497 1 d189920d497.htm 497 497
Table of Contents

Filed Pursuant to Rule 497
File No. 333-204996

 

PROSPECTUS SUPPLEMENT

(to Prospectus dated July 28, 2016)

2,000,000 Shares

 

LOGO

Gladstone Investment Corporation

6.25% Series D Cumulative Term Preferred Stock due 2023

(Liquidation Preference $25 per Share)

 

 

We are an externally managed, closed-end, non-diversified management investment company that has elected to be regulated as a business development company under the Investment Company Act of 1940. Generally, our investment objective is to generate current income by investing in debt securities of established businesses and provide our stockholders with long-term capital appreciation by investing in equity securities, generally in combination with the aforementioned debt securities.

We are offering 2,000,000 shares of our 6.25% Series D Cumulative Term Preferred Stock due 2023, or the Series D Term Preferred Stock. We will pay monthly dividends on the Series D Term Preferred Stock at an annual rate of 6.25% of the $25 liquidation preference per share, or $1.5625 per share of Series D Term Preferred Stock per year, monthly, as declared by our Board of Directors, commencing on October 31, 2016.

We are required to redeem all of the outstanding Series D Term Preferred Stock on September 30, 2023, at a redemption price equal to $25 per share, plus an amount equal to accumulated but unpaid dividends, if any, up to, but excluding, the date of redemption. We will also be required to redeem Series D Term Preferred Stock at a redemption price equal to $25 per share, plus an amount equal to accumulated but unpaid dividends, if any, up to, but excluding, the date of redemption in the event of certain events that constitute a change of control of the company. If we fail to maintain an Asset Coverage ratio of at least 200%, we will redeem a sufficient number of shares of our 7.125% Series A Cumulative Term Preferred Stock (“Series A Term Preferred Stock”) (traded on the NASDAQ Global Select Market (“NASDAQ”) under the symbol “GAINP”), 6.75% Series B Cumulative Term Preferred Stock (“Series B Term Preferred Stock”) (traded on NASDAQ under the symbol “GAINO”), 6.50% Series C Cumulative Term Preferred Stock (“Series C Term Preferred Stock”) (traded on NASDAQ under the symbol “GAINN”), Series D Term Preferred Stock and any other series of outstanding shares of preferred stock issued by us (collectively, the “Preferred Stock”) in an amount at least equal to the lesser of (1) the minimum number of shares of Preferred Stock necessary to cause us to meet our required Asset Coverage ratio and (2) the maximum number of Preferred Stock that we can redeem out of cash legally available for such redemption. At any time on or after September 30, 2018, at our sole option, we may redeem the Series D Term Preferred Stock at a redemption price of $25 per share of Series D Term Preferred Stock, plus any accumulated but unpaid dividends, if any, on the Series D Term Preferred Stock up to, but excluding, the date of redemption. We cannot effect any amendment, alteration or repeal of our obligation to redeem all of the Series D Term Preferred Stock on September 30, 2023 or pay dividends at the stated rate without the prior unanimous consent of the holders of Series D Term Preferred Stock.

Each holder of our Series D Term Preferred Stock (and any other outstanding Preferred Stock we have issued or may issue in the future) will be entitled to one vote for each share held by such holder on any matter submitted to a vote of our stockholders, and the holders of all of our outstanding Preferred Stock and common stock will generally vote together as a single class. The holders of the Series Term D Preferred Stock, Series A Term Preferred Stock, Series B Term Preferred Stock, Series C Term Preferred Stock and any other Preferred Stock we may issue in the future, voting separately as a single class, will elect two of our directors and, upon our failure to pay dividends for at least two years, will elect a majority of our directors. The Series D Term Preferred Stock will rank equally in right of payment with all other shares of Preferred Stock and will rank senior in right of payment to our outstanding common stock.

We have applied to have the Series D Term Preferred Stock listed on NASDAQ under the symbol “GAINM.” Our common stock is traded on NASDAQ under the symbol “GAIN.” On September 16, 2016, the last sale price of our common stock, Series A Term Preferred Stock, Series B Term Preferred Stock and Series C Term Preferred Stock as reported on NASDAQ was $8.77 per share, $25.83 per share and $25.75 per share and $26.24 per share, respectively. The Series D Term Preferred Stock has no trading history and will not be convertible into our common stock or any other security of our company.

This prospectus supplement and the accompanying prospectus contain important information you should know before investing in the Series D Term Preferred Stock, including information about risks. Please read it before you invest and retain it for future reference. Additional information about us, including our annual, quarterly and current reports, has been filed with the Securities and Exchange Commission, or the SEC, and can be accessed at its website at www.sec.gov. You may also request this and other information free of charge, or make other stockholder inquiries, by calling (866) 366-5745, from our website (www.GladstoneInvestment.com) or by writing us at 1521 Westbranch Drive, Suite 100, McLean, Virginia 22012. See “Additional Information” in the accompanying prospectus.

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 issuer’s capacity to pay interest and repay principal. They may also be difficult to value and illiquid.

 

 

Investing in the Series D Term Preferred Stock involves a high degree of risk, including, among other things, the risk of leverage and risks relating to investments in securities of small, private and developing businesses. You could lose some or all of your investment. You should carefully consider each of the factors described under “Risk Factors” beginning on page S-10 of this prospectus supplement and beginning on page 12 of the accompanying prospectus before you invest in the Series D Term Preferred Stock.

 

 

The SEC has not approved or disapproved of these securities or determined if this prospectus supplement or the accompanying prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

     PER SHARE      TOTAL (2)  

Public offering price

   $ 25.00       $ 50,000,000   

Underwriting discounts and commissions (sales load)

   $ 0.78125       $ 1,562,500   

Proceeds, before expenses, to us (1)

   $ 24.21875       $ 48,437,500   

 

(1) Total expenses of the offering payable by us, excluding underwriting discounts and commissions, are estimated to be $0.2 million.
(2) We have granted the underwriters a 30-day option to purchase up to an additional 300,000 shares of Series D Term Preferred Stock from us on the same terms and conditions set forth above solely to cover overallotments, if any. If such option is exercised in full, the total public offering price will be $57,500,000, the total underwriting discounts and commissions will be $1,796,875 and total proceeds, before expenses, to us would be $55,703,125. See “Underwriting” on page S-55 of this prospectus supplement for additional information with respect to our arrangements with the underwriters, including stabilizing transactions and other transactions that affect the price of the Series D Term Preferred Stock.

The underwriters expect to deliver the Series D Term Preferred Stock on or about September 26, 2016.

 

 

Joint Book-Running Managers

Janney Montgomery Scott    Ladenburg Thalmann

Co-Lead Managers

J.J.B. Hilliard, W.L. Lyons, LLC  

Wunderlich

Co-Managers

William Blair   Maxim Group LLC

Prospectus Supplement dated September 19, 2016


Table of Contents

ABOUT THIS PROSPECTUS SUPPLEMENT

This prospectus supplement, together with the accompanying prospectus, sets forth the information that you should know before investing. You should read the prospectus supplement and accompanying prospectus, which contain important information, before deciding whether to invest in the Series D Term Preferred Stock.

You may request a free copy of this prospectus supplement, the accompanying prospectus, our annual reports to stockholders, when available, and other information about us, and make stockholder inquiries by calling (866) 366-5745 or by writing to us at 1521 Westbranch Drive, Suite 100, McLean, Virginia 22102, or from our website (http://www.GladstoneInvestment.com). The information contained in, or that can be accessed through, our website is not part of this prospectus supplement or the accompanying prospectus. We make available free of charge on our website our annual reports 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.

This prospectus supplement, which describes the specific terms of this offering, also adds to and updates information contained in the accompanying prospectus. The accompanying prospectus gives more general information, some of which may not apply to this offering. If the description of this offering varies between this prospectus supplement and the accompanying prospectus, you should rely on the information contained in this prospectus supplement. However, if any statement in one of these documents is inconsistent with a statement in another document having a later date, the statement in the document having the later date modifies or supersedes the earlier statement.

The Series D Term Preferred Stock does not represent a deposit or obligation of, and is not guaranteed or endorsed by, any bank or other insured depository institution, and is not federally insured by the Federal Deposit Insurance Corporation, the Federal Reserve Board or any other government agency.

You should rely only on the information contained in this prospectus supplement and the accompanying prospectus in making an investment decision. Neither we nor the underwriters have authorized any other person to provide you with different or inconsistent information. If anyone provides you with different or inconsistent information, you should not rely on it. We are not, and the underwriters are not, making an offer to sell the Series D Term Preferred Stock in any jurisdiction where such an offer or sale is not permitted. The information appearing in this prospectus supplement and in the accompanying prospectus is accurate only as of the dates on their respective covers, regardless of the time of delivery or any sale of the Series D Term Preferred Stock.


Table of Contents

TABLE OF CONTENTS

 

     PAGE  

Prospectus Supplement

  

Prospectus Supplement Summary

     S-1   

The Offering

     S-5   

Risk Factors

     S-10   

Special Note Regarding Forward-Looking Statements

     S-18   

Use of Proceeds

     S-19   

Ratio of Earnings to Combined Fixed Charges and Preferred Dividends

     S-20   

Capitalization

     S-21   

Selected Financial Information

     S-23   

Selected Quarterly Financial Data

     S-25   

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     S-26   

Description of the Series D Term Preferred Stock

     S-43   

Underwriting

     S-55   

Additional Material U.S. Federal Income Tax Considerations

     S-59   

Custodian, Transfer Agent, Dividend Disbursing Agent and Redemption and Paying Agent

     S-59   

Miscellaneous

     S-60   

Where You Can Find More Information

     S-60   

Legal Matters

     S-60   

Experts

     S-60   

Index to Interim Consolidated Financial Statements

     S-F-1   

Appendix  A: Form of Certificate of Designation of 6.25% Series D Cumulative Term Preferred Stock due 2023 of Gladstone Investment Corporation

     SA-1   

Prospectus

  

Prospectus Summary

     1   

Fees and Expenses

     7   

Additional Information

     10   

Risk Factors

     12   

Special Note Regarding Forward-Looking Statements

     33   

Use of Proceeds

     34   

Price Range of Common Stock and Distributions

     34   

Ratio of Earnings to Fixed Charges and Preferred Dividends

     36   

Selected Consolidated Financial and Other Data

     37   

Selected Quarterly Financial Data

     38   

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     39   

Sales of Common Stock Below Net Asset Value

     68   

Senior Securities

     75   

Business

     77   

Portfolio Companies

     90   

Management

     97   

Control Persons and Principal Stockholders

     113   

Dividend Reinvestment Plan

     115   

Material U.S. Federal Income Tax Considerations

     116   

Regulation as a Business Development Company

     119   

Description of Our Securities

     122   

Certain Provisions of Delaware Law and of Our Certificate of Incorporation and Bylaws

     127   

Share Repurchases

     130   

Plan of Distribution

     131   

Custodian, Transfer and Dividend Paying Agent and Registrar

     132   

Brokerage Allocation and Other Practices

     133   

Proxy Voting Policies and Procedures

     133   

Legal Matters

     134   

Experts

     134   

Financial Statements

     F-1   


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PROSPECTUS SUPPLEMENT SUMMARY

This summary highlights some of the information included in the prospectus supplement and the accompanying prospectus. You should review the more detailed information contained elsewhere in this prospectus supplement and in the accompanying prospectus, including the Company’s Certificate of Designation of 6.25% Series D Cumulative Term Preferred Stock due 2023 of Gladstone Investment Corporation, or the Certificate of Designation, the form of which is attached as Appendix A to this prospectus supplement, and especially the information set forth under the heading “Risk Factors” prior to making an investment in the Series D Term Preferred Stock. In this prospectus supplement and the accompanying prospectus, except where the context suggests otherwise, the “Company,” “we,” “us” or “our” refers to Gladstone Investment Corporation; “Adviser” refers to Gladstone Management Corporation; “Administrator” refers to Gladstone Administration, LLC; and “Gladstone Companies” refers to our Adviser and its affiliated companies. Capitalized terms used but not defined in this prospectus supplement or accompanying prospectus have the meanings given to such terms in the Certificate of Designation. Unless otherwise stated, the information in this prospectus supplement and the accompanying prospectus does not take into account the possible exercise by the underwriters of their overallotment option.

Gladstone Investment Corporation

Gladstone Investment Corporation was organized under the laws of the State of Delaware on February 18, 2005. We are an externally managed specialty finance company that generally invests in secured first or second lien debt in combination with a direct equity investment in established U.S. businesses. Our investments are structured with the goal of producing a mix of assets to provide current income from our debt investments and capital gains from our equity investments at exit.

As of June 30, 2016, our portfolio consisted of investments in 36 portfolio companies located in 19 states across 17 different industries with an aggregate fair value of $491.0 million, consisting of secured first lien term debt, secured second lien term debt, preferred equity and common equity. Our weighted average yield on our interest-bearing investments for the three months ended June 30, 2016, excluding cash and cash equivalents and receipts recorded as other income, was 12.7%. For both fiscal years ended March 31, 2016 and 2015, our weighted average yield on our interest-bearing investments, excluding cash and cash equivalents and receipts recorded as other income, was 12.6%. Since our initial public offering in June 2005, we have made 134 consecutive monthly distributions on our common stock, par value $0.001 per share, or Common Stock.

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, or the 1940 Act. In addition, for tax purposes, we have elected to be treated as a regulated investment company, or RIC, under the Internal Revenue Code of 1986, as amended, or the Code.

As of September 16, 2016, we had 30,270,958 shares of Common Stock outstanding, 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. We are required to redeem all shares of Series A Term Preferred Stock on February 28, 2017, all shares of Series B Term Preferred Stock on December 31, 2021 and all shares of Series C Term Preferred stock on May 31, 2022.

Our principal executive offices are located at 1521 Westbranch Drive, Suite 100, McLean, Virginia 22102, and our telephone number is (703) 287-5800. Our corporate website is located at http://www.GladstoneInvestment.com. Information on, or accessible through, our website is not incorporated into or a part of this prospectus supplement or the accompanying prospectus.

 



 

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Investment Adviser and Administrator

We are externally managed by our affiliated investment adviser, Gladstone Management Corporation (the “Adviser”), under an investment advisory and management agreement (the “Advisory Agreement”) and another of our affiliates, Gladstone Administration, LLC (the “Administrator”), provides administrative services to us pursuant to a contractual agreement (the “Administration Agreement”). Each of the Adviser and Administrator are privately-held companies that are indirectly owned and controlled by David Gladstone, our chairman and chief executive officer. Mr. Gladstone and Terry Brubaker, our vice chairman and chief operating officer, also serve on the board of directors of the Adviser, the board of managers of the Administrator, and serve as executive officers of the Adviser and the Administrator. The Administrator employs, among others, our chief financial officer and treasurer, chief valuation officer, chief compliance officer, general counsel and secretary (who also serves as the president of the Administrator) and their respective staffs. The Adviser and Administrator have extensive experience in our lines of business and also provide investment advisory and administrative services, respectively, to our affiliates, including, but not limited to: Gladstone Commercial Corporation (“Gladstone Commercial”), a publicly-traded real estate investment trust; Gladstone Capital Corporation (“Gladstone Capital”), a publicly-traded BDC and RIC; and Gladstone Land Corporation, a publicly-traded real estate investment trust (“Gladstone Land,” with “Gladstone Commercial,” and “Gladstone Capital,” collectively the “Affiliated Public Funds”). In the future, the Adviser and Administrator may provide investment advisory and administrative services, respectively, to other funds and companies, both public and private.

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 Adviser also has offices in several other states.

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 intend that our investment portfolio over time will consist of approximately 75% in debt securities and 25% in equity securities, at cost. As of June 30, 2016, our investment portfolio was made up of 71.9% in debt securities and 28.1% in equity securities, at cost.

In July 2012, the U.S. SEC granted us an exemptive order (the “Co-Investment Order”) that expanded our ability to co-invest with certain of our affiliates, including Gladstone Capital, 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 SEC’s order.

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

 



 

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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. Since our initial public offering in 2005 and through June 30, 2016, we have made investments in 44 companies, excluding investments in syndicated loans. Our Board of Directors has the authority to modify or waive our current operating policies and our strategies without prior notice to or approval of our stockholders.

We expect that our investment portfolio will primarily include the following three categories of investments in private companies in the U.S.:

 

  First Lien Secured Debt Securities: We seek to invest a portion of our assets in first lien 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 first lien secured debt to cover a substantial portion of the funding needs of the business. These debt securities usually take the form of first priority liens on all, or substantially all, of the assets of the business.

 

  Second Lien Secured Debt Securities: We seek to invest a portion of our assets in second lien secured debt securities, which may also be referred to as subordinated loans, subordinated notes and mezzanine loans. These second lien secured debt securities rank junior to the borrower’s first lien secured debt securities and may be secured by second priority liens on all or a portion of the assets of the business. Additionally, we may receive other yield enhancements, such as warrants to buy common and preferred stock or limited liability interests, in connection with these second lien secured 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, limited liability company interests, 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 of the businesses in which we invest.

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 Business Development Company — Qualifying Assets” in the accompanying prospectus 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 higher risk, as compared to investment-grade debt instruments. See “Business — Investment Process” included in the accompanying prospectus for additional information on our investment practices.

 



 

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Recent Developments

Renewal of our Advisory Agreement

On July 12, 2016, our Board of Directors, including a majority of the directors who are not parties to the agreement or interested persons of any such party, approved the annual renewal of the Advisory Agreement with the Adviser through August 31, 2017. Mr. Gladstone, our chairman and chief executive officer, controls the Adviser. In reaching a decision to approve the Advisory Agreement, our Board of Directors reviewed a significant amount of information and considered, among other things:

 

    the nature, quality and extent of the advisory and other services to be provided to us by the Adviser;

 

    our investment performance and that of the Adviser;

 

    the costs of the services to be provided and profits to be realized by the Adviser from the relationship with us;

 

    the fee structures of comparable externally managed business development companies that engage in similar investing activities; and

 

    various other matters.

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 being in the best interests of our stockholders.

Conditional Redemption of Series A Term Preferred Stock

On September 19, 2016, we announced the conditional redemption of all 1,600,000 outstanding shares of our Series A Term Preferred Stock with a redemption date of September 30, 2016. This redemption is conditioned on the closing of this offering on or prior to September 30, 2016. We may waive this contingency with respect to the redemption, may authorize a partial redemption and may cancel the redemption in our sole discretion.

 



 

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THE OFFERING

The following is a brief summary of some of the terms of this offering. For a more complete description of the rights, preferences and other terms of the Series D Term Preferred Stock, see “Description of the Series D Term Preferred Stock” in this prospectus supplement and the Certificate of Designation.

 

Issuer

Gladstone Investment Corporation

 

Securities Offered

2,000,000 shares of Series D Term Preferred Stock or 2,300,000 shares if the underwriters exercise their overallotment option in full.

 

Listing

We have applied to list the Series D Term Preferred Stock on NASDAQ under the symbol “GAINM.” Trading on the Series D Term Preferred Stock is expected to begin within 30 days of the date of this prospectus supplement. Prior to the expected commencement of trading on NASDAQ, the underwriters may make a market in the Series D Term Preferred Stock, but they are not obligated to do so and may discontinue any market-making at any time without notice.

 

Liquidation Preference

In the event of any liquidation, dissolution or winding up of our affairs, holders of the Series D Term Preferred Stock will be entitled to receive a liquidation distribution equal to $25 per share (which we refer to in this prospectus supplement as the Liquidation Preference), plus an amount equal to all accumulated but unpaid dividends and distributions, if any, up to, but excluding, the date fixed for distribution or payment, whether or not earned or declared by us, but excluding interest on any such distribution or payment. See “Description of the Series D Term Preferred Stock — Liquidation Rights.”

 

Dividends

The Series D Term Preferred Stock will pay a monthly dividend at a fixed annual rate of 6.25% of the Liquidation Preference, or $1.5625 per share per year, which we refer to as the Fixed Dividend Rate. The Fixed Dividend Rate is subject to adjustment under certain circumstances, but will not in any case be lower than $1.5625 per share per year.

 

  Cumulative cash dividends or distributions on each Series D Term Preferred Share will be payable monthly, when, as and if declared by our Board of Directors or a duly authorized committee of our Board of Directors out of funds legally available for such payment. The first dividend period for the Series D Term Preferred Stock will commence on the initial issuance date of such shares upon the closing of this offering, which we refer to as the Date of Original Issue, and will end on October 31, 2016.

 

Ranking

The shares of Series D Term Preferred Stock are senior securities that constitute capital stock of the Company.

 



 

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  The Series D Term Preferred Stock ranks:

 

    senior to the Common Stock in priority of payment of dividends and as to the distribution of assets upon dissolution, liquidation or the winding-up of our affairs;

 

    equal in priority with all other series of Preferred Stock we have issued or may issue in the future as to priority of payment of dividends and as to distributions of assets upon dissolution, liquidation or the winding-up of our affairs; and

 

    effectively subordinated to our existing and future indebtedness, including borrowings under our Fifth Amended and Restated Credit Agreement, dated April 30, 2013 (the “Credit Facility”).

 

  We may issue additional shares of Preferred Stock, but we may not issue additional classes of capital stock that rank senior to the Series A Term Preferred Stock, Series B Term Preferred Stock, Series C Term Preferred Stock or Series D Term Preferred Stock as to priority of payment of dividends and as to distribution of assets upon dissolution, liquidation or winding-up of our affairs. We may, however, borrow funds from banks and other lenders so long as the ratio of (1) the value of total assets less the total borrowed amounts to (2) the sum of all senior securities representing indebtedness and the number of shares of outstanding Series A Term Preferred Stock, Series B Term Preferred Stock, Series C Term Preferred Stock, Series D Term Preferred Stock multiplied by $25 per share is not less than 2 to 1.

 

Mandatory Term Redemption

We are required to redeem all outstanding Series D Term Preferred Stock on September 30, 2023, or the Mandatory Term Redemption Date, at a redemption price equal to the Liquidation Preference, plus an amount equal to accumulated but unpaid dividends, if any, on such shares (whether or not earned or declared, but excluding interest on such dividends) to, but excluding, the redemption date. If we fail to redeem the Series D Term Preferred Stock pursuant to the mandatory redemption required on September 30, 2023, or in any other circumstance in which we are required to redeem the Series D Term Preferred Stock, then the Fixed Dividend Rate will increase by three percent (3.00%) for so long as such failure continues. See “Description of the Series D Term Preferred Stock — Redemption” and “— Voting Rights.”

 

Mandatory Redemption for Asset Coverage

If we fail to maintain Asset Coverage (as defined below) of at least 200% as of the time of declaration of dividends or other distributions on the Company’s common stock (other than dividends payable in shares of common stock) after deducting the amount of such dividend or other distribution as of the time of purchase of the Company’s common stock or issuance of any senior security as defined in the 1940 Act, and such failure is not cured in 90 calendar days after the date of such failure (referred to in this prospectus supplement as an Asset Coverage Cure Date), then we are required to redeem, within

 



 

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90 calendar days of the Asset Coverage Cure Date, shares of Preferred Stock equal to the lesser of (1) the minimum number of shares of Preferred Stock that will result in our having Asset Coverage of at least 200% and (2) the maximum number of shares of Preferred Stock that can be redeemed out of funds legally available for such redemption, provided further, that in connection with any such redemption for failure to maintain such Asset Coverage, we may redeem such additional number of shares of Preferred Stock that will result in our having Asset Coverage of up to and including 240%. The Preferred Stock to be redeemed may include, at our sole option, any number or proportion of the Series A Term Preferred Stock, Series B Term Preferred Stock, Series C Term Preferred Stock, Series D Term Preferred Stock and other future series of Preferred Stock. If shares of Series D Term Preferred Stock are to be redeemed in such an event, they will be redeemed at a redemption price equal to the Liquidation Preference, plus accumulated but unpaid dividends, if any, on such shares (whether or not declared, but excluding interest on accumulated but unpaid dividends, if any) up to, but excluding, the date fixed for such redemption.

 

  Asset Coverage for purposes of our Preferred Stock is calculated in accordance with Sections 18 and 61 of the 1940 Act, as in effect on the date of the Certificate of Designation, and is determined on the basis of values calculated as of a time within 48 hours (only including Business Days) preceding each determination. We estimate that, on the Date of Original Issue, our Asset Coverage, based on the composition and value of our portfolio as of June 30, 2016, and after giving effect to (1) the issuance of the Series D Term Preferred Stock offered in this offering, and (2) the payment of underwriting discounts and commissions of $1.6 million and estimated related offering costs payable by us of approximately $0.2 million, would have been 212.0% prior to the activity noted in the “Use of Proceeds” section. We estimate that following our expected use of proceeds, which includes the full redemption of our Series A Term Preferred Stock, our Asset Coverage would be 237.7%. Our net investment income, including prior period undistributed net investment income, coverage, which is calculated by dividing the sum of our undistributed net investment income at the beginning of the period and our net investment income during the period by the amount of distributions from net investment income to holders of our Common Stock during the period, was approximately 124.1% for the year ended March 31, 2016 and approximately 233.2% for the three months ended June 30, 2016. Net investment income coverage has varied each year since our inception, and there is no assurance that historical coverage levels will be maintained. See “Description of the Series D Term Preferred Stock — Asset Coverage.”

 



 

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Optional Redemption

At any time on or after September 30, 2018, at our sole option, we may redeem the Series D Term Preferred Stock in whole or from time to time, in part, out of funds legally available for such redemption, at the Liquidation Preference, plus an amount equal to accumulated but unpaid dividends, if any, on such shares (whether or not earned or declared, but excluding interest on such dividends) up to, but excluding, the date fixed for such redemption. See “Description of the Series D Term Preferred Stock — Redemption — Optional Redemption.”

 

Change of Control Redemption

If a Change of Control Triggering Event occurs, unless we have exercised our option to redeem the Series D Term Preferred Stock, we will be required to redeem all of the outstanding Series D Term Preferred Stock at the Liquidation Preference, plus an amount equal to accumulated but unpaid dividends, if any, on such shares (whether or not earned or declared, but excluding interest on such dividends) to, but excluding, the date fixed for such redemption. For the definition of Change of Control Triggering Event and additional information concerning the redemption of the Series D Term Preferred Stock in connection with such events, see “Description of the Series D Term Preferred Stock — Redemption — Change of Control.”

 

Voting Rights

Except as otherwise provided in our Amended and Restated Certificate of Incorporation or as otherwise required by law, (1) each holder of Preferred Stock (including the Series D Term Preferred Stock) will be entitled to one vote for each share of Preferred Stock held by such holder on each matter submitted to a vote of our stockholders and (2) the holders of all outstanding Preferred Stock and Common Stock will vote together as a single class; provided, that holders of Preferred Stock, voting separately as a class, will be entitled to elect two of our directors and, if we fail to pay dividends on any outstanding shares of Preferred Stock in an amount equal to two full years of dividends and continuing until such failure is corrected, will be entitled to elect a majority of our directors. Preferred Stock holders will also vote by series separately as a class on any matter that materially and adversely affects any preference, right or power of holders of such series of Preferred Stock. See “Description of the Series D Term Preferred Stock — Voting Rights.”

 

Conversion Rights

The Series D Term Preferred Stock will have no conversion rights.

 

Use of Proceeds

We intend to use the net proceeds from this offering of approximately $48.2 million (after the payment of underwriting discounts and commissions of $1.6 million and estimated offering expenses payable by us of approximately $0.2 million) to redeem outstanding shares of our Series A Term Preferred Stock, to pay down our Credit Facility and for other general corporate purposes. See “Use of Proceeds.”

 



 

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U.S. Federal Income Taxes

Prospective investors are urged to consult their own tax advisors regarding the tax considerations relevant to holders of the Series D Term Preferred Stock in light of their personal investment circumstances.

 

  We have elected to be treated, and intend to continue to so qualify each year, as a RIC under Subchapter M of the Code, and we generally do not expect to be subject to U.S. federal income tax.

 

  The dividends on the Series D Term Preferred Stock generally will not qualify for the dividends received deduction or for taxation as qualified dividend income.

 

Risk Factors

Investing in the Series D Term Preferred Stock involves risks. You should carefully consider the information set forth in the sections entitled “Risk Factors” beginning on page S-10 of this prospectus supplement and page 12 of the accompanying prospectus before deciding whether to invest in our Series D Term Preferred Stock.

 

Information Rights

During any period in which we are not subject to the reporting requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, or the Exchange Act, and any shares of Series D Term Preferred Stock are outstanding, we will provide holders of Series D Term Preferred Stock, without cost, copies of annual reports and quarterly reports substantially similar to the reports on Form 10-K and Form 10-Q that we would have been required to file with the SEC pursuant to Section 13 or 15(d) of the Exchange Act if we were subject to such provisions or, alternatively, we will voluntarily file reports on Form 10-K and Form 10-Q as if we were subject to Section 13 or 15(d) of the Exchange Act.

 

Redemption and Paying Agent

We have entered into an amendment to our Transfer Agency and Service Agreement with Computershare, Inc., or Computershare, or the Redemption and Paying Agent. Under this amendment, the Redemption and Paying Agent will serve as transfer agent and registrar, dividend disbursing agent and redemption and paying agent with respect to the Series D Term Preferred Stock.

 



 

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RISK FACTORS

You should carefully consider the risks described below, and the risks described in “Risk Factors” beginning on page 12 of the accompanying prospectus, before deciding to invest in the Series D Term Preferred Stock. The risks and uncertainties described below and in the accompanying prospectus are not the only ones we face. Additional risks and uncertainties not presently known to us, or not presently deemed material by us, may also impair our operations and performance and the value of the Series D Term Preferred Stock. If any of the following risks or the risks described in the accompanying prospectus actually occur, our business, financial condition or results of operations could be materially adversely affected, and the value of the Series D Term Preferred Stock may be impaired. If that happens, the trading price of the Series D Term Preferred Stock could decline, and you may lose all or part of your investment.

Risks of Investing in Preferred Stock

We may be unable to use the net proceeds from this offering to redeem the Series A Term Preferred Stock within the time period that we anticipate or at all, which could adversely affect our financial condition and results of operations and increase the likelihood of our failing to meet the asset coverage requirements of the 1940 Act.

We intend to use the net proceeds from this offering to redeem outstanding Series A Term Preferred Stock, to repay borrowings under our Credit Facility and for other general corporate purposes. We anticipate that substantially all of the net proceeds of this offering will be utilized in this manner within three months of the completion of this offering. However, we cannot assure you that we will be able to redeem the Series A Term Preferred Stock within this time period or at all. Any delay or failure to use the net proceeds from this offering to redeem the Series A Term Preferred Stock could adversely affect our financial condition and results of operations and increase the likelihood of our failing to meet the asset coverage requirements of the 1940 Act, as described below under “— Our amount of senior securities outstanding will increase as a result of this offering, which could adversely affect our business, financial condition and results of operations, our ability to meet our payment obligations under the Credit Facility and our ability to meet the asset coverage requirements of the 1940 Act.

The Series D Term Preferred Stock is a new issuance and does not have an established trading market, which may negatively affect its market value and your ability to transfer or sell your shares.

The shares of Series D Term Preferred Stock are a new issue of securities with no established trading market. We intend to apply to list the Series D Term Preferred Stock on the NASDAQ Global Select Market under the symbol “GAINM,” but there can be no assurance that NASDAQ will accept the Series D Term Preferred Stock for listing. Even if the application is approved, however, an active trading market for the shares may not develop or, even if it develops, may not last, in which case the trading price of the shares could be adversely affected and your ability to transfer your shares of Series D Term Preferred Stock will be limited. If an active trading market does develop, the Series D Term Preferred Stock may trade at prices lower than the initial offering price. The trading price of the Series D Term Preferred Stock would depend on many factors, including:

 

    prevailing interest rates;

 

    the market for similar securities;

 

    general economic and financial market conditions;

 

    our issuance of debt or preferred equity securities; and

 

    our financial condition, results of operations and prospects.

An investment in preferred stock with a fixed interest rate bears interest rate risk.

Preferred stock, including the Series D Term Preferred Stock, pays dividends at a fixed dividend rate. Prices of fixed income investments vary inversely with changes in market yields. The market yields on securities

 

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comparable to the Series D Term Preferred Stock may increase, which would likely result in a decline in the secondary market price of the Series D Term Preferred Stock prior to the Mandatory Term Redemption Date. This risk may be even more significant in light of low currently prevailing market interest rates. For additional information concerning dividends on the Series D Term Preferred Stock, see “Description of the Series D Term Preferred Stock — Dividends and Dividend Periods.”

There is no guarantee that the Series D Term Preferred Stock will be approved for listing, there may be no initial secondary trading market due to delayed listing, and even after listing a liquid secondary trading market may not develop.

We have applied to list the Series D Term Preferred Stock on NASDAQ, and we do not know when the Series D Term Preferred Stock will be approved for listing, if at all. If approved, we expect the Series D Term Preferred Stock to begin trading on NASDAQ within 30 days of the date of this prospectus supplement. During the time the Series D Term Preferred Stock is not listed on NASDAQ, the underwriters may make a market in the Series D Term Preferred Stock, but they are not obligated to do so and may discontinue any market-making at any time without notice. Consequently, an investment in the Series D Term Preferred Stock during this period may be illiquid, and holders of such shares may not be able to sell them during that period as it is unlikely that an active secondary market for the Series D Term Preferred Stock will develop. If a secondary market does develop during this period, holders of the Series D Term Preferred Stock may be able to sell such shares only at substantial discounts from the Liquidation Preference. We cannot accurately predict the trading patterns of the Series D Term Preferred Stock, including the effective costs of trading the stock. Even if our Series D Term Preferred Stock begins trading on NASDAQ, there is also a risk that such shares may be thinly traded, and the market for such shares may be relatively illiquid compared to the market for other types of securities, with the spread between the bid and asked prices considerably greater than the spreads of other securities with comparable terms and features.

The Series D Term Preferred Stock will not be rated.

We do not intend to have the Series D Term Preferred Stock rated by any rating agency. Unrated securities usually trade at a discount to similar, rated securities. As a result, there is a risk that the Series D Term Preferred Stock may trade at a price that is lower than it might otherwise trade if rated by a rating agency. It is possible, however, that one or more rating agencies might independently determine to assign a rating to the Series D Term Preferred Stock. In addition, we may elect to issue other securities for which we may seek to obtain a rating. If any ratings are assigned to the Series D Term Preferred Stock in the future or if we issue other securities with a rating, such ratings, if they are lower than market expectations or are subsequently lowered or withdrawn, could adversely affect the market for or the market value of the Series D Term Preferred Stock.

The Series D Term Preferred Stock will bear a risk of early redemption by us.

We may voluntarily redeem some or all of the Series D Term Preferred Stock on or after September 30, 2018, which is five years before the Mandatory Term Redemption Date of September 30, 2023. We also may be forced to redeem some or all of the Series D Term Preferred Stock to meet regulatory requirements and the Asset Coverage requirements of such shares. We are also required to redeem all of the Series D Term Preferred Stock upon a Change of Control Triggering Event. Any such redemption may occur at a time that is unfavorable to holders of the Series D Term Preferred Stock. We may have an incentive to redeem the Series D Term Preferred Stock voluntarily before the Mandatory Term Redemption Date if market conditions allow us to issue other Preferred Stock or debt securities at a rate that is lower than the Fixed Dividend Rate on the Series D Term Preferred Stock, or for other reasons. For further information regarding our ability to redeem the Series D Term Preferred Stock, see “Description of the Series D Term Preferred Stock — Optional Redemption” and “— Asset Coverage.”

 

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Claims of holders of the Series D Term Preferred Stock will be subject to a risk of subordination relative to holders of our debt instruments.

Rights of holders of the Series D Term Preferred Stock will be subordinated to the rights of holders of our current and any future indebtedness, including the Credit Facility. Even though the Series D Term Preferred Stock will be classified as a liability for purposes of accounting principles generally accepted in the U.S., or GAAP, and considered senior securities under the 1940 Act, the Series D Term Preferred Stock are not debt instruments. Therefore, dividends, distributions and other payments to holders of Preferred Stock in liquidation or otherwise may be subject to prior payments due to the holders of our indebtedness. In addition, under some circumstances the 1940 Act may provide debt holders with voting rights that are superior to the voting rights of holders of the Series D Term Preferred Stock.

We are subject to risks related to the general credit crisis and related liquidity risks.

General market uncertainty and extraordinary conditions in the credit markets may impact the liquidity of our investment portfolio. In turn, during extraordinary circumstances, this uncertainty could impact our distributions and/or ability to redeem the Series D Term Preferred Stock in accordance with their terms. Further, there may be market imbalances of sellers and buyers of Series D Term Preferred Stock during periods of extreme illiquidity and volatility in the credit markets. Such market conditions may lead to periods of thin trading in any secondary market for the Series D Term Preferred Stock and may make valuation of the Series D Term Preferred Stock uncertain. As a result, the spread between bid and ask prices is likely to increase significantly such that, if you invest in the Series D Term Preferred Stock, you may have difficulty selling your shares. Less liquid and more volatile trading environments could also result in sudden and significant valuation declines in the Series D Term Preferred Stock.

Holders of the Series D Term Preferred Stock will be subject to inflation risk.

Inflation is the reduction in the purchasing power of money resulting from the increase in the price of goods and services. Inflation risk is the risk that the inflation-adjusted, or “real,” value of an investment in Preferred Stock or the income from that investment will be worth less in the future. As inflation occurs, the real value of the Series D Term Preferred Stock and dividends payable on such shares declines.

Holders of the Series D Term Preferred Stock will bear reinvestment risk.

Given the seven-year term and potential for early redemption of the Series D Term Preferred Stock, holders of such shares may face an increased reinvestment risk, which is the risk that the return on an investment purchased with proceeds from the sale or redemption of the Series D Term Preferred Stock may be lower than the return previously obtained from the investment in such shares.

Holders of the Series D Term Preferred Stock will bear dividend risk.

We may be unable to pay dividends on the Series D Term Preferred Stock under some circumstances. The terms of our indebtedness, including the Credit Facility, preclude the payment of dividends in respect of equity securities, including the Series D Term Preferred Stock, under certain conditions. See “Liquidity and Capital Resources — Revolving Credit Facility.”

We face Asset Coverage risks in our investment activities.

The Asset Coverage that we maintain on our Preferred Stock, including the Series D Term Preferred Stock, is based upon a calculation of the value of our portfolio holdings. Our portfolio investments are, and we expect a large percentage of such investments 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 is generally not readily

 

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determinable. 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, employed by the Administrator (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 an established investment valuation policy, or the Policy, which has been approved by our Board of Directors, 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. 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, or TEV, of certain of our investments. Generally, at least once per year, we engage an independent valuation firm to value or review our valuation of our significant equity investments, which includes providing the information noted above. The Valuation Team evaluates such information for incorporation into our TEV, 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 Team’s recommended fair value.

A portion of our assets are, and may in the future be, comprised of debt and equity securities that are valued based on internal assessment using valuation methods approved by our Board of Directors, without the input of Standard & Poor’s Securities Evaluations, Inc., or SPSE, or other third-party evaluators. While we believe that our debt and equity valuation methods reflect those regularly used as standards by other professionals in our industry who value equity securities, the determination of fair value for securities that are not publicly traded necessarily involves an exercise of subjective judgment, whether or not we obtain the recommendations of an independent third-party evaluator.

Our use of these fair value methods is inherently subjective and is based on estimates and assumptions regarding each security. In the event that we are required to sell a security, we may ultimately sell for an amount materially less than the estimated fair value calculated by us or SPSE, or determined using TEV, or the discounted cash flow, or DCF, methodology. As a result, a risk exists that the Asset Coverage attributable to the Preferred Stock, including the Series D Term Preferred Stock, may be materially lower than what is calculated based upon the fair valuation of our portfolio securities in accordance with our valuation policies. See “Risk Factors — Risks Related to Our Investments — 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 NAV” on page 14 of the accompanying prospectus.

There is a risk of delay in our redemption of the Series D Term Preferred Stock, and we may fail to redeem such securities as required by their terms.

We 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 obtain cash equal to the value at which we record our investments quickly if a need arises. If we are unable to obtain sufficient liquidity prior to the Mandatory Term Redemption Date or a Change of Control Triggering Event, we may be forced to engage in a partial redemption or to delay a required redemption. If such a partial redemption or delay were to occur, the market price of the Series D Term Preferred Stock might be adversely affected.

 

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We finance our investments with borrowed money and 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.

 

     ASSUMED RETURN ON
OUR PORTFOLIO
(NET OF EXPENSES)
 
     (10)%     (5)%     0%     5%     10%  

Corresponding return to common stockholder (1)

     -20.91     -12.40 %     -3.89 %     4.62 %     13.13 %

 

(1) The hypothetical return to common stockholders is calculated by multiplying our total assets as of June 30, 2016, by the assumed rates of return and subtracting all interest accrued on our debt and dividends on our mandatorily redeemable preferred stock expected to be paid or declared during the twelve months following June 30, 2016, adjusted for the assumed dividends declared on the Series D Term Preferred Stock to be issued in this offering (and assuming proceeds are used as described under “Use of Proceeds”); and then dividing the resulting difference by our total assets attributable to Common Stock as of June 30, 2016. Based on $507.0 million in total assets, $79.6 million in borrowings outstanding on our Credit Facility, $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, $40.3 million in aggregate liquidation preference of Series C Term Preferred Stock and $297.9 million in net assets as of June 30, 2016 and assuming the Series D Term Preferred Stock to be issued in this offering is outstanding during the entire period and assuming proceeds are used as described under “Use of Proceeds.”

Based on an outstanding indebtedness of $84.7 million as of June 30, 2016, and the effective annual interest rate of 3.9% as of that date, aggregate liquidation preference of our Series B Term Preferred Stock of $41.4 million at a dividend rate of 6.75%, aggregate liquidation preference of our Series C Term Preferred stock of $40.3 million at a dividend rate of 6.50%, aggregate Liquidation Preference of the Series D Term Preferred Stock of $50.0 million to be issued in this offering at a dividend rate of 6.25%, and redemption of our Series A Term Preferred Stock with an aggregate liquidation preference of $40.0 million, our investment portfolio at fair value would have been required to experience an annual return of at least 2.36% to cover annual interest payments on our outstanding debt and dividends on the Series B, Series C and Series D Term Preferred Stock.

Other Risks

In addition to regulatory limitations on our ability to raise capital, the Credit Facility contains various covenants that, 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. In addition, we are obligated to redeem our Series A Term Preferred Stock in February 2017, to redeem our Series B Term Preferred Stock in December 2021 and to redeem our Series C Term Preferred Stock in May 2022. If we do not have sufficient funds to redeem the Series A Term Preferred Stock, the Series B Term Preferred Stock, or the Series C Term Preferred Stock, or if we do not have sufficient funds remaining following such redemption, we may experience an adverse effect on our business, financial condition and results of operations and our ability to meet our payment obligations under the Credit Facility and monthly dividend obligations with respect to our Preferred Stock.

We will have a continuing need for capital to finance our loans. We are party to a credit facility, which provides us with a revolving credit line facility of $185.0 million, of which $76.4 million was drawn as of September 16, 2016. The Credit Facility permits us to fund additional loans and investments as long as we are within the conditions set forth in the credit agreement and is currently scheduled to mature in June 2019. As a result of the Credit Facility, we are subject to certain limitations on the type of loan investments we make, including, but not limited to, restrictions on geographic concentrations, sector concentrations, loan size, dividend payout, payment

 

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frequency and status, and average life. The Credit Facility also requires us to comply with other financial and operational covenants, which require us to, among other things, maintain certain financial ratios, including asset and interest coverage, and a minimum net worth. As of September 16, 2016, we were in compliance with these covenants; however, our continued compliance with these covenants depends on many factors, some of which are beyond our control. Current market conditions have forced us to write down the value of a portion of our assets as required by the 1940 Act and fair value accounting rules. These are not realized losses, but constitute adjustment in asset values for purposes of financial reporting and for collateral value for the Credit Facility. As assets are marked down in value, the amount we can borrow on the Credit Facility decreases.

In particular, depreciation in the valuation of our assets, which valuation is subject to changing market conditions that remain very volatile, affects our ability to comply with the covenants under the Credit Facility. As of June 30, 2016, our net assets were $297.9 million, up from $279.0 million at March 31, 2016. The increase in our net assets is primarily a result of unrealized appreciation over the respective periods. The minimum net worth covenant contained in the credit agreement requires our net assets to be at least $170.0 million plus 50% of all equity and subordinated debt raised after June 26, 2014 minus 50% of all equity and subordinated debt retired or redeemed after June 26, 2014, which equates to $224.9 million as of June 30, 2016. Despite the recent increase in our net assets, the fair value of our investment portfolio remains less than the cost basis by approximately $31.4 million as of June 30, 2016. Given the slow recovery and general volatility in the capital markets, the cumulative 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 the Credit Facility. Accordingly, there are no assurances that we will continue to comply with these covenants. Under the Credit Facility, we are also required to maintain our status as a BDC under the 1940 Act and as a RIC under the Code. 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.

We are required to redeem all outstanding shares of Series A Term Preferred Stock on February 28, 2017, at a redemption price equal to the liquidation preference, plus an amount equal to accumulated but unpaid dividends, if any, on such shares (whether or not earned or declared, but excluding interest on such dividends) up to, but excluding, the redemption date. If we fail to redeem the Series A Term Preferred Stock pursuant to the mandatory redemption required on February 28, 2017, or in any other circumstance in which we are required to redeem the Series A Term Preferred Stock, then the fixed dividend rate of the Series A Term Preferred Stock will increase to an annual rate of 11% for so long as such failure continues. If we do not have sufficient funds to redeem the Series A Term Preferred Stock, whether from this offering or otherwise, or if we do not have sufficient funds remaining following such redemption, we may experience an adverse effect on our business, financial condition and results of operations and our ability to meet our payment obligations under the Credit Facility and monthly dividend obligations with respect to our Preferred Stock.

In addition, we are required to redeem all outstanding shares of Series B Term Preferred Stock on December 31, 2021, at a redemption price equal to the liquidation preference, plus an amount equal to accumulated but unpaid dividends, if any, on such shares (whether or not earned or declared, but excluding interest on such dividends) up to, but excluding, the redemption date. If we fail to redeem the Series B Term Preferred Stock pursuant to the mandatory redemption required on December 31, 2021, or in any other circumstance in which we are required to redeem the Series B Term Preferred Stock, then the fixed dividend rate of the Series B Term Preferred Stock will increase to an annual rate of 10.75% for so long as such failure continues. If we do not have sufficient funds to redeem the Series B Term Preferred Stock or if we do not have sufficient funds remaining following such redemption, we may experience an adverse effect on our business, financial condition and results of operations and our ability to meet our payment obligations under the Credit Facility and monthly dividend obligations with respect to our Preferred Stock.

Further, we are required to redeem all outstanding shares of Series C Term Preferred Stock on May 31, 2022, at a redemption price equal to the liquidation preference, plus an amount equal to accumulated but unpaid dividends,

 

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if any, on such shares (whether or not earned or declared, but excluding interest on such dividends) up to, but excluding, the redemption date. If we fail to redeem the Series C Term Preferred Stock pursuant to the mandatory redemption required on May 31, 2022, or in any other circumstance in which we are required to redeem the Series C Term Preferred Stock, then the fixed dividend rate of the Series C Term Preferred Stock will increase to an annual rate of 10.50% for so long as such failure continues. If we do not have sufficient funds to redeem the Series C Term Preferred Stock or if we do not have sufficient funds remaining following such redemption, we may experience an adverse effect on our business, financial condition and results of operations and our ability to meet our payment obligations under the Credit Facility and monthly dividend obligations with respect to our Preferred Stock.

Our amount of senior securities outstanding will increase as a result of this offering prior to the anticipated use of proceeds, which could adversely affect our business, financial condition and results of operations, our ability to meet our payment obligations under the Credit Facility and our ability to meet the asset coverage requirements of the 1940 Act.

As of June 30, 2016, we had $40.0 million outstanding of Series A Term Preferred Stock, $41.4 million outstanding of Series B Term Preferred Stock, $40.3 million outstanding of Series C Term Preferred Stock, $79.6 million of borrowings outstanding under the Credit Facility, and a $5.1 million secured borrowing. We intend to use the proceeds from this offering to redeem all outstanding shares of the Series A Term Preferred Stock, to repay borrowings under our Credit Facility and for other general corporate purposes. We anticipate that substantially all of the net proceeds of this offering will be used to redeem the shares of Series A Term Preferred Stock within three months of the completion of this offering; however, we cannot assure you that we will be able to redeem the shares of Series A Term Preferred Stock within this time period or at all. Until such time as the Series A Term Preferred Stock is redeemed in full using the proceeds of this offering (and, to the extent that the aggregate amount of shares of Series D Term Preferred Stock issued in this offering exceeds the aggregate amount of Series A Term Preferred Stock currently outstanding, following such redemption of the Series A Term Preferred Stock), our amount of senior securities outstanding will increase as a result of this offering.

The issuance of additional senior securities could have significant consequences on our future operations, including:

 

    making it more difficult for us to meet our payment and other obligations under the Credit Facility;

 

    resulting in an event of default if we fail to comply with the financial and other restrictive covenants contained in the Credit Facility, which event of default could result in all amounts outstanding under the Credit Facility becoming immediately due and payable;

 

    reducing the availability of our cash flow to fund investments and other general corporate purposes, and limiting our ability to obtain additional financing for these purposes;

 

    limiting our flexibility in planning for, or reacting to, and increasing our vulnerability to, changes in our business, the industry in which we operate and the general economy; and

 

    increasing the likelihood of our failing to meet the asset coverage requirements of the 1940 Act, as described below.

We may authorize, establish, create, issue and sell shares of one or more series of a class of our senior securities while shares of Series D Term Preferred Stock are outstanding without the vote or consent of the holders thereof.

While shares of Series D Term Preferred Stock are outstanding, we may, without the vote or consent of the holders thereof, authorize, establish and create and issue and sell shares of one or more series of a class of our senior securities representing stock under Section 18, as modified by Section 61, of the 1940 Act, ranking on parity with the Series D Term Preferred Stock as to payment of dividends and distribution of assets upon

 

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dissolution, liquidation or the winding up of our affairs, in addition to then outstanding shares of Series D Term Preferred Stock, including additional series of Preferred Stock, and authorize, issue and sell additional shares of any such series of Preferred Stock then outstanding or so established and created, in each case in accordance with applicable law, provided that we will, immediately after giving effect to the issuance of such additional Preferred Stock and to our receipt and application of the proceeds thereof, including to the redemption of Preferred Stock with such proceeds, have Asset Coverage of at least 200%.

Any of the above-listed factors could have an adverse effect on our business, financial condition and results of operations and our ability to meet our payment obligations under the Credit Facility and monthly dividend obligations or redemption obligations with respect to our Preferred Stock.

Our ability to meet our payment and other obligations under the Credit Facility and monthly dividend obligations with respect to our Preferred Stock depends on our ability to generate significant cash flow in the future. This, to some extent, is subject to general economic, financial, competitive, legislative and regulatory factors as well as other factors that are beyond our control. We cannot assure you that our business will generate cash flow from operations, or that future borrowings will be available to us under the Credit Facility or otherwise, in an amount sufficient to enable us to meet these obligations and to fund other liquidity needs. If we are not able to generate sufficient cash flow to service our obligations, we may need to refinance or restructure our debt, sell assets, reduce or delay capital investments, or seek to raise additional capital. If we are unable to implement one or more of these alternatives, we may not be able to meet our payment obligations under the Credit Facility or monthly dividend obligations with respect to our Preferred Stock.

In addition, we may issue debt securities, other evidences of indebtedness (including borrowings under the Credit Facility), senior securities representing indebtedness and senior securities that are 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 that are stock (such as our Preferred Stock), in amounts such that our asset coverage, in accordance with Sections 18 and 61 of the 1940 Act, is at least 200% immediately after each issuance of such senior security. The issuance of additional senior securities in this offering may increase the likelihood of our failing to meet the asset coverage requirements of the 1940 Act, especially prior to any redemption of the Series A Term Preferred Stock. 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 at a price below net asset value (“NAV”) per common share, as we have in October 2012 and in March 2015 for two separate follow-on common offerings, any non-participating common stockholders will be subject to dilution.

 

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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 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:

 

    further adverse changes in the economy and the capital markets;

 

    risks associated with negotiation and consummation of pending and future transactions;

 

    the loss of one or more of our executive officers, in particular David Gladstone, David A. R. Dullum or Terry Lee Brubaker;

 

    changes in our business strategy;

 

    availability, terms and deployment of capital;

 

    changes in our industry, interest rates or exchange rates or the general economy;

 

    the business prospectus of our portfolio companies;

 

    the degree and nature of our competition;

 

    our ability to maintain our qualification as a RIC and as a BDC;

 

    our ability to defend successfully claims and litigation against us; and

 

    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 or the accompanying prospectus, except as otherwise required by applicable law. The forward-looking statements contained in this prospectus supplement and 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.

 

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USE OF PROCEEDS

We estimate that the net proceeds to us of this offering will be approximately $48.2 million, after the payment of underwriting discounts and commissions of $1.6 million and estimated offering expenses of $0.2 million payable by us. We intend to use the net proceeds from this offering to redeem outstanding shares of Series A Term Preferred Stock, to repay borrowings under our Credit Facility and for other general corporate purposes. Shares of our Series A Term Preferred Stock accrue cumulative dividends at an annual rate of 7.125% and must be redeemed in full by February 28, 2017, the mandatory redemption date. The aggregate redemption price is $40.0 million, plus an amount equal to any accrued and unpaid dividends up to, but excluding, the date of redemption. As of June 30, 2016, we had $79.6 million of borrowings outstanding under the Credit Facility. As of September 16, 2016, we have $76.4 million outstanding under the Credit Facility. Indebtedness under the Credit Facility currently accrues interest at the rate of approximately 3.8%. The revolving period ends in June 2017 and outstanding balances under the Credit Facility are due and payable in June 2019.

We have granted the underwriters the right to purchase up to 300,000 additional shares of Series D Term Preferred Stock at the public offering price, less underwriting discounts and commissions, within 30 days of the date of this prospectus supplement solely to cover overallotments, if any. If the underwriters exercise such option in full, the estimated aggregate net proceeds to us, after the payment of underwriting discounts and commissions of $1.8 million and estimated offering expenses of $0.2 million payable by us, will be $55.5 million. 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 such offering.

 

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RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED DIVIDENDS

 

    

FOR THE

THREE
MONTHS

ENDED
JUNE 30,

     FOR THE YEARS ENDED MARCH 31,  
     2016      2016      2015      2014      2013      2012  
     (Dollars in thousands)  

Net investment income

   $ 6,812       $ 20,716       $ 19,897       $ 19,307       $ 16,488       $ 13,743   

Add: fixed charges and preferred dividends

     3,520         14,036         8,799         5,959         4,779         1,435   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Earnings

   $ 10,332       $ 34,752       $ 28,696       $ 25,266       $ 21,267       $ 15,178   

Fixed charges and preferred dividends:

                 

Interest expense

   $ 971       $ 4,154       $ 3,539       $ 2,075       $ 1,127       $ 768   

Amortization of deferred financing costs

     481         1,908         1,329         1,024         791         459   

Preferred dividends

     2,065         7,963         3,921         2,850         2,850         198   

Estimated interest component of rent

     3         11         10         10         11         10   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total fixed charges and preferred dividends

   $ 3,520       $ 14,036       $ 8,799       $ 5,959       $ 4,779       $ 1,435   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Ratio of earnings to combined fixed charges and preferred dividends

     2.9x         2.5x         3.3x         4.2x         4.5x         10.6x   

Computation of Pro Forma Ratio of Earnings to Combined Fixed Charges and Preferred Dividends After Adjustment for Issuance of the Series D Term Preferred Stock

 

     FOR THE
THREE
MONTHS

ENDED
JUNE 30,
2016
    FOR THE
YEAR
ENDED
MARCH 31,
2016
 
     (Dollars in thousands)  

Net investment income, as above

   $ 6,812      $ 20,716   

Add: fixed charges and preferred dividends, as above

     3,520        14,036   

Adjustments:

    

Pro forma decrease in interest expense (A)

     (90     (331

Pro forma increase of amortization of deferred financing costs (B)

     65        258   

Pro forma increase in preferred dividends (C)

     69        275   
  

 

 

   

 

 

 

Pro forma fixed charges and preferred dividends

     3,563        14,239   
  

 

 

   

 

 

 

Pro forma earnings

   $ 10,375      $ 34,955   
  

 

 

   

 

 

 

Pro forma ratio of earnings to combined fixed charges and preferred dividends (B)

     2.9x        2.5x   

 

(A) Pro forma decrease in interest expense on our Credit Facility related to this offering.
(B) Pro forma increase in amortization of deferred financing costs related to this offering. Pro forma numbers do not take into account adjustments for deferred financing cost amortization related to the redemption of our Series A Term Preferred Stock.
(C) Pro forma increase in preferred dividends paid related to this offering and the redemption of our Series A Term Preferred Stock.

 

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CAPITALIZATION

The following table sets forth our capitalization as of June 30, 2016:

 

    on an actual basis;

 

    on an as adjusted basis to give effect to the completion of this offering and the application of the estimated net proceeds of this offering (as described under “Use of Proceeds”), after deducting underwriters’ discounts and commissions and estimated offering expenses payable by us (and assuming the underwriters’ overallotment option is not exercised).

 

     AS OF JUNE 30,
2016
 
     ACTUAL     AS
ADJUSTED
 
     (Unaudited)  
     (Dollars in thousands)  

Borrowings, at cost

    

Borrowings under line of credit (1)

   $ 79,600      $ 71,409   

Secured borrowing

     5,096        5,096   
  

 

 

   

 

 

 

Total borrowings

     84,696        76,505   

Preferred Stock, at liquidation preference

    

Series A Term Preferred Stock, $.001 par value per share; $25 liquidation preference per share; 1,600,000 shares authorized, issued and outstanding, actual; 0 shares authorized, issued and outstanding, as adjusted

   $ 40,000      $ —     

Series B Term Preferred Stock, $.001 par value per share; $25 liquidation preference per share; 1,656,000 shares authorized, issued and outstanding, actual and as adjusted

     41,400        41,400   

Series C Term Preferred Stock, $.001 par value per share; $25 liquidation preference per share; 1,700,000 shares authorized, 1,610,000 issued and outstanding, actual and as adjusted

     40,250        40,250   

Series D Term Preferred Stock, $.001 par value per share; $25 liquidation preference per share; 0 shares authorized, issued and outstanding, actual; 3,000,000 shares authorized, 2,000,000 shares issued and outstanding, as adjusted (2)

     —          50,000   
  

 

 

   

 

 

 

Net Assets Applicable to Common Stockholders

    

Common stock, $.001 par value per share, 100,000,000 shares authorized, actual and as adjusted; 30,270,958 shares issued and outstanding, actual and as adjusted (3)

   $ 30      $ 30   

Capital in excess of par value

     311,493        311,493   

Cumulative net unrealized depreciation of investments

     (31,382     (31,382

Net investment income in excess of distributions

     7,603        7,603   

Accumulated net realized gain

     10,136        10,136   
  

 

 

   

 

 

 

Total Net Assets Available to Common Stockholders

   $ 297,880      $ 297,880   
  

 

 

   

 

 

 

Total Capitalization

   $ 504,226      $ 506,035   
  

 

 

   

 

 

 

 

(1) As of September 16, 2016, prior to closing the offering of the Series D Term Preferred Stock, the outstanding balance on the Credit Facility was $76.4 million. The net repayments during the period from July 1, 2016 through September 16, 2016, are not included in the “as adjusted” balance outstanding on the Credit Facility.
(2) Exclusive of assumed aggregate underwriting discounts and commissions of $1.6 million and $0.2 million of estimated offering costs payable by us in connection with this offering.
(3) None of these outstanding shares are held by us or for our account.

 

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The following are our outstanding classes of securities as of June 30, 2016.

 

TITLE OF CLASS

   AMOUNT
AUTHORIZED
     AMOUNT HELD
BY US OR

FOR OUR
ACCOUNT
     AMOUNT
OUTSTANDING
(EXCLUSIVE

OF AMOUNTS
HELD BY US
OR FOR OUR
ACCOUNT)
 

Common Stock

     100,000,000         —           30,270,958   

Series A Term Preferred Stock

     1,600,000         —           1,600,000   

Series B Term Preferred Stock

     1,656,000         —           1,656,000   

Series C Term Preferred Stock

     1,700,000         —           1,610,000   

 

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SELECTED FINANCIAL INFORMATION

The following consolidated selected financial data for the fiscal years ended March 31, 2016, 2015, 2014, 2013 and 2012 are derived from our consolidated financial statements that have been audited by PricewaterhouseCoopers, LLP, an independent registered public accounting firm. The consolidated selected financial data for the three months ended June 30, 2016 and 2015 are derived from our unaudited consolidated financial statements included in this prospectus supplement. The “other unaudited data” included at the bottom of the table are also unaudited. The data should be read in conjunction with our consolidated financial statements and notes thereto and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus supplement and the accompanying prospectus.

 

    Three Months Ended
June 30,
    Year Ended March 31,  
    2016     2015     2016     2015     2014     2013     2012  
    (dollar amounts in thousands, except per share data)  

Statement of Operations Data:

             

Total investment income

  $ 14,393      $ 12,706      $ 50,955      $ 41,643      $ 36,264      $ 30,538      $ 21,242   

Total expenses, net of credits from Adviser

    7,581        7,543        30,239        21,746        16,957        14,050        7,499   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net investment income

    6,812        5,163        20,716        19,897        19,307        16,488        13,743   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net realized and unrealized gain (loss)

    17,722        3,396        4,138        30,317        (20,636     791        8,223   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net increase (decrease) in net assets resulting from operations

  $ 24,534      $ 8,559      $ 24,854      $ 50,214      $ (1,329   $ 17,279      $ 21,966   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Per Common Share Data:

             

Net increase (decrease) in net assets resulting from operations per common share —basic and diluted (A)

  $ 0.81      $ 0.28      $ 0.82      $ 1.88      $ (0.05   $ 0.71      $ 0.99   

Net investment income before net gain (loss) on investments per common share —basic and diluted (A)

    0.23        0.17        0.68        0.75        0.73        0.68        0.62   

Cash distributions declared per common share (B)

    0.19        0.19        0.75        0.77        0.71        0.60        0.61   

Statement of Assets and Liabilities Data:

             

Total assets

  $ 507,039      $ 501,774      $ 506,260      $ 483,521      $ 330,694      $ 379,803      $ 325,297   

Net assets

    297,880        279,754        279,022        273,429        220,837        240,963        207,216   

Net asset value per common share

    9.84        9.24        9.22        9.18        8.34        9.10        9.38   

Common shares outstanding

    30,270,958        30,270,958        30,270,958        29,775,958        26,475,958        26,475,958        22,080,133   

Weighted common shares outstanding —basic and diluted

    30,270,958        30,260,079        30,268,253        26,665,821        26,475,958        24,189,148        22,080,133   

Senior Securities Data:

             

Total borrowings, at cost (C)

  $ 84,696      $ 94,846      $ 100,096      $ 123,896      $ 66,250      $ 94,016      $ 76,005   

Mandatorily redeemable preferred stock (D)

    121,650        121,650        121,650        81,400        40,000        40,000        40,000   

 

(A) Per share data is based on the weighted average common stock outstanding for both basic and diluted.
(B) The tax character of distributions is determined on an annual basis. For further information on the estimated character of our distributions to common stockholders, please refer to Note 9 — Distributions to Common Stockholders to our Consolidated Financial Statements included elsewhere in this prospectus.

 

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(C) Includes borrowings under our Credit Facility, other secured borrowings, and short-term loans, as applicable.
(D) Represents the total liquidation preference of our mandatorily redeemable preferred stock.

 

    Three Months
Ended June 30,
    Year Ended March 31,  
    2016     2015     2016     2015     2014     2013     2012  
    (dollar amounts in thousands, except per share data)  

Other Unaudited Data:

             

Number of portfolio companies

    36        34        36        34        29        21        17   

Average size of portfolio company investment at cost

  $ 14,510      $ 15,213      $ 14,392      $ 14,861      $ 13,225      $ 15,544      $ 15,670   

Total dollars invested

    28,976        17,326        69,380        108,197        132,291        87,607        91,298   

Total dollars repaid and collected from sales

    42,942        5,548        44,582        11,260        83,415        28,424        27,185   

Weighted average yield on investments (A)

    12.67     12.63     12.62     12.60     12.61     12.51     12.32

Total return (B)

    4.75        10.07        4.82        11.96        24.26        4.73        5.58   

 

(A) Weighted average yield on investments equals interest income earned on investments divided by the weighted average interest-bearing principal balance throughout the fiscal year.
(B) 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 distributions reinvested in accordance with the terms of the 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 9 — Distributions to Common Stockholders to our Consolidated Financial Statements included elsewhere in this prospectus.

 

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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, 2016 and the first quarter of the fiscal year ending March 31, 2017. 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.

(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)

 

     Quarter
Ended
 

Year ending March 31, 2017

   June 30, 2016  

Total investment income

   $ 14,393   

Net investment income

     6,812   

Net increase in net assets resulting from operations

     24,534   

Net increase in net assets resulting from operations per weighted average common share — basic & diluted

   $ 0.81   

 

     Quarter Ended  

Year ended March 31, 2016

   June 30, 2015      September 30, 2015     December 31, 2015     March 31, 2016  

Total investment income

   $ 12,706       $ 13,740      $ 12,068      $ 12,441   

Net investment income

     5,163         6,023        4,631        4,899   

Net increase (decrease) in net assets resulting from operations

     8,559         (110     (6,213     22,618   

Net increase (decrease) in net assets resulting from operations per weighted average common share — basic & diluted

   $ 0.29       $ —        $ (0.21   $ 0.74   
     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   

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following analysis of our financial conditions and results of operations in conjunction with our interim consolidated financial statements and the related notes contained elsewhere in this prospectus supplement and the consolidated financial statements in the accompanying prospectus. Historical financial condition and results of operations and percentage relationship among any amounts in the financial statements are not necessarily indicative of financial condition, results of operations or percentage relationship for any future periods. Except per share amounts, dollar amounts in the tables included herein are in thousands unless otherwise indicated.

OVERVIEW

General

We were incorporated under the General Corporation Law of the State of Delaware on February 18, 2005. On June 22, 2005, we completed our 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 BDC under the 1940 Act. For federal income tax purposes, we have elected to be treated as a RIC under 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 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 our 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 in value 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 June 30, 2016, our investment portfolio was made up of 71.9% in debt securities and 28.1% in equity securities, at cost.

We focus on investing in small and medium-sized private businesses in the 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 borrower’s 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.

Additionally, in July 2012, the SEC granted us the Co-Investment Order that expanded our ability to co-invest with certain of our affiliates under certain circumstances and any future business development company or

 

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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 SEC’s order. We have opportunistically made several co-investments with our affiliate, Gladstone Capital Corporation, pursuant to the Co-Investment Order. We believe the Co-Investment Order has enhanced and will continue to enhance our ability to further our investment objectives and strategies. If we are participating in an investment with one or more co-investors, whether or not an affiliate of ours, our investment is likely to be smaller than if we were investing alone.

We are externally managed by our affiliated investment adviser, Gladstone Management Corporation, an SEC registered investment adviser, pursuant to the Advisory Agreement. The Adviser manages our investment activities. We have also entered into the Administration Agreement with the Administrator, an affiliate of ours and the Adviser, whereby we pay separately for administrative services. Each of the Adviser and Administrator are privately-held companies that are indirectly owned and controlled by David Gladstone, our chairman and chief executive officer.

Additionally, Gladstone Securities, LLC (“Gladstone Securities”), a privately-held broker-dealer registered with the Financial Industry Regulatory Authority and insured by the Securities Investor Protection Corporation, which is 100% indirectly owned and controlled by Mr. Gladstone, our chairman and chief executive officer, has provided other services, such as investment banking and due diligence services, to certain of our portfolio companies, for which Gladstone Securities receives a fee. Any such fees paid by portfolio companies to Gladstone Securities do not impact the fees we pay to the Adviser or the voluntary, unconditional, and irrevocable credits against the base management fee. For additional information refer to Note 4 — Related Party Transactions of the notes to our accompanying Consolidated Financial Statements.

Our shares of common stock, Series A Term Preferred Stock, Series B Term Preferred Stock and Series C Term Preferred Stock are traded on NASDAQ under the trading symbols “GAIN,” “GAINP,” “GAINO,” and “GAINN,” respectively.

Business

Portfolio Activity

While economic 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. During the three months ended June 30, 2016, we invested $25.5 million in one new portfolio company and exited one existing portfolio company with a fair value of $44.9 million as of March 31, 2016; therefore, the number of portfolio companies was 36 as of both June 30, 2016 and March 31, 2016. From our initial public offering in June 2005 through June 30, 2016, we have made investments in 44 companies, excluding investments in syndicated loans, for a total of approximately $860 million before giving effect to principal repayments and divestitures. For the three months ended June 30, 2016, our new investments consisted of 72.9% secured second lien loans and 27.1% equity investments, based on the originating principal balances.

The majority of the 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 the contingent nature of success fees, 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 June 30, 2016, we had unrecognized success fees of $29.9 million, or $0.99 per common share. Consistent with GAAP, we have not recognized success fee receivables and related income in our Consolidated Financial Statements until earned.

Since inception, we have closed eight buyout liquidity events, which, in the aggregate, have generated $88.4 million in net realized gains and $18.9 million in other income, for a total increase to our net assets of $107.3

 

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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. The eight liquidity events have offset our cumulative realized losses since inception, which were primarily incurred during the recession in connection with the sale of performing syndicated loans at a realized loss to pay off a former lender. These successful exits, in part, enabled us to increase the monthly distribution by 56.3% since March 2011, and allowed us to declare and pay a $0.03 per common share one-time special distribution in fiscal year 2012, a $0.05 per common share one-time special distribution in November 2013, and a $0.05 per common share one-time special distribution 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 of and increases to our Credit Facility and by accessing the capital markets in the form of public offerings of common and preferred stock. We have successfully extended our Credit Facility’s revolving period multiple times, most recently to June 2017, and increased the commitment from $60.0 million to $185.0 million (with a potential total commitment of $250.0 million through additional commitments of new or existing lenders). Additionally, we issued approximately 3.8 million shares of common stock for gross proceeds of $28.1 million in March 2015, inclusive of the April 2015 overallotment, and 1.6 million shares of our Series C Term Preferred Stock for gross proceeds of $40.3 million in May 2015. Refer to “Liquidity and Capital Resources — Equity — Common Stock” and “Liquidity and Capital Resources — Equity — Term Preferred Stock” for further discussion of our common stock and mandatorily redeemable preferred stock and “Liquidity and Capital Resources — Revolving Credit Facility” for further discussion of our Credit Facility.

Although we were able to access the capital markets historically, 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 common equity. On September 16, 2016, the closing market price of our common stock was $8.77 per share, which represented a 10.9% discount to our NAV of $9.84 per share as of June 30, 2016. When our common stock trades below NAV, our ability to issue additional 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 2015 Annual Meeting of Stockholders held on August 6, 2015, 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 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 2015 stockholder authorization is in effect for one year from the date of stockholder approval. At our 2016 Annual Meeting of Stockholders held on August 4, 2016, we asked our stockholders to vote in favor of a similar proposal, which was approved to be effective through August 2017. We sought and obtained stockholder approval concerning similar proposals at each Annual Meeting of Stockholders since 2008, and with our Board of Directors’ subsequent approval, we issued shares of our common stock in March and April 2015 and 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

 

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(in accordance with Sections 18 and 61 of the 1940 Act) of at least 200.0% on each of our senior securities representing indebtedness and our senior securities that are stock (such as our three series of term preferred stock).

Investment Highlights

During the three months ended June 30, 2016, we disbursed $25.5 million in new debt and equity investments, received $43.5 million in proceeds from repayments and sales, and extended $3.5 million of follow-on investments to existing portfolio companies through revolver draws or additions to equity. From our initial public offering in June 2005 through June 30, 2016, we have made investments in 44 companies, excluding investments in syndicated loans, for a total of approximately $860 million before giving effect to principal repayments and divestitures.

Investment Activity

During the three months ended June 30, 2016, the following significant transactions occurred:

 

    In April 2016, we sold our investment in Acme Cryogenics, Inc. (“Acme”), which resulted in dividend income of $2.8 million and a net realized gain of $18.8 million. In connection with the sale, we received net cash proceeds of $44.6 million, including the repayment of our debt investment of $14.5 million at par and net receivables of $0.6 million, which are recorded within Other assets, net on the accompanying Consolidated Statement of Assets and Liabilities included elsewhere in this prospectus supplement.

 

    In May 2016, we invested $25.5 million in The Mountain Corporation (“The Mountain”) through a combination of secured second lien debt and preferred equity. The Mountain, headquartered in Keene, New Hampshire, is a designer and manufacturer of premium quality, bold artwear apparel serving a diverse global customer base.

Recent Developments

Registration Statement

On June 16, 2015, we filed a registration statement on Form N-2 (File No. 333-204996) with the SEC and subsequently filed a Pre-Effective Amendment No. 1 to the registration statement on July 28, 2015, which the SEC declared effective on July 29, 2015. On June 8, 2016, we filed Post-Effective Amendment No. 1 to the registration statement, which the SEC declared effective on July 28, 2016. 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 concurrent, separate offerings of such securities. No securities have been issued to date under the registration statement.

Distributions and Dividends

In July 2016, our Board of Directors declared the following monthly distributions to common stockholders and dividends to holders of our Series A Term Preferred Stock, Series B Term Preferred Stock, and Series C 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
     Dividend
per Series C
Term
Preferred
Share
 

July 22, 2016

     August 2, 2016       $ 0.0625       $ 0.1484375       $ 0.140625       $ 0.135417   

August 22, 2016

     August 31, 2016         0.0625         0.1484375         0.140625         0.135417   

September 21, 2016

     September 30, 2016         0.0625         0.1484375         0.140625         0.135417   
     

 

 

    

 

 

    

 

 

    

 

 

 

Total for the Quarter:

      $ 0.1875       $ 0.4453125       $ 0.421875       $ 0.406251   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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RESULTS OF OPERATIONS

Comparison of the Three Months Ended June 30, 2016 to the Three Months Ended June 30, 2015

 

     For the Three Months Ended June 30,  
     2016     2015     $ Change     % Change  

INVESTMENT INCOME

        

Interest income

   $ 11,628      $ 11,385      $ 243        2.1

Other income

     2,765        1,321        1,444        109.3   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total investment income

     14,393        12,706        1,687        13.3   
  

 

 

   

 

 

   

 

 

   

 

 

 

EXPENSES

        

Base management fee

     2,509        2,453        56        2.3   

Loan servicing fee

     1,681        1,559        122        7.8   

Incentive fee

     1,700        1,291        409        31.7   

Administration fee

     299        355        (56     (15.8

Interest and dividend expense

     3,036        2,831        205        7.2   

Amortization of deferred financing costs and discounts

     481        460        21        4.6   

Other

     393        998        (605     (60.6
  

 

 

   

 

 

   

 

 

   

 

 

 

Expenses before credits from Adviser

     10,099        9,947        152        1.5   

Credits to fees from Adviser

     (2,518     (2,404     (114     4.7   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses, net of credits to fees

     7,581        7,543        38        0.5   
  

 

 

   

 

 

   

 

 

   

 

 

 

NET INVESTMENT INCOME

     6,812        5,163        1,649        31.9   
  

 

 

   

 

 

   

 

 

   

 

 

 

REALIZED AND UNREALIZED GAIN (LOSS)

        

Net realized gain on investments

     18,635        199        18,436        NM   

Net realized loss on other

     (75     —          (75     NM   

Net unrealized (depreciation) appreciation of investments

     (913     3,197        (4,110     NM   

Net unrealized appreciation of other

     75        —          75        NM   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net realized and unrealized gain

     17,722        3,396        14,326        421.8   
  

 

 

   

 

 

   

 

 

   

 

 

 

NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS

   $ 24,534      $ 8,559      $ 15,975        186.6
  

 

 

   

 

 

   

 

 

   

 

 

 

BASIC AND DILUTED PER COMMON SHARE:

        

Net investment income

   $ 0.23      $ 0.17      $ 0.05        29.4
  

 

 

   

 

 

   

 

 

   

 

 

 

Net increase in net assets resulting from operations

   $ 0.81      $ 0.28      $ 0.53        189.3
  

 

 

   

 

 

   

 

 

   

 

 

 

NM = Not Meaningful

Investment Income

Total investment income increased by 13.3% for the three months ended June 30, 2016, as compared to the prior year period. This increase was primarily due to an increase in other income as well as an increase in interest income, which resulted from an increase in the size of our interest-bearing portfolio for the three months ended June 30, 2016 as compared to the prior year period.

Interest income from our investments in debt securities increased 2.1% for the three months ended June 30, 2016, as compared to the prior year period. 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 three months ended June 30, 2016 was $367.2 million, compared to $362.6 million for the prior year

 

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period. This increase was primarily due to $60.7 million in new debt investments originated after June 30, 2015, partially offset by the pay-off of $48.1 million of debt investments principally related to the exit of portfolio companies.

At June 30, 2016 and 2015, our loans to one portfolio company, Tread Corporation (“Tread”), were on non-accrual status, with an aggregate debt cost basis of $3.2 million and $11.3 million, respectively. The weighted average yield on our interest-bearing investments, excluding cash and cash equivalents and receipts recorded as other income, was 12.7% and 12.6% for the three months ended June 30, 2016 and 2015, respectively. 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 three months ended June 30, 2016 increased 109.3% from the prior year period. During the three months ended June 30, 2016, other income primarily consisted of $2.8 million of dividend income. For the three months ended June 30, 2015, other income primarily consisted of $0.4 million of dividend income and $0.9 million of success fee income.

The following table lists the investment income for our five largest portfolio company investments based on fair value during the respective periods:

 

     As of June 30, 2016     Three months ended
June 30, 2016
 

Portfolio Company

   Fair Value      % of
Portfolio
    Investment
Income
     % of Total
Investment
Income
 

Counsel Press, Inc.

   $ 30,198         6.2   $ 777         5.4

Cambridge Sound Management, Inc.

     26,806         5.5        493         3.4   

The Mountain Corporation (A)

     25,500         5.2        370         2.6   

SOG Specialty Knives & Tools, LLC

     22,731         4.6        662         4.6   

Nth Degree, Inc.

     22,405         4.6        420         2.9   
  

 

 

    

 

 

   

 

 

    

 

 

 

Subtotal — five largest investments

     127,640         26.1        2,722         18.9   

Other portfolio companies

     363,341         73.9        11,671         81.1   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total investment portfolio

   $ 490,981         100.0   $ 14,393         100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

 

     As of June 30, 2015     Three months ended
June 30, 2015
 

Portfolio Company

   Fair Value      % of
Portfolio
    Investment
Income
     % of Total
Investment
Income
 

Funko, LLC (B)

   $ 31,221         6.5   $ 442         3.5

SOG Specialty Knives & Tools, LLC

     29,766         6.2        662         5.2   

Counsel Press, Inc.

     29,463         6.1        791         6.2   

Cambridge Sound Management, Inc.

     26,180         5.4        493         3.9   

Acme Cryogenics, Inc. (B)

     25,569         5.3        422         3.3   
  

 

 

    

 

 

   

 

 

    

 

 

 

Subtotal — five largest investments

     142,199         29.5        2,810         22.1   

Other portfolio companies

     339,044         70.5        9,896         77.9   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total investment portfolio

   $ 481,243         100.0   $ 12,706         100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

 

(A) New investment during the applicable period.
(B) We exited the investment subsequent to June 30, 2015.

 

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Expenses

Total expenses, net of any voluntary, unconditional, and irrevocable credits from the Adviser, were relatively flat during the three months ended June 30, 2016, as compared to the prior year period, as the increase in interest and dividend expense and the incentive fee was offset by a decrease in other expenses.

The incentive fee increased for the three months ended June 30, 2016, as compared to the prior year period, as net investment income increased over the respective periods.

The base management fee, loan servicing fee, incentive fee, and their related voluntary, unconditional, and irrevocable credits are computed quarterly, as described under Transactions with the Adviser in Note 4 —Related Party Transactions of the notes to our accompanying Consolidated Financial Statements and are summarized in the following table:

 

     Three Months Ended
June 30,
 
     2016     2015  

Average total assets subject to base management fee (A)

   $ 501,800      $ 490,600   

Multiplied by prorated annual base management fee of 2.0%

     0.5     0.5
  

 

 

   

 

 

 

Base management fee (B)

     2,509        2,453   

Credits to fees from Adviser — other (B)

     (837     (845
  

 

 

   

 

 

 

Net base management fee

   $ 1,672      $ 1,608   
  

 

 

   

 

 

 

Loan servicing fee (B)

   $ 1,681      $ 1,559   

Credits to base management fee — loan servicing fee (B)

     (1,681     (1,559
  

 

 

   

 

 

 

Net loan servicing fee

   $ —        $ —     
  

 

 

   

 

 

 

Incentive fee (B)

   $ 1,700      $ 1,291   

Credits to fees from Adviser — other (B)

     —          —     
  

 

 

   

 

 

 

Net incentive fee

   $ 1,700      $ 1,291   
  

 

 

   

 

 

 

 

(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 7.2% for the three months ended June 30, 2016, as compared to the prior year period, primarily due to dividends paid related to our Series C Term Preferred Stock issued in May 2015, partially offset by lower costs of borrowings on our Credit Facility, as the increase in the effective interest rate was more than offset by the decrease in average borrowings outstanding. The weighted average balance outstanding on our Credit Facility during the three months ended June 30, 2016, was $79.9 million, as compared to $103.1 million in the prior year period. The effective interest rate on our Credit Facility, excluding the impact of deferred financing costs, during the three months ended June 30, 2016 was 4.4% as compared to 3.9% in the prior year period. Dividends on mandatorily redeemable preferred stock increased $0.3 million from the prior year period, when the Series C Term Preferred Stock was newly issued and only outstanding for a portion of the period.

Other expenses decreased 60.6% for the three months ended June 30, 2016, as compared to the prior year period, primarily as a result of lower professional fees, including legal and diligence fees, as well as lower bad debt expense.

 

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Realized and Unrealized Gain (Loss)

Net Realized Gain on Investments

During the three months ended June 30, 2016, we recorded net realized gains on investments of $18.6 million, primarily related to the $18.8 million realized gain from the exit of Acme, compared to net realized gains of $0.2 million during the prior year period related to exit of Roanoke Industries Corp.

Net Realized Loss on Other

During the three months ended June 30, 2016, we recorded a net realized loss on other of $75 due to the expiration of our interest rate cap agreement.

Net Unrealized Appreciation (Depreciation) of Investments

During the three months ended June 30, 2016, we recorded net unrealized depreciation of investments of $0.9 million. The realized gain (loss) and unrealized appreciation (depreciation) across our investments for the three months ended June 30, 2016, were as follows:

 

     Three Months Ended June 30, 2016  

Portfolio Company

   Realized
Gain
(Loss)
     Unrealized
Appreciation
(Depreciation)
     Reversal of
Unrealized
(Appreciation)
Depreciation
     Net Gain
(Loss)
 

Galaxy Tool Holding Corporation

   $ —         $ 7,819       $ —         $ 7,819   

Head Country, Inc.

     —           5,082         —           5,082   

Jackrabbit, Inc.

     —           2,891         —           2,891   

Brunswick Bowling Products, Inc.

     —           2,279         —           2,279   

Logo Sportswear, Inc.

     —           1,909         —           1,909   

Country Club Enterprises, LLC

     —           1,406         —           1,406   

Nth Degree, Inc.

     —           1,403         —           1,403   

Mitchell Rubber Products, Inc.

     —           1,326         —           1,326   

Counsel Press, Inc.

     —           1,299         —           1,299   

Behrens Manufacturing, LLC

     —           1,297         —           1,297   

Drew Foam Company, Inc.

     —           1,239         —           1,239   

B-Dry, LLC

     —           1,186         —           1,186   

Schylling, Inc.

     —           1,169         —           1,169   

Frontier Packaging, Inc.

     —           1,119         —           1,119   

Ginsey Home Solutions, Inc.

     —           1,002         —           1,002   

GI Plastek, Inc.

     —           247         —           247   

Channel Technologies Group, LLC

     —           (257      —           (257

Meridian Rack & Pinion, Inc.

     —           (530      —           (530

B+T Group Acquisition, Inc.

     —           (770      —           (770

Cambridge Sound Management, Inc.

     —           (1,028      —           (1,028

D.P.M.S., Inc.

     —           (1,154      —           (1,154

Old World Christmas, Inc.

     —           (1,610      —           (1,610

Tread Corporation

     —           (1,708      —           (1,708

Precision Southeast, Inc.

     —           (2,240      —           (2,240

Acme Cryogenics, Inc.

     18,806         —           (21,216      (2,410

SOG Specialty Knives & Tools, LLC

     —           (3,416      —           (3,416

Other, net (<$250 Net)

     (171      343         —           172   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 18,635       $ 20,303       $ (21,216    $ 17,722   
  

 

 

    

 

 

    

 

 

    

 

 

 

The primary driver of net unrealized depreciation of $0.9 million for the three months ended June 30, 2016, was the reversal of $21.2 million of previously recorded unrealized appreciation on our investment in Acme upon exit. This decrease was partially offset by unrealized appreciation resulting from an increase in performance of several of our portfolio companies.

 

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During the three months ended June 30, 2015, we recorded net unrealized appreciation on investments of $3.2 million. The realized gain (loss) and unrealized appreciation (depreciation) across our investments for the three months ended June 30, 2015, were as follows:

 

     Three Months Ended June 30, 2015  

Portfolio Company

   Realized
Gain
     Unrealized
Appreciation
(Depreciation)
     Reversal of
Unrealized
(Appreciation)
Depreciation
     Net Gain
(Loss)
 

Funko, LLC

   $ —         $ 6,213       $ —         $ 6,213   

Cambridge Sound Management, Inc.

     —           3,982         —           3,982   

Frontier Packaging, Inc

     —           3,484         —           3,484   

Acme Cryogenics, Inc.

     —           2,550         —           2,550   

D.P.M.S., Inc.

     —           2,470         —           2,470   

Mathey Investments, Inc.

     —           1,703         —           1,703   

Precision Southeast, Inc.

     —           1,668         —           1,668   

Tread Corporation

     —           1,520         —           1,520   

Logo Sportswear, Inc.

     —           1,204         —           1,204   

SBS Industries, LLC

     —           829         —           829   

Behrens Manufacturing, LLC

     —           672         —           672   

Roanoke Industries Corp.

     215         —           (110      105   

Head Country, Inc.

     —           (155      —           (155

Quench Holdings Corp.

     —           (197      —           (197

Drew Foam Company, Inc.

     —           (323      —           (323

Ginsey Home Solutions, Inc.

     —           (968      —           (968

Meridian Rack & Pinion, Inc.

     —           (1,239      —           (1,239

Alloy Die Casting Co.

     —           (1,360      —           (1,360

Counsel Press, Inc.

     —           (1,432      —           (1,432

Country Club Enterprises, LLC

     —           (1,437      —           (1,437

SOG Specialty Knives & Tools, LLC

     —           (2,085      —           (2,085

Edge Adhesives Holdings, Inc.

     —           (2,114      —           (2,114

Jackrabbit, Inc.

     —           (2,776      —           (2,776

Old World Christmas, Inc.

     —           (4,205      —           (4,205

B+T Group Acquisition, Inc.

     —           (4,541      —           (4,541

Other, net (<$250 Net)

     (16      (156      —           (172
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 199       $ 3,307       $ (110    $ 3,396   
  

 

 

    

 

 

    

 

 

    

 

 

 

The primary driver of net unrealized appreciation of $3.2 million for the three months ended June 30, 2015, was an improvement in the performance of certain portfolio companies and an increase in comparable multiples used to estimate the fair value of our investments, which more than offset the decreased performance of several of our portfolio companies.

Across our entire investment portfolio, we recorded $0.3 million of net unrealized depreciation on our debt positions and $0.6 million of net unrealized depreciation on our equity holdings for the three months ended June 30, 2016. At June 30, 2016, the fair value of our investment portfolio was less than our cost basis by $31.4 million, as compared to $30.5 million at March 31, 2016, representing net unrealized depreciation of $0.9 million for the three months ended June 30, 2016. Our entire portfolio had a fair value of 94.0% of cost as of June 30, 2016.

 

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Net Unrealized Appreciation on Other

During the three months ended June 30, 2016, we recorded net unrealized appreciation on other of $75 due to the reversal of previously recorded depreciation upon the expiration of our interest rate cap agreement. There was no net unrealized appreciation or depreciation on other for the three months ended June 30, 2015.

LIQUIDITY AND CAPITAL RESOURCES

Operating Activities

Net cash provided by operating activities for the three months ended June 30, 2016, was $21.9 million, as compared to net cash used in operating activities of $6.1 million for the three months ended June 30, 2015. This change was primarily due to increased investment repayments and net proceeds from sales of investments, which more than offset the increase in cash paid for the purchase of investments period over period. Purchases of investments were $29.0 million during the three months ended June 30, 2016 compared to $17.3 million during the three months ended June 30, 2015. Repayments and proceeds from the sale of investments totaled $42.9 million during the three months ended June 30, 2016 compared to $5.5 million during the three months ended June 30, 2015.

As of June 30, 2016, we had equity investments in or loans to 36 portfolio companies with an aggregate cost basis of $522.4 million. As of June 30, 2015, we had equity investments in or loans to 34 portfolio companies with an aggregate cost basis of $517.3 million. The following table summarizes our total portfolio investment activity during the three months ended June 30, 2016 and 2015:

 

     Three Months Ended
June 30,
 
     2016      2015  

Beginning investment portfolio, at fair value

   $ 487,656       $ 466,053   

New investments

     25,500         16,251   

Disbursements to existing portfolio companies

     3,476         1,075   

Scheduled principal repayments

     —           (1,650

Unscheduled principal repayments

     (15,411      (3,583

Net proceeds from sales of investments

     (27,531      (315

Net realized gain on investments

     18,204         215   

Net unrealized appreciation of investments

     20,303         3,307   

Reversal of net unrealized appreciation of investments

     (21,216      (110
  

 

 

    

 

 

 

Ending investment portfolio, at fair value

   $ 490,981       $ 481,243   
  

 

 

    

 

 

 

The following table summarizes the contractual principal repayment and maturity of our investment portfolio by fiscal year, assuming no voluntary prepayments, as of June 30, 2016:

 

          Amount  

For the remaining nine months ending March 31:

   2017    $ 22,160   

For the fiscal years ending March 31:

   2018      76,326   
   2019      81,681   
   2020      101,108   
   2021      75,515   
   Thereafter      18,600   
     

 

 

 
  

Total contractual repayments

   $ 375,390   
  

Investments in equity securities

     146,973   
     

 

 

 
  

Total cost basis of investments held as of June 30, 2016:

   $ 522,363   
     

 

 

 

 

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Financing Activities

Net cash used in financing activities for the three months ended June 30, 2016, was $21.2 million, which consisted primarily of $15.4 million of net repayments on our Credit Facility and $5.7 million in distributions to common stockholders. Net cash provided by financing activities for the three months ended June 30, 2015, was $7.3 million, which consisted primarily of $38.5 million of proceeds from the issuance of our Series C Term Preferred Stock in May 2015, net of total deferred financing and offering costs, and $3.4 million of net proceeds from the issuance of common shares in April 2015, partially offset by $29.1 million of net repayments on our Credit Facility and $5.7 million in distributions to common stockholders.

Distributions and Dividends 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 ordinary income plus the excess of our net short-term capital gains over net long-term capital losses (“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 $0.0625 per common share for each of the three months, April, May, and June 2016. Our Board of Directors declared these distributions based on estimates of Investment Company Taxable Income for the fiscal year ending March 31, 2017.

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, 2017 will be determined after the 2017 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, 2016, distributions to common stockholders totaled $22.7 million and were less than our taxable income for the same year, when also considering prior spillover amounts under Section 855(a) of the Code. At March 31, 2016, we elected to treat $6.9 million of the first distributions paid after fiscal year-end as having been paid in the prior fiscal year, in accordance with Section 855(a) of the Code. In addition, we recorded a $1.7 million adjustment for estimated permanent book-tax differences, which decreased Capital in excess of par value and Accumulated net realized loss and increased Net investment income in excess of distributions as of March 31, 2016. As of June 30, 2016, we recorded a $0.1 million adjustment for estimated permanent book-tax differences, which decreased Capital in excess of par value, and increased Accumulated net realized gain (loss) and Net investment income in excess of distributions.

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, $0.140625 per share to holders of our Series B Term Preferred Stock, and $0.135417 per share to holders of our Series C Term Preferred Stock for each of the three months, April, May, and June 2016. 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.

 

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Dividend Reinvestment Plan

Our common stockholders who hold their shares through our transfer agent, Computershare, have the option to participate in a dividend reinvestment plan offered by Computershare. 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 stockholder’s account. Our plan agent purchases shares in the open market in connection with the obligations under the plan. The Computershare dividend reinvestment plan is not open to our preferred stock stockholders.

Equity

Registration Statement

On June 16, 2015, we filed a registration statement on Form N-2 (File No. 333-204996) with the SEC and subsequently filed a Pre-Effective Amendment No. 1 to the registration statement on July 28, 2015, which the SEC declared effective on July 29, 2015. On June 8, 2016, we filed Post-Effective Amendment No. 1 to the registration statement, which the SEC declared effective on July 28, 2016. 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 concurrent, separate offerings of such securities. No securities have been issued to date under the registration statement.

Common Stock

We anticipate issuing equity securities to obtain additional capital in the future. However, we cannot determine the timing or 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 predominantly 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, and meeting other stated requirements. On September 16, 2016, the closing market price of our common stock was $8.77 per share, representing a 10.9% discount to our NAV of $9.84 per share as of June 30, 2016. 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 2015 Annual Meeting of Stockholders held on August 6, 2015, 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 2016 Annual Meeting of Stockholders, which took place on August 4, 2016, we again asked our stockholders to vote in favor of a similar proposal for the fiscal year ending March 31, 2017, which was approved on such date.

Term Preferred Stock

Pursuant to our 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

 

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offering costs borne by us, were $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 discounts to the liquidation value 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, up 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.

Pursuant to our 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 costs 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 discounts to the liquidation value 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, up 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, and (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 our 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 costs borne by us, were $38.6 million. We incurred $1.6 million in total offering costs related to this offering, which have been recorded as discounts to the liquidation value on our accompanying Consolidated Statements of Assets and Liabilities and are being 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, up 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

 

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control of us, we would be required to redeem all of our outstanding Series C Term Preferred Stock, and (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 mandatorily redeemable 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. The asset coverage on our senior securities that are stock (our Series A, B, and C Term Preferred Stock) as of June 30, 2016 was 239.7%, calculated pursuant to Sections 18 and 61 of the 1940 Act.

Revolving Credit Facility

On June 26, 2014, we, through our wholly-owned subsidiary, Business Investment, entered into Amendment No. 1 to our Fifth Amended and Restated Credit Agreement originally entered into on April 30, 2013 with KeyBank National Association (“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 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. 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, 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.

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.

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. 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 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. Business Investment is also subject to certain limitations on the type of loan investments it can make, including restrictions on geographic concentrations, sector concentrations, loan size, payment frequency and status, average life, portfolio company leverage, and lien property. Our Credit Facility

 

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also requires Business Investment to comply with other financial and operational covenants, which obligate it 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 $224.9 million as of June 30, 2016, (ii) asset coverage with respect to senior securities representing indebtedness of at least 200%, in accordance with Sections 18 and 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 June 30, 2016, and as defined in the performance guaranty of our Credit Facility, we had a net worth of $415.6 million, an asset coverage ratio with respect to senior securities representing indebtedness of 574.4%, calculated in compliance with the requirements of Sections 18 and 61 of the 1940 Act, 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 June 30, 2016, we had 29 obligors in the borrowing base. As of June 30, 2016, 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, effective October 2013, for a notional amount of $45.0 million. The interest rate cap agreement, which expired in April 2016, effectively limited the interest rate on a portion of the borrowings pursuant to the terms of our Credit Facility. We incurrent a premium of $75 in conjunction with this agreement, which was recorded within Net realized loss on other in our accompanying Consolidated Statements of Operations for the three months ended June 30, 2016 upon the expiration of the agreement.

OFF-BALANCE SHEET ARRANGEMENTS

Unlike PIK income, we generally recognize success fees as income when the payment has been received. As a result, as of June 30, 2016, we had off-balance sheet success fee receivables of $29.9 million (or $0.99 per common share) 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 success fee receivables and related income in our Consolidated Financial Statements until earned. Due to the contingent nature of our success fees, 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.

CONTRACTUAL 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 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 lines of credit and other uncalled capital commitments as of June 30, 2016 to be immaterial.

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 one of our portfolio companies, whereby we have guaranteed an aggregate of $2.2 million of obligations of Country Club Enterprises, LLC (“CCE”). As of June 30, 2016, 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 immaterial.

 

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The following table shows our contractual obligations as of June 30, 2016, at cost:

 

     Payments Due by Period  

Contractual Obligations (A)

   Total      Less
than
1 Year
     1-3 Years      3-5 Years      More
than
5 Years
 

Credit Facility (B)

   $ 79,600       $ —         $ 79,600       $ —         $ —     

Mandatorily redeemable preferred stock

     121,650         40,000         —           —           81,650   

Secured borrowing

     5,096         —           —           5,096         —     

Interest payments on obligations (C)

     45,430         11,306         18,726         11,535         3,863   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 251,776       $ 51,306       $ 98,326       $ 16,631       $ 85,513   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(A) Excludes unused line of credit commitments, uncalled capital commitments and guaranties to our portfolio companies in the aggregate principal amount of $9.1 million.
(B) Principal balance of borrowings outstanding under our Credit Facility, based on the maturity date following the current contractual revolver period end date due to the revolving nature of the facility.
(C) Includes interest payments due on our Credit Facility, secured borrowing, and dividend obligations on each series of our mandatorily redeemable term preferred stock. The amount of interest expense calculated for purposes of this table was based upon rates and outstanding balances as of June 30, 2016. Dividend payments on our mandatorily redeemable term preferred stock assume quarterly declarations and monthly dividend payments through the date of mandatory redemption of each series.

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 the Policy (which has been approved by our Board of Directors) as our most critical accounting policy, which is described in Note 2 — Summary of Significant Accounting Policies in the accompanying notes to our Consolidated Financial Statements included elsewhere in this prospectus supplement. Additionally, refer to Note 3 — Investments in the accompanying notes to our Consolidated Financial Statements included elsewhere in this prospectus supplement for additional information regarding fair value measurements and our application of Financial Accounting Standards Board (the “FASB”) Accounting Standards Codification Topic 820, “ Fair Value Measurements and Disclosures (“ASC 820”). We have also identified our revenue recognition policy as a critical accounting policy, which is described in Note 2 —Summary of Significant Accounting Policies in the accompanying notes to our Consolidated Financial Statements included elsewhere in this prospectus supplement.

Investment Valuation

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.

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 SEC registered Nationally Recognized Statistical Rating Organization (“NRSRO”), the Adviser generally uses the average of two corporate level NRSRO’s risk ratings

 

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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 Adviser’s risk rating system will provide the same risk rating as an NRSRO for these securities. The Adviser’s risk rating system is used to estimate the probability of default on debt securities and the expected loss if there is a default. The Adviser’s risk rating system uses a scale of 0 to >10, with >10 being the lowest probability of default. It is the Adviser’s 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 Adviser’s 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 Adviser’s scale is equal to a BBB or Baa2 on an NRSRO scale. The Adviser’s risk rating system covers both qualitative and quantitative aspects of the business and the securities we hold.

The following table reflects risk ratings for all loans in our portfolio as of June 30, 2016 and March 31, 2016:

 

Rating

   June 30, 2016      March 31, 2016  

Highest

     9.0         10.0   

Average

     6.0         6.0   

Weighted Average

     6.3         6.2   

Lowest

     3.0         3.0   

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 we distribute 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 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 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 from preceding years that were not distributed during such years. Under the RIC Modernization Act, we are permitted to carryforward capital losses incurred in taxable years beginning after March 31, 2011, for an unlimited period. 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 capital loss carryforward balance was $0 and $13.6 million as of June 30, 2016 and March 31, 2016.

Recent Accounting Pronouncements

See Note 2 — Summary of Significant Accounting Policies in the accompanying notes to our Consolidated Financial Statements included elsewhere in this prospectus supplement for a description of recent accounting pronouncements.

Legal Proceedings

We are party to certain legal proceedings incidental to the normal course of our business. 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. See also Note 10 — Commitments and Contingencies.

 

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DESCRIPTION OF THE SERIES D TERM PREFERRED STOCK

The following is a brief description of the terms of our 6.25% Series D Cumulative Term Preferred Stock due 2023. This is not a complete description and is subject to, and entirely qualified by reference to, our Amended and Restated Certificate of Incorporation and the Certificate of Designation. The form of the Certificate of Designation is attached to this prospectus supplement, and the final form of the Certificate of Designation will be filed with the SEC as an exhibit to our registration statement of which this prospectus supplement and the accompanying prospectus are a part. You may obtain copies of these documents as described under “Where You Can Find More Information.” Capitalized terms used, but not defined herein, have the meanings attributed to them in the Certificate of Designation.

General

Under our Amended and Restated Certificate of Incorporation, we are authorized to issue 110,000,000 shares of stock, of which 100,000,000 are Common Stock and 10,000,000 are Preferred Stock. In February 2012, we designated 1,610,000 shares of Preferred Stock as Series A Term Preferred Stock and issued 1,600,000 of those shares. In October and November 2014, our Board took action to approve designation of 2,000,000 shares of Preferred Stock as Series B Term Preferred Stock and we issued 1,656,000 of those shares. In April 2015, our Board of Directors designated 1,700,000 shares of Preferred Stock as Series C Term Preferred Stock and we issued 1,610,000 shares of Preferred Stock as Series C Term Preferred Stock. In August 2015, our Board of Directors amended the certificates of designation of the Series A Term Preferred Stock and Series B Term Preferred Stock to decrease the number of shares of Preferred Stock designated as Series A Term Preferred Stock to 1,600,000 and decrease the number of shares of Preferred Stock designated as Series B Preferred Stock to 1,656,000. In July 2016, our Board of Directors approved the designation of 3,000,000 shares of Preferred Stock as Series D Term Preferred Stock. Terms of the Series D Term Preferred Stock are set forth in the Certificate of Designation.

At the time of issuance, the Series D Term Preferred Stock will be fully paid and non-assessable and will have no preemptive, conversion, or exchange rights or rights to cumulative voting. The Series D Term Preferred Stock will rank on parity with shares of all our other Preferred Stock currently outstanding and that we may issue in the future as to payment of dividends and the distribution of our assets upon dissolution, liquidation or winding up of our affairs. The Series D Term Preferred Stock is, and all other Preferred Stock that is currently outstanding and that we may issue in the future will have preference with respect to payment of dividends and distributions to the Common Stock. We may issue additional series of Preferred Stock in the future without stockholder action.

Except in certain limited circumstances, holders of the Series D Term Preferred Stock will not receive certificates representing their ownership interest in such shares, and the shares of Series D Term Preferred Stock will be represented by a global certificate to be held by The Depository Trust Company, or the Securities Depository, for the Series D Term Preferred Stock.

Dividends and Dividend Periods

General

The holders of the Series D Term Preferred Stock will be entitled to receive cumulative cash dividends and distributions on such shares, when, as and if declared by our Board of Directors or a duly authorized committee of our Board of Directors out of funds legally available for payment, in parity with dividends and distributions to holders of the Series A Term Preferred Stock, Series B Term Preferred Stock, Series C Term Preferred Stock and in preference to dividends and distributions on Common Stock, calculated separately for each monthly dividend period, each a Dividend Period, for the Series D Term Preferred Stock at the Fixed Dividend Rate in effect during such Dividend Period, on an amount equal to the Liquidation Preference for the Series D Term Preferred Stock. The Fixed Dividend Rate is computed on the basis of a 360-day year consisting of twelve 30-day months.

 

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Dividends so declared and payable will be paid to the extent permitted under state law and our Amended and Restated Certificate of Incorporation and in preference to and priority over any dividend declared and payable on Common Stock.

Fixed Dividend Rate

The Fixed Dividend Rate is an annual rate of 6.25% for the Series D Term Preferred Stock. The Fixed Dividend Rate for the Series D Term Preferred Stock may be adjusted in certain circumstances, including upon the occurrence of certain events resulting in a Default Period (as defined below).

Payment of Dividends and Dividend Periods

The first Dividend Period for the Series D Term Preferred Stock will commence on the Date of Original Issue and end on and include October 31, 2016, and each subsequent Dividend Period will be a calendar month (or the portion thereof occurring prior to the redemption of such Series D Term Preferred Stock). Dividends will be payable monthly in arrears on the last Business Day of the Dividend Period, referred to herein as the Dividend Payment Date, and upon redemption of the Series D Term Preferred Stock. Except for the first Dividend Period, dividends with respect to any monthly Dividend Period will be declared and paid to holders of record of Series D Term Preferred Stock as their names shall appear on our registration books at the close of business on the applicable record date, which shall be such date designated by our Board of Directors that is not more than 20, nor less than seven, calendar days prior to such Dividend Payment Date. We expect that dividends with respect to the first Dividend Period of the Series D Term Preferred Stock will be declared on October 11, 2016 and paid on October 31, 2016 to holders of record of such Series D Term Preferred Stock as their names appear on our registration books at the close of business on October 21, 2016.

Only holders of Series D Term Preferred Stock on the record date for a Dividend Period will be entitled to receive dividends and distributions payable with respect to such Dividend Period, and holders of Series D Term Preferred Stock who sell shares before such a record date and purchasers of Series D Term Preferred Stock who purchase shares after such a record date should take the effect of the foregoing provisions into account in evaluating the price to be received or paid for such Series D Term Preferred Stock.

Although dividends will accrue and be paid monthly, the record date for holders of Series D Term Preferred Stock entitled to receive dividend payments may vary from month-to-month. We will notify holders of the Series D Term Preferred Stock of each record date by issuance of a quarterly press release.

Mechanics of Payment of Dividends

Not later than 12:00 noon, New York City time, on a Dividend Payment Date, we are required to deposit with the Redemption and Paying Agent sufficient funds for the payment of dividends in the form of Deposit Securities. Deposit Securities will generally consist of: (1) cash or cash equivalents; (2) direct obligations of the United States or its agencies or instrumentalities that are entitled to the full faith and credit of the United States, which we refer to as the U.S. Government Obligations; (3) short-term money market instruments; (4) investments in money market funds registered under the 1940 Act that qualify under Rule 2a-7 under the 1940 Act, and certain similar investment vehicles that invest principally in short-term money market instruments or U.S. Government Obligations or any combination thereof; or (5) any letter of credit from a bank or other financial institution that has a credit rating from at least one national recognized statistical rating agency that is the highest applicable rating generally ascribed by such rating agency to bank deposits or short-term debt of similar banks or other financial institutions, in each case either that is a demand obligation payable to the holder on any Business Day or that has a maturity date, mandatory redemption date or mandatory payment date preceding the relevant date of redemption, or the Redemption Date, Dividend Payment Date or other payment date. We do not intend to establish any reserves for the payment of dividends.

 

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All Deposit Securities paid to the Redemption and Payment Agent for the payment of dividends will be held in trust for the payment of such dividends to the holders of Series D Term Preferred Stock. Dividends will be paid by the Redemption and Paying Agent to the holders of Series D Term Preferred Stock as their names appear on our registration books. Dividends that are in arrears for any past Dividend Period may be declared and paid at any time, without reference to any regular Dividend Payment Date. Such payments are made to holders of Series D Term Preferred Stock as their names appear on our registration books on such date, not exceeding 20 nor less than seven calendar days preceding the payment date thereof, as may be fixed by our Board of Directors. Any payment of dividends in arrears will first be credited against the earliest accumulated but unpaid dividends. No interest or sum of money in lieu of interest will be payable in respect of any dividend payment or payments on any Series D Term Preferred Stock which may be in arrears. See “— Adjustment to Fixed Dividend Rate—Default Period.”

Upon failure to pay dividends for at least two full years, the holders of Series D Term Preferred Stock will acquire certain additional voting rights. See “— Voting Rights” below. Such rights shall be the exclusive remedy of the holders of Series D Term Preferred Stock upon any failure to pay dividends on Preferred Stock; provided that the foregoing does not affect our obligation to accumulate and, if permitted by applicable law and the Certificate of Designation, pay dividends at the Default Rate (as defined below).

Adjustment to Fixed Dividend Rate — Default Period

Subject to the cure provisions below, a Default Period with respect to the Series D Term Preferred Stock will commence on a date we fail to deposit the Deposit Securities to redeem the Series D Term Preferred Stock in any circumstance in which redemption is required or we fail to pay a dividend on the Series D Term Preferred Stock as required as described above (either such failure, a Default). A Default Period shall end on the Business Day on which, by 12:00 noon, New York City time, an amount equal to all unpaid dividends and any unpaid redemption price shall have been deposited irrevocably in trust in same-day funds with the Redemption and Paying Agent. In the case of a Default, the applicable dividend rate for each day during the Default Period will be equal to the Default Rate. The Default Rate for any calendar day will be equal to the applicable Fixed Dividend Rate in effect on such day plus three percent (3.0%) per annum.

No Default Period with respect to a Default will be deemed to commence if the amount of any dividend or any redemption price due (if such Default is not solely due to our willful failure) is deposited irrevocably in trust, in same-day funds with the Redemption and Paying Agent by 12:00 noon, New York City time, on a Business Day that is not later than five Business Days after the applicable Dividend Payment Date or Redemption Date with respect to which such Default occurred, together with an amount equal to the Default Rate applied to the amount and period of such non-payment based on the actual number of calendar days comprising such period divided by 360.

Restrictions on Dividend, Redemption, Other Payments and Issuance of Debt

No full dividends and distributions will be declared or paid on Series D Term Preferred Stock for any Dividend Period, or a part of a Dividend Period, unless the full cumulative dividends and distributions due through the most recent dividend payment dates for all outstanding shares of Preferred Stock have been, or contemporaneously are, declared and paid through the most recent dividend payment dates for each share of Preferred Stock. If full cumulative dividends and distributions due have not been paid on all outstanding shares of Preferred Stock of any series, any dividends and distributions being declared and paid on Series D Term Preferred Stock will be declared and paid as nearly pro rata as possible in proportion to the respective amounts of dividends and distributions accumulated but unpaid on the shares of each such series of Preferred Stock on the relevant dividend payment date. No holders of Series D Term Preferred Stock will be entitled to any dividends and distributions in excess of full cumulative dividends and distributions as provided in the Certificate of Designation.

 

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For so long as any shares of Preferred Stock are outstanding, we will not: (x) declare any dividend or other distribution (other than a dividend or distribution paid in Common Stock) in respect of the Common Stock; (y) call for redemption, redeem, purchase or otherwise acquire for consideration any such Common Stock; or (z) pay any proceeds of our liquidation in respect of such Common Stock, unless, in each case, (A) immediately thereafter, we will be in compliance with the 200% Asset Coverage limitations set forth under the 1940 Act after deducting the amount of such dividend or distribution or redemption or purchase price or liquidation proceeds, (B) all cumulative dividends and distributions of shares of all series of Series D Term Preferred Stock and all other series of Preferred Stock, if any, ranking on parity with the Series D Term Preferred Stock due on or prior to the date of the applicable dividend, distribution, redemption, purchase or acquisition shall have been declared and paid (or shall have been declared and sufficient funds or Deposit Securities as permitted by the terms of such Preferred Stock for the payment thereof shall have been deposited irrevocably with the applicable paying agent) and (C) we have deposited Deposit Securities with the Redemption and Paying Agent in accordance with the requirements described herein with respect to outstanding Preferred Stock of any series to be redeemed pursuant to a Term Redemption (as defined below), or a mandatory redemption resulting from the failure to comply with the Asset Coverage or due to a Change of Control Triggering Event as described below for which a Notice of Redemption shall have been given or shall have been required to be given in accordance with the terms described herein on or prior to the date of the applicable dividend, distribution, redemption, purchase or acquisition.

Except as required by law, we will not redeem any shares of Series D Term Preferred Stock unless all accumulated and unpaid dividends and distributions (whether or not earned or declared by us) on all outstanding shares of Series D Term Preferred Stock and other current or future series of Preferred Stock ranking on parity with the Series D Term Preferred Stock with respect to dividends and distributions for all applicable past dividend periods including the Series A Term Preferred Stock, Series B Term Preferred Stock and Series C Term Preferred Stock (x) will have been or are contemporaneously paid or (y) will have been or are contemporaneously declared and Deposit Securities or sufficient funds (in accordance with the terms of such Preferred Stock) for the payment of such dividends and distributions will have been or are contemporaneously deposited with the Redemption and Paying Agent or other applicable paying agent; provided, however, that the foregoing will not prevent the purchase or acquisition of outstanding shares of Series D Term Preferred Stock pursuant to an otherwise lawful purchase or exchange offer made on the same terms to holders of all outstanding shares of Series D Term Preferred Stock and any other series of Preferred Stock, such as the Series A Term Preferred Stock, Series B Term Preferred Stock and Series C Term Preferred Stock, for which all accumulated and unpaid dividends and distributions have not been paid.

We may issue debt in one or more classes or series. Under the 1940 Act, we may not (1) declare any dividend with respect to any Preferred Stock if, at the time of such declaration (and after giving effect thereto), the Asset Coverage with respect to any of our borrowings that are senior securities representing indebtedness (as defined in the 1940 Act), would be less than 200% (or such other percentage as may in the future be specified in or under the 1940 Act as the minimum Asset Coverage for senior securities representing indebtedness of a business development company as a condition of declaring dividends on its Preferred Stock) or (2) declare any other distribution on the Preferred Stock or purchase or redeem Preferred Stock if at the time of the declaration or redemption (and after giving effect thereto), the Asset Coverage with respect to such borrowings that are senior securities representing indebtedness would be less than 200% (or such other percentage as may in the future be specified in or under the 1940 Act as the minimum Asset Coverage for senior securities representing indebtedness of a business development company as a condition of declaring distributions, purchases or redemptions of its shares). “Senior securities representing indebtedness” generally means any bond, debenture, note or similar obligation or instrument constituting a security (other than shares of capital stock) and evidencing indebtedness and could include our obligations under any borrowings. For purposes of determining the Asset Coverage for senior securities representing indebtedness in connection with the payment of dividends or other distributions on or purchases or redemptions of stock, the term senior security does not include any promissory note or other evidence of indebtedness issued in consideration of any loan, extension or renewal thereof, made by a bank or other person and privately arranged, and not intended to be publicly distributed. The term senior security also does not include any such promissory note or other evidence of indebtedness in any case where such

 

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a loan is for temporary purposes only and in an amount not exceeding 5% of the value of our total assets at the time when the loan is made; a loan is presumed under the 1940 Act to be for temporary purposes if it is repaid within 60 calendar days and is not extended or renewed; otherwise, such loan is presumed not to be for temporary purposes. For purposes of determining whether the 200% statutory Asset Coverage requirements described above apply in connection with dividends or distributions on or purchases or redemptions of Preferred Stock, such Asset Coverage may be calculated on the basis of values calculated as of a time within 48 hours (only including Business Days) next preceding the time of the applicable determination.

Asset Coverage

If we fail to maintain Asset Coverage of at least 200% as of as of any date as required by Sections 18 and 61 of the 1940 Act under the circumstances described below, the Series D Term Preferred Stock may become subject to mandatory redemption as provided below. “Asset Coverage” means asset coverage of a class of senior security which is a stock, for purposes of Sections 18 and 61 of the 1940 Act as in effect on the date of the Certificate of Designation, determined on the basis of values calculated as of a time within two Business Days next preceding the time of such determination. For purposes of this determination, no shares of Series D Term Preferred Stock or other Preferred Stock we have issued will be deemed to be outstanding for purposes of the computation of Asset Coverage if, prior to or concurrently with such determination, either sufficient Deposit Securities or other sufficient funds (in accordance with the terms of such Preferred Stock) to pay the full redemption price for such Preferred Stock (or the portion thereof to be redeemed) will have been deposited in trust with the Redemption and Paying Agent for such Preferred Stock and the requisite notice of redemption for such Preferred Stock (or the portion thereof to be redeemed) will have been given or sufficient Deposit Securities or other sufficient funds (in accordance with the terms of such Preferred Stock) to pay the full redemption price for such Preferred Stock (or the portion thereof to be redeemed) will have been segregated by us and our custodian, or the Custodian, from our assets, by means of appropriate identification on the Custodian’s books and records or otherwise in accordance with the Custodian’s normal procedures. In such event, the Deposit Securities or other sufficient funds so deposited or segregated will not be included as our assets for purposes of the computation of Asset Coverage.

Redemption

Mandatory Term Redemption

We are required to provide for the mandatory redemption, or the Term Redemption, of all of the Series D Term Preferred Stock on the Mandatory Term Redemption Date, at a redemption price equal to the Liquidation Preference, plus an amount equal to accumulated but unpaid dividends thereon (whether or not earned or declared but excluding interest thereon) up to, but excluding, the Mandatory Term Redemption Date, which we refer to as the Term Redemption Price.

Mandatory Redemption for Asset Coverage

If we fail to have Asset Coverage of at least 200% as of the time of declaration of dividends or other distributions on the Company’s common stock (other than dividends payable in shares of common stock), after deducting the amount of such dividend or other distribution, as of the time of purchase of the Company’s common stock or issuance of any senior security as defined in the 1940 Act, and such failure is not cured as of the close of business on the Asset Coverage Cure Date, we will fix a redemption date and proceed to redeem the number of shares of Preferred Stock as described below at a price per share equal to the liquidation price per share of the applicable Preferred Stock, which in the case of the Series D Term Preferred Stock we refer to as the Mandatory Redemption Price and is equal to the Liquidation Preference, plus accumulated but unpaid dividends and distributions thereon (whether or not earned or declared but excluding interest thereon) up to, but excluding, the date fixed for redemption by our Board of Directors. We will redeem out of funds legally available the number of shares of Preferred Stock (which may include at our sole option any number or proportion of Preferred Stock) equal to the lesser of (i) the minimum number of shares of Preferred Stock, the redemption of which, if deemed to have occurred immediately prior to the opening of business on the Asset Coverage Cure Date, would result in us having Asset Coverage of at least

 

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200% and (ii) the maximum number of shares of Preferred Stock that can be redeemed out of funds expected to be legally available in accordance with our Amended and Restated Certificate of Incorporation and applicable law, provided further, that in connection with any such redemption for failure to maintain such Asset Coverage, we may redeem such additional number of shares of Preferred Stock that will result in our having an Asset Coverage of up to and including 240%. We will effect a redemption on the date fixed by us, which date will not be later than 90 calendar days after the Asset Coverage Cure Date, except that if we do not have funds legally available for the redemption of all of the required number of shares of Series D Term Preferred Stock and other shares of Preferred Stock which have been designated to be redeemed or we otherwise are unable to effect such redemption on or prior to 90 calendar days after the Asset Coverage Cure Date, we will redeem those shares of Series D Term Preferred Stock and other shares of Preferred Stock which we were unable to redeem on the earliest practicable date on which we are able to effect such redemption.

Optional Redemption

On or after September 30, 2018 (any such date, an Optional Redemption Date), at our sole option, we may redeem, from time to time, in whole or in part, outstanding Series D Term Preferred Stock, at a redemption price equal to the Liquidation Preference, plus an amount equal to all unpaid dividends and distributions accumulated up to, but excluding, the Optional Redemption Date (whether or not earned or declared by us, but excluding interest thereon), which we refer to as the Optional Redemption Price.

Subject to the provisions of the Certificate of Designation and applicable law, our Board of Directors will have the full power and authority to prescribe the terms and conditions upon which shares of Series D Term Preferred Stock will be redeemed from time to time.

We may not on any date deliver a notice of redemption to redeem any shares of Series D Term Preferred Stock pursuant to the optional redemption provisions described above unless on such date we have available Deposit Securities for the Optional Redemption Date contemplated by such notice of redemption having a market value not less than the amount due to holders of shares of Series D Term Preferred Stock by reason of the redemption of such shares of Series D Term Preferred Stock on such Optional Redemption Date.

Change of Control

If a Change of Control Triggering Event (as defined below) occurs with respect to the Series D Term Preferred Stock, unless we have exercised our option to redeem such Series D Term Preferred Stock as described above, we will be required to redeem, which redemption we refer to as a Change of Control Redemption, all of the outstanding Series D Term Preferred Stock at a price equal to the Liquidation Preference, plus an amount equal to any accumulated and unpaid dividends up to, but excluding, the date of redemption, but without interest, which we refer to as the Change of Control Redemption Price, no later than three Business Days after the occurrence of any Change in Control Triggering Event. We will be obligated to do the same with respect to the Series A Term Preferred Stock, Series B Term Preferred Stock and Series C Term Preferred Stock if a Change of Control Triggering Event occurs.

For purposes of the foregoing discussion of the Change of Control Redemption, the following definitions are applicable:

“Change of Control Triggering Event” means the occurrence of any of the following: (1) the direct or indirect sale, lease, transfer, conveyance or other disposition (other than by way of merger or consolidation), in one or more series of related transactions, of all or substantially all of our assets and the assets of the our subsidiaries, taken as a whole, to any Person, other than us or one of our subsidiaries; (2) the consummation of any transaction (including any merger or consolidation) the result of which is that any Person becomes the beneficial owner (as defined in Rules 13d-3 and 13d-5 under the Exchange Act), directly or indirectly, of more than 50% of our outstanding Voting Stock or other Voting Stock into which our Voting Stock is

 

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reclassified, consolidated, exchanged or changed, measured by voting power rather than number of shares; (3) we consolidate with, or merge with or into, any Person, or any Person consolidates with, or merges with or into, us, in any such event pursuant to a transaction in which any of our outstanding Voting Stock or the Voting Stock of such other Person is converted into or exchanged for cash, securities or other property, other than any such transaction where the shares of our Voting Stock outstanding immediately prior to such transaction constitute, or are converted into or exchanged for, a majority of the Voting Stock of the surviving Person or any direct or indirect parent company of the surviving Person immediately after giving effect to such transaction; or (4) the adoption of a plan relating to our liquidation or dissolution. Notwithstanding the foregoing, a transaction will not be deemed to involve a Change of Control Triggering Event under clause (2) above if (i) we become a direct or indirect wholly-owned subsidiary of a holding company and (ii)(A) the direct or indirect holders of the Voting Stock of such holding company immediately following that transaction are substantially the same as the holders of our Voting Stock immediately prior to that transaction or (B) immediately following that transaction no Person (other than a holding company satisfying the requirements of this sentence) is the beneficial owner, directly or indirectly, of more than 50% of the Voting Stock of such holding company.

“Person” means and includes an individual, a partnership, a trust, a corporation, a limited liability company, an unincorporated association, a joint venture or other entity or a government or any agency or political subdivision thereof.

“Voting Stock” means, with respect to any specified Person that is a corporation as of any date, the capital stock of such Person that is at the time entitled to vote generally in the election of the directors of such Person.

Redemption Procedures

We will file a notice of our intention to redeem with the SEC so as to provide the 30 calendar day notice period contemplated by Rule 23c-2 under the 1940 Act, or such shorter notice period as may be permitted by the SEC or its staff.

If we shall determine or be required to redeem, in whole or in part, shares of Series D Term Preferred Stock, we will deliver a notice of redemption, or a Notice of Redemption, by overnight delivery, by first class mail, postage prepaid or by electronic means to the holders of record of such shares of Series D Term Preferred Stock to be redeemed, or request the Redemption and Paying Agent, on our behalf, to promptly do so by overnight delivery, by first class mail or by electronic means. A Notice of Redemption will be provided not more than 45 calendar days prior to the Redemption Date; provided, however, that, in the event of a Change of Control Redemption, the Notice of Redemption will, if mailed prior to the date of consummation of the Change of Control Triggering Event, state that the Change of Control Redemption is conditioned on the Change of Control Triggering Event occurring and, provided further, that if, by the date that is three Business Days prior to the date fixed for redemption in such Notice of Redemption, the Change of Control Triggering Event shall not have occurred, the Redemption Date shall be extended until a date that is no more than three Business Days after the date on which the Change of Control Triggering Event occurs. If fewer than all of the outstanding shares of Series D Term Preferred Stock are to be redeemed pursuant to either the Asset Coverage mandatory redemption provisions or the optional redemption provisions, the shares of Series D Term Preferred Stock to be redeemed will be selected either (1) pro rata among Series D Term Preferred Stock, (2) by lot or (3) in such other manner as our Board of Directors may determine to be fair and equitable. If fewer than all shares of Series D Term Preferred Stock held by any holder are to be redeemed, the Notice of Redemption mailed to such holder shall also specify the number of shares of Series D Term Preferred Stock to be redeemed from such holder or the method of determining such number. We may provide in any Notice of Redemption relating to a redemption contemplated to be effected pursuant to the Certificate of Designation that such redemption is subject to one or more conditions precedent and that we will not be required to effect such redemption unless each such condition has been satisfied. No defect in any Notice of Redemption or delivery thereof will affect the validity of redemption proceedings except as required by applicable law.

 

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If we give a Notice of Redemption, then at any time from and after the giving of such Notice of Redemption and prior to 12:00 noon, New York City time, on the Redemption Date (so long as any conditions precedent to such redemption have been met or waived by us), we will (i) deposit with the Redemption and Paying Agent Deposit Securities having an aggregate market value at the time of deposit no less than the redemption price of the shares of Series D Term Preferred Stock to be redeemed on the Redemption Date and (ii) give the Redemption and Paying Agent irrevocable instructions and authority to pay the applicable redemption price to the holders of shares of Series D Term Preferred Stock called for redemption on the Redemption Date. Notwithstanding the foregoing, if the applicable Redemption Date is the Mandatory Term Redemption Date, then such deposit of Deposit Securities will be made such that proceeds of any deposit shall be available at the opening of business on the Mandatory Term Redemption Date.

Upon the date of the deposit of Deposit Securities by us for purposes of redemption of shares of Series D Term Preferred Stock, all rights of the holders of Series D Term Preferred Stock so called for redemption shall cease and terminate except the right of the holders thereof to receive the Term Redemption Price, the Mandatory Redemption Price, the Optional Redemption Price or the Change of Control Redemption Price thereof, as applicable (any of the foregoing referred to in this prospectus supplement as the Redemption Price), and such shares of Series D Term Preferred Stock will no longer be deemed outstanding for any purpose whatsoever (other than the transfer thereof prior to the applicable Redemption Date and other than the accumulation of dividends on such stock in accordance with the terms of the Series D Term Preferred Stock up to, but excluding, the applicable Redemption Date). We will be entitled to receive, promptly after the Redemption Date, any Deposit Securities in excess of the aggregate Redemption Price of shares of Series D Term Preferred Stock called for redemption on the Redemption Date. Any Deposit Securities so deposited that are unclaimed at the end of 90 calendar days from the Redemption Date will, to the extent permitted by law, be repaid to us, after which the holders of shares of Series D Term Preferred Stock so called for redemption shall look only to us for payment of the Redemption Price. We will be entitled to receive, from time to time after the Redemption Date, any interest on the Deposit Securities so deposited.

If any redemption for which a Notice of Redemption has been provided is not made by reason of the absence of our legally available funds in accordance with the Certificate of Incorporation and applicable law, such redemption shall be made as soon as practicable to the extent such funds become available. No Redemption Default will be deemed to have occurred if we have failed to deposit in trust with the Redemption and Paying Agent the applicable Redemption Price with respect to any shares where (1) the Notice of Redemption relating to such redemption provided that such redemption was subject to one or more conditions precedent and (2) any such condition precedent has not been satisfied at the time or times and in the manner specified in such Notice of Redemption. Notwithstanding the fact that a Notice of Redemption has been provided with respect to any shares of Series D Term Preferred Stock, dividends may be declared and paid on such shares of Series D Term Preferred Stock in accordance with their terms if Deposit Securities for the payment of the Redemption Price of such shares of Series D Term Preferred Stock shall not have been deposited in trust with the Redemption and Paying Agent for that purpose. If the Redemption Date of either a Mandatory Term Redemption, Mandatory Asset Coverage Redemption, Optional Redemption or a Change of Control Redemption occurs after the applicable record date for a dividend but on or prior to the related Dividend Payment Date, the dividend payable on such Dividend Payment Date in respect of such Series D Term Preferred Stock will be payable on such Dividend Payment Date to the holders of record of such shares of Series D Term Preferred Stock at the close of business on the applicable record date, and will not be payable as part of the Redemption Price for such shares of Series D Term Preferred Stock.

We may, in our sole discretion and without a stockholder vote, modify the redemption procedures with respect to notification of redemption for the Series D Term Preferred Stock, provided that such modification does not materially and adversely affect the holders of Series D Term Preferred Stock or cause us to violate any applicable law, rule or regulation.

 

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Liquidation Rights

In the event of any liquidation, dissolution or winding up of our affairs, whether voluntary or involuntary, the holders of the Preferred Stock will be entitled to receive out of our assets available for distribution to stockholders, after satisfying claims of creditors but before any distribution or payment will be made in respect of the Common Stock, a liquidation distribution equal to the Liquidation Preference, plus an amount equal to all unpaid dividends and distributions accumulated to, but excluding, the date fixed for such distribution or payment (whether or not earned or declared by us, but excluding interest thereon), and such holders will be entitled to no further participation in any distribution or payment in connection with any such liquidation, dissolution or winding up.

If, upon any liquidation, dissolution or winding up of our affairs, whether voluntary or involuntary, our assets available for distribution among the holders of all outstanding shares of Series D Term Preferred Stock, and any other outstanding shares of Preferred Stock, if any, will be insufficient to permit the payment in full to such holders of Series D Term Preferred Stock of the Liquidation Preference, plus accumulated and unpaid dividends and distributions and the amounts due upon liquidation with respect to such other shares of Preferred Stock, then the available assets will be distributed among the holders of such Series D Term Preferred Stock and such other series of Preferred Stock ratably in proportion to the respective preferential liquidation amounts to which they are entitled. In connection with any liquidation, dissolution or winding up of our affairs whether voluntary or involuntary, unless and until the Liquidation Preference on each outstanding share of Series D Term Preferred Stock plus accumulated and unpaid dividends and distributions has been paid in full to the holders of Series D Term Preferred Stock, no dividends, distributions or other payments will be made on, and no redemption, repurchase or other acquisition by us will be made by us in respect of, the Common Stock.

Neither the sale of all or substantially all of our property or business, nor the merger, consolidation or our reorganization into or with any other business or corporation, statutory trust or other entity, nor the merger, consolidation or reorganization of any other business or corporation, statutory trust or other entity into or with us will be a dissolution, liquidation or winding up, whether voluntary or involuntary, for purposes of the provisions relating to liquidation set forth in the Certificate of Designation.

Voting Rights

Except as otherwise provided in our Amended and Restated Certificate of Incorporation, the Certificate of Designation, or as otherwise required by applicable law, each holder of Series D Term Preferred Stock will be entitled to one vote for each share of Series D Term Preferred Stock held by such holder on each matter submitted to a vote of our stockholders and the holders of outstanding shares of any Preferred Stock, including the Series D Term Preferred Stock, will vote together with holders of Common Stock as a single class. Under applicable rules of NASDAQ and Delaware law, we are currently required to hold annual meetings of stockholders.

In addition, the holders of outstanding shares of any Preferred Stock, including the Series D Term Preferred Stock, will be entitled, as a class, to the exclusion of the holders of all other securities and the 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. The holders of outstanding shares of Common Stock and Preferred Stock, including Series D Term Preferred Stock, voting together as a single class, will elect the balance of our directors. Under our bylaws, 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. 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. One of the Preferred Directors was elected in 2014, and another Preferred Director was elected in 2015.

In the event we owe accumulated dividends (whether or not earned or declared) on our Preferred Stock equal to at least two full years of dividends (and sufficient cash or securities have not been deposited with a paying agent

 

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for the payment of the accumulated dividends), the number of directors constituting the board will be increased by the smallest number of directors, which we refer to as the New Preferred Directors, that when added to the Preferred Directors will constitute a majority of the Board of Directors. We will then call a special meeting of holders of the Preferred Stock to permit the election of the New Preferred Directors. The term of the New Preferred Directors will last for so long as we are in arrears on our dividends as described above. The ability of the holders of Preferred Stock to elect the New Preferred Directors will also terminate, subject to reinstatement, once we have a Dividend Payment Date on which we are no longer in arrears on our dividends to the extent described above.

Notwithstanding the foregoing, if: (1) at the close of business on any dividend payment date for dividends on any outstanding share of any Preferred Stock, including any outstanding shares of Series D Term Preferred Stock, accumulated dividends (whether or not earned or declared) on the shares of Preferred Stock, including the Series D Term Preferred Stock, equal to at least two full years’ dividends shall be due and unpaid and sufficient cash or specified securities shall not have been deposited with the Redemption and Paying Agent or other applicable paying agent for the payment of such accumulated dividends; or (2) at any time holders of any shares of Preferred Stock are entitled under the 1940 Act to elect a majority of our directors (a period when either of the foregoing conditions exists, a Voting Period), then the number of members constituting our Board of Directors will automatically be increased by the smallest number that, when added to the two directors elected exclusively by the holders of shares of any Preferred Stock, including the Series D Term Preferred Stock, as described above, would constitute a majority of our Board of Directors as so increased by such smallest number; and the holders of the shares of Preferred Stock, including the Series D Term Preferred Stock, will be entitled as a class on a one-vote-per-share basis, to elect such additional directors. The terms of office of the persons who are directors at the time of that election will not be affected by the election of the additional directors. If we thereafter shall pay, or declare and set apart for payment, in full all dividends payable on all outstanding shares of Preferred Stock, including Series D Term Preferred Stock, for all past dividend periods, or the Voting Period is otherwise terminated, (1) the voting rights stated above shall cease, subject always, however, to the revesting of such voting rights in the holders of shares of Preferred Stock upon the further occurrence of any of the events described herein, and (2) the terms of office of all of the additional directors so elected will terminate automatically. Any Preferred Stock, including Series D Term Preferred Stock, issued after the date hereof will vote with Series D Term Preferred Stock as a single class on the matters described above, and the issuance of any other Preferred Stock, including Series D Term Preferred Stock, by us may reduce the voting power of the holders of Series D Term Preferred Stock.

As soon as practicable after the accrual of any right of the holders of shares of Preferred Stock to elect additional directors as described above, we will call a special meeting of such holders and notify the Redemption and Paying Agent and/or such other person as is specified in the terms of such Preferred Stock to receive notice, (i) by mailing or delivery by electronic means or (ii) in such other manner and by such other means as are specified in the terms of such Preferred Stock, a notice of such special meeting to such holders, such meeting to be held not less than ten nor more than 30 calendar days after the date of the delivery by electronic means or mailing of such notice. If we fail to call such a special meeting, it may be called at our expense by any such holder on like notice. The record date for determining the holders of shares of Preferred Stock entitled to notice of and to vote at such special meeting shall be the close of business on the fifth Business Day preceding the calendar day on which such notice is mailed. At any such special meeting and at each meeting of holders of shares of Preferred Stock held during a Voting Period at which directors are to be elected, such holders, voting together as a class (to the exclusion of the holders of all our other securities and classes of capital stock), will be entitled to elect the number of additional directors prescribed above on a one-vote-per-share basis.

Except as otherwise permitted by the terms of the Certificate of Designation, (a) so long as any shares of Series D Term Preferred Stock are outstanding, we will not, without the affirmative vote or consent of the holders of at least two-thirds of shares of Series D Term Preferred Stock, voting as a separate class, amend, alter or repeal the provisions of the Amended and Restated Certificate of Incorporation or the Certificate of Designation, whether by merger, consolidation or otherwise, so as to materially and adversely affect any preference, right or power of

 

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the Series D Term Preferred Stock or the holders thereof and (b) so long as any shares of Preferred Stock of a particular series are outstanding, we will not, without the affirmative vote or consent of the holders of at least two-thirds of the shares of such series of Preferred Stock, voting as a separate class, amend, alter or repeal the provisions of the Amended and Restated Certificate of Incorporation, including the certificate of designation for that series, whether by merger, consolidation or otherwise, so as to materially and adversely affect any preference, right or power of the such series of Preferred Stock or the holders thereof; provided, however, that (i) a change in our capitalization as described under the heading “— Issuance of Additional Preferred Stock” will not be considered to materially and adversely affect the rights and preferences of Series D Term Preferred Stock, and (ii) a division of a share of Series D Term Preferred Stock will be deemed to affect such preferences, rights or powers only if the terms of such division materially and adversely affect the holders of Series D Term Preferred Stock. For purposes of the foregoing, no matter shall be deemed to adversely affect any preference, right or power of a share of Series D Term Preferred Stock of such series or the holder thereof unless such matter (i) alters or abolishes any preferential right of such share of Series D Term Preferred Stock, or (ii) creates, alters or abolishes any right in respect of redemption of such Series D Term Preferred Stock (other than as a result of a division of such Series D Term Preferred Stock).

So long as any shares of Series D Term Preferred Stock are outstanding, we will not, without the affirmative vote or consent of the holders of at least 66 23 % of the shares of Series D Term Preferred Stock outstanding at the time, voting as a separate class, file a voluntary application for relief under federal bankruptcy law or any similar application under state law for so long as we are solvent and does not foresee becoming insolvent. No amendment, alteration or repeal of our obligation to accumulate dividends at the Dividend Rate or our obligation to pay the Term Redemption Price on the Term Redemption Date will be effected without, in each case, the prior unanimous vote or consent of the holders of Series D Term Preferred Stock.

The affirmative vote of the holders of at least a “majority of the outstanding shares of Preferred Stock,” including the shares of Series D Term Preferred Stock outstanding at the time, voting as a separate class, will be required (i) to approve us ceasing to be, or to withdraw our election as, a business development company, or (ii) to approve any plan of “reorganization” (as such term is defined in Section 2(a)(33) of the 1940 Act) adversely affecting such shares of Preferred Stock. For purposes of the foregoing, the vote of a “majority of the outstanding shares of Preferred Stock” means the vote at an annual or special meeting duly called of (a) 67% or more of such shares present at a meeting, if the holders of more than 50% of such outstanding shares are present or represented by proxy at such meeting, or (b) more than 50% of such outstanding shares, whichever is less.

For purposes of determining any rights of the holders of Series D Term Preferred Stock to vote on any matter, whether such right is created by the Certificate of Designation, by the provisions of the Amended and Restated Certificate of Incorporation, by statute or otherwise, no holder of Series D Term Preferred Stock will be entitled to vote any shares of Series D Term Preferred Stock and no share of Series D Term Preferred Stock will be deemed to be “outstanding” for the purpose of voting or determining the number of shares required to constitute a quorum if, prior to or concurrently with the time of determination of shares entitled to vote or the time of the actual vote on the matter, as the case may be, the requisite Notice of Redemption with respect to such Series D Term Preferred Stock will have been given in accordance with the Certificate of Designation, and the Redemption Price for the redemption of such shares of Series D Term Preferred Stock will have been irrevocably deposited with the Redemption and Paying Agent for that purpose. No shares of Series D Term Preferred Stock held by us will have any voting rights or be deemed to be outstanding for voting or for calculating the voting percentage required on any other matter or other purposes.

Unless otherwise required by law or our Amended and Restated Certificate of Incorporation, holders of Series D Term Preferred Stock will not have any relative rights or preferences or other special rights with respect to voting other than those specifically set forth in the “Voting Rights” section of the Certificate of Designation. The holders of shares of Series D Term Preferred Stock will have no rights to cumulative voting. In the event that we fail to declare or pay any dividends on Series D Term Preferred Stock, the exclusive remedy of the holders will be the right to vote for additional directors as discussed above; provided that the foregoing does not affect our obligation to accumulate and, if permitted by applicable law and the Certificate of Designation, pay dividends at the Default Rate as discussed above.

 

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Issuance of Additional Preferred Stock

So long as any shares of Series D Term Preferred Stock are outstanding, we may, without the vote or consent of the holders thereof, authorize, establish and create and issue and sell shares of one or more series of a class of our senior securities representing stock under Section 18, as modified by Section 61, of the 1940 Act, ranking on parity with the Series D Term Preferred Stock as to payment of dividends and distribution of assets upon dissolution, liquidation or the winding up of our affairs, in addition to then outstanding shares of Series D Term Preferred Stock, including additional series of Preferred Stock, and authorize, issue and sell additional shares of any such series of Preferred Stock then outstanding or so established and created, in each case in accordance with applicable law, provided that we will, immediately after giving effect to the issuance of such additional Preferred Stock and to our receipt and application of the proceeds thereof, including to the redemption of Preferred Stock with such proceeds, have Asset Coverage of at least 200%.

Actions on Other than Business Days

Unless otherwise provided in the Certificate of Designation, if the date for making any payment, performing any act or exercising any right is not a Business Day, such payment will be made, act performed or right exercised on the next succeeding Business Day, with the same force and effect as if made or done on the nominal date provided therefor, and, with respect to any payment so made, no dividends, interest or other amount will accrue for the period between such nominal date and the date of payment.

Modification

The Board of Directors, without the vote of the holders of Series D Term Preferred Stock, may interpret, supplement or amend the provisions of the Certificate of Designation or any appendix thereto to supply any omission, resolve any inconsistency or ambiguity or to cure, correct or supplement any defective or inconsistent provision, including any provision that becomes defective after the date hereof because of impossibility of performance or any provision that is inconsistent with any provision of any other Preferred Stock or the Common Stock.

Information Rights

During any period in which we are not subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act and any shares of Series D Term Preferred Stock are outstanding, we will provide holders of Series D Term Preferred Stock, without cost, copies of annual reports and quarterly reports substantially similar to the reports on Form 10-K and Form 10-Q that we would have been required to file with the SEC pursuant to Section 13 or 15(d) of the Exchange Act if we were subject to such provisions or, alternatively, we will voluntarily file reports on Form 10-K and Form 10-Q as if we were subject to Section 13 or 15(d) of the Exchange Act.

 

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UNDERWRITING

Janney Montgomery Scott LLC, Ladenburg Thalmann & Co. Inc., J.J.B. Hilliard, W.L. Lyons, LLC, Wunderlich Securities, Inc., William Blair & Company, L.L.C. and Maxim Group LLC are the underwriters of this offering. Subject to the terms and conditions of the underwriting agreement dated September 19, 2016, the underwriters have agreed to purchase severally, and we have agreed to sell to the underwriters, the number of Series D Term Preferred Stock set forth opposite their respective names below at the public offering price less the underwriting discounts and commissions on the cover page of this prospectus supplement.

 

     Number
of Shares
 

Underwriters

  

Janney Montgomery Scott LLC

     650,000   

Ladenburg Thalmann & Co. Inc.

     500,000   

J.J.B. Hilliard, W.L. Lyons, LLC

     300,000   

Wunderlich Securities, Inc.

     300,000   

William Blair & Company, L.L.C.

     150,000   

Maxim Group LLC

     100,000   
  

 

 

 

Total

     2,000,000   
  

 

 

 

Janney Montgomery Scott LLC and Ladenburg Thalmann & Co. Inc. are acting as joint book-running managers of this offering and Janney Montgomery Scott LLC is acting as representative of the underwriters named above.

The underwriting agreement provides that obligations of the underwriters to purchase the Series D Term Preferred Stock that are being offered are subject to the approval of certain legal matters by counsel to the underwriters and to certain other conditions. Each underwriter is obligated to purchase all of the Series D Term Preferred Stock set forth opposite its name in the table above if it purchases any of the Series D Term Preferred Stock.

The underwriters propose to offer some of the Series D Term Preferred Stock to the public initially at the offering price per share shown on the cover page of this prospectus supplement and may offer shares to certain dealers at such price less a concession not in excess of $0.50 per share. Investors must pay for shares purchased in this offering on or before September 26, 2016. After the public offering of the Series D Term Preferred Stock, the public offering price and concessions described above may be changed by the underwriters.

We have granted to the underwriters an option, exercisable for up to 30 days after the date of this prospectus supplement, to purchase up to 300,000 additional shares of Series D Term Preferred Stock at the same price per share as the public offering price, less the underwriting discounts shown on the cover page of this prospectus supplement. The underwriters may exercise such option only to cover overallotments in the sale of the Series D Term Preferred Stock offered by this prospectus supplement. To the extent that the underwriters exercise this option, each of the underwriters has a firm commitment, subject to certain conditions set forth in the underwriting agreement, to purchase the number of such additional shares of Series D Term Preferred Stock proportionate to such underwriter’s initial commitment indicated in the table above.

 

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The following table shows the per share and total underwriting discounts and commissions to be paid to the underwriters by us. The amounts as shown assume (1) no exercise and (2) exercise in full of the underwriters’ option to purchase the overallotment shares:

 

     Per share      Total  
     Without
Overallotment
     With
Overallotment
     Without
Overallotment
     With
Overallotment
 

Public offering price

   $ 25.00       $ 25.00       $ 50,000,000       $ 57,500,000   

Underwriting discounts and commissions paid by us (3.125% of the public offering price)

   $ 0.78125       $ 0.78125       $ 1,562,500       $ 1,796,875   

Proceeds to us, before expenses

   $ 24.21875       $ 24.21875       $ 48,437,500       $ 55,703,125   

We estimate that expenses payable by us in connection with this offering, other than underwriting discounts and commissions referred to above but including reimbursement of fees of underwriters’ counsel in connection with the Financial Industry Regulatory Authority clearing process, will be approximately $0.2 million.

In connection with this offering and in compliance with applicable securities laws, including Regulation M under the Exchange Act, the underwriters may overallot (i.e., sell more shares of Series D Term Preferred Stock than the amount shown on the cover page of this prospectus supplement) and may effect transactions that stabilize, maintain or otherwise affect the market price of such shares at levels above those which might otherwise prevail in the open market. Such transactions may include making short sales and placing bids for the Series D Term Preferred Stock or effecting purchases of such shares for the purpose of pegging, fixing or maintaining the market price of such shares or for the purpose of reducing a short position created in connection with this offering. The underwriters may cover a short position by exercising the overallotment option described above in place of, or in addition to, open market purchases.

Additionally, the underwriters may engage in syndicate covering transactions which involve purchases of Series D Term Preferred Stock in the open market after they have completed the distribution of such shares in order to cover syndicate short positions. In determining the appropriate source of shares to close out a covered short sale, the underwriters may consider, among other things, the market price of such shares compared to the purchase price of shares available under the overallotment option.

The underwriters may also sell Series D Term Preferred Stock in excess of the overallotment option, thereby creating a naked short position. The underwriters must close out any such naked short position by purchasing shares in the open market. The underwriters are more likely to create a naked short position if they are concerned that there may be downward pressure on the price of the Series D Term Preferred Stock in the open market after pricing, which could adversely affect investors who purchase in this offering.

The underwriters may also impose a penalty bid in connection with this offering. Penalty bids permit the underwriters to reclaim a selling concession from a syndicate member when the Series D Term Preferred Stock originally sold by such syndicate member are purchased in a stabilizing transaction or syndicate covering transaction to cover syndicate short positions. The imposition of a penalty bid may affect the open market price of the Series D Term Preferred Stock to the extent that it discourages resales of such shares.

We and the underwriters make no representation or prediction as to the direction or magnitude of any effect that these transactions may have on the market price of the Series D Term Preferred Stock. In addition, we and the underwriters make no representation that the underwriters will engage in such transactions or that such transactions, if and when commenced, will not be discontinued without notice.

Each underwriter does not intend to confirm sales of the Series D Term Preferred Stock to any accounts over which it exercises discretionary authority.

 

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The underwriting agreement provides that we will not, directly or indirectly, sell or otherwise dispose of any shares of the Series D Term Preferred Stock, for a period of 60 days after the date of this prospectus supplement without the prior written consent of Janney Montgomery Scott LLC, on behalf of the underwriters. The underwriting agreement also provides that our directors and executive officers will agree not to, directly or indirectly, sell or otherwise dispose of any of the Series D Term Preferred Stock, Series A Term Preferred Stock, Series B Term Preferred Stock or shares of our Common Stock for a period of 60 days after the date of this prospectus without the prior written consent of Janney Montgomery Scott LLC, on behalf of the underwriters.

In addition, the terms of the lock-up agreement do not prevent a stockholder party to such agreement from (a) transferring shares of our Preferred Stock or shares of our Common Stock acquired in open market transactions after the completion of this offering, (b) transferring any or all of the Preferred Stock or shares of our Common Stock or other Company securities if the transfer is by (i) gift, will or intestacy, or (ii) distribution to partners, members or stockholders of the undersigned, (c) transferring shares of our Preferred Stock or shares of our Common Stock pursuant to any 10b5-1 trading plan in effect prior to the date of this prospectus and (d) entering into any new 10b5-1 plan, provided that no sales of Preferred Stock or shares of our Common Stock or other Company securities shall be made pursuant to such 10b5-1 plan until after the expiration of the lock-up period; provided, however, that in the case of a transfer pursuant to clause (b) above, it shall be a condition to the transfer that the transferee execute an agreement stating that the transferee is receiving and holding the securities subject to the provisions of the lock-up agreement.

We have agreed to indemnify the underwriters against certain liabilities that they may incur in connection with this offering, including liabilities under the Securities Act.

We have applied to list the Series D Term Preferred Stock on NASDAQ, under the symbol “GAINM”. Trading on the Series D Term Preferred Stock is expected to begin within 30 days after the date of the prospectus supplement. Our Common Stock is traded on NASDAQ under the symbol “GAIN”, our Series A Term Preferred Stock is traded on NASDAQ under the symbol “GAINP”, our Series B Term Preferred Stock is traded on NASDAQ under symbol “GAINO” and our Series C Term Preferred Stock is traded on NASDAQ under symbol “GAINN.”

This prospectus supplement and the accompanying prospectus may be made available in electronic format on websites maintained by one or more of the underwriters or selling group members, if any, participating in this offering, and one or more of the underwriters participating in this offering may distribute this prospectus supplement and the accompanying prospectus electronically. Janney Montgomery Scott LLC, as representative of the underwriters, may agree to allocate a number of shares to underwriters and selling group members for sale to their online brokerage account holders. Internet distributions will be allocated by the underwriters and selling group members that will make internet distributions on the same basis as other allocations. Other than the prospectus supplement and the accompanying prospectus that are distributed in electronic format, the information on any of these underwriters’ or selling group members’ websites, and any other information contained on a website maintained by an underwriter or selling group member, is not part of this prospectus supplement or the accompanying prospectus.

The distribution of this prospectus supplement and the accompanying prospectus and this offering of Series D Term Preferred Stock in certain jurisdictions may be restricted by law. Persons who come into possession of this prospectus supplement and the accompanying prospectus should inform themselves about and observe any such restrictions.

Alternative Settlement Cycle

We expect that delivery of the shares of Series D Term Preferred Stock will be made against payment therefor on or about September 26, 2016, which will be the fifth business day following the date of the pricing of the Series D Term Preferred Stock (such settlement being herein referred to as “T+5”). Under Rule 15c6-1

 

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promulgated under the Exchange Act, trades in the secondary market generally are required to settle in three business days, unless the parties to any such trade expressly agree otherwise. Accordingly, purchasers who wish to trade the Series D Term Preferred Stock prior to the date of delivery hereunder will be required, by virtue of the fact that the Series D Term Preferred Stock initially will settle in T+5 business days, to specify an alternative settlement arrangement at the time of any such trade to prevent a failed settlement.

Affiliations and Conflicts of Interest

The underwriters and certain of their affiliates are full service financial institutions engaged in various activities, which may include securities trading, commercial and investment banking, financial advisory, investment management, investment research, principal investment, hedging, financing and brokerage activities. The underwriters and certain of their affiliates have, from time to time, performed, and may in the future perform, various financial advisory and investment banking services for us, for which they received or will receive customary fees and expenses. Affiliates of certain of the underwriters serve as lenders under the Credit Facility and may serve as lenders under any future credit facilities. Affiliates of the underwriters may receive part of the proceeds of the offering by reason of the repayment of certain amounts outstanding under the Credit Facility.

In the ordinary course of their various business activities, the underwriters and certain of their affiliates may make or hold a broad array of investments and actively trade debt and equity securities (or related derivative securities) and financial instruments (including bank loans) for their own account and for the account of their customers, and such investment and securities activities may involve our securities and/or instruments. The underwriters and certain of their affiliates may also make investment recommendations and/or publish or express independent research views in respect of such securities or instruments and may at any time hold, or recommend to clients that they acquire, long and/or short positions in such securities and instruments.

The principal business address of Janney Montgomery Scott LLC is 1717 Arch Street, Philadelphia, PA 19103. The principal business address of Ladenburg Thalmann & Co. Inc. is 570 Lexington Avenue, 12th Floor, New York, NY 10022. The principal business address of J.J.B. Hilliard, W.L. Lyons, LLC is 500 W. Jefferson Street, Louisville, KY 40202. The principal business address of Wunderlich Securities, Inc. is 6000 Poplar Avenue, Suite 150, Memphis, TN 38119. The principal business address of William Blair & Company, L.L.C. is 222 West Adams Street, Chicago, Illinois 60606. The principal business address of Maxim Group LLC is 405 Lexington Avenue, 2nd Floor, New York, NY 10174.

 

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ADDITIONAL MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS

This summary supplements the discussion in the accompanying prospectus under the caption “Material U.S. Federal Income Tax Considerations — Taxation of Our U.S. Stockholders.”

Redemption of our Series D Term Preferred Stock. Gain or loss, if any, recognized by a stockholder in connection with our redemption of Series D Term Preferred Stock generally will be taxed as gain or loss from a sale or exchange of Series D Term Preferred Stock if the redemption (a) is “not essentially equivalent to a dividend” with respect to the stockholder, (b) results in a “complete termination” of stockholder’s ownership of our stock, or (c) is “substantially disproportionate” with respect to the stockholder, in each case, within the meaning of Section 302(b) of the Code.

In determining whether any of these alternative tests has been met, stock considered to be owned by the stockholder by reason of certain constructive ownership rules in the federal income tax laws, as well as stock actually owned by the stockholder, generally must be taken into account. The determination as to whether any of the alternative tests described above will be satisfied with respect to the stockholder depends upon the facts and circumstances at the time that the determination must be made. Stockholders are advised to consult their tax advisors to determine their own tax treatment in the event of a redemption of Series D Term Preferred Stock.

Even if a redemption of our Series D Term Preferred Stock is treated as a sale or exchange, a portion of the amount received by a stockholder on the redemption may be characterized as dividend income to the extent it is attributable to declared but unpaid dividends.

If a redemption of Series D Term Preferred Stock from a stockholder is not treated as a sale or exchange for federal income tax purposes, the proceeds of such distribution will be treated for federal income tax purposes as a distribution, the consequences of which are described in the accompanying prospectus under the caption “Material U.S. Federal Income Tax Considerations — Taxation of Our U.S. Stockholders — Distributions”.

The Internal Revenue Service currently requires that a RIC that has two or more classes of stock allocate to each class proportionate amounts of each type of its income (such as ordinary income, capital gains, qualified dividend income and dividends qualifying for the dividends-received deduction) based upon the percentage of total dividends paid to each class for the tax year. Accordingly, we intend to allocate capital gain distributions and distributions of qualified dividend income and distributions qualifying for the dividends-received deduction, if any, between our common shares and preferred shares in proportion to the total distributions paid to each class with respect to such tax year.

CUSTODIAN, TRANSFER AGENT, DIVIDEND DISBURSING AGENT AND REDEMPTION AND PAYING AGENT

The custodian of our assets is The Bank of New York Mellon Corp. The custodian’s address 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, Gladstone Business Investment, LLC, or Business Investment, are held under a custodian agreement with The Bank of New York Mellon Corp., which acts as collateral custodian pursuant to the Credit Facility with Key Equipment Finance Inc. and certain other parties. The address of the collateral custodian is 500 Ross Street, Suite 625, Pittsburgh, PA 15262. Computershare Inc. acts as our transfer, redemption and dividend paying agent and registrar. The principal business address of Computershare Inc. is 250 Royall Street, Canton, Massachusetts 02021, telephone number 781-575-2000. Computershare Inc. also maintains an internet website at www.computershare.com.

 

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MISCELLANEOUS

To the extent that a holder of Series D Term Preferred Stock is directly or indirectly a beneficial owner of more than 10% of any class of our outstanding shares (meaning, for purposes of holders of Series D Term Preferred Stock, more than 10% of our outstanding Series D Term Preferred Stock), such 10% beneficial owner would be subject to the short-swing profit rules that are imposed pursuant to Section 16 of the Exchange Act (and related reporting requirements). These rules generally provide that such a 10% beneficial owner must disgorge any profits made on purchases and sales, or sales and purchases, of our equity securities (including the Series D Term Preferred Stock and common stock) within any six-month time period. Investors should consult with their own counsel to determine the applicability of these rules.

WHERE YOU CAN FIND MORE INFORMATION

We are subject to the informational requirements of the Exchange Act and are required to file reports, proxy statements and other information with the SEC. These documents may be inspected and copied for a fee at the SEC’s public reference room, 100 F Street, N.E., Washington, D.C. 20549.

This prospectus supplement and the accompanying prospectus do not contain all of the information in our registration statement, including amendments, exhibits and schedules. Statements in this prospectus supplement and in the accompanying prospectus about the contents of any contract or other document are not necessarily complete and, in each instance, reference is made to the copy of the contract or other document filed as an exhibit to the registration statement, each such statement being qualified in all respects by this reference.

Additional information about the Company and the Preferred Stock may be found in our registration statement on Form N-2 (including the related amendments, exhibits and schedules) filed with the SEC. The SEC maintains a web site (http://www.sec.gov) that contains our registration statement, other documents incorporated by reference in the registration statement and other information that we have filed electronically with the SEC, including proxy statements and reports filed under the Exchange Act.

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 Dechert LLP, Washington, D.C.

EXPERTS

The financial statements as of March 31, 2016 and March 31, 2015 and for each of the three years in the period ended March 31, 2016 and management’s assessment of the effectiveness of internal control over financial reporting (which is included in the Report of Management on Internal Controls) as of March 31, 2016 included in the accompanying 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.

 

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INDEX TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

 

Consolidated Statements of Assets and Liabilities as of June  30 and March 31, 2016

     S-F-2   

Consolidated Statements of Operations for the three months ended June 30, 2016 and 2015

     S-F-3   

Consolidated Statements of Changes in Net Assets for the three months ended June 30, 2016 and 2015

     S-F-4   

Consolidated Statements of Cash Flows for the three months ended June 30, 2016 and 2015

     S-F-5   

Consolidated Schedules of Investments as of June  30 and March 31, 2016

     S-F-6   

Notes to Consolidated Financial Statements

     S-F-16   

 

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GLADSTONE INVESTMENT CORPORATION

CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES

(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

(UNAUDITED)

 

     June 30,     March 31,  
     2016     2016  

ASSETS

    

Investments at fair value

    

Non-Control/Non-Affiliate investments (Cost of $200,094 and $191,757, respectively)

   $ 196,486      $ 180,933   

Affiliate investments (Cost of $300,757 and $304,856, respectively)

     276,676        296,723   

Control investments (Cost of $21,512 and $21,512 respectively)

     17,819        10,000   
  

 

 

   

 

 

 

Total investments at fair value (Cost of $522,363 and $518,125, respectively)

     490,981        487,656   

Cash and cash equivalents

     5,233        4,481   

Restricted cash and cash equivalents

     1,384        1,107   

Interest receivable

     2,766        2,790   

Due from custodian

     1,149        1,638   

Deferred financing costs, net

     959        1,147   

Other assets, net

     4,567        4,256   
  

 

 

   

 

 

 

TOTAL ASSETS

   $ 507,039      $ 503,075   
  

 

 

   

 

 

 

LIABILITIES

    

Borrowings:

    

Line of credit at fair value (Cost of $79,600 and $95,000, respectively)

   $ 79,600      $ 95,000   

Secured borrowing

     5,096        5,096   
  

 

 

   

 

 

 

Total borrowings

     84,696        100,096   

Mandatorily redeemable preferred stock, $0.001 par value, $25 liquidation preference; 4,956,000 shares authorized; 4,866,000 shares issued and outstanding, net

     118,683        118,465   

Accounts payable and accrued expenses

     828        1,054   

Fees due to Adviser (A)

     2,111        1,912   

Fee due to Administrator (A)

     299        311   

Other liabilities

     2,542        2,215   
  

 

 

   

 

 

 

TOTAL LIABILITIES

   $ 209,159      $ 224,053   
  

 

 

   

 

 

 

Commitments and contingencies (B)

    

NET ASSETS

   $ 297,880      $ 279,022   
  

 

 

   

 

 

 

ANALYSIS OF NET ASSETS

    

Common stock, $0.001 par value per share, 100,000,000 shares authorized, 30,270,958 shares issued and outstanding

     30      $ 30   

Capital in excess of par value

     311,493        311,608   

Cumulative net unrealized depreciation of investments

     (31,382     (30,469

Cumulative net unrealized depreciation of other

     —          (75

Net investment income in excess of distributions

     7,603        6,426   

Accumulated net realized gain (loss)

     10,136        (8,498
  

 

 

   

 

 

 

TOTAL NET ASSETS

   $ 297,880      $ 279,022   
  

 

 

   

 

 

 

NET ASSET VALUE PER SHARE AT END OF PERIOD

   $ 9.84      $ 9.22   
  

 

 

   

 

 

 

 

(A) Refer to Note 4 — Related Party Transactions for additional information.
(B) Refer to Note 10 — Commitments and Contingencies for additional information.

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.

 

S-F-2


Table of Contents

GLADSTONE INVESTMENT CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

(UNAUDITED)

 

     Three Months Ended
June 30,
 
     2016     2015  

INVESTMENT INCOME

    

Interest income:

    

Non-Control/Non-Affiliate investments

   $ 4,505      $ 3,802   

Affiliate investments

     6,914        6,924   

Control investments

     209        659   
  

 

 

   

 

 

 

Total interest income

     11,628        11,385   

Other income:

    

Non-Control/Non-Affiliate investments

     15        1,321   

Affiliate investments

     2,750        —     
  

 

 

   

 

 

 

Total other income

     2,765        1,321   
  

 

 

   

 

 

 

Total investment income

     14,393        12,706   
  

 

 

   

 

 

 

EXPENSES

    

Base management fee (A)

     2,509        2,453   

Loan servicing fee (A)

     1,681        1,559   

Incentive fee (A)

     1,700        1,291   

Administration fee (A)

     299        355   

Interest expense on borrowings

     971        1,064   

Dividends on mandatorily redeemable preferred stock

     2,065        1,767   

Amortization of deferred financing costs and discounts

     481        460   

Professional fees

     192        442   

Other general and administrative expenses

     201        556   
  

 

 

   

 

 

 

Expenses before credits from Adviser

     10,099        9,947   
  

 

 

   

 

 

 

Credit to base management fee — loan servicing fee (A)

     (1,681     (1,559

Credit to fees from Adviser — other (A)

     (837     (845
  

 

 

   

 

 

 

Total expenses, net of credits to fees

     7,581        7,543   
  

 

 

   

 

 

 

NET INVESTMENT INCOME

   $ 6,812      $ 5,163   
  

 

 

   

 

 

 

REALIZED AND UNREALIZED GAIN (LOSS)

    

Net realized gain (loss):

    

Non-Control/Non-Affiliate investments

     (153     —     

Affiliate investments

     18,789        —     

Control investments

     (1     199   

Other

     (75     —     
  

 

 

   

 

 

 

Total net realized gain

     18,560        199   

Net unrealized appreciation (depreciation):

    

Non-Control/Non-Affiliate investments

     7,217        6,508   

Affiliate investments

     (15,949     (3,201

Control investments

     7,819        (110

Other

     75        —     
  

 

 

   

 

 

 

Total net unrealized (depreciation) appreciation

     (838     3,197   
  

 

 

   

 

 

 

Net realized and unrealized gain

     17,722        3,396   
  

 

 

   

 

 

 

NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS

   $ 24,534      $ 8,559   
  

 

 

   

 

 

 

BASIC AND DILUTED PER COMMON SHARE:

    

Net investment income

   $ 0.23      $ 0.17   
  

 

 

   

 

 

 

Net increase in net assets resulting from operations

   $ 0.81      $ 0.28   
  

 

 

   

 

 

 

Distributions

   $ 0.19      $ 0.19   
  

 

 

   

 

 

 

WEIGHTED AVERAGE SHARES OF COMMON STOCK OUTSTANDING:

    

Basic and diluted

     30,270,958        30,260,079   

 

(A) Refer to Note 4 — Related Party Transactions for additional information.

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.

 

S-F-3


Table of Contents

GLADSTONE INVESTMENT CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS

(IN THOUSANDS)

(UNAUDITED)

 

     Three Months Ended June 30,  
             2016                     2015          

OPERATIONS

    

Net investment income

   $ 6,812      $ 5,163   

Net realized gain on investments

     18,635        199   

Net realized loss on other

     (75     —     

Net unrealized (depreciation) appreciation of investments

     (913     3,197   

Net unrealized appreciation of other

     75        —     
  

 

 

   

 

 

 

Net increase in net assets from operations

     24,534        8,559   
  

 

 

   

 

 

 

DISTRIBUTIONS

    

Distributions to common stockholders

     (5,676     (5,676
  

 

 

   

 

 

 

Net decrease in net assets from distributions

     (5,676     (5,676
  

 

 

   

 

 

 

CAPITAL ACTIVITY

    

Issuance of common stock

     —          3,663   

Offering costs for issuance of common stock

     —          (221
  

 

 

   

 

 

 

Net increase in net assets from capital activity

     —          3,442   
  

 

 

   

 

 

 

TOTAL INCREASE IN NET ASSETS

     18,858        6,325   

NET ASSETS, BEGINNING OF PERIOD

     279,022        273,429   
  

 

 

   

 

 

 

NET ASSETS, END OF PERIOD

   $ 297,880      $ 279,754   
  

 

 

   

 

 

 

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.

 

S-F-4


Table of Contents

GLADSTONE INVESTMENT CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN THOUSANDS)

(UNAUDITED)

 

     Three Months Ended June 30,  
             2016                     2015          

CASH FLOWS FROM OPERATING ACTIVITIES

    

Net increase in net assets resulting from operations

   $ 24,534      $ 8,559   

Adjustments to reconcile net increase in net assets resulting from operations to net cash provided by (used in) operating activities:

    

Purchase of investments

     (28,976     (17,326

Principal repayments of investments

     15,411        5,233   

Net proceeds from the sale of investments

     27,531        315   

Net realized gain on investments

     (18,654     (215

Net realized loss on other

     75        —     

Net unrealized depreciation (appreciation) of investments

     913        (3,197

Net unrealized appreciation of other

     (75     —     

Amortization of deferred financing costs and discounts

     481        460   

Bad debt expense, net of recoveries

     (18     225   

Changes in assets and liabilities:

    

Increase in restricted cash and cash equivalents

     (277     (695

Decrease (increase) in interest receivable

     24        (134

Decrease in due from custodian

     489        544   

Decrease (increase) in other assets, net

     157        (590

(Decrease) increase in accounts payable and accrued expenses

     (226     842   

Increase in fees due to Adviser (A)

     199        308   

(Decrease) increase in fee due to Administrator (A)

     (12     93   

Increase (decrease) in other liabilities

     327        (515
  

 

 

   

 

 

 

Net cash provided by (used in) operating activities

     21,903        (6,093
  

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES

    

Proceeds from issuance of common stock

     —          3,663   

Offering costs for issuance of common stock

     —          (221

Proceeds from line of credit

     31,100        38,500   

Repayments on line of credit

     (46,500     (67,550

Proceeds from issuance of mandatorily redeemable preferred stock

     —          40,250   

Deferred financing and offering costs

     (75     (1,712

Distributions paid to common stockholders

     (5,676     (5,676
  

 

 

   

 

 

 

Net cash (used in) provided by financing activities

     (21,151     7,254   
  

 

 

   

 

 

 

NET INCREASE IN CASH AND CASH EQUIVALENTS

     752        1,161   

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD

     4,481        4,921   
  

 

 

   

 

 

 

CASH AND CASH EQUIVALENTS, END OF PERIOD

   $ 5,233      $ 6,082   
  

 

 

   

 

 

 

CASH PAID FOR INTEREST

   $ 913      $ 974   
  

 

 

   

 

 

 

 

(A) Refer to Note 4 — Related Party Transactions for additional information.

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.

 

S-F-5


Table of Contents

GLADSTONE INVESTMENT CORPORATION

CONSOLIDATED SCHEDULE OF INVESTMENTS

JUNE 30, 2016

(DOLLAR AMOUNTS IN THOUSANDS)

(UNAUDITED)

 

Company (A)

 

Industry

  

Investment (B)(F)

  Principal     Cost     Fair Value  

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

   

Auto Safety House, LLC

 

Automobile

  

Secured First Lien Line of Credit, $1,000 available (8.0%, Due 10/2019) (I)(Q)

  $ —        $ —        $ —     
    

Secured First Lien Term Debt (8.0%, Due 10/2019) (I)(Q)

    5,000        5,000        5,362   
        

 

 

   

 

 

 
           5,000        5,362   

B-Dry, LLC

 

Personal, Food and Miscellaneous Services

  

Secured First Lien Line of Credit, $400 available (6.7% (0.8% Unused Fee), Due 12/2016) (L)

    3,600        3,600        3,600   
    

Secured First Lien Term Debt (12.0%, Due 12/2019) (L)

    6,433        6,443        2,378   
    

Secured First Lien Term Debt (12.0%, Due 12/2019) (L)

    840        840        —     
    

Preferred Stock (2,500 shares) (C)(L)

      2,516        —     
    

Common Stock (2,500 shares) (C)(L)

      300        —     
        

 

 

   

 

 

 
           13,699        5,978   

Country Club Enterprises, LLC

 

Automobile

  

Secured Second Lien Term Debt (18.7%, Due 5/2017) (L)

    4,000        4,000        4,000   
    

Preferred Stock (7,245,681 shares) (C)(L)

      7,725        6,719   
    

Guaranty ($2,000) (D)

      —          —     
    

Guaranty ($211) (D)

      —          —     
        

 

 

   

 

 

 
           11,725        10,719   

Diligent Delivery Systems

 

Cargo Transport

  

Secured Second Lien Term Debt (10.0%, Due 8/2020) (K)

    13,000        13,000        13,065   
    

Common Stock Warrants (8% ownership) (C)(L)

      500        2,000   
        

 

 

   

 

 

 
           13,500        15,065   

Drew Foam Company, Inc.

 

Chemicals, Plastics, and Rubber

  

Secured First Lien Term Debt (13.5%, Due 8/2017) (L)

    9,913        9,913        9,913   
    

Preferred Stock (34,045 shares) (C)(L)

      3,375        3,654   
    

Common Stock (5,372 shares) (C)(L)

      63        7,627   
        

 

 

   

 

 

 
           13,351        21,194   

Frontier Packaging, Inc.

 

Containers, Packaging, and Glass

  

Secured First Lien Term Debt (12.0%, Due 12/2017) (L)

    10,500        10,500        10,500   
    

Preferred Stock (1,373 shares) (C)(L)

      1,373        1,413   
    

Common Stock (152 shares) (C)(L)

      152        9,313   
        

 

 

   

 

 

 
           12,025        21,226   

Funko Acquisition Holdings, LLC (M)

 

Personal and Non-Durable Consumer Products (Manufacturing Only)

  

Preferred Stock (260 units) (C)(L)

      260        326   
    

Common Stock (975 units) (C)(L)

      —          —     
        

 

 

   

 

 

 
           260        326   

Ginsey Home Solutions, Inc.

 

Home and Office Furnishings, Housewares, and Durable Consumer Products

  

Secured Second Lien Term Debt (13.5%, Due 1/2021) (H)(L)

    13,300        13,300        13,300   
    

Preferred Stock (19,280 shares) (C)(L)

      9,583        5,816   
    

Common Stock (63,747 shares) (C)(L)

      8        —     
        

 

 

   

 

 

 
           22,891        19,116   

Jackrabbit, Inc.

 

Farming and Agriculture

  

Secured First Lien Term Debt (13.5%, Due 4/2018) (L)

    11,000        11,000        11,000   
    

Preferred Stock (3,556 shares) (C)(L)

      3,556        4,560   
    

Common Stock (548 shares) (C)(L)

      94        3,736   
        

 

 

   

 

 

 
           14,650        19,296   

 

S-F-6


Table of Contents

GLADSTONE INVESTMENT CORPORATION

CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

JUNE 30, 2016

(DOLLAR AMOUNTS IN THOUSANDS)

(UNAUDITED)

 

Company (A)

 

Industry

  

Investment (B)(F)

  Principal     Cost     Fair Value  

Mathey Investments, Inc.

 

Machinery (Nonagriculture, Nonconstruction, Nonelectronic)

  

Secured First Lien Term Debt (10.0%, Due 3/2018) (L)

    1,375        1,375        1,375   
    

Secured First Lien Term Debt (12.0%, Due 3/2018) (L)

    3,727        3,727        3,727   
    

Secured First Lien Term Debt (12.5%, Due 3/2018) (E)(I)(L)

    3,500        3,500        3,500   
    

Common Stock (29,102 shares) (C)(L)

      777        —     
        

 

 

   

 

 

 
           9,379        8,602   

Mitchell Rubber Products, Inc.

 

Chemicals, Plastics, and Rubber

  

Secured Second Lien Term Debt (13.0%, Due 3/2018) (I)(K)

    13,560        13,560        6,408   
    

Preferred Stock (27,900 shares) (C)(L)

      2,790        —     
    

Common Stock (27,900 shares) (C)(L)

      28        —     
        

 

 

   

 

 

 
           16,378        6,408   

Nth Degree, Inc.

 

Diversified/Conglomerate Service

  

Secured First Lien Term Debt (12.5%, Due 12/2020) (L)

  $ 13,290      $ 13,290      $ 13,290   
    

Preferred Stock (5,660 units) (C)(L)

      5,660        9,115   
        

 

 

   

 

 

 
           18,950        22,405   

Quench Holdings Corp.

 

Home and Office Furnishings, Housewares, and Durable Consumer Products

  

Common Stock (4,770,391 shares) (C)(L)

      3,397        4,359   
        

 

 

   

 

 

 
           3,397        4,359   

SBS Industries, LLC

 

Machinery (Nonagriculture, Nonconstruction, Nonelectronic)

  

Secured First Lien Term Debt (14.0%, Due 8/2019) (L)

    11,355        11,355        11,355   
    

Preferred Stock (19,935 shares) (C)(L)

      1,994        —     
    

Common Stock (221,500 shares) (C)(L)

      222        —     
        

 

 

   

 

 

 
           13,571        11,355   

Schylling, Inc.

 

Leisure, Amusement, Motion Pictures, Entertainment

  

Secured First Lien Term Debt (13.0%, Due 8/2018) (L)

    13,081        13,081        13,081   
    

Preferred Stock (4,000 shares) (C)(L)

      4,000        5,273   
        

 

 

   

 

 

 
           17,081        18,354   

Star Seed, Inc.

 

Farming and Agriculture

  

Secured First Lien Term Debt (12.5%, Due 5/2018) (E)(K)

    5,000        5,000        4,675   
    

Preferred Stock (1,499 shares) (C)(L)

      1,499        —     
    

Common Stock (600 shares) (C)(L)

      1        —     
        

 

 

   

 

 

 
           6,500        4,675   

Tread Corporation

 

Oil and Gas

  

Secured First Lien Line of Credit, $634 available (12.5%, Due 2/2018) (G)(L)

    3,216        3,216        2,046   
    

Preferred Stock (12,998,639 shares) (C)(L)

      3,768        —     
    

Common Stock (10,089,048 shares) (C)(L)

      753        —     
        

 

 

   

 

 

 
           7,737        2,046   
        

 

 

   

 

 

 

Total Non-Control/Non-Affiliate Investments (represents 40.0% of total investments at fair value)

  

  $ 200,094      $ 196,486   
 

 

 

   

 

 

 

 

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.

 

S-F-7


Table of Contents

GLADSTONE INVESTMENT CORPORATION

CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

JUNE 30, 2016

(DOLLAR AMOUNTS IN THOUSANDS)

(UNAUDITED)

 

Company (A)

 

Industry

  

Investment (B)(F)

  Principal     Cost     Fair Value  

AFFILIATE INVESTMENTS (O) :

     

Alloy Die Casting Co. (M)

 

Diversified/Conglomerate Manufacturing

  

Secured First Lien Term Debt (13.5%, Due 10/2018) (K)

  $ 12,215      $ 12,215      $ 11,543   
    

Secured First Lien Term Debt (13.5%, Due 4/2017) (J)

    175        175        175   
    

Preferred Stock (4,064 shares) (C)(L)

      4,064        580   
    

Common Stock (630 shares) (C)(L)

      41        —     
        

 

 

   

 

 

 
           16,495        12,298   

Behrens Manufacturing, LLC (M)

 

Diversified/Conglomerate Manufacturing

  

Secured First Lien Term Debt (13.0%, Due 12/2018) (L)

    9,975        9,975        9,975   
    

Preferred Stock (2,923 shares) (C)(L)

      2,922        9,890   
        

 

 

   

 

 

 
           12,897        19,865   

Brunswick Bowling Products, Inc.

 

Home and Office Furnishings, Housewares and Durable Consumer Products

  

Secured First Lien Term Debt (16.3%, Due 5/2020) (L)

    11,307        11,307        11,307   
    

Preferred Stock (4,943 shares) (C)(L)

      4,943        7,546   
        

 

 

   

 

 

 
           16,250        18,853   

B+T Group Acquisition Inc. (M)

 

Telecommunications

  

Secured First Lien Term Debt (13.0%, Due 12/2019) (K)

    14,000        14,000        13,230   
    

Preferred Stock (12,841 shares) (C)(L)

      4,196        —     
        

 

 

   

 

 

 
           18,196        13,230   

Cambridge Sound Management, Inc.

 

Home and Office Furnishings, Housewares and Durable Consumer Products

  

Secured First Lien Term Debt (13.0%, Due 9/2019) (L)

    15,000        15,000        15,000   
    

Preferred Stock (4,500 shares) (C)(L)

      4,500        11,806   
        

 

 

   

 

 

 
           19,500        26,806   

Channel Technologies Group, LLC

 

Diversified/Conglomerate Manufacturing

  

Preferred Stock (2,279 shares) (C)(L)

      2,789        582   
    

Common Stock (2,319,184 shares) (C)(L)

      —          —     
        

 

 

   

 

 

 
           2,789        582   

Counsel Press, Inc.

 

Diversified/Conglomerate Services

  

Secured First Lien Line of Credit, $1,000 available (12.8% (1.0% Unused Fee), Due 3/2017) (L)

  $ —        $ —        $ —     
    

Secured First Lien Term Debt (12.8%, Due 3/2020) (L)

    18,000        18,000        18,000   
    

Secured First Lien Term Debt (14.0%, Due 3/2020) (L)

    5,500        5,500        5,500   
    

Preferred Stock (6,995 shares) (C)(L)

      6,995        6,698   
        

 

 

   

 

 

 
           30,495        30,198   

D.P.M.S., Inc.

 

Diversified/Conglomerate Manufacturing

  

Secured First Lien Line of Credit, $550 available (4.0% (0.5% Unused Fee), Due 8/2017) (I)(L)

    4,000        4,000        4,000   
    

Secured First Lien Term Debt (4.0%, Due 8/2017) (I)(L)

    2,575        2,575        2,575   
    

Secured First Lien Term Debt (4.0%, Due 8/2017) (I)(L)

    8,795        8,795        918   
    

Secured First Lien Term Debt (5.2%, Due 8/2017) (E)(L)

    1,150        1,150        —     
    

Preferred Stock (25 shares) (C)(L)

      2,500        —     
    

Common Stock (1,241 shares) (C)(L)

      3        —     
        

 

 

   

 

 

 
           19,023        7,493   

 

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.

 

S-F-8


Table of Contents

GLADSTONE INVESTMENT CORPORATION

CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

JUNE 30, 2016

(DOLLAR AMOUNTS IN THOUSANDS)

(UNAUDITED)

 

Company (A)

 

Industry

  

Investment (B)(F)

  Principal     Cost     Fair Value  

Edge Adhesives Holdings, Inc. (M)

 

Diversified/Conglomerate Manufacturing

  

Secured First Lien Term Debt (12.5%, Due 2/2019) (K)

    9,300        9,300        8,975   
    

Secured First Lien Term Debt (13.8%, Due 2/2019) (K)

    2,400        2,400        2,322   
    

Preferred Stock (3,774 units) (C)(L)

      3,774        —     
        

 

 

   

 

 

 
           15,474        11,297   

GI Plastek, Inc.

 

Chemicals, Plastics, and Rubber

  

Secured First Lien Term Debt (13.3%, Due 7/2020) (L)

    15,000        15,000        15,000   
    

Preferred Stock (5,150 units) (C)(L)

      5,150        5,919   
        

 

 

   

 

 

 
           20,150        20,919   

Head Country, Inc.

 

Beverage, Food and Tobacco

  

Secured First Lien Term Debt (12.5%, Due 2/2019) (L)

    9,050        9,050        9,050   
    

Preferred Stock (4,000 shares) (C)(L)

      4,000        5,082   
        

 

 

   

 

 

 
           13,050        14,132   

Logo Sportswear, Inc.

 

Textiles and Leather

  

Secured First Lien Term Debt (12.5%, Due 3/2020) (L)

    9,200        9,200        9,200   
    

Preferred Stock (1,550 shares) (C)(L)

      1,550        4,704   
        

 

 

   

 

 

 
           10,750        13,904   

Meridian Rack & Pinion, Inc. (M)

 

Automobile

  

Secured First Lien Term Debt (13.5%, Due 12/2018) (K)

    9,660        9,660        8,646   
    

Preferred Stock (3,381 shares) (C)(L)

      3,381        603   
        

 

 

   

 

 

 
           13,041        9,249   

The Mountain Corporation

 

Personal and Non-Durable Consumer Products (Manufacturing Only)

  

Secured Second Lien Term Debt (13.5%, Due 8/2021) (J)

    18,600        18,600        18,600   
    

Preferred Stock (6,899 shares) (C)(J)

      6,899        6,899   
    

Common Stock (751 shares) (C)(J)

      1        1   
        

 

 

   

 

 

 
           25,500        25,500   

NDLI, Inc.

 

Cargo Transport

  

Preferred Stock (3,600 shares) (C)(L)

      3,600        —     
    

Common Stock (545 shares) (C)(L)

      —          —     
        

 

 

   

 

 

 
           3,600        —     

Old World Christmas, Inc.

 

Home and Office Furnishings, Housewares, and Durable Consumer Products

  

Secured First Lien Term Debt (13.3%, Due 10/2019) (L)

    15,770        15,770        15,770   
    

Preferred Stock (6,180 shares) (C)(L)

      6,180        2,549   
        

 

 

   

 

 

 
           21,950        18,319   

Precision Southeast, Inc.

 

Diversified/Conglomerate Manufacturing

  

Secured Second Lien Term Debt (14.0%, Due 9/2020) (L)

    9,618        9,618        9,618   
    

Preferred Stock (37,391 shares) (C)(L)

      3,739        1,682   
    

Common Stock (90,909 shares) (C)(L)

      91        —     
        

 

 

   

 

 

 
           13,448        11,300   

SOG Specialty Knives & Tools, LLC

 

Leisure, Amusement, Motion Pictures, Entertainment

  

Secured First Lien Term Debt (13.3%, Due 10/2017) (L)

  $ 6,200      $ 6,200      $ 6,200   
    

Secured First Lien Term Debt (14.8%, Due 10/2017) (L)

    12,200        12,200        12,200   
    

Preferred Stock (9,749 shares) (C)(L)

      9,749        4,331   
        

 

 

   

 

 

 
           28,149        22,731   
        

 

 

   

 

 

 

Total Affiliate Investments (represents 56.4% of total investments at fair value)

  

  $ 300,757      $ 276,676   
 

 

 

   

 

 

 

 

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.

 

S-F-9


Table of Contents

GLADSTONE INVESTMENT CORPORATION

CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

JUNE 30, 2016

(DOLLAR AMOUNTS IN THOUSANDS)

(UNAUDITED)

 

Company (A)

 

Industry

  

Investment (B)(F)

  Principal     Cost     Fair Value  

CONTROL INVESTMENTS (P) :

     

Galaxy Tool Holding Corporation

 

Aerospace and Defense

  

Secured First Lien Line of Credit, $0 available (6.5% (1.0% Unused Fee), Due 9/2016) (L)

  $ 5,000      $ 5,000      $ 5,000   
    

Secured Second Lien Term Debt (10.0%, Due 8/2017) (L)

    5,000        5,000        5,000   
    

Preferred Stock (5,517,444 shares) (C)(L)

      11,464        7,819   
    

Common Stock (88,843 shares) (C)(L)

      48        —     
        

 

 

   

 

 

 
           21,512        17,819   
        

 

 

   

 

 

 

Total Control Investments (represents 3.6% of total investments at fair value)

  

  $ 21,512      $ 17,819   
 

 

 

   

 

 

 

TOTAL INVESTMENTS

         $ 522,363      $ 490,981   
        

 

 

   

 

 

 

 

(A) Certain of the securities listed are issued by affiliate(s) of the indicated portfolio company. The majority of the securities listed, totaling $458.4 million at fair value, are pledged as collateral to our revolving line of credit as described further in Note 5 — Borrowings. 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 June 30, 2016. Under the 1940 Act, we may not acquire any non-qualifying assets unless, at the time such acquisition is made, qualifying assets represent at least 70% of our total assets.
(B) Percentages represent the weighted average cash interest rates in effect at June 30, 2016, and due date represents the contractual maturity date. Unless indicated otherwise, all cash interest rates are indexed to 30-day London Interbank Offered Rate. If applicable, paid-in-kind interest rates are noted separately from the cash interest rates.
(C) Security is non-income producing.
(D) Refer to Note 10 — Commitments and Contingencies for additional information regarding these guaranties.
(E) Last Out Tranche (“LOT”) of secured first lien debt, meaning if the portfolio company is liquidated, the holder of the LOT generally is paid after the other secured first lien debt but before the secured second lien debt.
(F) Where applicable, aggregates all shares of a 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 a 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 was participated to a third party, but is accounted for as collateral for a secured borrowing under accounting principles generally accepted in the U.S. and presented as secured borrowing on our accompanying Consolidated Statement of Assets and Liabilities as of June 30, 2016.
(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 June 30, 2016 best represents fair value as of June 30, 2016.
(K) Fair value was based on internal yield analysis or on estimates of value submitted by Standard & Poor’s Securities Evaluations, Inc. Refer to Note 3 — Investments for additional information.
(L) Fair value was based on the total enterprise value of the portfolio company, which is generally allocated to the portfolio company’s securities in order of their relative priority in the capital structure. Refer to Note 3 — Investments for additional information.
(M) One of our affiliated funds, Gladstone Capital Corporation, co-invested with us in this portfolio company pursuant to an exemptive order granted by the U.S. Securities and Exchange Commission.
(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) Fair value was based on the expected exit or payoff amount, where such event has occurred or is expected to occur imminently.

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.

 

S-F-10


Table of Contents

GLADSTONE INVESTMENT CORPORATION

CONSOLIDATED SCHEDULE OF INVESTMENTS

MARCH 31, 2016

(DOLLAR AMOUNTS IN THOUSANDS)

 

Company (A)

 

Industry

 

Investment (B)(F)

  Principal     Cost     Fair Value  

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

  

   

Auto Safety House, LLC

 

Automobile

 

Secured First Lien Line of Credit, $1,000 available (8.0%, Due 10/2019) (I)(Q)

  $ —        $ —        $ —     
   

Secured First Lien Term Debt (8.0%, Due 10/2019) (I)(Q)

    5,000        5,000        5,311   
       

 

 

   

 

 

 
        5,000        5,311   

B-Dry, LLC

 

Personal, Food and Miscellaneous Services

 

Secured First Lien Line of Credit, $500 available (6.7% (0.8% Unused Fee), Due 12/2016) (L)

    3,500        3,500        3,500   
   

Secured First Lien Term Debt (12.0%, Due 12/2019) (L)

    6,433        6,443        1,191   
   

Secured First Lien Term Debt (12.0%, Due 12/2019) (L)

    840        840        —     
   

Preferred Stock (2,500 shares) (C)(L)

      2,516        —     
   

Common Stock (2,500 shares) (C)(L)

      300        —     
       

 

 

   

 

 

 
          13,599        4,691   

Country Club Enterprises, LLC

 

Automobile

 

Secured Second Lien Term Debt (18.7%, Due 5/2017) (L)

    4,000        4,000        4,000   
   

Preferred Stock (7,245,681 shares) (C)(L)

      7,725        5,313   
   

Guaranty ($2,000) (D)

      —          —     
   

Guaranty ($279) (D)

      —          —     
       

 

 

   

 

 

 
        11,725        9,313   

Diligent Delivery Systems

 

Cargo Transport

 

Secured Second Lien Term Debt (10.0%, Due 8/2020) (K)

    13,000        13,000        12,984   
   

Common Stock Warrants (6.0% ownership) (C)(L)

      —          1,500   
       

 

 

   

 

 

 
        13,000        14,484   

Drew Foam Company, Inc.

 

Chemicals, Plastics, and Rubber

 

Secured First Lien Term Debt (13.5%, Due 8/2017) (L)

    9,913        9,913        9,913   
   

Preferred Stock (34,045 shares) (C)(L)

      3,375        3,583   
   

Common Stock (5,372 shares) (C)(L)

      63        6,459   
       

 

 

   

 

 

 
        13,351        19,955   

Frontier Packaging, Inc.

 

Containers, Packaging, and Glass

 

Secured First Lien Term Debt (12.0%, Due 12/2017) (L)

    10,500        10,500        10,500   
   

Preferred Stock (1,373 shares) (C)(L)

      1,373        1,386   
   

Common Stock (152 shares) (C)(L)

      152        8,222   
       

 

 

   

 

 

 
        12,025        20,108   

Funko Acquisition Holdings, LLC (M)

 

Personal and Non-Durable Consumer Products (Manufacturing Only)

 

Preferred Stock (260 units) (C)(L)

      260        315   
   

Common Stock (975 units) (C)(L)

      —          —     
       

 

 

   

 

 

 
        260        315   

Ginsey Home Solutions, Inc.

 

Home and Office Furnishings, Housewares, and Durable Consumer Products

 

Secured Second Lien Term Debt (13.5%, Due 1/2018) (H)(L)

    13,300        13,300        13,300   
   

Preferred Stock (19,280 shares) (C)(L)

      9,583        4,813   
   

Common Stock (63,747 shares) (C)(L)

      8        —     
       

 

 

   

 

 

 
        22,891        18,113   

Jackrabbit, Inc.

 

Farming and Agriculture

 

Secured First Lien Term Debt (13.5%, Due 4/2018) (L)

    11,000        11,000        11,000   
   

Preferred Stock (3,556 shares) (C)(L)

      3,556        4,471   
   

Common Stock (548 shares) (C)(L)

      94        934   
       

 

 

   

 

 

 
        14,650        16,405   

Mathey Investments, Inc.

 

Machinery (Nonagriculture, Nonconstruction, Nonelectronic)

 

Secured First Lien Term Debt (10.0%, Due 3/2018) (L)

    1,375        1,375        1,375   
   

Secured First Lien Term Debt (12.0%, Due 3/2018) (L)

    3,727        3,727        3,727   
   

Secured First Lien Term Debt (12.5%, Due 3/2018) (E)(I)(L)

    3,500        3,500        3,500   
   

Common Stock (29,102 shares) (C)(L)

      777        54   
       

 

 

   

 

 

 
        9,379        8,656   

 

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.

 

S-F-11


Table of Contents

GLADSTONE INVESTMENT CORPORATION

CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

MARCH 31, 2016

(DOLLAR AMOUNTS IN THOUSANDS)

 

Company (A)

 

Industry

 

Investment (B)(F)

  Principal     Cost     Fair Value  

Mitchell Rubber Products, Inc.

 

Chemicals, Plastics, and Rubber

 

Secured Second Lien Term Debt (13.0%, Due 10/2016) (I)(K)

    13,560        13,560        5,082   
   

Preferred Stock (27,900 shares) (C)(L)

      2,790        —     
   

Common Stock (27,900 shares) (C)(L)

      28        —     
       

 

 

   

 

 

 
        16,378        5,082   

Nth Degree, Inc.

 

Diversified/Conglomerate Service

 

Secured First Lien Term Debt (12.5%, Due 12/2020) (L)

    13,290        13,290        13,290   
   

Preferred Equity (5,660 units) (C)(L)

      5,660        7,712   
       

 

 

   

 

 

 
        18,950        21,002   

Quench Holdings Corp.

 

Home and Office Furnishings, Housewares, and Durable Consumer Products

 

Common Stock (4,770,391 shares) (C)(L)

  $                 $ 3,397      $ 4,359   
       

 

 

   

 

 

 
          3,397        4,359   

SBS Industries, LLC

 

Machinery (Nonagriculture, Nonconstruction, Nonelectronic)

 

Secured First Lien Term Debt (14.0%, Due 8/2019) (L)

    11,355        11,355        11,355   
   

Preferred Stock (19,935 shares) (C)(L)

      1,994        —     
   

Common Stock (221,500 shares) (C)(L)

      222        —     
       

 

 

   

 

 

 
          13,571        11,355   

Schylling, Inc.

 

Leisure, Amusement, Motion Pictures, Entertainment

 

Secured First Lien Term Debt (13.0%, Due 8/2018) (L)

    13,081        13,081        13,081   
   

Preferred Stock (4,000 shares) (C)(L)

      4,000        4,103   
       

 

 

   

 

 

 
          17,081        17,184   

Star Seed, Inc.

 

Farming and Agriculture

 

Secured First Lien Term Debt (12.5%, Due 5/2018) (E)(K)

    5,000        5,000        4,600   
   

Preferred Stock (1,499 shares) (C)(L)

      1,499        —     
   

Common Stock (600 shares) (C)(L)

      1        —     
       

 

 

   

 

 

 
          6,500        4,600   
       

 

 

   

 

 

 

Total Non-Control/Non-Affiliate Investments (represents 37.1% of total investments at fair value)

  

  $ 191,757      $ 180,933   
 

 

 

   

 

 

 

AFFILIATE INVESTMENTS (O) :

     

Acme Cryogenics, Inc.

 

Chemicals, Plastics, and Rubber

 

Secured Second Lien Term Debt (11.5%, Due 3/2020) (I)(Q)

    $14,500      $ 14,500      $ 14,500   
   

Preferred Stock (965,982 shares) (C)(Q)

      7,956        22,337   
   

Common Stock (549,908 shares) (C)(Q)

      1,197        4,201   
   

Common Stock Warrants (465,639 shares) (C)(Q)

      25        3,856   
       

 

 

   

 

 

 
          23,678        44,894   

Alloy Die Casting Corp. (M)

 

Diversified/Conglomerate Manufacturing

 

Secured First Lien Term Debt (13.5%, Due 10/2018) (K)

    12,215        12,215        11,390   
   

Preferred Stock (4,064 shares) (C)(L)

      4,064        612   
   

Common Stock (630 shares) (C)(L)

      41        —     
       

 

 

   

 

 

 
          16,320        12,002   

Behrens Manufacturing, LLC (M)

 

Diversified/Conglomerate Manufacturing

 

Secured First Lien Term Debt (13.0%, Due 12/2018) (L)

    9,975        9,975        9,975   
   

Preferred Stock (2,923 shares) (C)(L)

      2,922        8,593   
       

 

 

   

 

 

 
          12,897        18,568   

Brunswick Bowling Products, Inc.

 

Home and Office Furnishings, Housewares and Durable Consumer Products

 

Secured First Lien Term Debt (16.3%, Due 5/2020) (L)

    11,307        11,307        11,307   
   

Preferred Stock (4,943 shares) (C)(F)(L)

      4,943        5,267   
       

 

 

   

 

 

 
          16,250        16,574   

 

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.

 

S-F-12


Table of Contents

GLADSTONE INVESTMENT CORPORATION

CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

MARCH 31, 2016

(DOLLAR AMOUNTS IN THOUSANDS)

 

Company (A)

 

Industry

 

Investment (B)(F)

  Principal     Cost     Fair Value  

B+T Group Acquisition,
Inc. (M)

 

Telecommunications

 

Secured First Lien Term Debt (13.0%, Due 12/2019) (L)

    14,000        14,000        14,000   
   

Preferred Stock (12,841 shares) (C)(L)

      4,196        —     
       

 

 

   

 

 

 
          18,196        14,000   

Cambridge Sound Management, Inc.

 

Home and Office Furnishing, Housewares and Durable Consumer Products

 

Secured First Lien Term Debt (13.0%, Due 9/2019) (L)

    15,000        15,000        15,000   
   

Preferred Stock (4,500 shares) (C)(L)

      4,500        12,835   
       

 

 

   

 

 

 
          19,500        27,835   

Channel Technologies Group, LLC

 

Diversified/Conglomerate Manufacturing

 

Preferred Stock (2,319 shares) (C)(L)

      2,938        989   
   

Common Stock (2,319,184 shares) (C)(L)

      —          —     
       

 

 

   

 

 

 
          2,938        989   

Counsel Press, Inc.

 

Diversified/Conglomerate Services

 

Secured First Lien Line of Credit, $1,000 available (12.8% (1% Unused Fee), Due 3/2017) (L)

    —          —          —     
   

Secured First Lien Term Debt (12.8%, Due 3/2020) (L)

    18,000        18,000        18,000   
   

Secured First Lien Term Debt (14.0%, Due 3/2020) (L)

    5,500        5,500        5,500   
   

Preferred Stock (6,995 shares) (C)(L)

      6,995        5,399   
       

 

 

   

 

 

 
          30,495        28,899   

D.P.M.S., Inc.

 

Diversified/Conglomerate Manufacturing

 

Secured First Lien Line of Credit, $550 available (4.0% (0.5% Unused Fee), Due 8/2017) (I)(L)

  $ 4,000      $ 4,000      $ 4,000