLDING CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2012 and 2011
|
|
|
|
|
|
|
|
|
|
|
2012 |
|
|
2011 |
|
ASSETS |
|
|
|
|
|
|
|
|
CURRENT ASSETS |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
473,656 |
|
|
$ |
363,206 |
|
Accounts receivable less allowance for doubtful accounts of $10,000 and $30,000 |
|
|
5,523,041 |
|
|
|
3,651,042 |
|
Inventories |
|
|
2,813,369 |
|
|
|
942,861 |
|
Prepaid expenses |
|
|
74,048 |
|
|
|
67,800 |
|
Deferred income taxes |
|
|
126,000 |
|
|
|
899,100 |
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
9,010,114 |
|
|
|
5,924,009 |
|
|
|
|
|
|
|
|
|
|
PROPERTY, PLANT AND EQUIPMENT |
|
|
|
|
|
|
|
|
Land |
|
|
9,000 |
|
|
|
9,000 |
|
Buildings and improvements |
|
|
3,071,919 |
|
|
|
2,868,034 |
|
Machinery and equipment |
|
|
6,919,387 |
|
|
|
6,880,095 |
|
Computer hardware and software |
|
|
422,852 |
|
|
|
544,756 |
|
Office furniture and fixtures |
|
|
57,682 |
|
|
|
92,751 |
|
Equipment installations in progress |
|
|
|
|
|
|
175,814 |
|
|
|
|
|
|
|
|
|
|
|
|
|
10,480,840 |
|
|
|
10,570,450 |
|
Less accumulated depreciation |
|
|
3,250,913 |
|
|
|
2,919,319 |
|
|
|
|
|
|
|
|
|
|
Net property and equipment |
|
|
7,229,927 |
|
|
|
7,651,131 |
|
|
|
|
|
|
|
|
|
|
OTHER ASSETS |
|
|
|
|
|
|
|
|
Goodwill |
|
|
8,679,091 |
|
|
|
8,679,091 |
|
Customer list, net |
|
|
2,293,786 |
|
|
|
3,024,037 |
|
Deferred debt issuance costs, net of accumulated amortization of $373,424 and $355,771 |
|
|
21,576 |
|
|
|
39,229 |
|
|
|
|
|
|
|
|
|
|
|
|
|
10,994,453 |
|
|
|
11,742,357 |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
27,234,494 |
|
|
$ |
25,317,497 |
|
|
|
|
|
|
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
2012 |
|
|
2011 |
|
LIABILITIES AND STOCKHOLDERS EQUITY |
|
|
|
|
|
|
|
|
CURRENT LIABILITIES |
|
|
|
|
|
|
|
|
Revolving credit agreement |
|
$ |
|
|
|
$ |
1,110,707 |
|
Current maturities of long-term debt |
|
|
3,730,181 |
|
|
|
133,737 |
|
Accounts payable |
|
|
1,800,948 |
|
|
|
1,088,899 |
|
Accrued expenses |
|
|
1,708,303 |
|
|
|
822,814 |
|
Deferred revenue |
|
|
363,130 |
|
|
|
95,563 |
|
Income taxes payable |
|
|
240,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
7,842,562 |
|
|
|
3,251,720 |
|
LONG-TERM LIABILITIES |
|
|
|
|
|
|
|
|
Long-term debt, less current maturities |
|
|
2,179,904 |
|
|
|
6,158,887 |
|
Deferred income taxes |
|
|
2,227,000 |
|
|
|
2,303,100 |
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
12,249,466 |
|
|
|
11,713,707 |
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS EQUITY |
|
|
|
|
|
|
|
|
Preferred stock, Series A, par value $.01 per share; 5,000,000 shares authorized and 4,111,907 shares issued and outstanding, total
liquidation preference of outstanding shares of $7,324,224; net of offering costs of $83,200 |
|
|
4,028,707 |
|
|
|
4,028,707 |
|
Preferred stock, Series B, par value $.01 per share; 5,000,000 shares authorized and 4,438,093 shares issued and outstanding, total
liquidation preference of outstanding shares of $5,620,679; net of offering costs of $300,000 |
|
|
4,138,093 |
|
|
|
4,138,093 |
|
Preferred stock, Series C, par value $.01 per share; 1,000,000 shares authorized and 927,480 shares issued and outstanding, total
liquidation preference of outstanding shares of $6,424,032 |
|
|
3,246,178 |
|
|
|
3,246,178 |
|
Preferred stock, Series D, par value $.01 per share; 1,000,000 shares authorized and 1,000,000 shares issued and outstanding, total
liquidation preference of outstanding shares of $17,291,908 |
|
|
12,300,000 |
|
|
|
12,300,000 |
|
Common stock, Class A, par value $.01 per share; 200,000 shares authorized and 92,657 share issued and outstanding |
|
|
927 |
|
|
|
927 |
|
Common stock, Class B, par value $.01 per share; 50,000 shares authorized and 48,093 share issued and outstanding |
|
|
481 |
|
|
|
481 |
|
Common stock, Class C, par value $.01 per share; 1,000 shares authorized and 1,000 share issued and outstanding; issued for no
consideration |
|
|
|
|
|
|
|
|
Additional paid-in capital |
|
|
99,000 |
|
|
|
99,000 |
|
Retained earnings (deficit) |
|
|
(1,776,880 |
) |
|
|
(3,158,118 |
) |
Excess of consideration paid over consideration contributed by continuing stockholder interests |
|
|
(7,051,478 |
) |
|
|
(7,051,478 |
) |
|
|
|
|
|
|
|
|
|
Total stockholders equity |
|
|
14,985,028 |
|
|
|
13,603,790 |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
27,234,494 |
|
|
$ |
25,317,497 |
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part
of these consolidated financial statements.
4
GALAXY TOOL HOLDING CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended December 31, 2012 and 2011
|
|
|
|
|
|
|
|
|
|
|
2012 |
|
|
2011 |
|
Net Sales |
|
$ |
26,178,800 |
|
|
$ |
21,127,383 |
|
Cost of goods sold |
|
|
18,872,154 |
|
|
|
18,363,948 |
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
7,306,646 |
|
|
|
2,763,435 |
|
General and administrative expenses |
|
|
4,295,610 |
|
|
|
3,326,950 |
|
|
|
|
|
|
|
|
|
|
Operating profit (loss) |
|
|
3,011,036 |
|
|
|
(563,515 |
) |
Interest expense |
|
|
692,798 |
|
|
|
787,785 |
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
|
2,318,238 |
|
|
|
(1,351,300 |
) |
Income tax expense (benefit) |
|
|
937,000 |
|
|
|
(478,730 |
) |
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
1,381,238 |
|
|
$ |
(872,570 |
) |
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part
of these consolidated financial statements.
5
GALAXY TOOL HOLDING CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
For the Years Ended December 31, 2012 and 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Excess of |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consideration |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paid Over Consideration |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contributed by |
|
|
|
|
|
|
Preferred Stock |
|
|
Common Stock |
|
|
Additional |
|
|
Retained |
|
|
Continuing |
|
|
|
|
|
|
Series A |
|
|
Series B |
|
|
Series C |
|
|
Series D |
|
|
Class A |
|
|
Class B |
|
|
Paid In Capital |
|
|
Earnings (Deficit) |
|
|
Stockholder Interests |
|
|
Total |
|
Balance, December 31, 2010 |
|
$ |
4,028,707 |
|
|
$ |
4,138,093 |
|
|
$ |
3,246,178 |
|
|
$ |
12,300,000 |
|
|
$ |
927 |
|
|
$ |
481 |
|
|
$ |
99,000 |
|
|
$ |
(2,285,548 |
) |
|
$ |
(7,051,478 |
) |
|
$ |
14,476,360 |
|
Net (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(872,570 |
) |
|
|
|
|
|
|
(872,570 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2011 |
|
|
4,028,707 |
|
|
|
4,138,093 |
|
|
|
3,246,178 |
|
|
|
12,300,000 |
|
|
|
927 |
|
|
|
481 |
|
|
|
99,000 |
|
|
|
(3,158,118 |
) |
|
|
(7,051,478 |
) |
|
|
13,603,790 |
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,381,238 |
|
|
|
|
|
|
|
1,381,238 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2012 |
|
$ |
4,028,707 |
|
|
$ |
4,138,093 |
|
|
$ |
3,246,178 |
|
|
$ |
12,300,000 |
|
|
$ |
927 |
|
|
$ |
481 |
|
|
$ |
99,000 |
|
|
$ |
(1,776,880 |
) |
|
$ |
(7,051,478 |
) |
|
$ |
14,985,028 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes
are an integral part
of these consolidated financial statements.
6
GALAXY TOOL HOLDING CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2012 and 2011
|
|
|
|
|
|
|
|
|
|
|
2012 |
|
|
2011 |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
1,381,238 |
|
|
$ |
(872,570 |
) |
Adjustments to reconcile net income (loss) to net cash from operating activities: |
|
|
|
|
|
|
|
|
Depreciation |
|
|
1,143,039 |
|
|
|
983,553 |
|
Amortization |
|
|
747,904 |
|
|
|
753,789 |
|
Deferred income tax expense (benefit) |
|
|
697,000 |
|
|
|
(367,000 |
) |
Loss on sale of equipment |
|
|
11,174 |
|
|
|
|
|
Change in operating assets and liabilities: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
(1,871,999 |
) |
|
|
(107,231 |
) |
Prepaid expenses |
|
|
(6,248 |
) |
|
|
(34,079 |
) |
Inventories |
|
|
(1,870,508 |
) |
|
|
1,298,283 |
|
Income taxes |
|
|
240,000 |
|
|
|
8,201 |
|
Accounts payable and accrued expenses |
|
|
1,597,538 |
|
|
|
85,820 |
|
Deferred revenue |
|
|
267,567 |
|
|
|
(435,647 |
) |
|
|
|
|
|
|
|
|
|
Net cash from operating activities |
|
|
2,336,705 |
|
|
|
1,313,119 |
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Purchase of property, plant and equipment |
|
|
(736,009 |
) |
|
|
(2,300,050 |
) |
Proceeds from sale of property, plant and equipment |
|
|
3,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash from investing activities |
|
|
(733,009 |
) |
|
|
(2,300,050 |
) |
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Net (payments) borrowings on revolving credit agreement |
|
|
(1,110,707 |
) |
|
|
110,707 |
|
Borrowings on long-term debt |
|
|
|
|
|
|
1,104,836 |
|
Principal payments on long-term debt |
|
|
(382,539 |
) |
|
|
(32,212 |
) |
|
|
|
|
|
|
|
|
|
Net cash from financing activities |
|
|
(1,493,246 |
) |
|
|
1,183,331 |
|
|
|
|
|
|
|
|
|
|
Change in cash |
|
|
110,450 |
|
|
|
196,400 |
|
Cash at beginning of year |
|
|
363,206 |
|
|
|
166,806 |
|
|
|
|
|
|
|
|
|
|
Cash at end of year |
|
$ |
473,656 |
|
|
$ |
363,206 |
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information: |
|
|
|
|
|
|
|
|
Interest paid |
|
$ |
683,776 |
|
|
$ |
845,291 |
|
|
|
|
|
|
|
|
|
|
Income taxes |
|
$ |
|
|
|
$ |
(119,931 |
) |
|
|
|
|
|
|
|
|
|
The accompanying notes
are an integral part
of these consolidated financial statements.
7
GALAXY TOOL HOLDING CORPORATION
AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
1. |
BUSINESS OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
Business
Operations - Galaxy Tool Holding Corporation and Subsidiaries (d/b/a Galaxy Technologies) is in the business of manufacturing and designing precision tools and parts, fabricating steel and aluminum assemblies, and producing secondary equipment
for the customers in the aerospace industry. Additionally, the company serves customers in the plastic products industry with manufacturing and repairing injection and blow molds and designing component parts and secondary equipment. The
Companys customers are located throughout the United States and internationally. The Company is headquartered in Winfield, Kansas, where it has a manufacturing facility.
Principles of Consolidation - The accompanying consolidated financial statements include the accounts of Galaxy Tool Holding Corporation
and its wholly-owned subsidiaries, Galaxy Technologies, Inc. and Encompass Tool & Machine, Inc., hereinafter collectively referred to as the the Company. During 2011, Encompass was formally dissolved and its operations were
transferred to Galaxy Technologies. All material intercompany related party balances and transactions have been eliminated in the consolidation.
Use of Estimates - The preparation of financial statements in conformity with accounting principles generally accepted in the United
States of America requires management to make estimates and assumptions that affect: (1) the reported amounts of assets and liabilities, (2) disclosures such as contingencies, and (3) the reported amounts of revenues and expenses
included in such financial statements. Actual results could differ from those estimates.
Cash and Cash Equivalents - For purposes
of reporting the statements of cash flows, the Company considers all cash accounts, which are not subject to withdrawal restrictions or penalties, and all highly liquid debt instruments purchased with a maturity of three months or less, to be cash
equivalents. The Company maintains its cash in bank deposit accounts that, at times, may exceed federally insured limits. The Company has not experienced any losses in such accounts.
Accounts Receivable, Trade - Trade receivables are carried at original invoice amount less an estimate made for doubtful receivables
based on a review of all outstanding amounts on a monthly basis. Management determines the allowance for doubtful accounts by regularly evaluating individual customer receivables and considering a customers financial condition, credit history,
and current economic conditions. Trade receivables are written off when deemed uncollectible. Recoveries of trade receivables previously written off are recorded when received.
A trade receivable is considered to be past due if any portion of the receivable balance is outstanding for more than 30 to 60 days, depending
on the customer. Interest is not charged on past due accounts.
Inventories - Inventories are stated at the lower of cost or market,
with cost determined by the first-in, first-out (FIFO) method. Work-in-process includes material, labor, and allocable factory overhead costs.
Property, Plant and Equipment - Property, plant and equipment are carried at cost. Depreciation is computed using the straight-line
method, using estimated useful lives. When assets are retired or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts, and any resulting gain or loss is recognized in income for the period. The cost of
maintenance and repairs is charged to income as incurred; significant renewals and betterments are capitalized. Deduction is made for retirements resulting from renewals or betterments.
8
GALAXY TOOL HOLDING CORPORATION
AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
1. |
BUSINESS OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) |
Customer list - The Company is amortizing its customer list, using a straight-line method, over a 7
1⁄2 year period.
Goodwill - Goodwill is
not amortized, but is subject to an annual impairment test, as well as when an event triggering impairment may have occurred. The Company has elected to perform its annual analysis during the fourth quarter. No indicators of impairment were
identified for the years ended December 31, 2012 and 2011.
Deferred debt issuance costs - Deferred debt issuance costs are
being amortized over the life of the related loan by the effective interest method.
Impairment of Long-Lived Assets - Long-lived
assets are reviewed for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an
asset to estimate future net cash flows (undiscounted and without interest charges) expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. There were no impairment losses recognized in 2012 or 2011.
Deferred revenue - Deferred revenue represents deposits and progress billings on jobs in progress.
Income Taxes - Deferred tax assets and liabilities are recognized for temporary differences and loss carryforwards. Temporary
differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.
The Company recognizes the financial statement effects of a tax position only when it believes it can more likely than not sustain the position
upon an examination by the relevant tax authority. Tax years that remain subject to examination in the Companys major tax jurisdictions (Federal and State of Kansas) are 2009, 2010, 2011 and 2012.
Revenue Recognition - Revenue is recognized upon shipment of goods. Shipping and handling charges are included in revenue. Shipping and
handling costs are included in cost of goods sold.
Advertising Costs - The Company expenses costs of advertising as they are
incurred. Advertising expense for the years ended December 31, 2012 and 2011 was $39,493 and $63,165, respectively.
Subsequent
Events - Subsequent events have been evaluated through April 5, 2013, which is the date the financial statements were available to be issued.
9
GALAXY TOOL HOLDING CORPORATION
AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
On August 22, 2008, the Company acquired 100% of the stock of
Galaxy Tool Corporation and its subsidiary, Encompass Tool & Machine, Inc., under the terms of a stock purchase agreement. The stock purchase transaction was accounted for in accordance with EITF Issue No. 88-16, Basis in Leveraged
Buyout Transactions, and EITF Issue No. 90-12, Allocating Basis in Individual Assets and Liabilities for Transactions Within the Scope of EITF Issue No. 88-16. The aggregate purchase price was allocated to the assets and
liabilities of the Company based upon an allocation of their respective carryover and fair market values. The carryover interest on the transaction was 38.6%. The portion of the acquisition recognized at fair value was 61.4%. The caption
consideration paid over consideration contributed by continuing stockholder interests within the equity section of the accompanying balance sheets represents the difference between the fair value and the carrying value of the 38.6%
carryover interest.
Inventories consist of the following at December 31:
|
|
|
|
|
|
|
|
|
|
|
2012 |
|
|
2011 |
|
Raw Materials |
|
$ |
392,565 |
|
|
$ |
185,066 |
|
Work-in-process parts and labor |
|
|
2,420,804 |
|
|
|
757,795 |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
2,813,369 |
|
|
$ |
942,861 |
|
|
|
|
|
|
|
|
|
|
Depreciation expense for the years ended December 31, 2012 and 2011,
based on useful lives shown below, consists of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012 |
|
|
2011 |
|
|
Useful Lives |
|
Building and improvements |
|
$ |
96,704 |
|
|
$ |
75,749 |
|
|
|
40 years |
|
Machinery and equipment |
|
|
968,569 |
|
|
|
849,158 |
|
|
|
5 to 10 years |
|
Computer hardware and software |
|
|
72,528 |
|
|
|
54,517 |
|
|
|
3 to 5 years |
|
Office furniture and equipment |
|
|
5,238 |
|
|
|
4,129 |
|
|
|
5 to 10 years |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,143,039 |
|
|
$ |
983,553 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10
GALAXY TOOL HOLDING CORPORATION
AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
The net values for intangible assets at December 31, 2012 and
2011 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012 |
|
|
2011 |
|
|
|
Gross Carrying Amount |
|
|
Accumulated Amortization |
|
|
Net Carrying Value |
|
|
Gross Carrying Amount |
|
|
Accumulated Amortization |
|
|
Net Carrying Value |
|
Customer list |
|
$ |
5,476,880 |
|
|
$ |
(3,183,094 |
) |
|
$ |
2,293,786 |
|
|
$ |
5,476,880 |
|
|
$ |
(2,452,843 |
) |
|
$ |
3,024,037 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill of $8,679,091 was recognized with the acquisition as described in Note 2 and there were no changes in
its carrying amount for the years ended December 31, 2012 and 2011.
Amortization expense of the customer list for the years ended
December 31, 2012 and 2011 was $730,251. Estimated amortization expense for each of the following four years is:
|
|
|
|
|
2013 |
|
$ |
730,251 |
|
2014 |
|
|
730,251 |
|
2015 |
|
|
730,251 |
|
2016 |
|
|
103,033 |
|
|
|
|
|
|
|
|
$ |
2,293,786 |
|
|
|
|
|
|
6. |
REVOLVING LINE-OF-CREDIT AND LONG-TERM DEBT |
Revolving Line-of-Credit - Under
terms of the revolving line-of-credit agreement with a bank, which expires October 2013, the Company may borrow up to $1,500,000, limited to 70% of eligible accounts receivable, 50% of the book value of eligible inventory (inventory is limited to
50% of eligible accounts receivable). The interest rate at December 31, 2012 was 5.75%. The agreement is secured by substantially all of the Companys accounts receivable, inventories, and equipment. The agreement also contains certain
restrictive covenants common to this type of agreement. Outstanding borrowings at December 31, 2012 and 2011 were $0 and $1,110,707, respectively. As of December 31, 2012, the full line is available to be drawn on.
11
GALAXY TOOL HOLDING CORPORATION
AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
6. |
REVOLVING LINE-OF-CREDIT AND LONG-TERM DEBT (CONTINUED) |
Long-term debt at December 31, 2012 and 2011 consists of the following:
|
|
|
|
|
|
|
|
|
|
|
2012 |
|
|
2011 |
|
Subordinated notes payable to a stockholder of the Company; interest at the greater of 13.5% or a floating rate equal to the LIBOR plus
9.5% (the rate was 13.5% at December 31, 2012); due in full in August 2013. The loan is collateralized by substantially all assets of the Company. The note is subordinated to the revolving credit agreement and term loan disclosed below. Under
the terms of the subordinated note payable agreement, the Company is subject to certain restrictions, which include, but are not limited to, making equity distributions; limitations on indebtedness, capital expenditures, management fees and leases;
and restrictions on investments. The Company is also required to comply with certain financial covenants; including minimum EBITDA levels and a fixed charge coverage ratio. The subordinated note payable agreement contains a prepayment premium clause
that requires the Company to pay a premium for prepayments on or prior to the maturity date. The dates and percentages related to this clause are 3% of principal prepaid in year one, 2% in year two, and 1% in year three from the anniversary date in
August 2010. The note also contains a clause that, as permitted under the subordination agreement, requires the Company to prepay the outstanding amount based on excess cash flow, as defined in the agreement. The note also provides for an exit fee
of $1,421,853 plus 4% per annum of the greater of the outstanding principal balance or $4,437,000, payable upon any charge of control that occurs prior to the payoff of the amounts due under the note. See Note 13 for subsequent event. |
|
$ |
3,220,000 |
|
|
$ |
5,220,000 |
|
Note payable to a bank; due in monthly payments of $38,681 including interest at 5.95% through maturity in April of 2017. The loan is
collateralized by equipment, accounts receivable, and inventory. |
|
|
1,765,798 |
|
|
|
|
|
Note payable to a bank; due in monthly payments of $16,164 including interest at 5.95% through September 2016 and prime plus 2%
thereafter, through maturity in September 2018. The loan is collateralized by equipment, accounts receivable, and inventory. |
|
|
924,287 |
|
|
|
1,072,624 |
|
|
|
|
|
|
|
|
|
|
|
|
|
5,910,085 |
|
|
|
6,292,624 |
|
Less current maturities |
|
|
3,730,181 |
|
|
|
133,737 |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
2,179,904 |
|
|
$ |
6,158,887 |
|
|
|
|
|
|
|
|
|
|
12
GALAXY TOOL HOLDING CORPORATION
AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
6. |
REVOLVING LINE-OF-CREDIT AND LONG-TERM DEBT (CONTINUED) |
Annual maturities of long-term debt at December 31, 2012, are as follows:
|
|
|
|
|
Year ending December 31, |
|
|
|
2013 |
|
$ |
3,730,181 |
|
2014 |
|
|
541,379 |
|
2015 |
|
|
574,484 |
|
2016 |
|
|
611,957 |
|
2017 |
|
|
338,516 |
|
Thereafter |
|
|
113,568 |
|
|
|
|
|
|
|
|
$ |
5,910,085 |
|
|
|
|
|
|
The above maturities do not include the changes in the term debt as described in Note 13.
Deferred Income Taxes - Net deferred tax assets (liabilities) consist
of the following at December 31, 2012 and 2011:
|
|
|
|
|
|
|
|
|
|
|
2012 |
|
|
2011 |
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
$ |
4,000 |
|
|
$ |
12,000 |
|
Accrued expenses |
|
|
101,000 |
|
|
|
71,700 |
|
Contributions |
|
|
|
|
|
|
3,400 |
|
State net operating loss carryforwards (expires 2021) |
|
|
21,000 |
|
|
|
812,000 |
|
|
|
|
|
|
|
|
|
|
Current deferred tax assets |
|
|
126,000 |
|
|
|
899,100 |
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
Property, plant and equipment |
|
|
(1,309,000 |
) |
|
|
(1,093,500 |
) |
Customer list |
|
|
(918,000 |
) |
|
|
(1,209,600 |
) |
|
|
|
|
|
|
|
|
|
Non-current deferred tax liabilities |
|
|
(2,227,000 |
) |
|
|
(2,303,100 |
) |
|
|
|
|
|
|
|
|
|
Net deferred tax assets (liabilities) |
|
$ |
(2,101,000 |
) |
|
$ |
(1,404,000 |
) |
|
|
|
|
|
|
|
|
|
Income Tax Expense - Income tax expense (benefit) for the years ended December 31, 2012 and 2011
is comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
2012 |
|
|
2011 |
|
Current |
|
$ |
240,000 |
|
|
$ |
(111,730 |
) |
Deferred |
|
|
697,000 |
|
|
|
(367,000 |
) |
|
|
|
|
|
|
|
|
|
Total |
|
$ |
937,000 |
|
|
$ |
(478,730 |
) |
|
|
|
|
|
|
|
|
|
The income tax provision differs from the amount of income tax determined by applying the U.S. federal income
tax rate to pretax income from operations because of state taxes, nondeductible expenses, and tax credits.
13
GALAXY TOOL HOLDING CORPORATION
AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
The Company has a defined contribution plan covering all
employees meeting the eligibility requirements of the plan. The Company contributes a discretionary percentage of employee contributions as determined annually by the Board of Directors. Retirement plan matching expense for the years ended
December 31, 2012 and 2011 was $97,514 and $88,202, respectively.
The Company leases equipment under operating leases expiring in the
years 2013 through 2017. Total rent expense under all operating leases amounted to $168,197 and $181,549 for the years ended December 31, 2012 and 2011, respectively.
The following is a schedule of future minimum rental payments required under the operating leases as of December 31, 2012:
|
|
|
|
|
Year Ending December 31, |
|
|
|
2013 |
|
$ |
163,506 |
|
2014 |
|
|
107,476 |
|
2015 |
|
|
53,477 |
|
2016 |
|
|
19,751 |
|
2017 |
|
|
3,034 |
|
|
|
|
|
|
|
|
$ |
347,244 |
|
|
|
|
|
|
10. |
COMMON AND PREFERRED STOCK |
Common stock consists of Class A, B and C shares.
Class A and B shares are voting. Class C shares are non-voting. Upon a triggering event, such as a letter of intent to sell the Company, failure to meet certain EBITDA levels, or a default under the loan agreements, the Class B shares may
become Class A shares at the option of the holder. Upon corporate liquidation or dissolution, after preferred shareholders receive their liquidation value, the remaining proceeds are divided between Class A and B shares, except that the
proceeds allocated to Class B shares are allocated in part to Class C shares based on certain internal rates of return earned by one of the principal stockholders on his preferred and common stock investment in the Company.
Preferred stock consists of series A, B, C, and D shares carried at the original issue price of $1 per share for Series A and B, $3.50 for
Series C and $12.30 for Series D. All shares are designated as nonvoting. However, a majority of Series A, C and D shareholders must approve certain corporate matters of significance, including amendments to the Articles of Incorporation, share
issuances or redemptions, asset or stock sales or mergers, hiring of a Chief Executive Officer and change in number of board members. Dividends on the shares are payable when and if declared by the board. Dividends compound annually and are
cumulative. Dividend rates are 15% on Series A shares, 6% on Series B, 15% on Series C and 17.5% on Series D. Series D shares have first priority in liquidation or dissolution, receiving their original issuance price plus unpaid dividends. Series C
shares have second
14
GALAXY TOOL HOLDING CORPORATION
AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
10. |
COMMON AND PREFERRED STOCK (CONTINUED) |
priority receiving 1.5 times their original issuance price plus unpaid dividends; followed by Series A shares and lastly Series B shares, both
of which receive their original issue price plus unpaid dividends. Dividend payments receive the same priority with Series C dividends payable only if Series D accumulated dividends have been paid, Series A after Series C dividends are paid and
Series B after Series A dividends are paid.
All shares may be redeemed at the holders option after six years from the date of
issuance, which will be August 2014 for Series A and B shares and August 2016 for Series C or D shares, or after satisfaction of all amounts due under loans extended to the Company by the holders (see Note 6). Redemption is mandatory in the case of
a qualified public offering of the Companys common stock.
The agreement between the stockholders also provides for various rights of
electing the members of the Companys Board of Directors and requires consents as to the sale of the Company.
In connection with the
acquisition discussed in Note 2, the Company issued warrants to purchase 5,389 Class A common shares for $1 per share to an outside entity for investment banker services. No value was ascribed to the warrants. The warrants expire in August
2020.
As described in Note 13, $8.2 million of preferred D stock was redeemed subsequent to December 31, 2012.
Sales to major customers for the years ended December 31, 2012 and
2011 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012 |
|
|
2011 |
|
|
|
Percent of Revenues |
|
|
Percent of Accounts Receivable at December 31 |
|
|
Percent of Revenues |
|
|
Percent of Accounts Receivable at December 31 |
|
Customer A |
|
|
7 |
% |
|
|
7 |
% |
|
|
15 |
% |
|
|
58 |
% |
Customer B |
|
|
11 |
% |
|
|
10 |
% |
|
|
9 |
% |
|
|
4 |
% |
The Company pays a management services fee to a stockholder. In August
2010 an agreement deferring payment of the fee was entered into with the stockholder. The fee continues to accrue. Total expense for the year ended December 31, 2012 and 2011 was $225,000. Included in accrued expenses at December 31, 2012
and 2011 are fees of $558,750 and $333,750, respectively, that remain payable.
15
GALAXY TOOL HOLDING CORPORATION
AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
12. |
RELATED PARTIES (CONTINUED) |
As discussed in Note 6, the Company has a debt agreement with a stockholder. Interest expense for the year ended December 31, 2012 and
2011 was $527,044 and $704,700, respectively.
On February 28, 2013, the Company obtained $12.3 million in
additional borrowing from a stockholder increasing the term loan described in Note 6 to $15.52 million. The proceeds were used to redeem $8.2 million of preferred D stock and to pay a $4.1 million dividend on that preferred stock. The exit fee on
the term loan increased from 4% to 8.6% and the maturity date was extended to August 2017. The preferred D stock dividend rate was reduced from 17.5% to 6%.
16
Exhibit 2.s.7
Financial Statements for
SOG
Specialty Knives and Tools, LLC
December 31, 2014 and 2013
(unaudited)
CONTENTS
|
|
|
|
|
|
|
PAGE |
|
FINANCIAL STATEMENTS |
|
|
|
|
Balance sheets |
|
|
1 |
|
Statements of income |
|
|
2 |
|
Statements of members equity |
|
|
3 |
|
Statements of cash flows |
|
|
4 |
|
Notes to financial statements |
|
|
514 |
|
SOG SPECIALTY KNIVES AND TOOLS, LLC
BALANCE SHEETS
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2014 |
|
|
2013 |
|
ASSETS |
|
|
|
|
|
|
|
|
CURRENT ASSETS |
|
|
|
|
|
|
|
|
Cash |
|
$ |
75,446 |
|
|
$ |
158,490 |
|
Trade accounts receivable, net of allowance of $68,693 and $71,637, respectively |
|
|
3,919,450 |
|
|
|
4,159,332 |
|
Inventories, net |
|
|
8,686,077 |
|
|
|
9,625,225 |
|
Prepaid expenses and other current assets |
|
|
757,722 |
|
|
|
562,817 |
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
13,438,695 |
|
|
|
14,505,864 |
|
PROPERTY AND EQUIPMENT, net |
|
|
950,958 |
|
|
|
760,258 |
|
OTHER ASSETS |
|
|
|
|
|
|
|
|
Deferred financing costs, net |
|
|
207,435 |
|
|
|
336,523 |
|
Intangible assets, net |
|
|
14,561,521 |
|
|
|
15,815,560 |
|
Goodwill |
|
|
10,984,431 |
|
|
|
10,984,431 |
|
Other assets |
|
|
61,375 |
|
|
|
78,534 |
|
|
|
|
|
|
|
|
|
|
|
|
|
25,814,762 |
|
|
|
27,215,048 |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
40,204,415 |
|
|
$ |
42,481,170 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND MEMBERS EQUITY |
|
|
|
|
|
|
|
|
CURRENT LIABILITIES |
|
|
|
|
|
|
|
|
Line of credit |
|
$ |
3,693,222 |
|
|
$ |
4,474,106 |
|
Checks in excess of cash |
|
|
236,817 |
|
|
|
|
|
Trade accounts payable |
|
|
1,107,395 |
|
|
|
2,088,060 |
|
Accrued expenses |
|
|
1,379,935 |
|
|
|
2,344,983 |
|
|
|
|
|
|
|
|
|
|
Current portion of capital lease obligation |
|
|
13,694 |
|
|
|
14,939 |
|
Total current liabilities |
|
|
6,431,063 |
|
|
|
8,922,088 |
|
LONG-TERM LIABILITIES |
|
|
|
|
|
|
|
|
Notes payable to related party |
|
|
18,399,000 |
|
|
|
18,399,000 |
|
Capital lease obligations, net of current portion |
|
|
|
|
|
|
13,694 |
|
|
|
|
|
|
|
|
|
|
MEMBERS EQUITY |
|
|
15,374,352 |
|
|
|
15,146,388 |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
40,204,415 |
|
|
$ |
42,481,170 |
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
1
SOG SPECIALTY KNIVES AND TOOLS, LLC
STATEMENTS OF INCOME
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2014 |
|
|
2013 |
|
NET SALES |
|
$ |
39,638,830 |
|
|
$ |
36,946,378 |
|
COST OF GOODS SOLD |
|
|
23,849,031 |
|
|
|
21,693,911 |
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
15,789,799 |
|
|
|
15,252,467 |
|
|
|
|
|
|
|
|
|
|
OPERATING EXPENSES |
|
|
|
|
|
|
|
|
Selling and marketing |
|
|
5,769,606 |
|
|
|
5,371,886 |
|
General and administrative |
|
|
6,386,565 |
|
|
|
6,191,690 |
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
12,156,171 |
|
|
|
11,563,576 |
|
|
|
|
|
|
|
|
|
|
INCOME FROM OPERATIONS |
|
|
3,633,628 |
|
|
|
3,688,891 |
|
OTHER EXPENSE |
|
|
|
|
|
|
|
|
Interest expense |
|
|
3,498,921 |
|
|
|
3,456,252 |
|
|
|
|
|
|
|
|
|
|
NET INCOME |
|
$ |
134,707 |
|
|
$ |
232,639 |
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
2
SOG SPECIALTY KNIVES AND TOOLS, LLC
STATEMENTS OF MEMBERS EQUITY
(unaudited)
|
|
|
|
|
BALANCE, December 31, 2012 |
|
$ |
14,763,267 |
|
Vesting of profit interest grants |
|
|
250,482 |
|
Repurchase of member units |
|
|
(100,000 |
) |
Net income |
|
|
232,639 |
|
|
|
|
|
|
BALANCE, December 31, 2013 |
|
|
15,146,388 |
|
Vesting of profit interest grants |
|
|
140,640 |
|
Distributions |
|
|
(47,383 |
) |
Net income |
|
|
134,707 |
|
|
|
|
|
|
BALANCE, December 31, 2014 |
|
$ |
15,374,352 |
|
|
|
|
|
|
See accompanying notes.
3
SOG SPECIALTY KNIVES AND TOOLS, LLC
STATEMENTS OF CASH FLOWS
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2014 |
|
|
2013 |
|
CASH FLOWS FROM OPERATING ACTIVITIES |
|
|
|
|
|
|
|
|
Net income |
|
$ |
134,707 |
|
|
$ |
232,639 |
|
Adjustments to reconcile net income to net cash from operating activities |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
1,636,190 |
|
|
|
1,573,246 |
|
Profit interest compensation expense |
|
|
140,640 |
|
|
|
250,482 |
|
Amortization of deferred financing costs |
|
|
129,088 |
|
|
|
128,171 |
|
Changes in current assets and liabilities |
|
|
|
|
|
|
|
|
Trade accounts receivable |
|
|
239,882 |
|
|
|
(194,362 |
) |
Inventories |
|
|
939,148 |
|
|
|
(2,632,560 |
) |
Prepaid expenses and other assets |
|
|
(177,746 |
) |
|
|
(79,762 |
) |
Trade accounts payable |
|
|
(980,665 |
) |
|
|
1,237,169 |
|
Accrued expenses |
|
|
(965,048 |
) |
|
|
1,225,792 |
|
|
|
|
|
|
|
|
|
|
Net cash from operating activities |
|
|
1,096,196 |
|
|
|
1,740,815 |
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES |
|
|
|
|
|
|
|
|
Purchase of property and equipment |
|
|
(572,851 |
) |
|
|
(364,679 |
) |
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES |
|
|
|
|
|
|
|
|
Net payments on line of credit |
|
|
(780,884 |
) |
|
|
(1,130,029 |
) |
Checks in excess of cash |
|
|
236,817 |
|
|
|
|
|
Capital lease payments |
|
|
(14,939 |
) |
|
|
(14,573 |
) |
Repurchase of member units |
|
|
|
|
|
|
(100,000 |
) |
Distribution to members |
|
|
(47,383 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash from financing activities |
|
|
(606,389 |
) |
|
|
(1,244,602 |
) |
|
|
|
|
|
|
|
|
|
NET INCREASE (DECREASE) IN CASH |
|
|
(83,044 |
) |
|
|
131,534 |
|
CASH, beginning of year |
|
|
158,490 |
|
|
|
26,956 |
|
|
|
|
|
|
|
|
|
|
CASH, end of year |
|
$ |
75,446 |
|
|
$ |
158,490 |
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION |
|
|
|
|
|
|
|
|
Cash paid during the year for interest |
|
$ |
3,872,419 |
|
|
$ |
2,817,527 |
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
4
SOG SPECIALTY KNIVES AND TOOLS, LLC
NOTES TO FINANCIAL STATEMENTS
(unaudited)
Note 1 - Organization and
Summary of Significant Accounting Policies
Organization - SOG Specialty Knives and Tools, LLC (the Company) is a Delaware limited liability
company and is a wholly owned subsidiary of SOG Specialty K&T Holdings, LLC (Holdings). The Company is in the business of designing, manufacturing, packaging, and distributing knives and specialty tools through a worldwide dealer network.
Basis of accounting - The Company prepares its financial statements on the accrual basis of accounting in accordance with accounting principles
generally accepted in the United States of America.
Use of estimates - Preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities, at the date of the
financial statements. Estimates also affect the reported amounts of revenue and expenses in the reporting period. Actual amounts could differ from those estimates. Significant estimates include bad debt and return allowances, lives for tangible and
definite-lived intangible assets, inventory valuations and reserves, and earnout contingencies.
Trade accounts receivable - Sales are made to
approved customers on an open-account basis. Receivables are generally unsecured. The Company monitors credit limits and payment habits of its customers to mitigate risk of loss from uncollectible accounts.
Trade accounts receivable are stated at the original invoice amount. Management maintains an allowance for doubtful accounts for estimated losses resulting
from the inability of its customers to pay through a charge to earnings and a credit to the allowance based on their assessment of the current status of individual accounts and the overall aging of the receivables. Trade accounts receivable are
written off when deemed uncollectible and recoveries of trade accounts receivable previously written off are recorded as a reduction of bad debt expense when received. The Company has established credit policies and historically the losses related
to customer nonpayment have been low as a percentage of sales.
The Company entered into a receivables factoring agreement with a bank (purchaser) whereby
all of a major customers receivables are submitted and sold to the purchaser upon product shipment. The receivables are sold without recourse at a discount reflecting LIBOR (LIBOR term varies depending on underlying receivable discount term)
plus a spread (1.25%). At December 31, 2014, the one-month LIBOR was .1635%. The purchaser receives all cash collections. The spreads are evaluated periodically by the purchaser. The factoring arrangement typically accelerates collection of
accounts receivable by 50 to 55 days from the customers payment due date according to the terms of sale. Total discounts were not significant for the years ended December 31, 2014 and 2013. The discounts are included in net sales on the
statements of income.
Concentration of business and credit risk - The Company is subject to concentrations of credit risk through its cash and
trade accounts receivable. Credit risk, with respect to trade accounts receivable, is minimized due to the diversification of the Companys customer base and its geographical dispersion. The concentration of credit risk is equal to the
outstanding trade accounts receivable balances, and such risk is subject to the financial and industry conditions of the Companys customers. The Company does not require collateral or other securities to support trade accounts receivable. At
times, cash balances in banks may be in excess of federally insured limits. The Company has not experienced any losses in its cash accounts.
5
SOG SPECIALTY KNIVES AND TOOLS, LLC
NOTES TO FINANCIAL STATEMENTS
(unaudited)
Note 1 - Organization and Summary of Significant Accounting Policies (continued)
For the year ended December 31, 2014, revenue from two customers totaled 36% of
revenue. For the year ended December 31, 2013, revenue from two customers totaled 31% of revenue. Accounts receivable for one customer at December 31, 2014 and 2013, was approximately 28% and 40%, respectively.
The Company purchases a significant quantity of product materials from suppliers outside the United States at prices that are determined by contract. All the
purchases are denominated in U.S. dollars with the exception of one vendor for which the purchases are denominated in yen. Total purchases from this vendor were $1,304,000 and $839,000 for the years ended December 31, 2014 and 2013,
respectively. Fluctuation of foreign currency exchange rates exposes the Company to changes in inventory costs and gross margins. For the years ended December 31, 2014 and 2013, purchases from three suppliers with facilities located in Asia
totaled 37% and 32%, respectively, of inventory purchases. Management believes that other suppliers could provide the necessary products; however, such a change could result in manufacturing delays.
Inventories - Inventories are valued at the lower of cost or market, determined by the first-in, first-out method. The Company regularly analyzes its
inventory for obsolescence and lower of cost or market adjustments. Inventory reserves are recorded for excess quantities, obsolescence, and adjustments to present inventory at the lower of cost or market. Reserves totaled $75,000 and $50,000 as of
December 31, 2014 and 2013, respectively, and result in the inventory being recorded at its adjusted cost basis.
Property and equipment -
Property and equipment are recorded at cost. Depreciation is computed using the straight-line method based upon the estimated useful lives of the assets. The estimated useful lives of machinery, equipment, furniture, and fixtures are five years.
Leasehold improvements are amortized over the lesser of the useful life of the asset or the remaining term of the lease. Expenditures that materially increase the lives of assets are capitalized. The cost and related accumulated depreciation or
amortization of property sold or retired are removed from the accounts and resulting gains or losses are included in operations. Minor repairs and maintenance are charged to expense as incurred.
Deferred financing costs - The deferred financing costs were incurred in the process of executing the related party notes payable (Note 7). The
financing costs are amortized to interest expense over the five-year term of the notes using the effective interest method. Amortization expense was $129,088 and $128,171 for the years ended December 31, 2014 and 2013, respectively.
Intangible assets - The Companys intangible assets consist of trade names, developed technology, customer relationships, and a noncompete
agreement. Amounts are subject to amortization on the straight-line basis over their estimated useful lives. Management assesses the carrying value of intangible assets for potential impairment when an event occurs or circumstances change to suggest
the carrying value of the assets may be greater than their fair value. Significant costs to renew or extend the term of certain intangible assets, primarily trademarks, will be capitalized and recognized over the renewal term. Management has
determined there is no impairment at December 31, 2014 and 2013.
6
SOG SPECIALTY KNIVES AND TOOLS, LLC
NOTES TO FINANCIAL STATEMENTS
(unaudited)
Note 1 - Organization and Summary of Significant Accounting Policies (continued)
Goodwill - Goodwill represents the excess of the cost of the Company over the
fair value of the net assets at the date of acquisition. The Company assesses qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for
determining whether it is necessary to perform the two-step goodwill impairment test. The Company evaluated qualitative factors in performing its annual goodwill impairment test for 2014 and 2013 and concluded that goodwill was not impaired.
Significant events and circumstances taken into consideration in arriving at this conclusion include the level of revenues and profitability since the Company was acquired.
Valuation of long-lived assets - Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying
amount may not be recoverable. Impairment is measured by comparing the carrying value of the long-lived assets to the estimated undiscounted future cash flows expected to result from use of the assets and their ultimate disposition. In circumstances
where impairment is determined to exist, the Company will write down the assets to their estimated fair value based on either the present value of estimated expected future cash flows or the anticipated realizable market value.
Members equity - Holdings is the sole member of the Company. Managers appointed by Holdings manage the business and affairs of the Company. No
member or manager shall be liable for the debts, obligations, or liabilities of the Company, solely by reason of being a member or acting as a manager. Holdings will receive all profits and losses, receive all distributions, and have all the voting
rights of the Company. During 2014, the Company distributed $47,383 to Holdings. No distributions were made in 2013.
Income taxes - The Company is
a limited liability company (LLC) (taxable as a partnership for U.S. tax purposes). Accordingly, taxable income or loss generated by its activities is reported on the tax returns of its members. Management evaluated the Companys tax positions
and concluded that the Company had taken no uncertain tax positions that require adjustment to the financial statements. With few exceptions, the Company is no longer subject to income tax examinations by the U.S. federal, state, or local tax
authorities for years before 2011.
Revenue recognition - Revenue from the sale of the Companys products is recognized at the time of
transfer of title to the customer. Revenue is reduced by amounts relating to promotional rebates, volume rebates, cash discounts, and returns. These sales incentives and promotions totaled approximately $1,230,921 and $957,066 for the years ended
December 31, 2014 and 2013, respectively. Revenue is presented net of applicable taxes.
Shipping and delivery - The Company incurs shipping
and delivery costs in the delivery of products to its customers. These costs are included in cost of goods sold for the years ended December 31, 2014 and 2013.
7
SOG SPECIALTY KNIVES AND TOOLS, LLC
NOTES TO FINANCIAL STATEMENTS
(unaudited)
Note 1 - Organization and Summary of Significant Accounting Policies (continued)
Advertising costs - The Company expenses advertising costs as they are incurred.
Advertising expense for the years ended December 31, 2014 and 2013, was $648,750 and $607,554, respectively. Additionally, the Company offers advertising rebate programs with customers whereby if a customer advertises Company-related products
and provides evidence of advertising, the Company provides certain incentives to the customer in the form of credits against future orders. The Company records the value of these credits in the year the advertising occurred and recognized total
expense related to these programs of $1,616,748 and $1,572,904 for the years ended December 31, 2014 and 2013, respectively.
Management
agreements - The Company entered into management agreements with each of the majority members of Holdings on August 5, 2011, which require the Company to pay quarterly management fees equal to amounts ranging from $125,000 to $150,000,
depending on trailing 12-month EBITDA (earnings before interest, taxes, depreciation, and amortization). The agreement has a term of seven years, with an automatic one-year extension unless notice is given by the parties. Management fees for the
years ended December 31, 2014 and 2013, were $500,000.
Product warranty - The Companys products are guaranteed against defects in
workmanship and materials for the life of the original purchaser and requires the replacement or repair of the products that meet the warranty terms. The Company estimates and accrues the cost of its warranties monthly. Estimates are based on
historic data and projected costs. All other warranty expenses are recognized in the period the replacement or repair occurs. The warranty costs and related warranty accrual as of and for the years ended December 31, 2014 and 2013, were not
significant.
Subsequent events - Subsequent events are events or transactions that occur after the balance sheet date but before financial
statements are available to be issued. The Company recognizes in the financial statements the effects of all subsequent events that provide additional evidence about conditions that existed at the date of the balance sheet, including the estimates
inherent in the process of preparing the financial statements. The Companys financial statements do not recognize subsequent events that provide evidence about conditions that did not exist at the date of the balance sheet but arose after the
balance sheet date and before the financial statements are available to be issued.
Note 2 - Inventories
Inventories consist of the following at December 31:
|
|
|
|
|
|
|
|
|
|
|
2014 |
|
|
2013 |
|
Raw materials |
|
$ |
1,582,399 |
|
|
$ |
2,114,788 |
|
Finished goods |
|
|
6,896,822 |
|
|
|
6,548,141 |
|
Inventories in transit |
|
|
281,856 |
|
|
|
1,012,296 |
|
Inventory reserves |
|
|
(75,000 |
) |
|
|
(50,000 |
) |
|
|
|
|
|
|
|
|
|
Total inventories |
|
$ |
8,686,077 |
|
|
$ |
9,625,225 |
|
|
|
|
|
|
|
|
|
|
8
SOG SPECIALTY KNIVES AND TOOLS, LLC
NOTES TO FINANCIAL STATEMENTS
(unaudited)
Note 3 - Property and Equipment
Property and equipment consist of the following at December 31:
|
|
|
|
|
|
|
|
|
|
|
2014 |
|
|
2013 |
|
Machinery and tooling |
|
$ |
1,448,677 |
|
|
$ |
966,224 |
|
Computer equipment and software |
|
|
334,347 |
|
|
|
298,055 |
|
Office equipment and other |
|
|
214,813 |
|
|
|
160,706 |
|
Transportation equipment |
|
|
8,237 |
|
|
|
8,238 |
|
|
|
|
|
|
|
|
|
|
|
|
|
2,006,074 |
|
|
|
1,433,223 |
|
Less accumulated depreciation and amortization |
|
|
(1,055,116 |
) |
|
|
(672,965 |
) |
|
|
|
|
|
|
|
|
|
Property and equipment, net |
|
$ |
950,958 |
|
|
$ |
760,258 |
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense on property and equipment for the years ended December 31, 2014 and 2013, was
$382,151 and $319,207, respectively.
Note 4 - Intangible Assets
Customer relationships - Customer relationships represent the estimated fair value of customer relationships obtained in business combinations. The
excess earnings method is considered by management to represent the fair value of customer relationships. The excess earnings look at projected discounted cash flows of the customer relationships, considering estimated attrition rates. Customer
relationships are being amortized over 25 years.
Developed technology - Developed technology represents the estimated fair value of internally
developed technology and designs incorporated in the products obtained in business combinations. The relief from royalty income method is considered by management to represent the fair value of the developed technology as it looks at the income
streams that would result if the technology was licensed from a third party. Developed technology is being amortized over 10 years.
Trade name -
Trade name represents the estimated fair value of exclusive rights to specified registered trademarks, trade names, and domain names obtained in business combinations. The relief from royalty income method and market information is considered by
management to represent the fair value of these trademarks. Trade name is being amortized over 15 years.
Noncompete agreement - Noncompete
agreement represents the estimated fair value of the noncompete agreement entered into during a business combination. The estimated discounted cash flows of potential lost revenues in the absence of the noncompete agreement were considered by
management to represent the fair value of the agreement. The noncompete agreement is being amortized over 3.5 years.
9
SOG SPECIALTY KNIVES AND TOOLS, LLC
NOTES TO FINANCIAL STATEMENTS
(unaudited)
Note 4 - Intangible Assets (continued)
Definite-lived intangibles consist of the following at December 31, 2014 and 2013:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
(Years) |
|
|
Cost |
|
|
Amortization |
|
|
Net Cost |
|
December 31, 2014 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships |
|
|
25.0 |
|
|
$ |
6,809,722 |
|
|
$ |
(926,879 |
) |
|
$ |
5,882,843 |
|
Developed technology |
|
|
10.0 |
|
|
|
5,358,482 |
|
|
|
(1,823,372 |
) |
|
|
3,535,110 |
|
Trade name |
|
|
15.0 |
|
|
|
6,652,469 |
|
|
|
(1,509,125 |
) |
|
|
5,143,344 |
|
Noncompete agreement |
|
|
3.5 |
|
|
|
8,064 |
|
|
|
(7,840 |
) |
|
|
224 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
18,828,737 |
|
|
$ |
(4,267,216 |
) |
|
$ |
14,561,521 |
|
December 31, 2013 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships |
|
|
25.0 |
|
|
$ |
6,809,722 |
|
|
$ |
(654,490 |
) |
|
$ |
6,155,232 |
|
Developed technology |
|
|
10.0 |
|
|
|
5,358,482 |
|
|
|
(1,287,524 |
) |
|
|
4,070,958 |
|
Trade name |
|
|
15.0 |
|
|
|
6,652,469 |
|
|
|
(1,065,627 |
) |
|
|
5,586,842 |
|
Noncompete agreement |
|
|
3.5 |
|
|
|
8,064 |
|
|
|
(5,536 |
) |
|
|
2,528 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
18,828,737 |
|
|
$ |
(3,013,177 |
) |
|
$ |
15,815,560 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense totaled $1,254,039 for both years ended December 31, 2014 and 2013.
Future amortization of definite-lived intangibles is expected to be recognized over a weighted-average period of 12 years and is as follows for future years
ending December 31 and thereafter:
|
|
|
|
|
2015 |
|
$ |
1,251,959 |
|
2016 |
|
|
1,251,735 |
|
2017 |
|
|
1,251,735 |
|
2018 |
|
|
1,251,735 |
|
2019 |
|
|
1,251,735 |
|
Thereafter |
|
|
8,302,622 |
|
|
|
|
|
|
|
|
$ |
14,561,521 |
|
|
|
|
|
|
10
SOG SPECIALTY KNIVES AND TOOLS, LLC
NOTES TO FINANCIAL STATEMENTS
(unaudited)
Note 5 - Bank Line of Credit
At December 31, 2014, the Company had up to $10,000,000 available in a revolving credit line with a commercial bank. This is an increase of $2,500,000 in
the available revolving credit line at December 31, 2013, of $7,500,000. The principal balance outstanding on the line of credit is limited to certain borrowing base requirements. The line of credit is subject to renewal on July 2, 2017.
The terms of the credit agreement require interest to accrue at the Alternate Base Rate (3.25% at December 31, 2014 and 2013) plus 1% or the Eurodollar Rate (.1635% and .1672% at December 31, 2014 and 2013, respectively) plus 3%, and it is
paid monthly. The Company elects the interest rate option at the time the advance is requested. The Alternate Base Rate is the higher of 1) the banks base commercial lending rate, 2) the Federal Funds Open Rate plus one-half of 1%,
or 3) the daily LIBOR rate plus 1%. The Eurodollar Rate is based on the one-month LIBOR rate. The line of credit is collateralized by essentially all assets of the Company. The loan is guaranteed by Holdings, which is a co-borrower on the loan.
There was $3,693,222 and $4,474,106 outstanding under the line of credit as of December 31, 2014 and 2013, respectively, of which $193,222 was under the Alternate Base Rate and $3,500,000 was under the Eurodollar Rate as of December 31,
2014. The line-of-credit agreement contains certain financial covenants related to debt coverage and EBITDA (as defined in the agreement).
Note 6 -
Capital Lease Obligations
The Company has two capital lease agreements for machinery and tooling related to the manufacture of the Companys
products. Monthly payments under the capital leases total $1,427, including interest at an implicit rate of 3%. Assets under capital leases are included in property and equipment and were approximately $14,000 and $29,000, net of accumulated
amortization, as of December 31, 2014 and 2013, respectively. These assets are amortized over their estimated useful lives.
Minimum payments under
capital leases for the year ending December 31, 2015, are as follows:
|
|
|
|
|
Total minimum lease payments |
|
$ |
15,702 |
|
Less amount representing interest |
|
|
2,008 |
|
|
|
|
|
|
Present value of capital lease payments |
|
|
13,694 |
|
Less current portion |
|
|
13,694 |
|
|
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
11
SOG SPECIALTY KNIVES AND TOOLS, LLC
NOTES TO FINANCIAL STATEMENTS
(unaudited)
Note 7 - Notes Payable to Related Party
The Company has two note agreements with a member of Holdings totaling $18,399,000, described as follows as of December 31:
|
|
|
|
|
|
|
|
|
|
|
2014 |
|
|
2013 |
|
Term A note agreement with member of Holdings, maturing August 4, 2016; interest payable monthly commencing September 1,
2011, at a rate equal to the one-month LIBOR plus 11.25%, provided that in no event the interest be lower than 13.25%. On each interest payment date after December 31, 2012, and prior to maturity date, in lieu of payment of the interest in part
or whole, payment-in-kind may be made by adding such amount to the principal amount of the note. |
|
$ |
6,199,500 |
|
|
$ |
6,199,500 |
|
Term B note agreement with member of Holdings, maturing August 4, 2016; interest payable monthly commencing September 1,
2011, at a rate equal to the one-month LIBOR plus 12.75%, provided that in no event the interest be lower than 14.75%. On each interest payment date after December 31, 2012, and prior to maturity date, in lieu of payment of the interest in part
or whole, payment-in-kind may be made by adding such amount to the principal amount of the note. |
|
|
12,199,500 |
|
|
|
12,199,500 |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
18,399,000 |
|
|
$ |
18,399,000 |
|
|
|
|
|
|
|
|
|
|
The notes in the preceding table were both issued on August 5, 2011. The principal amounts on both notes totaling
$18,399,000 are due in lump-sum payments on October 3, 2017. The note agreements stipulate that if the Company prepays any portion of the notes prior to the third anniversary of the notes, the Company would be required to pay a prepayment
penalty equal to a percentage of the principal repaid. The prepayment percentages are 3% prior to the first anniversary, 2% after the first anniversary but before the second anniversary, and 1% after the second anniversary but before the third
anniversary. No prepayments were made in 2014 or 2013. In addition, the note agreements stipulate upon change of control or prepayment of the amounts outstanding of Term A and Term B prior to the maturity date, the Company would pay to the member an
exit fee in the amount equal to 3% per annum on the greater of the 1) Term A outstanding and $4,649,625 and 2) Term B outstanding and $9,149,625. The exit fee shall survive termination of the repayment of the obligations.
12
SOG SPECIALTY KNIVES AND TOOLS, LLC
NOTES TO FINANCIAL STATEMENTS
(unaudited)
Note 7 - Notes Payable to Related Party (continued)
The agreement also allows for the election to make a payment on the exit fee in advance of a change of
control. In 2014, the Company made an exit fee payment of $500,000, which is included in interest expense. As of December 31, 2013, the management of the Company committed to making an exit fee payment of $500,000, which was included in
interest expense and accrued liabilities at December 31, 2013, and was paid to the notes holder subsequent to year-end. The notes holder has applied the payment from the Company as a reduction to the exit fee due upon the change of
control. After application of the $500,000 payments made in 2014 and 2013, there is approximately $884,000 of additional exit fees calculated through December 31, 2014, which would be required to be paid out if a change-of-control event
occurred. Because there has been no change-of-control event and the Company has not made an election to pay out this amount, this balance is not accrued as of December 31, 2014.
The note agreements limit capital expenditures and contain certain financial covenants for which the Company must comply related to EBITDA (as defined in the
agreements).
Note 8 - Commitments
Operating
leases - The Company leases the main facility from a member of Holdings. The lease agreement had an initial term maturing on December 31, 2013, but was renewed by the Company for two years. This is the first of three additional consecutive
period renewal options of two years each. Each renewal term will be on the same terms and conditions as the initial term, except that base rent will equal 90% of fair market rent. Base rent for the year ending December 31, 2015, is $16,101 per
month plus certain costs.
The Company also leases space from an unrelated entity. The lease agreement was entered into on January 1, 2011, for one
year, which automatically extends for an additional year. The lease term rolls over to the next year and expires on December 31, 2015. The lease allows for annual renewals. The monthly base rent is $9,000 for 2014 and $9,500 for 2015.
At December 31, 2014, future minimum lease payments under the leases are $333,000 for the year ended December 31, 2015.
Total rent expenses under lease agreements for the years ended December 31, 2014 and 2013, were approximately $340,500 and $371,000, respectively.
License agreements - The Company has several license agreements for which the Company is obligated to pay either a percentage of the sales price or a
set price per unit sold for every product sold that incorporates the patented design identified in the license agreements. The terms of the agreements run concurrent with the term of the underlying patents. License agreement expense under these
licenses for the years ended December 31, 2014 and 2013, was approximately $121,000 and $78,000, respectively.
Purchase commitments - The
Company purchases supplies for its products from various vendors. As of December 31, 2014 and 2013, respectively, the Company had outstanding purchase orders totaling approximately $5,283,000 and $7,311,000 for inventory on order and expected
to be received within the following year.
13
SOG SPECIALTY KNIVES AND TOOLS, LLC
NOTES TO FINANCIAL STATEMENTS
(unaudited)
Note 9 - Employee Benefit Plan
The Company has a qualified 401(k) and profit sharing plan (the Plan). The Plan is for eligible full-time employees who are over the age of 21, with 90 days of
service. The participant must have at least 1,000 hours of service in a Plan year. The Company may make discretionary contributions to the Plan. The Company made safe harbor contributions to the Plan in the amount of $112,664 and $-0- for the Plan
years ended December 31, 2014 and 2013, respectively.
Note 10 - Executive Unit Plan
In January 2012, Holdings established an executive unit plan (the SOG Plan). The SOG Plan is for any employee, officer, director, manager, and/or consultant of
the Company, pursuant to which awards of Holdings Class C units may be granted. The Class C units represent profit interests of Holdings that only have value to the holders of the units after the fair market value of the units exceeds a threshold
value as defined in the LLC operating agreement. The total number of units available for awards is 2,285, of which 2,279 have been awarded as of December 31, 2014. During 2014, 570 units were granted and are outstanding. There were no units
granted in 2013. The fair value of the awards was calculated based on calculating the present value of estimated distributions to the Class C unit holders based on the terms of Holdings LLC operating agreement and the calculation of a future
exit value using a discounted cash flow method. The total grant-date fair value for the awards issued during 2014 was determined to be approximately $198,000. The equity-based compensation related to the incentive units has been recorded on the
statements of income of the Company as a component of operating expenses over the vesting term of the awards. The awards generally vest over three to four years. Upon termination of service, any unvested units are cancelled. If a termination of
service is for cause (as defined in the agreement), Holdings has the right to cancel all units, whether vested or not. The Company recorded compensation expense of $140,640 and $250,482 in 2014 and 2013, respectively.
The following is a summary of the units granted under the SOG Plan:
|
|
|
|
|
|
|
|
|
|
|
Units |
|
|
Units |
|
|
|
Outstanding |
|
|
Vested |
|
December 31, 2013 |
|
$ |
2,094 |
|
|
$ |
956 |
|
Granted |
|
|
190 |
|
|
|
|
|
Vested |
|
|
|
|
|
|
460 |
|
|
|
|
|
|
|
|
|
|
December 31, 2014 |
|
$ |
2,284 |
|
|
$ |
1,416 |
|
|
|
|
|
|
|
|
|
|
Expected compensation expense for future years ending December 31 are as follows:
|
|
|
|
|
2015 |
|
$ |
149,000 |
|
2016 |
|
|
54,000 |
|
2017 |
|
|
49,000 |
|
2018 |
|
|
25,000 |
|
|
|
|
|
|
|
|
$ |
277,000 |
|
|
|
|
|
|
14
Exhibit 2.s.8
Report of Independent Auditors
and
Financial Statements for
SOG Specialty Knives and Tools, LLC
December 31, 2013 and 2012
CONTENTS
|
|
|
|
|
|
|
PAGE |
|
REPORT OF INDEPENDENT AUDITORS |
|
|
12 |
|
|
|
FINANCIAL STATEMENTS |
|
|
|
|
Balance sheets |
|
|
3 |
|
Statements of operations |
|
|
4 |
|
Statements of members equity |
|
|
5 |
|
Statements of cash flows |
|
|
6 |
|
Notes to financial statements |
|
|
719 |
|
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Member
SOG Specialty Knives and
Tools, LLC
Report on Financial Statements
We have
audited the accompanying financial statements of SOG Specialty Knives and Tools, LLC (a wholly owned subsidiary of SOG Specialty K&T Holdings, LLC), which comprise the balance sheets as of December 31, 2013 and 2012, and the related
statements of operations, members equity, and cash flows for the years then ended, and the related notes to the financial statements.
Managements Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted
in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud
or error.
Auditors Responsibility
Our
responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial statements are free from material misstatement.
An audit involves
performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditors judgment, including the assessment of the risks of material misstatement of the
financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entitys preparation and fair presentation of the financial statements in order to design audit
procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entitys internal control. Accordingly, we express no such opinion. An audit also includes evaluating the
appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.
1
We believe that the audit evidence obtained is sufficient and appropriate to provide a basis for our audit
opinion.
Opinion
In our opinion, the
financial statements referred to above present fairly, in all material respects, the financial position of SOG Specialty Knives and Tools, LLC as of December 31, 2013 and 2012, and the results of its operations and its cash flows for the years
then ended in accordance with accounting principles generally accepted in the United States of America.
Emphasis of Matter
As discussed in Note 1 to the financial statements, SOG Specialty Knives and Tools, LLC adopted a new method of accounting for goodwill and has revised their
previously issued 2013 financial statements. Our opinion is not modified with respect to this matter.
/s/ Moss Adams LLP
Everett, Washington
May 12, 2014
2
SOG SPECIALTY KNIVES AND TOOLS, LLC
BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2013 |
|
|
2012 |
|
ASSETS |
|
CURRENT ASSETS |
|
|
|
|
|
|
|
|
Cash |
|
$ |
158,490 |
|
|
$ |
26,956 |
|
Trade accounts receivable, net of allowance of $71,637 and $92,405, respectively |
|
|
4,159,332 |
|
|
|
3,964,970 |
|
Inventories, net |
|
|
9,625,225 |
|
|
|
6,992,665 |
|
Prepaid expenses and other current assets |
|
|
562,817 |
|
|
|
470,822 |
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
14,505,864 |
|
|
|
11,455,413 |
|
PROPERTY AND EQUIPMENT, net |
|
|
760,258 |
|
|
|
714,786 |
|
OTHER ASSETS |
|
|
|
|
|
|
|
|
Deferred financing costs, net |
|
|
336,523 |
|
|
|
464,694 |
|
Intangible assets, net |
|
|
15,815,560 |
|
|
|
17,069,599 |
|
Goodwill |
|
|
10,984,431 |
|
|
|
10,984,431 |
|
Other assets |
|
|
78,534 |
|
|
|
90,767 |
|
|
|
|
|
|
|
|
|
|
|
|
|
27,215,048 |
|
|
|
28,609,491 |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
42,481,170 |
|
|
$ |
40,779,690 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND MEMBERS EQUITY |
|
CURRENT LIABILITIES |
|
|
|
|
|
|
|
|
Line of credit |
|
$ |
4,474,106 |
|
|
$ |
5,604,135 |
|
Trade accounts payable |
|
|
2,088,060 |
|
|
|
850,891 |
|
Accrued expenses |
|
|
2,344,983 |
|
|
|
1,119,191 |
|
Capital lease obligation |
|
|
14,939 |
|
|
|
14,939 |
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
8,922,088 |
|
|
|
7,589,156 |
|
LONG-TERM LIABILITIES |
|
|
|
|
|
|
|
|
Notes payable to related party |
|
|
18,399,000 |
|
|
|
18,399,000 |
|
Capital lease obligations, net of current portion |
|
|
13,694 |
|
|
|
28,267 |
|
|
|
|
|
|
|
|
|
|
MEMBERS EQUITY |
|
|
15,146,388 |
|
|
|
14,763,267 |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
42,481,170 |
|
|
$ |
40,779,690 |
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
3
SOG SPECIALTY KNIVES AND TOOLS, LLC
STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2013 |
|
|
2012 |
|
NET SALES |
|
$ |
36,946,378 |
|
|
$ |
31,955,524 |
|
COST OF GOODS SOLD |
|
|
21,693,911 |
|
|
|
18,021,916 |
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
15,252,467 |
|
|
|
13,933,608 |
|
|
|
|
|
|
|
|
|
|
OPERATING EXPENSES |
|
|
|
|
|
|
|
|
Selling and marketing |
|
|
5,371,886 |
|
|
|
3,993,007 |
|
General and administrative |
|
|
6,191,690 |
|
|
|
6,402,750 |
|
Earnout adjustment (Note 10) |
|
|
|
|
|
|
(633,000 |
) |
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
11,563,576 |
|
|
|
9,762,757 |
|
|
|
|
|
|
|
|
|
|
INCOME FROM OPERATIONS |
|
|
3,688,891 |
|
|
|
4,170,851 |
|
OTHER EXPENSE |
|
|
|
|
|
|
|
|
Interest expense |
|
|
3,456,252 |
|
|
|
2,964,479 |
|
|
|
|
|
|
|
|
|
|
NET INCOME (LOSS) |
|
$ |
232,639 |
|
|
$ |
1,206,372 |
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
4
SOG SPECIALTY KNIVES AND TOOLS, LLC
STATEMENTS OF MEMBERS EQUITY
|
|
|
|
|
BALANCE, December 31, 2011 |
|
$ |
13,417,754 |
|
Vesting of profit interest grants |
|
|
139,141 |
|
Net income |
|
|
1,206,372 |
|
|
|
|
|
|
BALANCE, December 31, 2012 |
|
|
14,763,267 |
|
Vesting of profit interest grants |
|
|
250,482 |
|
Repurchase of member units |
|
|
(100,000 |
) |
Net loss |
|
|
232,639 |
|
|
|
|
|
|
BALANCE, December 31, 2013 |
|
$ |
15,146,388 |
|
|
|
|
|
|
See accompanying notes.
5
SOG SPECIALTY KNIVES AND TOOLS, LLC
STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
Years Ending December 31, |
|
|
|
2013 |
|
|
2012 |
|
CASH FLOWS FROM OPERATING ACTIVITIES |
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
232,639 |
|
|
$ |
1,206,372 |
|
Adjustments to reconcile net income (loss) to net cash from operating activities |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
1,573,246 |
|
|
|
1,521,583 |
|
Profit interest compensation expense |
|
|
250,482 |
|
|
|
139,141 |
|
Change in fair value of accrued earnout liability |
|
|
|
|
|
|
(633,000 |
) |
Amortization of deferred financing costs |
|
|
128,171 |
|
|
|
133,004 |
|
Changes in current assets and liabilities |
|
|
|
|
|
|
|
|
Trade accounts receivable |
|
|
(194,362 |
) |
|
|
(923,500 |
) |
Inventories |
|
|
(2,632,560 |
) |
|
|
(690,319 |
) |
Prepaid expenses and other assets |
|
|
(79,762 |
) |
|
|
(145,056 |
) |
Trade accounts payable |
|
|
1,237,169 |
|
|
|
(999,875 |
) |
Accrued expenses |
|
|
1,225,792 |
|
|
|
147,664 |
|
|
|
|
|
|
|
|
|
|
Net cash from operating activities |
|
|
1,740,815 |
|
|
|
(243,986 |
) |
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES |
|
|
|
|
|
|
|
|
Purchase of property and equipment |
|
|
(364,679 |
) |
|
|
(259,173 |
) |
Payment of accrued earnout |
|
|
|
|
|
|
(5,041,365 |
) |
|
|
|
|
|
|
|
|
|
Net cash from investing activities |
|
|
(364,679 |
) |
|
|
(5,300,538 |
) |
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES |
|
|
|
|
|
|
|
|
Net borrowings (payments) on line of credit |
|
|
(1,130,029 |
) |
|
|
4,804,135 |
|
Capital lease payments |
|
|
(14,573 |
) |
|
|
(15,122 |
) |
Repurchase of member units |
|
|
(100,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash from financing activities |
|
|
(1,244,602 |
) |
|
|
4,789,013 |
|
|
|
|
|
|
|
|
|
|
NET INCREASE (DECREASE) IN CASH |
|
|
131,534 |
|
|
|
(755,511 |
) |
CASH, beginning of year |
|
|
26,956 |
|
|
|
782,467 |
|
|
|
|
|
|
|
|
|
|
CASH, end of year |
|
$ |
158,490 |
|
|
$ |
26,956 |
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION |
|
|
|
|
|
|
|
|
Cash paid during the year for interest |
|
$ |
2,817,527 |
|
|
$ |
2,829,241 |
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
6
SOG SPECIALTY KNIVES AND TOOLS, LLC
NOTES TO FINANCIAL STATEMENTS
Note 1 -
Change in Accounting Policy for Goodwill and Financial Statement Revision
Effective January 1, 2013, SOG Specialty Knives and Tools, LLC
(the Company) changed its method of accounting for goodwill on a prospective basis as a result of the Companys adoption of the accounting alternative provided by Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU)
No. 2014-02, IntangiblesGoodwill and Other (Topic 350): Accounting for Goodwill (a consensus of the Private Company Council).
As a
result of adopting the alternative in ASU 2014-02, the Companys previously issued financial statements for the year ended December 31, 2013, included goodwill amortization expense of $1,098,443. Subsequent to the issuance of its 2013
financial statements, the Company determined that it no longer qualified to apply this alternative. Accordingly, the Company has changed its accounting method for goodwill to eliminate the amortization of goodwill with the following impacts to its
previously issued 2013 financial statements:
|
|
|
|
|
|
|
|
|
|
|
As Previously Reported |
|
|
As Revised |
|
Goodwill |
|
$ |
9,885,988 |
|
|
$ |
10,984,431 |
|
General and administrative expenses |
|
|
7,039,651 |
|
|
|
5,941,208 |
|
Net income (loss) |
|
|
(865,804 |
) |
|
|
232,639 |
|
Members equity |
|
|
14,047,945 |
|
|
|
15,146,388 |
|
The 2012 financial statements were not affected by this change.
Note 2 - Organization and Summary of Significant Accounting Policies
Organization - SOG Specialty Knives and Tools, LLC is a Delaware limited liability company and is a wholly owned subsidiary of SOG Specialty K&T
Holdings, LLC (Holdings). The Company is in the business of designing, manufacturing, packaging, and distributing knives and specialty tools through a worldwide dealer network.
Basis of accounting - The Company prepares its financial statements on the accrual basis of accounting in accordance with accounting principles
generally accepted in the United States of America.
Use of estimates - Preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities, at the date of the
financial statements. Estimates also affect the reported amounts of revenue and expenses in the reporting period. Actual amounts could differ from those estimates. Significant estimates include bad debt and return allowances, lives for tangible and
definite-lived intangible assets and goodwill, inventory valuations and reserves, and earnout contingencies.
Trade accounts receivable -
Sales are made to approved customers on an open-account basis. Receivables are generally unsecured. The Company monitors credit limits and payment habits of its customers to mitigate risk of loss from uncollectible accounts.
7
SOG SPECIALTY KNIVES AND TOOLS, LLC
NOTES TO FINANCIAL STATEMENTS
Note 2 - Organization and Summary of Significant Accounting Policies (continued)
Trade accounts receivable are stated at the original invoice amount. Management
maintains an allowance for doubtful accounts for estimated losses resulting from the inability of its customers to pay through a charge to earnings and a credit to the allowance based on their assessment of the current status of individual accounts
and the overall aging of the receivables. Trade accounts receivable are written off when deemed uncollectible and recoveries of trade accounts receivable previously written off are recorded as a reduction of bad debt expense when received. The
Company has established credit policies and historically the losses related to customer nonpayment have been low as a percentage of sales.
The Company
entered into a receivables factoring agreement with a bank (purchaser) whereby all of a major customers receivables are submitted and sold to the purchaser upon product shipment. The receivables are sold without recourse at a discount
reflecting LIBOR (LIBOR term varies depending on underlying receivable discount term) plus a spread (1.25%). At December 31, 2013, the one-month LIBOR was 0.1672%. The purchaser receives all cash collections. The spreads are evaluated
periodically by the purchaser. The factoring arrangement typically accelerates collection of accounts receivable by 50 to 55 days from the customers payment due date according to the terms of sale. Total discounts were not significant for the
years ended December 31, 2013 and 2012. The discounts are included in net sales on the statements of income.
Concentration of business and credit
risk - The Company is subject to concentrations of credit risk through its cash and trade accounts receivable. Credit risk, with respect to trade accounts receivable, is minimized due to the diversification of the Companys customer base
and its geographical dispersion. The concentration of credit risk is equal to the outstanding trade accounts receivable balances, and such risk is subject to the financial and industry conditions of the Companys customers. The Company does not
require collateral or other securities to support trade accounts receivable. At times, cash balances in banks may be in excess of federally insured limits. The Company has not experienced any losses in its cash accounts.
For the year ended December 31, 2013, revenue from two customers totaled 31% of revenue. For the year ended December 31, 2012, revenue from two
customers totaled 25% of revenue. Accounts receivable for one and three customers at December 31, 2013 and 2012, was approximately 40% and 41%, respectively.
The Company purchases a significant quantity of product materials from suppliers outside the United States at prices that are determined by contract. All the
purchases are denominated in U.S. dollars with the exception of one vendor where the purchases are denominated in yen. Total purchases from this vendor were $839,000 and $1.56 million for the years ended December 31, 2013 and 2012,
respectively. Fluctuation of foreign currency exchange rates exposes the Company to changes in inventory costs and gross margins. For the years ended December 31, 2013 and 2012, purchases from one supplier with facilities located in Asia
totaled 32% and 34%, respectively, of inventory purchases. Management believes that other suppliers could provide the necessary products; however, such a change may result in manufacturing delays.
8
SOG SPECIALTY KNIVES AND TOOLS, LLC
NOTES TO FINANCIAL STATEMENTS
Note 2 - Organization and Summary of Significant Accounting Policies (continued)
Inventories - Inventories are valued at the lower of cost or market, determined
by the first-in, first-out method. The Company regularly analyzes its inventory for obsolescence and lower of cost or market adjustments. Inventory reserves are recorded for excess quantities, obsolescence, and adjustments to present inventory at
the lower of cost or market. Reserves totaled $50,000 as of December 31, 2013 and 2012 and result in the inventory being recorded at its adjusted cost basis.
Property and equipment - Property and equipment are recorded at cost. Depreciation is computed using the straight-line method based upon the estimated
useful lives of the assets. The estimated useful lives of machinery, equipment, furniture, and fixtures are five years. Leasehold improvements are amortized over the lesser of the useful life of the asset or the remaining term of the lease.
Expenditures that materially increase the lives of assets are capitalized. The cost and related accumulated depreciation or amortization of property sold or retired are removed from the accounts and resulting gains or losses are included in
operations. Minor repairs and maintenance are charged to expense as incurred.
Deferred financing costs - The deferred financing costs were
incurred in the process of executing the related party notes payable (Note 8). The financing costs are amortized to interest expense over the five-year term of the notes using the effective interest method. Amortization expense was $128,171 and
$133,004 for the years ended December 31, 2013 and 2012, respectively.
Intangible assets - The Companys intangible assets
consist of trade names, developed technology, customer relationships, and a noncompete agreement. Amounts are subject to amortization on the straight-line basis over their estimated useful lives. Management assesses the carrying value of intangible
assets for potential impairment when an event occurs or circumstances change to suggest the carrying value of the assets may be greater than their fair value. Significant costs to renew or extend the term of certain intangible assets, primarily
trademarks, will be capitalized and recognized over the renewal term. Management has determined there is no impairment at December 31, 2013 and 2012.
Goodwill - Goodwill represents the excess of the cost of the Company over the fair value of the net assets at the date of acquisition. The Company
assesses qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill
impairment test. The Company evaluated qualitative factors in performing its annual goodwill impairment test for 2013 and 2012 and concluded that goodwill was not impaired. Significant events and circumstances taken into consideration in arriving at
this conclusion include the level of revenues and profitability since the Company was acquired.
Valuation of long-lived assets - Long-lived
assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Impairment is measured by comparing the carrying value of the long-lived assets to the estimated undiscounted
future cash flows expected to result from use of the assets and their ultimate disposition. In circumstances where impairment is determined to exist, the Company will write down the assets to their estimated fair value based on either the present
value of estimated expected future cash flows or the anticipated realizable market value.
9
SOG SPECIALTY KNIVES AND TOOLS, LLC
NOTES TO FINANCIAL STATEMENTS
Note 2 - Organization and Summary of Significant Accounting Policies (continued)
Members equity - Holdings is the sole member of the Company. Managers
appointed by Holdings manage the business and affairs of the Company. No member or manager shall be liable for the debts, obligations, or liabilities of the Company, solely by reason of being a member or acting as a manager. Holdings will receive
all profits and losses, receive all distributions, and have all the voting rights of the Company. During 2013, the Company repurchased 100 units from a member for a purchase price of $100,000.
Income taxes - The Company is a limited liability company (LLC) (taxable as a partnership for U.S. tax purposes). Accordingly, taxable income or loss
generated by its activities is reported on the tax returns of its members. Management evaluated the Companys tax positions and concluded that the Company had taken no uncertain tax positions that require adjustment to the financial statements.
With few exceptions, the Company is no longer subject to income tax examinations by the U.S. federal, state, or local tax authorities for years before 2010.
Revenue recognition - Revenue from the sale of the Companys products is recognized at time of transfer of title to the customer. Revenue is
reduced by amounts relating to promotional rebates, volume rebates, cash discounts, and returns. These sales incentives and promotions totaled approximately $1,231,780 and $904,259 for the years ended December 31, 2013 and 2012, respectively.
Revenue is presented net of applicable taxes.
Cost of goods sold - Cost of goods sold includes purchases, depreciation, changes in product
inventory, other production costs, and delivery costs. Other production costs include direct labor, overhead, repairs and maintenance, and supplies used in the production process.
Shipping and delivery - The Company incurs shipping and delivery costs in the delivery of products to its customers. These costs are completely
included in cost of goods sold for the year ended December 31, 2013. These costs were primarily included in the cost of goods sold with the exception of approximately $250,000 of certain warehouse handling costs and shipping supplies that are
included in general and administrative expenses for the year ended December 31, 2012. In certain circumstances, shipping and delivery costs are billed to and paid for by the customer, included as a component of net sales.
Operating expenses - Operating expenses consist primarily of compensation costs, amortization expense, expenses for rent, business and property taxes,
marketing, and other general operating expenses.
Advertising costs - The Company expenses advertising costs as they are incurred.
Advertising expense for the years ended December 31, 2013 and 2012, was $607,554 and $197,979, respectively. Additionally, the Company offers advertising rebate programs with customers whereby if a customer advertises Company-related products
and provides evidence of advertising, the Company provides certain incentives to the customers in the form of credits against future orders. The Company records the value of these credits in the year the advertising occurred and recognized total
expense related to these programs of $1,572,904 and $1,042,504 for the years ended December 31, 2013 and 2012, respectively.
10
SOG SPECIALTY KNIVES AND TOOLS, LLC
NOTES TO FINANCIAL STATEMENTS
Note 2 - Organization and Summary of Significant Accounting Policies (continued)
Management agreements - The Company entered into management agreements with each
of the majority members of Holdings on August 5, 2011, which require the Company to pay quarterly management fees equal to amounts ranging from $125,000 to $150,000, depending on trailing 12-month EBITDA (earnings before interest, taxes,
depreciation, and amortization). The agreement has a term of seven years, with an automatic one-year extension unless notice is given by the parties. Management fees for the years ended December 31, 2013 and 2012, were $500,000.
Product warranty - The Companys products are guaranteed against defects in workmanship and materials for the life of the original purchaser and
requires the replacement or repair of the products that meet the warranty terms. The Company estimates and accrues the cost of its warranties monthly. Estimates are based on historic data and projected costs. All other warranty expenses are
recognized in the period the replacement or repair occurs. The warranty costs and related warranty accrual as of and for the years ended December 31, 2013 and 2012, were not significant.
Subsequent events - Subsequent events are events or transactions that occur after the balance sheet date but before financial statements are available
to be issued. The Company recognizes in the financial statements the effects of all subsequent events that provide additional evidence about conditions that existed at the date of the balance sheet, including the estimates inherent in the process of
preparing the financial statements. The Companys financial statements do not recognize subsequent events that provide evidence about conditions that did not exist at the date of the balance sheet but arose after the balance sheet date and
before the consolidated financial statements are available to be issued.
The Company has evaluated subsequent events through May 12, 2014,
which is the date the financial statements are available to be issued. See Notes 6 and 8 for disclosure of significant subsequent events occurring after December 31, 2013.
Note 3 - Inventories
Inventories consist of the
following at December 31:
|
|
|
|
|
|
|
|
|
|
|
2013 |
|
|
2012 |
|
Raw materials |
|
$ |
2,114,788 |
|
|
$ |
2,909,302 |
|
Finished goods |
|
|
6,548,141 |
|
|
|
3,800,433 |
|
Inventories in transit |
|
|
1,012,296 |
|
|
|
332,930 |
|
Inventory reserves |
|
|
(50,000 |
) |
|
|
(50,000 |
) |
|
|
|
|
|
|
|
|
|
Total inventories |
|
$ |
9,625,225 |
|
|
$ |
6,992,665 |
|
|
|
|
|
|
|
|
|
|
11
SOG SPECIALTY KNIVES AND TOOLS, LLC
NOTES TO FINANCIAL STATEMENTS
Note 4 - Property and
Equipment
Property and equipment consist of the following at December 31, 2013:
|
|
|
|
|
|
|
|
|
|
|
2013 |
|
|
2012 |
|
Machinery and tooling |
|
$ |
966,224 |
|
|
$ |
670,722 |
|
Computer equipment and software |
|
|
298,055 |
|
|
|
241,988 |
|
Office equipment and other |
|
|
160,706 |
|
|
|
147,596 |
|
Transportation equipment |
|
|
8,238 |
|
|
|
8,238 |
|
|
|
|
|
|
|
|
|
|
|
|
|
1,433,223 |
|
|
|
1,068,544 |
|
Less accumulated depreciation and amortization |
|
|
(672,965 |
) |
|
|
(353,758 |
) |
|
|
|
|
|
|
|
|
|
Property and equipment, net |
|
$ |
760,258 |
|
|
$ |
714,786 |
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense on property and equipment for the years ended December 31, 2013 and 2012, was
$319,207 and $255,311, respectively.
Note 5 - Intangible Assets
Customer relationships - Customer relationships represent the estimated fair value of customer relationships obtained in business combinations. The
excess earnings method is considered by management to represent the fair value of customer relationships. The excess earnings look at projected discounted cash flows of the customer relationships, considering estimated attrition rates. Customer
relationships are being amortized over 25 years.
Developed technology - Developed technology represents the estimated fair value of
internally developed technology and designs incorporated in the products obtained in business acquisitions. The relief of royalty income method is considered by management to represent the fair value of the developed technology as it looks at the
income streams that would result if the technology was licensed from a third party. Developed technology is being amortized over 10 years.
Trade name - Trade name represent the estimated fair value of exclusive rights to specified registered trademarks, trade names, and domain names
obtained in business combinations. The relief of royalty income method and market information is considered by management to represent the fair value of these trademarks. Trade name is being amortized over 15 years.
Noncompete agreement - Noncompete agreement represents the estimated fair value of the noncompete agreement entered into during a business combination.
The estimated discounted cash flows of potential lost revenues in the absence of the noncompete agreement were considered by management to represent the fair value of the agreement. The noncompete agreement is being amortized over 3.5 years.
12
SOG SPECIALTY KNIVES AND TOOLS, LLC
NOTES TO FINANCIAL STATEMENTS
Note 5 - Intangible Assets (continued)
Definite-lived intangibles consist of the following at December 31, 2013 and 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2013 |
|
|
|
Weighted Average (Years) |
|
|
Cost |
|
|
Accumulated Amortization |
|
|
Net Cost |
|
Customer relationships |
|
|
25.0 |
|
|
$ |
6,809,722 |
|
|
$ |
(654,490 |
) |
|
$ |
6,155,232 |
|
Developed technology |
|
|
10.0 |
|
|
|
5,358,482 |
|
|
|
(1,287,524 |
) |
|
|
4,070,958 |
|
Trade name |
|
|
15.0 |
|
|
|
6,652,469 |
|
|
|
(1,065,627 |
) |
|
|
5,586,842 |
|
Noncompete agreement |
|
|
3.5 |
|
|
|
8,064 |
|
|
|
(5,536 |
) |
|
|
2,528 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
18,828,737 |
|
|
$ |
(3,013,177 |
) |
|
$ |
15,815,560 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2012 |
|
|
|
Weighted Average (Years) |
|
|
Cost |
|
|
Accumulated Amortization |
|
|
Net Cost |
|
Customer relationships |
|
|
25.0 |
|
|
$ |
6,809,722 |
|
|
$ |
(382,101 |
) |
|
$ |
6,427,621 |
|
Developed technology |
|
|
10.0 |
|
|
|
5,358,482 |
|
|
|
(751,676 |
) |
|
|
4,606,806 |
|
Trade name |
|
|
15.0 |
|
|
|
6,652,469 |
|
|
|
(622,129 |
) |
|
|
6,030,340 |
|
Noncompete agreement |
|
|
3.5 |
|
|
|
8,064 |
|
|
|
(3,232 |
) |
|
|
4,832 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
18,828,737 |
|
|
$ |
(1,759,138 |
) |
|
$ |
17,069,599 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense totaled $1,254,039 for the years ended December 31, 2013 and 2012, respectively.
Future amortization of definite-lived intangibles is expected to be recognized over a weighted-average period of 15 years and is as follows for future years
ending December 31 and thereafter:
|
|
|
|
|
2014 |
|
$ |
1,254,039 |
|
2015 |
|
|
1,251,959 |
|
2016 |
|
|
1,251,735 |
|
2017 |
|
|
1,251,735 |
|
2018 |
|
|
1,251,735 |
|
Thereafter |
|
|
9,554,357 |
|
|
|
|
|
|
|
|
$ |
15,815,560 |
|
|
|
|
|
|
13
SOG SPECIALTY KNIVES AND TOOLS, LLC
NOTES TO FINANCIAL STATEMENTS
Note 6 - Bank Line of
Credit
At December 31, 2013, and 2012, the Company had up to $7,500,000 available in a revolving credit line with a commercial bank. The
principal balance outstanding on the line of credit is limited to certain borrowing base requirements. The line of credit is subject to renewal July 2, 2015. The terms of the credit agreement require interest to accrue at the Alternate Base
Rate (3.25% at December 31, 2013, and 2012) plus 1% or the Eurodollar Rate (.1672% and .2108% at December 31, 2013 and 2012, respectively) plus 3%, and is paid monthly. The Company elects the interest rate option at the time the advance is
requested. The Alternate Base Rate is the higher of 1) the banks base commercial lending rate, 2) the Federal Funds Open Rate plus one-half of 1%, or 3) the daily LIBOR rate plus 1%. The Eurodollar Rate is based on the one-month LIBOR rate.
The line of credit is collateralized by essentially all assets of the Company. The loan is guaranteed by Holdings, who is a co-borrower on the loan. There was $4,474,106 and $5,604,135 outstanding under the line of credit as of December 31,
2013 and 2012, respectively, of which $474,106 was under the Alternate Base Rate and $4,000,000 was under the Eurodollar Rate as of December 31, 2013. The line-of-credit agreement contains certain financial covenants related to debt coverage
and EBITDA (as defined in the agreement).
Subsequent to December 31, 2013, the line of credit was amended to increase the availability to
$10,000,000, reduce certain borrowing base requirements, and extend the maturity date to July 2, 2017.
Note 7 - Capital Lease Obligations
The Company has two capital lease agreements for machinery and tooling related to the manufacture of the Companys products. Monthly payments
under the capital leases total $1,427, including interest at an implicit rate of 13%. Assets under capital leases are included in property and equipment were approximately $29,000 and $45,000, net of accumulated amortization, as of December 31,
2013 and 2012, respectively. These assets are amortized over the estimated useful lives.
Minimum payments under capital lease for future years ending
December 31 are as follows:
|
|
|
|
|
2014 |
|
$ |
17,129 |
|
2015 |
|
|
15,702 |
|
|
|
|
|
|
Total minimum lease payments |
|
|
32,831 |
|
Less amount representing interest |
|
|
4,198 |
|
|
|
|
|
|
Present value of capital lease payments |
|
|
28,633 |
|
Less current portion |
|
|
14,939 |
|
|
|
|
|
|
|
|
$ |
13,694 |
|
|
|
|
|
|
14
SOG SPECIALTY KNIVES AND TOOLS, LLC
NOTES TO FINANCIAL STATEMENTS
Note 8 -
Notes Payable to Related Party
The Company has two note agreements with a member of Holdings totaling $18,399,000, described as follows as of
December 31:
|
|
|
|
|
|
|
|
|
|
|
2013 |
|
|
2012 |
|
Term A note agreement with member of Holdings, maturing August 4, 2016; interest payable monthly commencing September 1,
2011, at a rate equal to the one-month LIBOR plus 11.25%, provided that in no event the interest be lower than 13.25%. On each interest payment date after December 31, 2012, and prior to maturity date, in lieu of payment of the interest in part
or whole, paid-in-kind may be made by adding such amount to the principal amount of the note. |
|
$ |
6,199,500 |
|
|
$ |
6,199,500 |
|
Term B note agreement with member of Holdings, maturing August 4, 2016; interest payable monthly commencing September 1,
2011, at a rate equal to the one-month LIBOR plus 12.75%, provided that in no event the interest be lower than 14.75%. On each interest payment date after December 31, 2012, and prior to maturity date, in lieu of payment of the interest in part
or whole, paid-in-kind may be made by adding such amount to the principal amount of the note. |
|
|
12,199,500 |
|
|
|
12,199,500 |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
18,399,000 |
|
|
$ |
18,399,000 |
|
|
|
|
|
|
|
|
|
|
The notes in the previous table were both issued on August 5, 2011. The principal amounts on both notes totaling
$18,399,000 are due in lump-sum payments on August 4, 2016. The note agreements stipulate that if the Company prepays any portion of the notes prior to the third anniversary of the notes, the Company would be required to pay a prepayment
penalty equal to a percentage of the principal repaid. The prepayment percentages are 3% prior to the first anniversary, 2% after the first anniversary but before the second anniversary, and 1% after the second anniversary but before the third
anniversary. No prepayments were made in 2012 or 2013. In addition, the note agreements stipulate upon change of control or prepayment of the amounts outstanding of Term A and Term B prior to maturity date, the Company would pay to the member an
exit fee in the amount equal to 3% per annum on the greater of the 1) Term A outstanding and $4,649,625 and 2) Term B outstanding and $9,149,625. The exit fee shall survive termination of the repayment of the obligations.
15
SOG SPECIALTY KNIVES AND TOOLS, LLC
NOTES TO FINANCIAL STATEMENTS
Note 8 - Notes Payable to Related Party (continued)
The agreement also allows for the election to make a payment on the exit fee in advance of a change of control. As of December 31, 2013, the management of
the Company committed to making an exit fee payment of $500,000, which is included in interest expense and accrued liabilities at December 31, 2013, and was paid to the notes holder subsequent to year-end. The notes holder has
applied the payment from the Company as a reduction to the exit fee due upon the change of control. After application of the $500,000 payment, there is approximately $832,000 of additional exit fees calculated through December 31, 2013, which
would be required to be paid out if a change of control event occurred. Because there has been no change of control event and the Company has not made an election to pay out this amount, this balance is not accrued as of December 31, 2013.
The note agreements limit capital expenditures and contain certain financial covenants for which the Company must comply related to EBITDA (as defined in the
agreements).
Subsequent to December 31, 2013, the maturity dates of the notes were extended to October 3, 2017 and certain covenants were
modified to be less restrictive.
Note 9 - Commitments
Operating leases - The Company leases the main facility from a member of Holdings. The lease agreement had an initial term maturing December 31,
2013, but was renewed by the Company for two years. This is the first of three additional consecutive period renewal options of two years each. Each renewal term will be on the same terms and conditions as the initial term, except that base rent
will equal 90% of fair market rent. Base rent for the year ending December 31, 2014, is $15,645 per month plus certain costs. Base rent for the year ending December 31, 2015, is $16,101 per month plus certain costs.
The Company also leases space from an unrelated entity. The lease agreement was entered into on January 1 2011, for one year, which automatically extends
for an additional year. The lease term rolls over to the next year and expires on December 31, 2013. The lease allows for annual renewals. The monthly base rent is $8,669 and $9,006 for 2013 and 2014, respectively.
At December 31, 2013, future minimum lease payments under the leases are as follows:
|
|
|
|
|
2014 |
|
$ |
320,214 |
|
2015 |
|
|
217,608 |
|
|
|
|
|
|
|
|
$ |
537,822 |
|
|
|
|
|
|
Total rent expenses under lease agreements for the years ended December 31, 2013 and 2012, were approximately $371,000
and $370,000, respectively.
16
SOG SPECIALTY KNIVES AND TOOLS, LLC
NOTES TO FINANCIAL STATEMENTS
Note 9 - Commitments (continued)
License agreements - The Company has several license agreements for which the Company is obligated to pay either a percentage of the sales price or a
set price per unit sold for every product sold that incorporates the patented design identified in the license agreements. The terms of the agreements run concurrent with the term of the underlying patents. License agreement expense under these
licenses for the years ended December 31, 2013 and 2012, was approximately $78,000 and $95,000, respectively.
Purchase commitments -
The Company purchases supplies for its products from various vendors. As of December 31, 2013 and 2012, respectively, the Company had outstanding purchase orders totaling approximately $7,311,000 and $5,450,000 for inventory on order and
expected to be received within the following year.
Note 10 - Fair Value Measurements
The Fair Value Measurements and Disclosures topic of the Accounting Standards Codification (ASC) applies to all assets and liabilities that are
being measured and reported on a fair value basis. It requires disclosure that establishes a framework for measuring fair value in generally accepted accounting practices, and expands disclosure about fair value measurements. This topic enables the
reader of the financial statements to assess the inputs used to develop those measurements by establishing a hierarchy for ranking the quality and reliability of the information used to determine fair values. The topic requires that assets and
liabilities carried at fair value be classified and disclosed in one of the following three categories:
Level 1 - Quoted
prices for identical assets and liabilities traded in active exchange markets, such as the New York Stock Exchange.
Level 2 -
Observable inputs other than Level 1, including quoted prices for similar assets or liabilities, quoted prices in less active markets, or other observable inputs that can be corroborated by observable market data. Level 2 also includes derivative
contracts whose value is determined using a pricing model with observable market inputs or that can be derived principally from or corroborated by observable market data.
Level 3 - Unobservable inputs supported by little or no market activity for financial instruments whose value is determined using
pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation. Level 3 also includes observable inputs for
nonbinding single dealer quotes not corroborated by observable market data.
The Companys accrued earnout liability is classified in accordance with
ASC 820 as a Level 3 liability because the amount is determined using a present value calculation using a probability-weighted analysis based on the expected achievement of factors related to the contingent payment. As discussed below, the
Level 3 liability has a fair value of zero at December 31, 2013 and 2012.
17
SOG SPECIALTY KNIVES AND TOOLS, LLC
NOTES TO FINANCIAL STATEMENTS
Note 10 - Fair Value Measurements (continued)
The accrued earnout liability consists of amounts recorded in connection with prior acquisitions. Two separate transactions had potential earnout payments of
$6,000,000 and $800,000, respectively. The amounts were originally recorded on the date of the prior acquisitions based on the present value of the contingent consideration liability and totaled $4.9 million and $250,000, respectively. During 2013,
there were no earnout payments made. During 2012, the Company paid $5,041,365 related to the earnout liabilities. As of December 31, 2012, management reassessed the fair value of the remaining liability based on updated expectations and
probability of the payment of the liability and recorded a decrease in the fair value of the accrued earnout liability of $633,000 to a fair value of zero. The remeasurement of the earnout liability decreased operating expenses by $633,000 for the
year ended December 31, 2012. There were no additional adjustments to the fair value during 2013 and all the earnouts expired as of December 31, 2013.
Note 11 - Employee Benefit Plan
The Company has a
qualified 401(k) and profit sharing plan (the Plan). The Plan is for eligible full-time employees who are over the age of 21, with at least one year of service. The participant must have at least 1,000 hours of service in a Plan year. The Company
may make discretionary contributions to the Plan. The Company made no discretionary profit sharing contributions to the Plan for the years ended December 31, 2013 and 2012.
Note 12 - Executive Unit Plan
In January 2012, Holdings
established an executive unit plan (the SOG Plan). The SOG Plan is for any employee, officer, director, manager, and/or consultant of the Company, pursuant to which awards of Holdings Class C units may be granted. The Class C units represent profit
interests of Holdings that only have value to the holders of the units after the fair market value of the units exceed a threshold value as defined in the LLC operating agreement. The total number of units available for awards is 1,905. During 2012,
1,713.5 units were granted and are outstanding. There were no units granted in 2013. The fair value of the awards was calculated using a discounted cash flow method to determine a future exit value. The fair value of the Class C units was then based
on the present value of the estimated distributions to the Class C unit holders calculated based on the terms of Holdings LLC operating agreement and the calculated future exit value. The total grant date fair value for the awards issued
during 2012 was determined to be approximately $616,000. The equity-based compensation related to the incentive units has been recorded on the statements of income of the Company as a component of operating expenses over the vesting term of the
awards. The awards generally vest over three to four years. Upon termination of service, any unvested units are cancelled. If a termination of service is for cause (as defined in the agreement), Holdings has the right to cancel all units, whether
vested or not. The Company recorded compensation expense of $250,482 and $139,141 in 2013 and 2012, respectively. At December 31, 2013 and 2012, respectively, there are 956 and 222 units vested.
18
SOG SPECIALTY KNIVES AND TOOLS, LLC
NOTES TO FINANCIAL STATEMENTS
Note 12 - Executive Unit Plan (continued)
Expected compensation expense for future years ending December 31 are as follows:
|
|
|
|
|
2014 |
|
$ |
120,000 |
|
2015 |
|
|
102,000 |
|
2016 |
|
|
4,000 |
|
|
|
|
|
|
|
|
$ |
226,000 |
|
|
|
|
|
|
19
|
|
|
|
|
Exhibit 2.s.9 |
The information in this prospectus supplement is not complete and may be changed. We may not sell
these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus supplement is not an offer to sell these securities and is not soliciting an offer to buy these securities in any state
where the offer or sale is not permitted.
Filed Pursuant to
Rule 497
Registration Statement No.
PROSPECTUS SUPPLEMENT
(To Prospectus
dated , 201 )
Shares of Common Stock
We are offering for sale shares of our common stock. Our common stock is traded on The
NASDAQ Global Select Market under the symbol GAIN. The last reported sale price for our common stock on , was
$ per share. The net asset value per share of our common stock at the close of business on , 201 was
$ per share.
|
|
|
|
|
|
|
|
|
|
|
Per Share |
|
|
Total (1) |
|
Public offering price |
|
$ |
|
|
|
$ |
|
|
Underwriting discounts and commissions |
|
$ |
|
|
|
$ |
|
|
Proceeds, before expenses, to us |
|
$ |
|
|
|
$ |
|
|
(1) |
The aggregate expenses of the offering are estimated to be $ , which represents approximately $ per
share. |
The underwriters may also purchase up to an additional shares of common stock from us at the public offering price,
less underwriting discounts and commissions, to cover over-allotments, if any, within 30 days after the date of this prospectus supplement. If the over-allotment option is exercised in full, our total proceeds, before expenses, would be $ and
the total underwriting discounts and commissions would be $ . The common shares will be ready for delivery on or
about , .
You should read this prospectus supplement and the accompanying prospectus before deciding whether to invest in our common stock and you
should retain them for future reference. Additional information about us, including our annual, quarterly and current reports, has been filed with the Securities and Exchange Commission. This information is available free of charge on our corporate
website at http://www.gladstoneinvestment.com.
An investment in our common stock involves certain risks, including, among other
things, risks relating to investments in securities of small, private and developing businesses. We describe some of these risks in the section entitled Risk Factors, which begins on page S-6 of this prospectus supplement and page 9 of
the accompanying prospectus. Shares of closed-end investment companies frequently trade at a discount to their net asset value and this may increase the risk of loss of purchasers of our common stock. You should carefully consider these risks
together with all of the other information contained in this prospectus supplement and the accompanying prospectus before making a decision to purchase our common stock.
The common stock being offered has not been approved or disapproved by the Securities and Exchange Commission or any state securities
commission nor has the Securities and Exchange Commission or any state securities commission passed upon the accuracy or adequacy of this prospectus supplement or the accompanying prospectus. Any representation to the contrary is a criminal offense.
, 201
S-1
We have not authorized any dealer, salesman or other person to give any information or to make
any representation other than those contained in this prospectus supplement or the accompanying prospectus. You must not rely upon any information or representation not contained in this prospectus supplement or the accompanying prospectus as if we
had authorized it. This prospectus supplement and the accompanying prospectus do not constitute an offer to sell or a solicitation of any offer to buy any security other than the registered securities to which they relate, nor do they constitute an
offer to sell or a solicitation of an offer to buy any securities in any jurisdiction to any person to whom it is unlawful to make such an offer or solicitation in such jurisdiction. The information contained in this prospectus supplement and any
accompanying prospectus is accurate as of the dates on their respective covers only. Our business, financial condition, results of operations and prospects may have changed since such dates.
TABLE OF CONTENTS
Prospectus Supplement
|
|
|
|
|
|
|
Page |
|
Table of Fees and Expenses |
|
|
S-3 |
|
Risk Factors |
|
|
S-5 |
|
Use of Proceeds |
|
|
S-5 |
|
Financial Highlights |
|
|
S-5 |
|
Price Range of Common Stock |
|
|
S-5 |
|
Plan of Distribution |
|
|
S-6 |
|
Legal Matters |
|
|
S-6 |
|
Prospectus
|
|
|
|
|
|
|
Page |
|
Prospectus Summary |
|
|
1 |
|
Fees and Expenses |
|
|
6 |
|
Additional Information |
|
|
8 |
|
Risk Factors |
|
|
9 |
|
Special Note Regarding Forward-Looking Statements |
|
|
26 |
|
Use of Proceeds |
|
|
26 |
|
Price Range of Common Stock and Distributions |
|
|
26 |
|
Ratios of Earnings to Combined Fixed Charges to Preferred Dividends |
|
|
28 |
|
Consolidated Selected Financial and Other Data |
|
|
29 |
|
Selected Quarterly Financial Data |
|
|
30 |
|
Managements Discussion and Analysis of Financial Condition and Results of Operations |
|
|
31 |
|
Sales of Common Stock Below Net Asset Value |
|
|
56 |
|
Senior Securities |
|
|
61 |
|
Business |
|
|
63 |
|
Portfolio Companies |
|
|
74 |
|
Management |
|
|
83 |
|
Control Persons and Principal Stockholders |
|
|
96 |
|
Dividend Reinvestment Plan |
|
|
98 |
|
Material U.S. Federal Income Tax Considerations |
|
|
99 |
|
Regulation as a Business Development Company |
|
|
101 |
|
Description of Our Securities |
|
|
104 |
|
Certain Provisions of Delaware Law and of Our Certificate of Incorporation and Bylaws |
|
|
108 |
|
Share Repurchases |
|
|
110 |
|
Plan of Distribution |
|
|
111 |
|
Custodian, Transfer and Dividend Paying Agent and Registrar |
|
|
112 |
|
Brokerage Allocation and Other Practices |
|
|
113 |
|
Proxy Voting Policies and Procedures |
|
|
113 |
|
Legal Matters |
|
|
114 |
|
Experts |
|
|
114 |
|
Financial Statements |
|
|
F-1 |
|
S-2
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
All statements contained in this prospectus supplement or the accompanying prospectus, other than historical facts, may constitute
forward-looking statements. These statements may relate to, among other things, future events or our future performance or financial condition. In some cases, you can identify forward-looking statements by terminology such as
may, might, believe, will, provided, anticipate, future, could, growth, plan, intend, expect,
should, would, if, seek, possible, potential, likely or the negative of such terms or comparable terminology. These forward-looking statements involve known and
unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or
implied by such forward-looking statements. Such factors include, among others: (1) further adverse changes in the economy and the capital markets; (2) risks associated with negotiation and consummation of pending and future transactions;
(3) the loss of one or more of our executive officers, in particular David Gladstone, Terry Lee Brubaker or David Dullum; (4) changes in our business strategy; (5) availability, terms and deployment of capital; (6) changes in our
industry, interest rates, exchange rates or the general economy; (7) the degree and nature of our competition; and (8) those factors described in the Risk Factors sections of this prospectus supplement and the accompanying
prospectus. We caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. 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 prospectus supplement. The forward-looking statements contained in this prospectus supplement or the accompanying prospectus are excluded from the safe harbor protection provided by
the Private Securities Litigation Reform Act of 1995 and Section 27A of the Securities Act.
FEES AND EXPENSES
The following table is intended to assist you in understanding the costs and expenses that an investor in this offering will bear directly or
indirectly. We caution you that some of the percentages indicated in the table below are estimates and may vary. Except where the context suggests otherwise, whenever this prospectus contains a reference to fees or expenses paid by us or
Gladstone Investment, or that we will pay fees or expenses, stockholders will indirectly bear such fees or expenses as investors in Gladstone Investment. The following percentages were calculated based on actual expenses
incurred in the year ended , and average net assets for the quarter ended
, .
|
|
|
|
|
Stockholder Transaction Expenses: |
|
|
|
|
Sales load (as a percentage of offering price) |
|
|
[ |
]% |
Offering expenses (as a percentage of offering price) |
|
|
[ |
]% |
Dividend reinvestment plan expenses(1) |
|
|
[ |
] |
Total stockholder transaction expenses |
|
|
[ |
]% |
Annual expenses (as a percentage of net assets attributable to common stock): |
|
|
|
|
Management fees(2) |
|
|
[ |
]% |
Incentive fees payable under investment advisory and management agreement (20% of realized capital gains and 20% of pre-incentive fee
net investment income)(3) |
|
|
[ |
]% |
Interest payments on borrowed funds(4) |
|
|
[ |
]% |
Other expenses(5) |
|
|
[ |
]% |
Total annual expenses (2)(5) |
|
|
[ |
]% |
(1) |
The expenses of the reinvestment plan are included in stock record expenses, a component of Other expenses. We do not have a cash purchase plan. The participants in the dividend reinvestment plan will bear a
pro rata share of brokerage commissions incurred with respect to open market purchases, if any. See Dividend Reinvestment Plan in the accompanying prospectus for information on the dividend reinvestment plan. |
(2) |
Our annual base management fee is 2% (0.5% quarterly) of our average gross assets, which are defined as total assets of Gladstone Investment, including investments made with proceeds of borrowings, less any uninvested
cash or cash equivalents resulting from borrowings. For the fiscal year ended , ,
our Adviser voluntarily agreed to waive the annual base management fee of 2% to [ ]% for those senior syndicated loans that we purchase using borrowings from our credit facility. However, because we held no senior syndicated
loans purchased using borrowings under our credit facility during the quarter ended ,
, the waiver did not impact our expenses for that period, as reflected in the table above. See Management Certain Transactions Investment Advisory and Management Agreement in
the accompanying prospectus and footnote 3 below. |
S-3
(3) |
The incentive fee consists of two parts: an income-based fee and a capital gains-based fee. The income-based fee is payable quarterly in arrears, and equals 20% of the excess, if any, of our pre-incentive fee net
investment income that exceeds a 1.75% quarterly ([ ]% annualized) hurdle rate of our net assets, subject to a catch-up provision measured as of the end of each calendar quarter. The catch-up provision
requires us to pay 100% of our pre-incentive fee net investment income with respect to that portion of such income, if any, that exceeds the hurdle rate but is less than 125% of the quarterly hurdle rate (or 2.1875%) in any calendar quarter (8.75%
annualized). The catch-up provision is meant to provide our Adviser with 20% of our pre-incentive fee net investment income as if a hurdle rate did not apply when our pre-incentive fee net investment income exceeds 125% of the quarterly hurdle rate
in any calendar quarter (8.75% annualized). The income-based incentive fee is computed and paid on income that may include interest that is accrued but not yet received in cash. Our pre-incentive fee net investment income used to calculate this part
of the income-based incentive fee is also included in the amount of our gross assets used to calculate the 2% base management fee (see footnote 2 above). The capital gains-based incentive fee equals 20% of our net realized capital gains since our
inception, if any, computed net of all realized capital losses and unrealized capital depreciation since our inception, less any prior payments, and is payable at the end of each fiscal year. |
Examples of how the incentive fee would be calculated are as follows:
|
|
|
Assuming pre-incentive fee net investment income of 0.55%, there would be no income-based incentive fee because such income would not exceed the hurdle rate of 1.75%. |
|
|
|
Assuming pre-incentive fee net investment income of 2.00%, the income-based incentive fee would be as follows: |
= 100% × (2.00% 1.75%)
= 0.25%
|
|
|
Assuming pre-incentive fee net investment income of 2.30%, the income-based incentive fee would be as follows: |
= (100% × (catch-up: 2.1875% 1.75%)) + (20% × (2.30% 2.1875%))
= (100% × 0.4375%) + (20% × 0.1125%)
= 0.4375% +
0.0225%
= 0.46%
|
|
|
Assuming net realized capital gains of 6% and realized capital losses and unrealized capital depreciation of 1%, the capital gains-based incentive fee would be as follows: |
= 20% × (6% 1%)
= 20% × 5%
= 1%
For a more detailed discussion of the
calculation of the two-part incentive fee, see Management Certain Transactions Investment Advisory and Management Agreement in the accompanying prospectus.
(4) |
Includes deferred financing costs. We entered into a revolving credit facility, effective ,
, under which our borrowing capacity is $[ ] million. We have drawn down on this credit facility and we expect to borrow additional funds in the future up
to an amount so that our asset coverage, as defined in the 1940 Act, is at least 200% after each issuance of our senior securities. Assuming that we borrowed $[ ] million at an interest rate of
[ ]% plus an additional fee related to borrowings of [ ]%, for an aggregate rate of [ ]%, interest payments and amortization of deferred financing costs on borrowed funds would
have been [ ]% of our average net assets for the quarter ended ,
. |
(5) |
Includes our overhead expenses, including payments under the administration agreement based on our projected allocable portion of overhead and other expenses incurred by our Administrator in performing its obligations
under the administration agreement. See Management Certain Transactions Administration Agreement in the accompanying prospectus. |
S-4
Example
The following examples demonstrate the projected dollar amount of total cumulative expenses that would be incurred over various periods with
respect to a hypothetical investment in our common stock. In calculating the following expense amounts, we have assumed that our annual operating expenses would remain at the levels set forth in the table above. The examples below and the expenses
in the table above should not be considered a representation of our future expenses, and actual expenses (including the cost of debt, incentive fees, if any, and other expenses) may be greater or less than those shown.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 Year |
|
|
3 Years |
|
|
5 Years |
|
|
10 Years |
|
You would pay the following expenses on a $1,000 investment: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
assuming a 5% annual return consisting entirely of ordinary income(1)(2) |
|
$ |
[ ] |
|
|
$ |
[ ] |
|
|
$ |
[ ] |
|
|
$ |
[ ] |
|
assuming a 5% annual return consisting entirely of capital gains(2)(3) |
|
$ |
[ ] |
|
|
$ |
[ ] |
|
|
$ |
[ ] |
|
|
$ |
[ ] |
|
(1) |
While the example assumes, as required by the SEC, a 5% annual return, our performance will vary and may result in a return greater or less than 5%. For purposes of this example, we have assumed that the entire amount
of such 5% annual return would constitute ordinary income as we have not historically realized positive capital gains (computed net of all realized capital losses) on our investments. Because the assumed 5% annual return is significantly below the
hurdle rate of 7% (annualized) that we must achieve under the investment advisory and management agreement to trigger the payment of an income-based incentive fee, we have assumed, for purposes of the this example, that no income-based incentive fee
would be payable if we realized a 5% annual return on our investments. |
(2) |
While the example assumes reinvestment of all dividends and distributions at NAV, participants in our dividend reinvestment plan will receive a number of shares of our common stock, determined by dividing the total
dollar amount of the dividend payable to a participant by the market price per share of our common stock at the close of trading on the valuation date for the dividend. See Dividend Reinvestment Plan in the accompanying prospectus for
additional information regarding our dividend reinvestment plan. |
(3) |
While the example assumes, as required by the SEC, a 5% annual return, our performance will vary and may result in a return greater or less than 5%. For purposes of this example, we have assumed that the entire amount
of such 5% annual return would constitute capital gains. |
RISK FACTORS
[To be provided.]
USE OF PROCEEDS
[To be provided.]
FINANCIAL HIGHLIGHTS
[To be provided.]
PRICE RANGE OF
COMMON STOCK AND DISTRIBUTIONS
We currently intend to distribute in the form of cash dividends, a minimum of 90% of our net ordinary
income and net short-term capital gains, if any, on a quarterly basis to our stockholders in the form of monthly dividends. We intend to retain long-term capital gains and treat them as deemed distributions for tax purposes. We report the estimated
tax characteristics of each distribution when declared while the actual tax characteristics of distributions are reported annually to each stockholder on IRS Form 1099 DIV. There is no assurance that we will achieve investment results or
maintain a tax status that will permit any specified level of cash distributions or year-to-year increases in cash distributions. At the option of a holder of record of common stock, all cash distributions can be reinvested automatically under our
dividend reinvestment plan in additional whole and fractional shares. A stockholder whose shares are held in the name of a broker or other nominee should contact the broker or nominee regarding participation in our dividend reinvestment plan on the
stockholders behalf. See [Risk Factors We will be subject to corporate-level tax if we are unable to satisfy Code requirements for RIC qualification;] Dividend Reinvestment Plan; and Material U.S. Federal
Income Tax Considerations in the accompanying prospectus.
S-5
Our common stock is quoted on The NASDAQ Global Select Market under the symbol GAIN.
Our common stock has historically traded at prices both above and below its net asset value. There can be no assurance, however, that any premium to net asset value will be attained or maintained. As of
, , we had [ ] stockholders of
record.
PLAN OF DISTRIBUTION
[To be
provided.]
LEGAL MATTERS
The legality of securities offered hereby will be passed upon for us by Bass, Berry & Sims PLC, Nashville, Tennessee. [Certain legal
matters will be passed upon for the underwriters by .]
S-6
Gladstone Investment Corporation
Shares of Common Stock
PROSPECTUS SUPPLEMENT
, 201
S-7
|
|
|
|
|
Exhibit 2.s.10 |
The information in this prospectus supplement is not complete and may be changed. We may not sell
these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus supplement is not an offer to sell these securities and is not soliciting an offer to buy these securities in any state
where the offer or sale is not permitted.
Filed Pursuant to Rule 497
Registration Statement No.
PROSPECTUS SUPPLEMENT
(To Prospectus
dated , 201 )
Shares
% Series [ ] Preferred Stock
Liquidation Preference $ per share
We are offering for sale shares of our Series Preferred Stock. Our common stock is traded on The NASDAQ Global Select Market under the symbol
GAIN. The last reported sale price for our common stock on , was $ per share. The net asset value per share of our common stock at the close of business on , 201 was $ per share. There currently is no market for the preferred
stock. We applied to list the preferred stock on [ ]. The expected trading symbol for the preferred stock is
[ ].
|
|
|
|
|
|
|
|
|
|
|
Per Share |
|
|
Total (1) |
|
Public offering price |
|
$ |
|
|
|
$ |
|
|
Underwriting discounts and commissions |
|
$ |
|
|
|
$ |
|
|
Proceeds, before expenses, to us |
|
$ |
|
|
|
$ |
|
|
(1) |
The aggregate expenses of the offering are estimated to be $ , which represents approximately $ per
share. |
The Underwriters are expected to deliver the Series Preferred Stock in book-entry form through the Depositary Trust
Company on or about .
You should read this prospectus supplement
and the accompanying prospectus before deciding whether to invest in our preferred stock and you should retain them for future reference. Additional information about us, including our annual, quarterly and current reports, has been filed with the
Securities and Exchange Commission. This information is available free of charge on our corporate website at http://www.gladstoneinvestment.com.
An investment in our preferred stock involves certain risks, including, among other things, risks relating to investments in securities of
small, private and developing businesses. We describe some of these risks in the section entitled Risk Factors, which begins on page P-5 of this prospectus supplement and page 9 of the accompanying prospectus. Shares of closed-end
investment companies frequently trade at a discount to their net asset value and this may increase the risk of loss of purchasers of our preferred stock. You should carefully consider these risks together with all of the other information contained
in this prospectus supplement and the accompanying prospectus before making a decision to purchase our preferred stock.
The
preferred stock being offered has not been approved or disapproved by the Securities and Exchange Commission or any state securities commission nor has the Securities and Exchange Commission or any state securities commission passed upon the
accuracy or adequacy of this prospectus supplement or the accompanying prospectus. Any representation to the contrary is a criminal offense.
, 201
We have not authorized any dealer, salesman or other person to give any information or to make
any representation other than those contained in this prospectus supplement or the accompanying prospectus. You must not rely upon any information or representation not contained in this prospectus supplement or the accompanying prospectus as if we
had authorized it. This prospectus supplement and the accompanying prospectus do not constitute an offer to sell or a solicitation of any offer to buy any security other than the registered securities to which they relate, nor do they constitute an
offer to sell or a solicitation of an offer to buy any securities in any jurisdiction to any person to whom it is unlawful to make such an offer or solicitation in such jurisdiction. The information contained in this prospectus supplement and any
accompanying prospectus is accurate as of the dates on their respective covers only. Our business, financial condition, results of operations and prospects may have changed since such dates.
TABLE OF CONTENTS
Prospectus Supplement
|
|
|
|
|
|
|
Page |
|
Terms of the Series [ ] Preferred Stock |
|
|
P-3 |
|
Risk Factors |
|
|
P-4 |
|
Use of Proceeds |
|
|
P-4 |
|
Capitalization |
|
|
P-4 |
|
Ratio of Earnings to Fixed Charges and Preferred Dividends |
|
|
P-4 |
|
Special Characteristics and Risks of the Series [ ] Preferred Stock |
|
|
P-4 |
|
Description of the Series [ ] Preferred Stock |
|
|
P-4 |
|
Taxation |
|
|
P-4 |
|
Underwriting |
|
|
P-4 |
|
Legal Matters |
|
|
P-4 |
|
Prospectus
|
|
|
|
|
|
|
Page |
|
Prospectus Summary |
|
|
1 |
|
Fees and Expenses |
|
|
6 |
|
Additional Information |
|
|
8 |
|
Risk Factors |
|
|
9 |
|
Special Note Regarding Forward-Looking Statements |
|
|
26 |
|
Use of Proceeds |
|
|
26 |
|
Price Range of Common Stock and Distributions |
|
|
26 |
|
Ratios of Earnings to Combined Fixed Charges and Preferred Dividends |
|
|
28 |
|
Consolidated Selected Financial and Other Data |
|
|
29 |
|
Selected Quarterly Financial Data |
|
|
30 |
|
Managements Discussion and Analysis of Financial Condition and Results of Operations |
|
|
31 |
|
Sales of Common Stock Below Net Asset Value |
|
|
56 |
|
Senior Securities |
|
|
61 |
|
Business |
|
|
63 |
|
Portfolio Companies |
|
|
74 |
|
Management |
|
|
83 |
|
Control Persons and Principal Stockholders |
|
|
96 |
|
Dividend Reinvestment Plan |
|
|
98 |
|
Material U.S. Federal Income Tax Considerations |
|
|
99 |
|
Regulation as a Business Development Company |
|
|
101 |
|
Description of Our Securities |
|
|
104 |
|
Certain Provisions of Delaware Law and of Our Certificate of Incorporation and Bylaws |
|
|
108 |
|
Share Repurchases |
|
|
110 |
|
Plan of Distribution |
|
|
111 |
|
Custodian, Transfer and Dividend Paying Agent and Registrar |
|
|
112 |
|
Brokerage Allocation and Other Practices |
|
|
113 |
|
Proxy Voting Policies and Procedures |
|
|
113 |
|
Legal Matters |
|
|
114 |
|
Experts |
|
|
114 |
|
Financial Statements |
|
|
F-1 |
|
P-2
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
All statements contained in this prospectus supplement or the accompanying prospectus, other than historical facts, may constitute
forward-looking statements. These statements may relate to, among other things, future events or our future performance or financial condition. In some cases, you can identify forward-looking statements by terminology such as
may, might, believe, will, provided, anticipate, future, could, growth, plan, intend, expect,
should, would, if, seek, possible, potential, likely or the negative of such terms or comparable terminology. These forward-looking statements involve known and
unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or
implied by such forward-looking statements. Such factors include, among others: (1) further adverse changes in the economy and the capital markets; (2) risks associated with negotiation and consummation of pending and future transactions;
(3) the loss of one or more of our executive officers, in particular David Gladstone, Terry Lee Brubaker or David Dullum; (4) changes in our business strategy; (5) availability, terms and deployment of capital; (6) changes in our
industry, interest rates, exchange rates or the general economy; (7) the degree and nature of our competition; and (8) those factors described in the Risk Factors sections of this prospectus supplement and the accompanying
prospectus. We caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. 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 prospectus supplement. The forward-looking statements contained in this prospectus supplement or the accompanying prospectus are excluded from the safe harbor protection provided by
the Private Securities Litigation Reform Act of 1995 and Section 27A of the Securities Act.
TERMS OF THE SERIES
[ ] PREFERRED STOCK
|
|
|
Dividend Rate |
|
The dividend rate will be %. |
|
|
Dividend Payment Rate |
|
[Dividends will be paid when, as and if declared
on , ,
, and ,
commencing .] The payment date for the initial dividend period will be
. ] |
|
|
Regular Dividend Period |
|
Regular dividend periods will be days. |
|
|
Liquidation Preference |
|
$ per share |
|
|
Non-Call Period |
|
The shares may not be called for redemption at the option of the Company prior to . |
|
|
Stock Exchange Listing |
|
|
P-3
RISK FACTORS
[To be provided.]
USE OF PROCEEDS
[To be provided.]
CAPITALIZATION
[To be provided.]
RATIO OF EARNINGS TO FIXED
CHARGES AND PREFERRED DIVIDENDS
[To be provided.]
DESCRIPTION OF THE SERIES [ ] PREFERRED STOCK
[To be provided.]
TAXATION
[To be provided.]
UNDERWRITING
[To be provided.]
LEGAL MATTERS
The legality of securities offered hereby will be passed upon for us by Bass, Berry & Sims PLC, Nashville, Tennessee. [Certain legal
matters will be passed upon for the underwriters by .]
P-4
Gladstone Investment Corporation
Shares
% Series [ ] Preferred Stock
(Liquidation Preference $ per share)
PROSPECTUS SUPPLEMENT
, 201
P-5
|
|
|
|
|
Exhibit 2.s.11 |
The information in this prospectus supplement is not complete and may be changed. We may not sell
these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus supplement is not an offer to sell these securities and is not soliciting an offer to buy these securities in any state
where the offer or sale is not permitted.
Filed Pursuant to Rule 497
Registration Statement No.
PROSPECTUS SUPPLEMENT
(To Prospectus
dated , 201 )
Rights
for Shares
Subscription Rights for Common Stock
Gladstone Investment Corporation, referred to as we, us, our or the Company, is issuing subscription rights, or Rights, to our common
stockholders to purchase additional shares of common stock.
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. When we invest in buyouts we do so with the management team of the portfolio
companies and with other buyout funds. We also sometimes 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, or BDC, under the Investment Company Act of 1940, as
amended, which we refer to as the 1940 Act. Our investment adviser is Gladstone Management Corporation, referred to as Adviser.
Our
common stock is traded on The NASDAQ Global Select Market under the symbol GAIN. The last reported sale price for our common stock on
, was $ per share. The net asset value per share of our common stock at the close of business
on , 201 was $ per share.
You should read this prospectus supplement and the accompanying prospectus before deciding whether to invest in our Rights and you should
retain them for future reference. Additional information about us, including our annual, quarterly and current reports, has been filed with the Securities and Exchange Commission. This information is available free of charge on our corporate website
at http://www.gladstoneinvestment.com.
Investing in common stock through Rights involves certain risks that are described in the
Risk Factors section beginning on page R-7 of this prospectus supplement and page 9 of the accompanying prospectus.
Stockholders who do not exercise their rights may, at the completion of the offering, own a smaller proportional interest in the Company
than if they exercised their rights. As a result of the offering you may experience dilution or accretion of the aggregate net asset value of your shares of common stock depending upon whether the Companys net asset value per share of common
stock is above or below the subscription price on the expiration date.
The Rights being offered have not been approved or
disapproved by the Securities and Exchange Commission or any state securities commission nor has the Securities and Exchange Commission or any state securities commission passed upon the accuracy or adequacy of this prospectus supplement or the
accompanying prospectus. Any representation to the contrary is a criminal offense.
|
|
|
|
|
|
|
|
|
|
|
Per Share |
|
|
Total |
|
Subscription price of Common Stock to shareholders exercising Rights |
|
$ |
|
|
|
$ |
|
|
Underwriting discounts and commissions |
|
$ |
|
|
|
$ |
|
|
Proceeds, before expenses, to us (1) |
|
$ |
|
|
|
$ |
|
|
(1) |
The aggregate expenses of the offering are estimated to be $ . |
The common stock is expected to be ready for delivery in book-entry form through the Depository Trust Company on or about
, 201 . If the offer is extended, the common stock is expected to be ready for delivery in book-entry form through the Depository Trust Company on or
about , 201 .
R-1
,
201
We have not authorized any dealer, salesman or other person to give any information or to make any
representation other than those contained in this prospectus supplement or the accompanying prospectus. You must not rely upon any information or representation not contained in this prospectus supplement or the accompanying prospectus as if we had
authorized it. This prospectus supplement and the accompanying prospectus do not constitute an offer to sell or a solicitation of any offer to buy any security other than the registered securities to which they relate, nor do they constitute an
offer to sell or a solicitation of an offer to buy any securities in any jurisdiction to any person to whom it is unlawful to make such an offer or solicitation in such jurisdiction. The information contained in this prospectus supplement and any
accompanying prospectus is accurate as of the dates on their respective covers only. Our business, financial condition, results of operations and prospects may have changed since such dates.
TABLE OF CONTENTS
Prospectus Supplement
|
|
|
|
|
|
|
Page |
|
Summary of the Terms of the Rights Offering |
|
|
R-4 |
|
Description of the Rights Offering |
|
|
R-5 |
|
Table of Fees and Expenses |
|
|
R-5 |
|
Risk Factors |
|
|
R-7 |
|
Use of Proceeds |
|
|
R-7 |
|
Capitalization |
|
|
R-7 |
|
Price Range of Common Stock |
|
|
R-7 |
|
Taxation |
|
|
R-7 |
|
Legal Matters |
|
|
R-7 |
|
Prospectus
|
|
|
|
|
|
|
Page |
|
Prospectus Summary |
|
|
1 |
|
Fees and Expenses |
|
|
6 |
|
Additional Information |
|
|
8 |
|
Risk Factors |
|
|
9 |
|
Special Note Regarding Forward-Looking Statements |
|
|
26 |
|
Use of Proceeds |
|
|
26 |
|
Price Range of Common Stock and Distributions |
|
|
26 |
|
Ratios of Earnings to Combined Fixed Charges and Preferred Dividends |
|
|
28 |
|
Consolidated Selected Financial and Other Data |
|
|
29 |
|
Selected Quarterly Financial Data |
|
|
30 |
|
Managements Discussion and Analysis of Financial Condition and Results of Operations |
|
|
31 |
|
Sales of Common Stock Below Net Asset Value |
|
|
56 |
|
Senior Securities |
|
|
61 |
|
Business |
|
|
63 |
|
Portfolio Companies |
|
|
74 |
|
Management |
|
|
83 |
|
Control Persons and Principal Stockholders |
|
|
96 |
|
Dividend Reinvestment Plan |
|
|
98 |
|
Material U.S. Federal Income Tax Considerations |
|
|
99 |
|
Regulation as a Business Development Company |
|
|
101 |
|
Description of Our Securities |
|
|
104 |
|
Certain Provisions of Delaware Law and of Our Certificate of Incorporation and Bylaws |
|
|
108 |
|
Share Repurchases |
|
|
110 |
|
Plan of Distribution |
|
|
111 |
|
Custodian, Transfer and Dividend Paying Agent and Registrar |
|
|
112 |
|
Brokerage Allocation and Other Practices |
|
|
113 |
|
Proxy Voting Policies and Procedures |
|
|
113 |
|
Legal Matters |
|
|
114 |
|
Experts |
|
|
114 |
|
Financial Statements |
|
|
F-1 |
|
R-2
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
All statements contained in this prospectus supplement or the accompanying prospectus, other than historical facts, may constitute
forward-looking statements. These statements may relate to, among other things, future events or our future performance or financial condition. In some cases, you can identify forward-looking statements by terminology such as
may, might, believe, will, provided, anticipate, future, could, growth, plan, intend, expect,
should, would, if, seek, possible, potential, likely or the negative of such terms or comparable terminology. These forward-looking statements involve known and
unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or
implied by such forward-looking statements. Such factors include, among others: (1) further adverse changes in the economy and the capital markets; (2) risks associated with negotiation and consummation of pending and future transactions;
(3) the loss of one or more of our executive officers, in particular David Gladstone, Terry Lee Brubaker or David Dullum; (4) changes in our business strategy; (5) availability, terms and deployment of capital; (6) changes in our
industry, interest rates, exchange rates or the general economy; (7) the degree and nature of our competition; and (8) those factors described in the Risk Factors sections of this prospectus supplement and the accompanying
prospectus. We caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. 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 prospectus supplement. The forward-looking statements contained in this prospectus supplement or the accompanying prospectus are excluded from the safe harbor protection provided by
the Private Securities Litigation Reform Act of 1995 and Section 27A of the Securities Act.
R-3
SUMMARY OF THE TERMS OF THE RIGHTS OFFERING
|
|
|
Terms of the Offer |
|
[To be provided.] |
|
|
Amount Available for Primary Subscription |
|
$[ ] |
|
|
Title |
|
Subscription Rights for common stock |
|
|
Subscription Price |
|
Rights may be exercised at a price of $ per share of common stock (the Subscription Price). See Description of the Rights Offering. |
|
|
Record Date |
|
Rights will be issued to holders of record of the Companys common stock on , 201 (the Record Date). See Description of the Rights
Offering. |
|
|
Number of Rights Issued |
|
Rights will be issued in respect of each share of common stock of the Company outstanding on the Record Date. See Description of the Rights Offering. |
|
|
Number of Rights Required to Purchase One Common Share |
|
A holder of Rights may purchase share of common stock of the Company for every Rights exercised. The number of Rights to be issued to a stockholder on the Record Date will be rounded up to the nearest
number of Rights evenly divisible by . See Description of the Rights Offering. |
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Over-Subscription Privilege |
|
[To be provided.] |
|
|
Transfer of Rights |
|
[To be provided.] |
|
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Subscription Period |
|
The Rights may be exercised at any time after issuance and prior to expiration of the Rights, which will be 5:00 PM Eastern Time on ,
201 (the Expiration Date) (the Subscription Period). See Description of the Rights Offering. |
|
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Offer Expenses |
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The expenses of the Offer are expected to be approximately $[ ]. See Use of Proceeds. |
|
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Sale of Rights |
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[To be provided.] |
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Use of Proceeds |
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The Company estimates the net proceeds of the Offer to be approximately $[ ]. This figure is based on the Subscription Price per share of
$ and assumes all new shares of common stock offered are sold and that the expenses related to the Offer estimated at approximately $[ ] are
paid. |
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|
The Company intends to use the net proceeds from this offering first to pay down existing short-term debt, then to make investments in small and mid-sized businesses in accordance with our investment objectives, with any
remaining proceeds to be used for other general corporate purposes. We anticipate that substantially all of the net proceeds of this offering will be utilized in the manner described above within three months of the completion of the offering.
Pending such utilization, we intend to invest the net proceeds of this offering primarily in cash, cash equivalents, U.S. government securities, and other high-quality debt investments that mature in one year or less from the date of investment,
consistent with the requirements for continued qualification as a RIC for federal income tax purposes. See Use of Proceeds. |
|
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Rights Agent |
|
[To be provided.] |
R-4
DESCRIPTION OF THE RIGHTS OFFERING
[To be provided.]
FEES AND EXPENSES
The following table is intended to assist you in understanding the costs and expenses that an investor in this offering will bear directly or
indirectly. We caution you that some of the percentages indicated in the table below are estimates and may vary. Except where the context suggests otherwise, whenever this prospectus contains a reference to fees or expenses paid by us or
Gladstone Investment, or that we will pay fees or expenses, stockholders will indirectly bear such fees or expenses as investors in Gladstone Investment. The following percentages were calculated based on actual expenses
incurred in the year ended
, and average net assets for the quarter
ended , .
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Stockholder Transaction Expenses: |
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Sales load (as a percentage of offering price) |
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[ |
]% |
Offering expenses (as a percentage of offering price) |
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[ |
]% |
Dividend reinvestment plan expenses(1) |
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[ |
] |
Total stockholder transaction expenses |
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[ |
]% |
Annual expenses (as a percentage of net assets attributable to common stock): |
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|
Management fees(2) |
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[ |
]% |
Incentive fees payable under investment advisory and management agreement (20% of realized capital gains and 20% of pre-incentive fee
net investment income)(3) |
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[ |
]% |
Interest payments on borrowed funds(4) |
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[ |
]% |
Other expenses(5) |
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[ |
]% |
Total annual expenses(2)(5) |
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[ |
]% |
(1) |
The expenses of the reinvestment plan are included in stock record expenses, a component of Other expenses. We do not have a cash purchase plan. The participants in the dividend reinvestment plan will bear a
pro rata share of brokerage commissions incurred with respect to open market purchases, if any. See Dividend Reinvestment Plan in the accompanying prospectus for information on the dividend reinvestment plan. |
(2) |
Our annual base management fee is 2% (0.5% quarterly) of our average gross assets, which are defined as total assets of Gladstone Investment, including investments made with proceeds of borrowings, less any uninvested
cash or cash equivalents resulting from borrowings. For the fiscal year ended
, , our Adviser voluntarily agreed to waive the annual base management fee of 2% to
[ ]% for those senior syndicated loans that we purchase using borrowings from our credit facility. However, because we held no senior syndicated loans purchased using borrowings under our credit
facility during the quarter ended
, , the waiver did not impact our expenses for that period, as reflected in the table above. See Management Certain
Transactions Investment Advisory and Management Agreement in the accompanying prospectus and footnote 3 below. |
(3) |
The incentive fee consists of two parts: an income-based fee and a capital gains-based fee. The income-based fee is payable quarterly in arrears, and equals 20% of the excess, if any, of our pre-incentive fee net
investment income that exceeds a 1.75% quarterly ([ ]% annualized) hurdle rate of our net assets, subject to a catch-up provision measured as of the end of each calendar quarter. The
catch-up provision requires us to pay 100% of our pre-incentive fee net investment income with respect to that portion of such income, if any, that exceeds the hurdle rate but is less than 125% of the quarterly hurdle rate (or 2.1875%)
in any calendar quarter (8.75% annualized). The catch-up provision is meant to provide our Adviser with 20% of our pre-incentive fee net investment income as if a hurdle rate did not apply when our pre-incentive fee net investment income exceeds
125% of the quarterly hurdle rate in any calendar quarter (8.75% annualized). The income-based incentive fee is computed and paid on income that may include interest that is accrued but not yet received in cash. Our pre-incentive fee net investment
income used to calculate this part of the income-based incentive fee is also included in the amount of our gross assets used to calculate the 2% base management fee (see footnote 2 above). The capital gains-based incentive fee equals 20% of our net
realized capital gains since our inception, if any, computed net of all realized capital losses and unrealized capital depreciation since our inception, less any prior payments, and is payable at the end of each fiscal year. |
Examples of how the incentive fee would be calculated are as follows:
|
|
|
Assuming pre-incentive fee net investment income of 0.55%, there would be no income-based incentive fee because such income would not exceed the hurdle rate of 1.75%. |
R-5
|
|
|
Assuming pre-incentive fee net investment income of 2.00%, the income-based incentive fee would be as follows: |
= 100% × (2.00% 1.75%)
= 0.25%
|
|
|
Assuming pre-incentive fee net investment income of 2.30%, the income-based incentive fee would be as follows: |
= (100% × (catch-up: 2.1875% 1.75%)) + (20%× (2.30% 2.1875%))
= (100% × 0.4375%) + (20% × 0.1125%)
= 0.4375% +
0.0225%
= 0.46%
|
|
|
Assuming net realized capital gains of 6% and realized capital losses and unrealized capital depreciation of 1%, the capital gains-based incentive fee would be as follows: |
= 20% × (6% 1%)
= 20% × 5%
= 1%
For a more detailed discussion of the
calculation of the two-part incentive fee, see Management Certain Transactions Investment Advisory and Management Agreement in the accompanying prospectus.
(4) |
Includes deferred financing costs. We entered into a revolving credit facility, effective ,
, under which our borrowing capacity is $[ ] million. We have drawn down on this
credit facility and we expect to borrow additional funds in the future up to an amount so that our asset coverage, as defined in the 1940 Act, is at least 200% after each issuance of our senior securities. Assuming that we borrowed
$[ ] million at an interest rate of [ ]% plus an additional fee related to borrowings of [ ]%, for an
aggregate rate of [ ]%, interest payments and amortization of deferred financing costs on borrowed funds would have been [ ]% of our average net assets for
the quarter ended , . |
(5) |
Includes our overhead expenses, including payments under the administration agreement based on our projected allocable portion of overhead and other expenses incurred by our Administrator in performing its obligations
under the administration agreement. See Management Certain Transactions Administration Agreement in the accompanying prospectus. |
Example
The following examples
demonstrate the projected dollar amount of total cumulative expenses that would be incurred over various periods with respect to a hypothetical investment in our common stock. In calculating the following expense amounts, we have assumed that our
annual operating expenses would remain at the levels set forth in the table above. The examples below and the expenses in the table above should not be considered a representation of our future expenses, and actual expenses (including the cost of
debt, incentive fees, if any, and other expenses) may be greater or less than those shown.
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1 Year |
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3 Years |
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5 Years |
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10 Years |
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You would pay the following expenses on a $1,000 investment: |
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|
assuming a 5% annual return consisting entirely of ordinary income(1)(2) |
|
$ |
[ ] |
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|
$ |
[ ] |
|
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$ |
[ ] |
|
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$ |
[ ] |
|
assuming a 5% annual return consisting entirely of capital gains(2)(3) |
|
$ |
[ ] |
|
|
$ |
[ ] |
|
|
$ |
[ ] |
|
|
$ |
[ ] |
|
(1) |
While the example assumes, as required by the SEC, a 5% annual return, our performance will vary and may result in a return greater or less than 5%. For purposes of this example, we have assumed that the entire amount
of such 5% annual return would constitute ordinary income as we have not historically realized positive capital gains (computed net of all realized capital losses) on our investments. Because the assumed 5% annual return is significantly below the
hurdle rate of 7% (annualized) that we must achieve under the investment advisory and management agreement to trigger the payment of an income-based incentive fee, we have assumed, for purposes of the this example, that no income-based incentive fee
would be payable if we realized a 5% annual return on our investments. |
R-6
(2) |
While the example assumes reinvestment of all dividends and distributions at NAV, participants in our dividend reinvestment plan will receive a number of shares of our common stock, determined by dividing the total
dollar amount of the dividend payable to a participant by the market price per share of our common stock at the close of trading on the valuation date for the dividend. See Dividend Reinvestment Plan in the accompanying prospectus for
additional information regarding our dividend reinvestment plan. |
(3) |
While the example assumes, as required by the SEC, a 5% annual return, our performance will vary and may result in a return greater or less than 5%. For purposes of this example, we have assumed that the entire amount
of such 5% annual return would constitute capital gains. |
RISK FACTORS
[To be provided.]
USE OF PROCEEDS
[To be provided.]
CAPITALIZATION
[To be provided.]
PRICE RANGE OF COMMON
STOCK AND DISTRIBUTIONS
We currently intend to distribute in the form of cash dividends, a minimum of 90% of our net ordinary income
and net short-term capital gains, if any, on a quarterly basis to our stockholders in the form of monthly dividends. We intend to retain long-term capital gains and treat them as deemed distributions for tax purposes. We report the estimated tax
characteristics of each distribution when declared while the actual tax characteristics of distributions are reported annually to each stockholder on IRS Form 1099 DIV. There is no assurance that we will achieve investment results or
maintain a tax status that will permit any specified level of cash distributions or year-to-year increases in cash distributions. At the option of a holder of record of common stock, all cash distributions can be reinvested automatically under our
dividend reinvestment plan in additional whole and fractional shares. A stockholder whose shares are held in the name of a broker or other nominee should contact the broker or nominee regarding participation in our dividend reinvestment plan on the
stockholders behalf. See Risk Factors We will be subject to corporate-level tax if we are unable to satisfy Code requirements for RIC qualification; Dividend Reinvestment Plan; and Material U.S. Federal
Income Tax Considerations in the accompanying prospectus.
Our common stock is quoted on The NASDAQ Global Select Market under the
symbol GAIN. Our common stock has historically traded at prices both above and below its net asset value. There can be no assurance, however, that any premium to net asset value will be attained or maintained. As of
, , we had [ ] stockholders of record.
TAXATION
[To be provided.]
LEGAL MATTERS
The
legality of securities offered hereby will be passed upon for us by Bass, Berry & Sims PLC, Nashville, Tennessee. [Certain legal matters will be passed upon for the underwriters by
.]
R-7
Gladstone Investment Corporation
Shares of Common Stock
Issuable Upon Exercise of Rights to
Subscribe for Such Shares of Common Stock
PROSPECTUS SUPPLEMENT
, 201
R-8
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Exhibit 2.s.12 |
The information in this prospectus supplement is not complete and may be changed. We may not sell
these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus supplement is not an offer to sell these securities and is not soliciting an offer to buy these securities in any state
where the offer or sale is not permitted.
Filed Pursuant to Rule 497
Registration Statement No.
PROSPECTUS SUPPLEMENT
(To Prospectus
dated , 201 )
Rights
for Shares
Subscription Rights for % Series
[ ] Preferred Stock
Gladstone Investment Corporation, referred to as we, us,
our or the Company, is issuing subscription rights, or Rights, to our common stockholders to purchase shares of % Series [ ] Preferred Stock, referred to
as the Series [ ] Preferred Stock.
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. When we invest in buyouts we do so with the
management team of the portfolio companies and with other buyout funds. We also sometimes 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, or BDC, under the Investment
Company Act of 1940, as amended, which we refer to as the 1940 Act. Our investment adviser is Gladstone Management Corporation, referred to as Adviser.
Our common stock is traded on The NASDAQ Global Select Market under the symbol GAIN. The last reported sale price for our common stock
on , was $ per share. The net asset value of our common shares at the close of
business on , 201 was $ per share. There currently is no market for the preferred stock. We applied to
list the preferred stock on [ ]. The expected trading symbol for the preferred stock is [ ].
You should read this prospectus supplement and the accompanying prospectus before deciding whether to invest in our Rights and you should
retain them for future reference. Additional information about us, including our annual, quarterly and current reports, has been filed with the Securities and Exchange Commission. This information is available free of charge on our corporate website
at http://www.gladstoneinvestment.com.
Investing in preferred stock through Rights involves certain risks that are described in the
Risk Factors section beginning on page PR-6 of this prospectus supplement and page 9 of the accompanying prospectus.
The Rights being offered have not been approved or disapproved by the Securities and Exchange Commission or any state securities commission
nor has the Securities and Exchange Commission or any state securities commission passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.
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Per Share |
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Total |
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Subscription price of Preferred Stock to shareholders exercising Rights |
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$ |
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$ |
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Underwriting discounts and commissions |
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$ |
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$ |
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Proceeds, before expenses, to us (1) |
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$ |
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$ |
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(1) |
The aggregate expenses of the offering are estimated to be $[ ]. |
The preferred stock is expected to be ready for delivery in book-entry form through the Depository Trust Company on or about
, 201 . If the offer is extended, the preferred stock is expected to be ready for delivery in book-entry form through the Depository Trust Company on or
about , 201 .
, 201
PR-1
We have not authorized any dealer, salesman or other person to give any information or to make
any representation other than those contained in this prospectus supplement or the accompanying prospectus. You must not rely upon any information or representation not contained in this prospectus supplement or the accompanying prospectus as if we
had authorized it. This prospectus supplement and the accompanying prospectus do not constitute an offer to sell or a solicitation of any offer to buy any security other than the registered securities to which they relate, nor do they constitute an
offer to sell or a solicitation of an offer to buy any securities in any jurisdiction to any person to whom it is unlawful to make such an offer or solicitation in such jurisdiction. The information contained in this prospectus supplement and any
accompanying prospectus is accurate as of the dates on their respective covers only. Our business, financial condition, results of operations and prospects may have changed since such dates.
TABLE OF CONTENTS
Prospectus Supplement
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Page |
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Summary of the Terms of the Rights Offering |
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PR-4 |
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Terms of the Series [ ] Preferred Stock |
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PR-4 |
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Description of the Rights Offering |
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PR-5 |
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Risk Factors |
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PR-5 |
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Use of Proceeds |
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PR-5 |
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Capitalization |
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PR-5 |
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Ratio of Earnings to Fixed Charges and Preferred Dividends |
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PR-5 |
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Taxation |
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PR-5 |
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Underwriting |
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PR-5 |
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Legal Matters |
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PR-5 |
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Prospectus
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Page |
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Prospectus Summary |
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1 |
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Fees and Expenses |
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6 |
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Additional Information |
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8 |
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Risk Factors |
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9 |
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Special Note Regarding Forward-Looking Statements |
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26 |
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Use of Proceeds |
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26 |
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Price Range of Common Stock and Distributions |
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26 |
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Ratios of Earnings to Combined Fixed Charges and Preferred Dividends |
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28 |
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Consolidated Selected Financial and Other Data |
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29 |
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Selected Quarterly Financial Data |
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30 |
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Managements Discussion and Analysis of Financial Condition and Results of Operations |
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31 |
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Sales of Common Stock Below Net Asset Value |
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56 |
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Senior Securities |
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61 |
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Business |
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63 |
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Portfolio Companies |
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74 |
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Management |
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83 |
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Control Persons and Principal Stockholders |
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96 |
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Dividend Reinvestment Plan |
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98 |
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Material U.S. Federal Income Tax Considerations |
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99 |
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Regulation as a Business Development Company |
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101 |
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Description of Our Securities |
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104 |
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Certain Provisions of Delaware Law and of Our Certificate of Incorporation and Bylaws |
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108 |
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Share Repurchases |
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110 |
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Plan of Distribution |
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111 |
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Custodian, Transfer and Dividend Paying Agent and Registrar |
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112 |
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Brokerage Allocation and Other Practices |
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113 |
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Proxy Voting Policies and Procedures |
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113 |
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Legal Matters |
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114 |
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Experts |
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114 |
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Financial Statements |
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F-1 |
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PR-2
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
All statements contained in this prospectus supplement or the accompanying prospectus, other than historical facts, may constitute
forward-looking statements. These statements may relate to, among other things, future events or our future performance or financial condition. In some cases, you can identify forward-looking statements by terminology such as
may, might, believe, will, provided, anticipate, future, could, growth, plan, intend, expect,
should, would, if, seek, possible, potential, likely or the negative of such terms or comparable terminology. These forward-looking statements involve known and
unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or
implied by such forward-looking statements. Such factors include, among others: (1) further adverse changes in the economy and the capital markets; (2) risks associated with negotiation and consummation of pending and future transactions;
(3) the loss of one or more of our executive officers, in particular David Gladstone, Terry Lee Brubaker or David Dullum; (4) changes in our business strategy; (5) availability, terms and deployment of capital; (6) changes in our
industry, interest rates, exchange rates or the general economy; (7) the degree and nature of our competition; and (8) those factors described in the Risk Factors sections of this prospectus supplement and the accompanying
prospectus. We caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. 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 prospectus supplement. The forward-looking statements contained in this prospectus supplement or the accompanying prospectus are excluded from the safe harbor protection provided by
the Private Securities Litigation Reform Act of 1995 and Section 27A of the Securities Act.
PR-3
SUMMARY OF THE TERMS OF THE RIGHTS OFFERING
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Terms of the Offer |
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[To be provided.] |
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Amount Available for Primary Subscription |
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$[ ] |
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Title |
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Subscription Rights for Series [ ] preferred stock |
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Exercise Price |
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Rights may be exercised at a price of $ per share of common stock (the Subscription Price). See Description of the Rights Offering. |
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Record Date |
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Rights will be issued to holders of record of the Companys common stock on , 201 (the Record Date). See
Description of the Rights Offering. |
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Number of Rights Issued |
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Rights will be issued in respect of each share of preferred stock of the Company outstanding on the Record Date. See Description of the Rights
Offering. |
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Number of Rights Required to Purchase One Preferred Share |
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A holder of Rights may purchase share of common stock of the
Company for every Rights exercised. The number of Rights to be issued to a stockholder on the Record Date will be rounded up to the nearest number of Rights evenly divisible by .
See Description of the Rights Offering. |
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Over-Subscription Privilege |
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[To be provided.] |
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Transfer of Rights |
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[To be provided.] |
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Exercise Period |
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The Rights may be exercised at any time after issuance and prior to expiration of the Rights, which will be 5:00 PM Eastern Time on ,
201 (the Expiration Date) (the Subscription Period). See Description of the Rights Offering. |
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Offer Expenses |
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The expenses of the Offer are expected to be approximately $[ ]. See Use of Proceeds. |
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Sale of Rights |
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[To be provided.] |
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Use of Proceeds |
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The Company estimates the net proceeds of the Offer to be approximately $[ ]. This figure is based on the Exercise Price per share of
$ and assumes all new shares of Series [ ] preferred stock offered are sold and that the expenses related to the Offer estimated
at approximately $[ ] are paid. |
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The Company intends to use the net proceeds from this offering first to pay down existing short-term debt, then to make investments in small and mid-sized businesses in accordance with our investment objectives, with any
remaining proceeds to be used for other general corporate purposes. We anticipate that substantially all of the net proceeds of this offering will be utilized in the manner described above within three months of the completion of the offering.
Pending such utilization, we intend to invest the net proceeds of this offering primarily in cash, cash equivalents, U.S. government securities, and other high-quality debt investments that mature in one year or less from the date of investment,
consistent with the requirements for continued qualification as a RIC for federal income tax purposes. See Use of Proceeds. |
|
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Rights Agent |
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[To be provided.] |
TERMS OF THE SERIES [ ] PREFERRED
STOCK
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Dividend Rate |
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The dividend rate will be %. |
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Dividend Payment Rate |
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[Dividends will be paid when, as and if declared on , ,
, and , commencing .] The payment date for the initial
dividend period will be .] |
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Regular Dividend Period |
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Regular dividend periods will be days. |
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Liquidation Preference |
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$ per share |
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Non-Call Period |
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The shares may not be called for redemption at the option of the Company prior to . |
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Stock Exchange Listing |
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PR-4
DESCRIPTION OF THE RIGHTS OFFERING
[To be provided.]
RISK FACTORS
[To be provided.]
USE OF PROCEEDS
We intend to use the net proceeds from this offering first to pay down existing short-term debt, then to make investments in small and
mid-sized businesses in accordance with our investment objectives, with any remaining proceeds to be used for other general corporate purposes. Indebtedness under our credit line facility currently accrues interest at the rate of approximately
[ ]% and matures on , . We anticipate that substantially all of the net proceeds of this offering will be
utilized in the manner described above within three months of the completion of the offering. Pending such utilization, we intend to invest the net proceeds of this offering primarily in cash, cash equivalents, U.S. government securities, and other
high-quality debt investments that mature in one year or less from the date of investment, consistent with the requirements for continued qualification as a RIC for federal income tax purposes.
CAPITALIZATION
[To be provided.]
RATIO OF EARNINGS TO FIXED CHARGES AND PREFERRED DIVIDENDS
[To be provided.]
TAXATION
[To be provided.]
UNDERWRITING
[To be provided.]
LEGAL MATTERS
The legality of securities offered hereby will be passed upon for us by Bass, Berry & Sims PLC, Nashville, Tennessee. [Certain legal
matters will be passed upon for the underwriters by .]
PR-5
Gladstone Investment Corporation
Shares of % Series [ ] Preferred Stock
Issuable Upon Exercise of Rights to
Subscribe for Such Shares of Preferred Stock
PROSPECTUS SUPPLEMENT
, 201
PR-6
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Exhibit 2.s.13 |
|
The information in this prospectus supplement is not complete and may be changed. We may not
sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus supplement is not an offer to sell these securities and is not soliciting an offer to buy these securities
in any state where the offer or sale is not permitted. |
Filed Pursuant to Rule 497
Registration Statement No.
PROSPECTUS SUPPLEMENT
(To Prospectus dated
, 201 )
% Notes due
,
We are
offering promissory notes in an aggregate principal amount of $ , which we refer to as the Notes in this prospectus supplement. Our common stock is traded on The NASDAQ Global Select Market under the
symbol GAIN. The last reported sale price for our common stock on , was
$ per share. The net asset value per share of our common stock at the close of business on , 201 was
$ per share.
You should read this prospectus supplement and the accompanying prospectus
before deciding whether to invest in our Notes and you should retain them for future reference. Additional information about us, including our annual, quarterly and current reports, has been filed with the Securities and Exchange Commission. This
information is available free of charge on our corporate website at http://www.gladstoneinvestment.com.
An investment in our Notes
involves certain risks, including, among other things, risks relating to investments in securities of small, private and developing businesses. We describe some of these risks in the section entitled Risk Factors, which begins on page
N-5 of this prospectus supplement and page 9 of the accompanying prospectus. Shares of closed-end investment companies frequently trade at a discount to their net asset value and this may increase the risk of loss of purchasers of our Notes. You
should carefully consider these risks together with all of the other information contained in this prospectus supplement and the accompanying prospectus before making a decision to purchase our Notes.
The Notes do not represent a deposit or obligation of, and are not guaranteed or endorsed by, any bank or other insured depository
institution, and are not federally insured by the Federal Deposit Insurance Corporation, the Federal Reserve Board or any other government agency.
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|
|
|
Per Note |
|
|
Total |
|
Public offering price |
|
$ |
|
|
|
$ |
|
|
Sales load |
|
$ |
|
|
|
$ |
|
|
Proceeds to us (before expenses) (1) |
|
$ |
|
|
|
$ |
|
|
(1) |
Does not include offering expenses payable to us estimated to be $ . |
The Notes will be ready for delivery on or about , 201 .
, 201
We have not authorized
any dealer, salesman or other person to give any information or to make any representation other than those contained in this prospectus supplement or the accompanying prospectus. You must not rely upon any information or representation not
contained in this prospectus supplement or the accompanying prospectus as if we had authorized it. This prospectus supplement and the accompanying prospectus do not constitute an offer to sell or a solicitation of any offer to buy any security other
than the registered securities to which they relate, nor do they constitute an offer to sell or a solicitation of an offer to buy any securities in any jurisdiction to any person to whom it is unlawful to make such an offer or solicitation in such
jurisdiction. The information contained in this prospectus supplement and any accompanying prospectus is accurate as of the dates on their respective covers only. Our business, financial condition, results of operations and prospects may have
changed since such dates.
N-1
TABLE OF CONTENTS
Prospectus Supplement
|
|
|
|
|
|
|
Page |
|
Terms of the Notes |
|
|
N-3 |
|
Risk Factors |
|
|
N-4 |
|
Use of Proceeds |
|
|
N-4 |
|
Capitalization |
|
|
N-4 |
|
Ratio of Earnings to Fixed Charges and Preferred Dividends |
|
|
N-4 |
|
Taxation |
|
|
N-4 |
|
Underwriting |
|
|
N-4 |
|
Legal Matters |
|
|
N-4 |
|
Prospectus
|
|
|
|
|
|
|
Page |
|
Prospectus Summary |
|
|
1 |
|
Fees and Expenses |
|
|
6 |
|
Additional Information |
|
|
8 |
|
Risk Factors |
|
|
9 |
|
Special Note Regarding Forward-Looking Statements |
|
|
26 |
|
Use of Proceeds |
|
|
26 |
|
Price Range of Common Stock and Distributions |
|
|
26 |
|
Ratios of Earnings to Combined Fixed Charges and Preferred Dividends |
|
|
28 |
|
Consolidated Selected Financial and Other Data |
|
|
29 |
|
Selected Quarterly Financial Data |
|
|
30 |
|
Managements Discussion and Analysis of Financial Condition and Results of Operations |
|
|
31 |
|
Sales of Common Stock Below Net Asset Value |
|
|
56 |
|
Senior Securities |
|
|
61 |
|
Business |
|
|
63 |
|
Portfolio Companies |
|
|
74 |
|
Management |
|
|
83 |
|
Control Persons and Principal Stockholders |
|
|
96 |
|
Dividend Reinvestment Plan |
|
|
98 |
|
Material U.S. Federal Income Tax Considerations |
|
|
99 |
|
Regulation as a Business Development Company |
|
|
101 |
|
Description of Our Securities |
|
|
104 |
|
Certain Provisions of Delaware Law and of Our Certificate of Incorporation and Bylaws |
|
|
108 |
|
Share Repurchases |
|
|
110 |
|
Plan of Distribution |
|
|
111 |
|
Custodian, Transfer and Dividend Paying Agent and Registrar |
|
|
112 |
|
Brokerage Allocation and Other Practices |
|
|
113 |
|
Proxy Voting Policies and Procedures |
|
|
113 |
|
Legal Matters |
|
|
114 |
|
Experts |
|
|
114 |
|
Financial Statements |
|
|
F-1 |
|
N-2
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
All statements contained in this prospectus supplement or the accompanying prospectus, other than historical facts, may constitute
forward-looking statements. These statements may relate to, among other things, future events or our future performance or financial condition. In some cases, you can identify forward-looking statements by terminology such as
may, might, believe, will, provided, anticipate, future, could, growth, plan, intend, expect,
should, would, if, seek, possible, potential, likely or the negative of such terms or comparable terminology. These forward-looking statements involve known and
unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or
implied by such forward-looking statements. Such factors include, among others: (1) further adverse changes in the economy and the capital markets; (2) risks associated with negotiation and consummation of pending and future transactions;
(3) the loss of one or more of our executive officers, in particular David Gladstone, Terry Lee Brubaker or David Dullum; (4) changes in our business strategy; (5) availability, terms and deployment of capital; (6) changes in our
industry, interest rates, exchange rates or the general economy; (7) the degree and nature of our competition; and (8) those factors described in the Risk Factors sections of this prospectus supplement and the accompanying
prospectus. We caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. 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 prospectus supplement. The forward-looking statements contained in this prospectus supplement or the accompanying prospectus are excluded from the safe harbor protection provided by
the Private Securities Litigation Reform Act of 1995 and Section 27A of the Securities Act.
TERMS OF THE NOTES
|
|
|
Principal Amount |
|
The principal amount of the Notes is $ in the aggregate. |
|
|
Maturity |
|
The principal amount of the Notes will become due and payable on , . |
|
|
Interest Rate |
|
The interest rate will be %. |
|
|
Frequency of payment |
|
Interest will be paid commencing . |
|
|
Prepayment Protections |
|
[To be provided.] |
|
|
Conversion |
|
[To be provided.] |
|
|
[Stock Exchange Listing] |
|
[To be provided.] |
|
|
Rating |
|
It is a condition of issuance that the notes be rated [ ] by [ ]. |
|
|
Covenants |
|
[To be provided.] |
|
|
Events of Default |
|
[To be provided.] |
|
|
Clearance and Settlement Procedures |
|
[To be provided.] |
|
|
Denominations |
|
[To be provided.] |
|
|
Ranking |
|
[To be provided.] |
|
|
Trustee |
|
[To be provided.] |
|
|
Redemption |
|
[To be provided.] |
N-3
RISK FACTORS
[To be provided.]
USE OF PROCEEDS
[To be provided.]
CAPITALIZATION
[To be provided.]
RATIO OF EARNINGS TO FIXED
CHARGES AND PREFERRED DIVIDENDS
[To be provided.]
TAXATION
[To be provided.]
UNDERWRITING
[To be provided.]
LEGAL MATTERS
The
legality of securities offered hereby will be passed upon for us by Bass, Berry & Sims PLC, Nashville, Tennessee. [Certain legal matters will be passed upon for the underwriters
by .]
N-4
Gladstone Investment Corporation
% Notes due ,
PROSPECTUS SUPPLEMENT
, 201
N-5
|
|
|
|
|
Exhibit 2.s.14 |
The information in this prospectus supplement is not complete and may be changed. We may not sell
these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus supplement is not an offer to sell these securities and is not soliciting an offer to buy these securities in any state
where the offer or sale is not permitted.
Filed Pursuant to Rule 497
Registration Statement No.
PROSPECTUS SUPPLEMENT
(To Prospectus
dated , 201 )
% Senior Notes
due ,
We are offering promissory senior notes in an aggregate principal amount of $ , which we refer
to as the Notes in this prospectus supplement. Our common stock is traded on The NASDAQ Global Select Market under the symbol GAIN. The last reported sale price for our common stock
on , was $ per share. The net asset value per share of our common stock at the
close of business on , 201 was $ per share.
You should read this prospectus supplement and the accompanying prospectus before deciding whether to invest in our Notes and you should
retain them for future reference. Additional information about us, including our annual, quarterly and current reports, has been filed with the Securities and Exchange Commission. This information is available free of charge on our corporate website
at http://www.gladstoneinvestment.com.
An investment in our Notes involves certain risks, including, among other things, risks
relating to investments in securities of small, private and developing businesses. We describe some of these risks in the section entitled Risk Factors, which begins on page N-5 of this prospectus supplement and page 9 of the
accompanying prospectus. Shares of closed-end investment companies frequently trade at a discount to their net asset value and this may increase the risk of loss of purchasers of our Notes. You should carefully consider these risks together with all
of the other information contained in this prospectus supplement and the accompanying prospectus before making a decision to purchase our Notes.
The Notes do not represent a deposit or obligation of, and are not guaranteed or endorsed by, any bank or other insured depository
institution, and are not federally insured by the Federal Deposit Insurance Corporation, the Federal Reserve Board or any other government agency.
|
|
|
|
|
|
|
|
|
|
|
Per Note |
|
|
Total |
|
Public offering price |
|
$ |
|
|
|
$ |
|
|
Sales load |
|
$ |
|
|
|
$ |
|
|
Proceeds to us (before expenses) (1) |
|
$ |
|
|
|
$ |
|
|
(1) |
Does not include offering expenses payable to us estimated to be $ . |
The Notes will be ready for delivery on or about , 201 .
, 201
We have not authorized any dealer, salesman or other person to give any information or to make any representation other than those
contained in this prospectus supplement or the accompanying prospectus. You must not rely upon any information or representation not contained in this prospectus supplement or the accompanying prospectus as if we had authorized it. This prospectus
supplement and the accompanying prospectus do not constitute an offer to sell or a solicitation of any offer to buy any security other than the registered securities to which they relate, nor do they constitute an offer to sell or a solicitation of
an offer to buy any securities in any jurisdiction to any person to whom it is unlawful to make such an offer or solicitation in such jurisdiction. The information contained in this prospectus supplement and any accompanying prospectus is accurate
as of the dates on their respective covers only. Our business, financial condition, results of operations and prospects may have changed since such dates.
SN-1
TABLE OF CONTENTS
Prospectus Supplement
|
|
|
|
|
|
|
Page |
|
Terms of the Notes |
|
|
SN-3 |
|
Risk Factors |
|
|
SN-4 |
|
Use of Proceeds |
|
|
SN-4 |
|
Capitalization |
|
|
SN-4 |
|
Ratio of Earnings to Fixed Charges and Preferred Dividends |
|
|
SN-4 |
|
Taxation |
|
|
SN-4 |
|
Underwriting |
|
|
SN-4 |
|
Legal Matters |
|
|
SN-4 |
|
Prospectus
|
|
|
|
|
|
|
Page |
|
Prospectus Summary |
|
|
1 |
|
Fees and Expenses |
|
|
6 |
|
Additional Information |
|
|
8 |
|
Risk Factors |
|
|
9 |
|
Special Note Regarding Forward-Looking Statements |
|
|
26 |
|
Use of Proceeds |
|
|
26 |
|
Price Range of Common Stock and Distributions |
|
|
26 |
|
Ratios of Earnings to Combined Fixed Charges and Preferred Dividends |
|
|
28 |
|
Consolidated Selected Financial and Other Data |
|
|
29 |
|
Selected Quarterly Financial Data |
|
|
30 |
|
Managements Discussion and Analysis of Financial Condition and Results of Operations |
|
|
31 |
|
Sales of Common Stock Below Net Asset Value |
|
|
56 |
|
Senior Securities |
|
|
61 |
|
Business |
|
|
63 |
|
Portfolio Companies |
|
|
74 |
|
Management |
|
|
83 |
|
Control Persons and Principal Stockholders |
|
|
96 |
|
Dividend Reinvestment Plan |
|
|
98 |
|
Material U.S. Federal Income Tax Considerations |
|
|
99 |
|
Regulation as a Business Development Company |
|
|
101 |
|
Description of Our Securities |
|
|
104 |
|
Certain Provisions of Delaware Law and of Our Certificate of Incorporation and Bylaws |
|
|
108 |
|
Share Repurchases |
|
|
110 |
|
Plan of Distribution |
|
|
111 |
|
Custodian, Transfer and Dividend Paying Agent and Registrar |
|
|
112 |
|
Brokerage Allocation and Other Practices |
|
|
113 |
|
Proxy Voting Policies and Procedures |
|
|
113 |
|
Legal Matters |
|
|
114 |
|
Experts |
|
|
114 |
|
Financial Statements |
|
|
F-1 |
|
SN-2
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
All statements contained in this prospectus supplement or the accompanying prospectus, other than historical facts, may constitute
forward-looking statements. These statements may relate to, among other things, future events or our future performance or financial condition. In some cases, you can identify forward-looking statements by terminology such as
may, might, believe, will, provided, anticipate, future, could, growth, plan, intend, expect,
should, would, if, seek, possible, potential, likely or the negative of such terms or comparable terminology. These forward-looking statements involve known and
unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or
implied by such forward-looking statements. Such factors include, among others: (1) further adverse changes in the economy and the capital markets; (2) risks associated with negotiation and consummation of pending and future transactions;
(3) the loss of one or more of our executive officers, in particular David Gladstone, Terry Lee Brubaker or David Dullum; (4) changes in our business strategy; (5) availability, terms and deployment of capital; (6) changes in our
industry, interest rates, exchange rates or the general economy; (7) the degree and nature of our competition; and (8) those factors described in the Risk Factors sections of this prospectus supplement and the accompanying
prospectus. We caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. 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 prospectus supplement. The forward-looking statements contained in this prospectus supplement or the accompanying prospectus are excluded from the safe harbor protection provided by
the Private Securities Litigation Reform Act of 1995 and Section 27A of the Securities Act.
TERMS OF THE NOTES
|
|
|
Principal Amount |
|
The principal amount of the Notes is $ in the aggregate. |
|
|
Maturity |
|
The principal amount of the Notes will become due and payable on , . |
|
|
Interest Rate |
|
The interest rate will be %. |
|
|
Frequency of payment |
|
Interest will be paid commencing . |
|
|
Prepayment Protections |
|
[To be provided.] |
|
|
Conversion |
|
[To be provided.] |
|
|
[Stock Exchange Listing] |
|
[To be provided.] |
|
|
Rating |
|
It is a condition of issuance that the notes be rated [ ] by [ ]. |
|
|
Covenants |
|
[To be provided.] |
|
|
Events of Default |
|
[To be provided.] |
|
|
Clearance and Settlement Procedures |
|
[To be provided.] |
|
|
Denominations |
|
[To be provided.] |
|
|
Ranking |
|
[The Notes may rank senior to future debt securities if such debt issuance is expressly subordinate to the Notes. The Notes may rank senior to current indebtedness if the Notes are secured. The Company will provide any required
disclosure should the Notes rank senior to current or future obligations, and any such ranking will be in accordance with the applicable provisions of the 1940 Act. Additional details to be provided regarding any such ranking.] |
|
|
Trustee |
|
[To be provided.] |
|
|
Redemption |
|
[To be provided.] |
SN-3
RISK FACTORS
[To be provided.]
USE OF PROCEEDS
[To be provided.]
CAPITALIZATION
[To be provided.]
RATIO OF EARNINGS TO FIXED
CHARGES AND PREFERRED DIVIDENDS
[To be provided.]
TAXATION
[To be provided.]
UNDERWRITING
[To be provided.]
LEGAL MATTERS
The
legality of securities offered hereby will be passed upon for us by Bass, Berry & Sims PLC, Nashville, Tennessee. [Certain legal matters will be passed upon for the underwriters
by .]
SN-4
Gladstone Investment Corporation
% Notes
due ,
PROSPECTUS SUPPLEMENT
, 201
SN-5
|
|
|
|
|
Exhibit 2.s.15 |
The information in this prospectus supplement is not complete and may be changed. We may not sell
these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus supplement is not an offer to sell these securities and is not soliciting an offer to buy these securities in any state
where the offer or sale is not permitted.
Filed Pursuant to Rule 497
Registration Statement No.
PROSPECTUS SUPPLEMENT
(To Prospectus
dated , 201 )
Warrants for Common Stock
We are offering for sale warrants to
purchase shares of common stock of the Company, which we refer to as Common Warrants, at an exercise price equal to $ per whole
share. No fractional Common Warrants will be issued. Our common stock is traded on The NASDAQ Global Select Market under the symbol GAIN. The last reported sale price for our common stock
on , was $ per share. The net asset value per share of our common stock at the
close of business on , 201 was $ per share.
Currently, no public market exists for
the Common Warrants offered by this prospectus supplement. It is anticipated that the Common Warrants will be quoted on promptly after the date of this prospectus supplement.
|
|
|
|
|
|
|
|
|
|
|
Per Warrant |
|
|
Total (1) |
|
Public offering price |
|
$ |
|
|
|
$ |
|
|
Underwriting discounts and commissions |
|
$ |
|
|
|
$ |
|
|
Proceeds, before expenses, to us |
|
$ |
|
|
|
$ |
|
|
(1) |
The aggregate expenses of the offering are estimated to be $ . |
The Underwriters are expected to deliver the Common Warrants in book-entry form through the Depositary Trust Company on or
about , .
You
should read this prospectus supplement and the accompanying prospectus before deciding whether to invest in our Common Warrants and you should retain them for future reference. Additional information about us, including our annual, quarterly and
current reports, has been filed with the Securities and Exchange Commission. This information is available free of charge on our corporate website at http://www.gladstoneinvestment.com.
An investment in our Common Warrants involves certain risks, including, among other things, risks relating to investments in securities of
small, private and developing businesses. We describe some of these risks in the section entitled Risk Factors, which begins on page W-7 of this prospectus supplement and page 9 of the accompanying prospectus. Shares of closed-end
investment companies frequently trade at a discount to their net asset value and this may increase the risk of loss of purchasers of our Common Warrants. You should carefully consider these risks together with all of the other information contained
in this prospectus supplement and the accompanying prospectus before making a decision to purchase our Common Warrants.
The Common
Warrants being offered have not been approved or disapproved by the Securities and Exchange Commission or any state securities commission nor has the Securities and Exchange Commission or any state securities commission passed upon the accuracy or
adequacy of this prospectus supplement or the accompanying prospectus. Any representation to the contrary is a criminal offense.
, 201
We have not authorized any dealer, salesman or other person to give any information or to make any representation other than those
contained in this prospectus supplement or the accompanying prospectus. You must not rely upon any information or representation not contained in this prospectus supplement or the accompanying prospectus as if we had
W-1
authorized it. This prospectus supplement and the accompanying prospectus do not constitute an offer to sell or a solicitation of any offer to buy any security other than the registered
securities to which they relate, nor do they constitute an offer to sell or a solicitation of an offer to buy any securities in any jurisdiction to any person to whom it is unlawful to make such an offer or solicitation in such jurisdiction. The
information contained in this prospectus supplement and any accompanying prospectus is accurate as of the dates on their respective covers only. Our business, financial condition, results of operations and prospects may have changed since such
dates.
TABLE OF CONTENTS
Prospectus Supplement
|
|
|
|
|
|
|
Page |
|
Terms of the Warrants |
|
|
W-3 |
|
Table of Fees and Expenses |
|
|
W-3 |
|
Risk Factors |
|
|
W-6 |
|
Use of Proceeds |
|
|
W-6 |
|
Capitalization |
|
|
W-6 |
|
Price Range of Common Stock |
|
|
W-6 |
|
Description of the Warrants |
|
|
W-6 |
|
Taxation |
|
|
W-6 |
|
Underwriting |
|
|
W-6 |
|
Legal Matters |
|
|
W-6 |
|
Prospectus
|
|
|
|
|
|
|
Page |
|
Prospectus Summary |
|
|
1 |
|
Fees and Expenses |
|
|
6 |
|
Additional Information |
|
|
8 |
|
Risk Factors |
|
|
9 |
|
Special Note Regarding Forward-Looking Statements |
|
|
26 |
|
Use of Proceeds |
|
|
26 |
|
Price Range of Common Stock and Distributions |
|
|
26 |
|
Ratios of Earnings to Combined Fixed Charges and Preferred Dividends |
|
|
28 |
|
Consolidated Selected Financial and Other Data |
|
|
29 |
|
Selected Quarterly Financial Data |
|
|
30 |
|
Managements Discussion and Analysis of Financial Condition and Results of Operations |
|
|
31 |
|
Sales of Common Stock Below Net Asset Value |
|
|
56 |
|
Senior Securities |
|
|
61 |
|
Business |
|
|
63 |
|
Portfolio Companies |
|
|
74 |
|
Management |
|
|
83 |
|
Control Persons and Principal Stockholders |
|
|
96 |
|
Dividend Reinvestment Plan |
|
|
98 |
|
Material U.S. Federal Income Tax Considerations |
|
|
99 |
|
Regulation as a Business Development Company |
|
|
101 |
|
Description of Our Securities |
|
|
104 |
|
Certain Provisions of Delaware Law and of Our Certificate of Incorporation and Bylaws |
|
|
108 |
|
Share Repurchases |
|
|
110 |
|
Plan of Distribution |
|
|
111 |
|
Custodian, Transfer and Dividend Paying Agent and Registrar |
|
|
112 |
|
Brokerage Allocation and Other Practices |
|
|
113 |
|
Proxy Voting Policies and Procedures |
|
|
113 |
|
Legal Matters |
|
|
114 |
|
Experts |
|
|
114 |
|
Financial Statements |
|
|
F-1 |
|
W-2
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
All statements contained in this prospectus supplement or the accompanying prospectus, other than historical facts, may constitute
forward-looking statements. These statements may relate to, among other things, future events or our future performance or financial condition. In some cases, you can identify forward-looking statements by terminology such as
may, might, believe, will, provided, anticipate, future, could, growth, plan, intend, expect,
should, would, if, seek, possible, potential, likely or the negative of such terms or comparable terminology. These forward-looking statements involve known and
unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or
implied by such forward-looking statements. Such factors include, among others: (1) further adverse changes in the economy and the capital markets; (2) risks associated with negotiation and consummation of pending and future transactions;
(3) the loss of one or more of our executive officers, in particular David Gladstone, Terry Lee Brubaker or David Dullum; (4) changes in our business strategy; (5) availability, terms and deployment of capital; (6) changes in our
industry, interest rates, exchange rates or the general economy; (7) the degree and nature of our competition; and (8) those factors described in the Risk Factors sections of this prospectus supplement and the accompanying
prospectus. We caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. 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 prospectus supplement. The forward-looking statements contained in this prospectus supplement or the accompanying prospectus are excluded from the safe harbor protection provided by
the Private Securities Litigation Reform Act of 1995 and Section 27A of the Securities Act.
TERMS OF THE WARRANTS
|
|
|
Exercise Price |
|
Each Common Warrant will be exercisable at an exercise price of $ per whole share of common stock of the Company. |
|
|
Exercise Period |
|
The Common Warrants will be exercisable until the date that is years from the original date of issuance, or the Exercise Period. The rights represented by the Common Warrants may be exercised in whole or
in part at any time during the Exercise Period. |
|
|
[Stock Exchange Listing] |
|
[To be provided.] |
|
|
[Non-Call Period |
|
The Common Warrants may not be called for redemption at the option of the Company prior to .] |
|
|
No Stockholder Rights |
|
The Common Warrants do not entitle the holder to any voting rights or other rights as a stockholder of the Company. |
FEES AND EXPENSES
The following table is intended to assist you in understanding the costs and expenses that an investor in this offering will bear directly or
indirectly. We caution you that some of the percentages indicated in the table below are estimates and may vary. Except where the context suggests otherwise, whenever this prospectus contains a reference to fees or expenses paid by us or
Gladstone Investment, or that we will pay fees or expenses, stockholders will indirectly bear such fees or expenses as investors in Gladstone Investment. The following percentages were calculated based on actual expenses
incurred in the year ended , and average net assets for the quarter ended
, .
|
|
|
Stockholder Transaction Expenses: |
|
|
Sales load (as a percentage of offering price) |
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[ ]% |
Offering expenses (as a percentage of offering price) |
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[ ]% |
Dividend reinvestment plan expenses(1) |
|
[ ] |
Total stockholder transaction expenses |
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[ ]% |
Annual expenses (as a percentage of net assets attributable to common stock): |
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Management fees(2) |
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[ ]% |
Incentive fees payable under investment advisory and management agreement (20% of realized capital gains and 20% of pre-incentive fee
net investment income)(3) |
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[ ]% |
Interest payments on borrowed funds(4) |
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[ ]% |
Other expenses(5) |
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[ ]% |
Total annual expenses (2)(5) |
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[ ]% |
W-3
(1) |
The expenses of the reinvestment plan are included in stock record expenses, a component of Other expenses. We do not have a cash purchase plan. The participants in the dividend reinvestment plan will bear a
pro rata share of brokerage commissions incurred with respect to open market purchases, if any. See Dividend Reinvestment Plan in the accompanying prospectus for information on the dividend reinvestment plan. |
(2) |
Our annual base management fee is 2% (0.5% quarterly) of our average gross assets, which are defined as total assets of Gladstone Investment, including investments made with proceeds of borrowings, less any uninvested
cash or cash equivalents resulting from borrowings. For the fiscal year ended , , our Adviser voluntarily agreed to waive
the annual base management fee of 2% to [ ]% for those senior syndicated loans that we purchase using borrowings from our credit facility. However, because we held no senior syndicated loans purchased using borrowings under
our credit facility during the quarter ended , , the waiver did not impact our expenses for that period, as reflected in the table above. See Management Certain Transactions Investment Advisory and Management Agreement
in the accompanying prospectus and footnote 3 below. |
(3) |
The incentive fee consists of two parts: an income-based fee and a capital gains-based fee. The income-based fee is payable quarterly in arrears, and equals 20% of the excess, if any, of our pre-incentive fee net
investment income that exceeds a 1.75% quarterly ([ ]% annualized) hurdle rate of our net assets, subject to a catch-up provision measured as of the end of each calendar quarter. The catch-up provision
requires us to pay 100% of our pre-incentive fee net investment income with respect to that portion of such income, if any, that exceeds the hurdle rate but is less than 125% of the quarterly hurdle rate (or 2.1875%) in any calendar quarter (8.75%
annualized). The catch-up provision is meant to provide our Adviser with 20% of our pre-incentive fee net investment income as if a hurdle rate did not apply when our pre-incentive fee net investment income exceeds 125% of the quarterly hurdle rate
in any calendar quarter (8.75% annualized). The income-based incentive fee is computed and paid on income that may include interest that is accrued but not yet received in cash. Our pre-incentive fee net investment income used to calculate this part
of the income-based incentive fee is also included in the amount of our gross assets used to calculate the 2% base management fee (see footnote 2 above). The capital gains-based incentive fee equals 20% of our net realized capital gains since our
inception, if any, computed net of all realized capital losses and unrealized capital depreciation since our inception, less any prior payments, and is payable at the end of each fiscal year. |
Examples of how the incentive fee would be calculated are as follows:
|
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|
Assuming pre-incentive fee net investment income of 0.55%, there would be no income-based incentive fee because such income would not exceed the hurdle rate of 1.75%. |
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Assuming pre-incentive fee net investment income of 2.00%, the income-based incentive fee would be as follows: |
= 100% × (2.00% 1.75%)
= 0.25%
|
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|
Assuming pre-incentive fee net investment income of 2.30%, the income-based incentive fee would be as follows: |
= (100% × (catch-up: 2.1875% 1.75%)) + (20% × (2.30% 2.1875%))
= (100% × 0.4375%) + (20% × 0.1125%)
= 0.4375% + 0.0225%
= 0.46%
|
|
|
Assuming net realized capital gains of 6% and realized capital losses and unrealized capital depreciation of 1%, the capital gains-based incentive fee would be as follows: |
= 20% × (6% 1%)
=
20% × 5%
= 1%
For a more detailed discussion of the calculation of the two-part incentive fee, see Management Certain
Transactions Investment Advisory and Management Agreement in the accompanying prospectus.
(4) |
Includes deferred financing costs. We entered into a revolving credit facility, effective , , under
which our borrowing capacity is $[ ] million. We have drawn down on this credit facility and we expect to borrow additional funds in the future up to an amount so that our asset coverage, as
defined in the 1940 Act, is at least 200% after each issuance of our senior securities. Assuming that we borrowed $[ ] million at an interest rate of [ ]% plus an additional fee
related to borrowings of [ ]%, for an aggregate rate of [ ]%, interest payments and amortization of deferred financing costs on borrowed funds would have been [ ]% of our average
net assets for the quarter ended , . |
(5) |
Includes our overhead expenses, including payments under the administration agreement based on our projected allocable portion of overhead and other expenses incurred by our Administrator in performing its obligations
under the administration agreement. See Management Certain Transactions Administration Agreement in the accompanying prospectus. |
W-4
Example
The following examples demonstrate the projected dollar amount of total cumulative expenses that would be incurred over various periods with
respect to a hypothetical investment in our common stock. In calculating the following expense amounts, we have assumed that our annual operating expenses would remain at the levels set forth in the table above. The examples below and the expenses
in the table above should not be considered a representation of our future expenses, and actual expenses (including the cost of debt, incentive fees, if any, and other expenses) may be greater or less than those shown.
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1 Year |
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3 Years |
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5 Years |
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10 Years |
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You would pay the following expenses on a $1,000 investment: |
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assuming a 5% annual return consisting entirely of ordinary income(1)(2) |
|
$ |
[ ] |
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|
$ |
[ ] |
|
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$ |
[ ] |
|
|
$ |
[ ] |
|
assuming a 5% annual return consisting entirely of capital gains(2)(3) |
|
$ |
[ ] |
|
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$ |
[ ] |
|
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$ |
[ ] |
|
|
$ |
[ ] |
|
(1) |
While the example assumes, as required by the SEC, a 5% annual return, our performance will vary and may result in a return greater or less than 5%. For purposes of this example, we have assumed that the entire amount
of such 5% annual return would constitute ordinary income as we have not historically realized positive capital gains (computed net of all realized capital losses) on our investments. Because the assumed 5% annual return is significantly below the
hurdle rate of 7% (annualized) that we must achieve under the investment advisory and management agreement to trigger the payment of an income-based incentive fee, we have assumed, for purposes of the this example, that no income-based incentive fee
would be payable if we realized a 5% annual return on our investments. |
(2) |
While the example assumes reinvestment of all dividends and distributions at NAV, participants in our dividend reinvestment plan will receive a number of shares of our common stock, determined by dividing the total
dollar amount of the dividend payable to a participant by the market price per share of our common stock at the close of trading on the valuation date for the dividend. See Dividend Reinvestment Plan in the accompanying prospectus for
additional information regarding our dividend reinvestment plan. |
(3) |
While the example assumes, as required by the SEC, a 5% annual return, our performance will vary and may result in a return greater or less than 5%. For purposes of this example, we have assumed that the entire amount
of such 5% annual return would constitute capital gains. |
W-5
RISK FACTORS
[To be provided.]
USE OF PROCEEDS
[To be provided.]
CAPITALIZATION
[To be provided.]
PRICE RANGE OF COMMON
STOCK AND DISTRIBUTIONS
We currently intend to distribute in the form of cash dividends, a minimum of 90% of our net ordinary income
and net short-term capital gains, if any, on a quarterly basis to our stockholders in the form of monthly dividends. We intend to retain long-term capital gains and treat them as deemed distributions for tax purposes. We report the estimated tax
characteristics of each distribution when declared while the actual tax characteristics of distributions are reported annually to each stockholder on IRS Form 1099 DIV. There is no assurance that we will achieve investment results or
maintain a tax status that will permit any specified level of cash distributions or year-to-year increases in cash distributions. At the option of a holder of record of common stock, all cash distributions can be reinvested automatically under our
dividend reinvestment plan in additional whole and fractional shares. A stockholder whose shares are held in the name of a broker or other nominee should contact the broker or nominee regarding participation in our dividend reinvestment plan on the
stockholders behalf. See Risk Factors We will be subject to corporate-level tax if we are unable to satisfy Code requirements for RIC qualification; Dividend Reinvestment Plan; and Material U.S. Federal
Income Tax Considerations in the accompanying prospectus.
Our common stock is quoted on The NASDAQ Global Select Market under the
symbol GAIN. Our common stock has historically traded at prices both above and below its net asset value. There can be no assurance, however, that any premium to net asset value will be attained or maintained. As
of , , we had [ ] stockholders of record.
DESCRIPTION OF THE WARRANTS
[To be
provided.]
TAXATION
[To be
provided.]
UNDERWRITING
[To be
provided.]
LEGAL MATTERS
The legality of securities offered hereby will be passed upon for us by Bass, Berry & Sims PLC, Nashville, Tennessee. [Certain legal
matters will be passed upon for the underwriters by .]
W-6
Gladstone Investment Corporation
Warrants for Common Stock
PROSPECTUS SUPPLEMENT
, 201
W-7
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Exhibit 2.s.16 |
|
The information in this prospectus supplement is not complete and may be changed. We may not sell
these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus supplement is not an offer to sell these securities and is not soliciting an offer to buy these securities in any state
where the offer or sale is not permitted.
Filed Pursuant to Rule 497
Registration Statement No.
PROSPECTUS SUPPLEMENT
(To Prospectus
dated , 201 )
Warrants for Series
[ ] Preferred Stock
We are offering for
sale warrants to purchase shares of Series
[ ] Preferred Stock of the Company, which we refer to as Preferred Warrants, at an exercise price equal to $ per whole share. No
fractional Preferred Warrants will be issued. Our common stock is traded on The NASDAQ Global Select Market under the symbol GAIN. The last reported sale price for our common stock
on , was $ per share. The net asset value per share of our common stock at the close of business
on , 201 was $ per share. Our preferred stock is traded on
[ ] under the symbol [ ]. The last reported sale of our preferred stock
on , 201 was $ per share.
Currently, no public market exists for the Preferred Warrants offered by this prospectus supplement. It is anticipated that the Preferred Warrants will be
quoted on promptly after the date of this prospectus supplement.
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Per Warrant |
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Total (1) |
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Public offering price |
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$ |
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$ |
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Underwriting discounts and commissions |
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$ |
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$ |
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Proceeds, before expenses, to us |
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$ |
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$ |
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(1) |
The aggregate expenses of the offering are estimated to be $ . |
The Underwriters are expected to deliver the Preferred Warrants in book-entry form through the Depositary Trust Company on or
about , .
You
should read this prospectus supplement and the accompanying prospectus before deciding whether to invest in our Preferred Warrants and you should retain them for future reference. Additional information about us, including our annual, quarterly and
current reports, has been filed with the Securities and Exchange Commission. This information is available free of charge on our corporate website at http://www.gladstoneinvestment.com.
An investment in our Preferred Warrants involves certain risks, including, among other things, risks relating to investments in securities
of small, private and developing businesses. We describe some of these risks in the section entitled Risk Factors, which begins on page WP-6 of this prospectus supplement and page 9 of the accompanying prospectus. Shares of closed-end
investment companies frequently trade at a discount to their net asset value and this may increase the risk of loss of purchasers of our Preferred Warrants. You should carefully consider these risks together with all of the other information
contained in this prospectus supplement and the accompanying prospectus before making a decision to purchase our Preferred Warrants.
The Preferred Warrants being offered have not been approved or disapproved by the Securities and Exchange Commission or any state
securities commission nor has the Securities and Exchange Commission or any state securities commission passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.
WP - 1
We have not authorized any dealer, salesman or other person to give any information or to make
any representation other than those contained in this prospectus supplement or the accompanying prospectus. You must not rely upon any information or representation not contained in this prospectus supplement or the accompanying prospectus as if we
had authorized it. This prospectus supplement and the accompanying prospectus do not constitute an offer to sell or a solicitation of any offer to buy any security other than the registered securities to which they relate, nor do they constitute an
offer to sell or a solicitation of an offer to buy any securities in any jurisdiction to any person to whom it is unlawful to make such an offer or solicitation in such jurisdiction. The information contained in this prospectus supplement and any
accompanying prospectus is accurate as of the dates on their respective covers only. Our business, financial condition, results of operations and prospects may have changed since such dates.
TABLE OF CONTENTS
Prospectus Supplement
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Page |
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Terms of the Warrants |
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WP-3 |
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Terms of the Series [ ] Preferred Stock |
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WP-3 |
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Risk Factors |
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WP-4 |
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Use of Proceeds |
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WP-4 |
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Capitalization |
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WP-4 |
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Description of the Warrants |
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WP-4 |
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Taxation |
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WP-4 |
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Underwriting |
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WP-4 |
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Legal Matters |
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WP-4 |
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Prospectus
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Page |
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Prospectus Summary |
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1 |
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Fees and Expenses |
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6 |
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Additional Information |
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8 |
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Risk Factors |
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9 |
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Special Note Regarding Forward-Looking Statements |
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26 |
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Use of Proceeds |
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26 |
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Price Range of Common Stock and Distributions |
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26 |
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Ratios of Earnings to Combined Fixed Charges and Preferred Dividends |
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28 |
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Consolidated Selected Financial and Other Data |
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29 |
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Selected Quarterly Financial Data |
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30 |
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Managements Discussion and Analysis of Financial Condition and Results of Operations |
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31 |
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Sales of Common Stock Below Net Asset Value |
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56 |
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Senior Securities |
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61 |
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Business |
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63 |
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Portfolio Companies |
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74 |
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Management |
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83 |
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Control Persons and Principal Stockholders |
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96 |
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Dividend Reinvestment Plan |
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98 |
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Material U.S. Federal Income Tax Considerations |
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99 |
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Regulation as a Business Development Company |
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101 |
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Description of Our Securities |
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104 |
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Certain Provisions of Delaware Law and of Our Certificate of Incorporation and Bylaws |
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108 |
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Share Repurchases |
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110 |
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Plan of Distribution |
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111 |
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Custodian, Transfer and Dividend Paying Agent and Registrar |
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112 |
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Brokerage Allocation and Other Practices |
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113 |
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Proxy Voting Policies and Procedures |
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113 |
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Legal Matters |
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114 |
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Experts |
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114 |
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Financial Statements |
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F-1 |
|
WP - 2
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
All statements contained in this prospectus supplement or the accompanying prospectus, other than historical facts, may constitute
forward-looking statements. These statements may relate to, among other things, future events or our future performance or financial condition. In some cases, you can identify forward-looking statements by terminology such as
may, might, believe, will, provided, anticipate, future, could, growth, plan, intend, expect,
should, would, if, seek, possible, potential, likely or the negative of such terms or comparable terminology. These forward-looking statements involve known and
unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or
implied by such forward-looking statements. Such factors include, among others: (1) further adverse changes in the economy and the capital markets; (2) risks associated with negotiation and consummation of pending and future transactions;
(3) the loss of one or more of our executive officers, in particular David Gladstone, Terry Lee Brubaker or David Dullum; (4) changes in our business strategy; (5) availability, terms and deployment of capital; (6) changes in our
industry, interest rates, exchange rates or the general economy; (7) the degree and nature of our competition; and (8) those factors described in the Risk Factors sections of this prospectus supplement and the accompanying
prospectus. We caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. 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 prospectus supplement. The forward-looking statements contained in this prospectus supplement or the accompanying prospectus are excluded from the safe harbor protection provided by
the Private Securities Litigation Reform Act of 1995 and Section 27A of the Securities Act.
TERMS OF THE WARRANTS
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Exercise Price |
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Each Preferred Warrant will be exercisable at an exercise price of $ per whole share of Series [ ] Preferred
Stock of the Company. |
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Exercise Period |
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The Preferred Warrants will be exercisable until the date that is years from the original date of issuance, or the Exercise Period. The rights represented by the warrant may be exercised in whole or in
part at any time during the Exercise Period. |
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[Stock Exchange Listing] |
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[To be provided.] |
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[Non-Call Period |
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The Preferred Warrants may not be called for redemption at the option of the Company prior to .] |
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No Stockholder Rights |
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The Preferred Warrants do not entitle the holder to any voting rights or other rights as a stockholder of the Company. |
TERMS OF THE SERIES [ ] PREFERRED
STOCK
|
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Dividend Rate |
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The dividend rate will be %. |
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Dividend Payment Rate |
|
[Dividends will be paid when, as and if declared on , , , and
, commencing .] The payment date for the initial dividend period will be
.] |
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Regular Dividend Period |
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Regular dividend periods will be days. |
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Liquidation Preference |
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$ per share |
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Non-Call Period |
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The shares may not be called for redemption at the option of the Company prior to . |
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Stock Exchange Listing |
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WP - 3
RISK FACTORS
[To be provided.]
USE OF PROCEEDS
[To be provided.]
CAPITALIZATION
[To be provided.]
DESCRIPTION OF THE
WARRANTS
[To be provided.]
TAXATION
[To be provided.]
UNDERWRITING
[To be provided.]
LEGAL MATTERS
The legality of securities offered hereby will be passed upon for us by Bass, Berry & Sims PLC, Nashville, Tennessee.
[Certain legal matters will be passed upon for the underwriters by .]
WP - 4
Gladstone Investment Corporation
Warrants for Series [ ] Preferred Stock
PROSPECTUS SUPPLEMENT
, 201
WP - 5
Gladstone Investment Corp. - 7.125% Series A Term Preferred Stock (MM) (NASDAQ:GAINP)
Gráfica de Acción Histórica
De Sep 2024 a Oct 2024
Gladstone Investment Corp. - 7.125% Series A Term Preferred Stock (MM) (NASDAQ:GAINP)
Gráfica de Acción Histórica
De Oct 2023 a Oct 2024