ITEM 2.
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MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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All
statements contained herein, other than historical facts, may constitute forward-looking statements. These statements may relate to, among other things, our future operating results, our business prospects and the prospects of our
portfolio companies, actual and potential conflicts of interest with Gladstone Management Corporation and its affiliates, the use of borrowed money to finance our investments, the adequacy of our financing sources and working capital, and our
ability to co-invest, among other factors. In some cases, you can identify forward-looking statements by terminology such as estimate, may, might, believe, will, provided,
anticipate, future, could, growth, plan, intend, expect, should, would, if, seek, possible,
potential, likely or the negative of such terms or comparable terminology. These forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of
activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among others: further adverse
changes in the economy and the capital markets; (2) risks associated with negotiation and consummation of pending and future transactions; (3) the loss of one or more of our executive officers, in particular David Gladstone, Terry Lee
Brubaker or David A.R. Dullum; (4) changes in our investment objectives and strategy; (5) availability, terms and deployment of capital; (6) changes in our industry, interest rates, exchange rates or the general economy; (7) the
degree and nature of our competition; (8) our ability to maintain our qualification as a RIC and as business development company; and (9) those factors described in the Risk Factors section of our Annual Report on Form 10-K
filed with the SEC on May 14, 2013. We caution readers not to place undue reliance on any such forward-looking statements. Actual results could differ materially from those anticipated in our forward-looking statements and future results could
differ materially from historical performance. We have based forward-looking statements on information available to us on the date of this report. Except as required by the federal securities laws, we undertake no obligation to revise or update any
forward-looking statements, whether as a result of new information, future events or otherwise, after the date of this Quarterly Report on Form 10-Q. Although we undertake no obligation to revise or update any forward-looking statements, whether as
a result of new information, future events or otherwise, you are advised to consult any additional disclosures that we may make directly to you or through reports that we have filed or in the future may file with the Securities and Exchange
Commission (SEC), including annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K.
The following
analysis of our financial condition and results of operations should be read in conjunction with our accompanying
Condensed Consolidated Financial Statements
and the notes thereto contained elsewhere in this Quarterly Report on
Form 10-Q and in our Annual Report on Form 10-K for the fiscal year ended March 31, 2013, filed with the SEC on May 14, 2013. Historical financial condition and results of operations and percentage relationships among any amounts in the
financial statements are not necessarily indicative of financial condition or results of operations for any future periods.
OVERVIEW
General
We are an externally-managed, closed-end, non-diversified management investment company that has elected to be regulated as a business development company
(BDC) under the Investment Company Act of 1940, as amended (the 1940 Act). In addition, for United States (U.S.) federal income tax purposes, we have elected to be treated as a regulated investment company
(RIC) under Subchapter M of the Internal Revenue Code of 1986, as amended (the Code). As a BDC and a RIC, we are also subject to certain constraints, including limitations imposed by the 1940 Act and the Code.
We were incorporated under the General Corporation Law of the State of Delaware on February 18, 2005. We were established for the purpose of investing in
debt and equity securities of established private businesses in the U.S. Debt investments primarily come in the form of three types of loans: senior term loans, senior subordinated loans and junior subordinated debt. Equity investments primarily
take the form of preferred or common equity (or warrants or options to acquire the foregoing), often in connection with buyouts and other recapitalizations. To a much lesser extent, we also invest in senior and subordinated syndicated loans. Our
investment objectives are (a) to achieve and grow current income by investing in debt securities of established businesses that we believe will provide stable earnings and cash flow to pay expenses, make principal and interest payments on our
outstanding indebtedness and make distributions to stockholders that grow over time and (b) to provide our stockholders with long-term capital appreciation in the value of our assets by investing in equity securities of established businesses
that we believe can grow over time to permit us to sell our equity investments for capital gains. We aim to maintain a portfolio allocation of approximately 80% debt investments and 20% equity investments, at cost.
We focus on investing in small and medium-sized private U.S. businesses that meet certain criteria, including some but not all of the following: the potential
for growth in cash flow, adequate assets for loan collateral, experienced management teams with a significant
32
ownership interest in the borrower, profitable operations based on the borrowers cash flow, reasonable capitalization of the borrower (usually by leveraged buyout funds or venture capital
funds) and the potential to realize appreciation and gain liquidity in our equity position, if any. We anticipate that liquidity in our equity position will be achieved through a merger or acquisition of the borrower, a public offering of the
borrowers stock or by exercising our right to require the borrower to repurchase our warrants, though there can be no assurance that we will always have these rights. We lend to borrowers that need funds to finance growth, restructure their
balance sheets or effect a change of control. We invest by ourselves or jointly with other funds and/or management of the portfolio company, depending on the opportunity. If we are participating in an investment with one or more co-investors, our
investment is likely to be smaller than if we were investing alone.
Our common stock and 7.125% Series A Cumulative Term Preferred Stock (our Term
Preferred Stock) are traded on the NASDAQ Global Select Market (NASDAQ) under the symbols GAIN and GAINP, respectively.
We are externally managed by our investment advisor, Gladstone Management Corporation (our Adviser), an SEC registered investment adviser and an
affiliate of ours, pursuant to an investment advisory and management agreement (the Advisory Agreement). The Adviser manages our investment activities. Our Board of Directors, which is composed of a majority of independent directors,
supervises such investment activities. We have also entered into an administration agreement (the Administration Agreement) with Gladstone Administration, LLC (our Administrator), an affiliate of ours and the Adviser, whereby
we pay separately for administrative services.
Business Environment
The strength of the global economy, and the U.S. economy in particular, continues to be uncertain and volatile, and we remain cautious about a long-term
economic recovery. The effects of the previous recession and the disruptions in the capital markets in particular, have impacted our liquidity options and increased our cost of debt and equity capital. In addition, the recent federal government
shutdown combined with the uncertainty surrounding the ability of the federal government to address its fiscal condition in both the near and long term have increased domestic and global economic instability. Many of our portfolio companies, as well
as those that we evaluate for possible investments, are adversely impacted by these political and economic conditions. If these conditions persist, it may adversely affect their ability to repay our loans or engage in a liquidity event, such as a
sale, recapitalization or initial public offering.
New Investment and Realized Gains/Losses from Exits
While conditions remain challenging, we are seeing an increase in the number of new investment opportunities consistent with our investing 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. These opportunities along with the capital raising efforts discussed below have allowed us to invest
approximately $281.4 million in 17 new proprietary debt and equity deals since October 2010. During the three months ended December 31, 2013, we invested a total of $42.3 million in three new deals.
These new investments, as well as the majority of our debt securities in our portfolio, have a success fee component, which enhances the yield on our debt
investments. Unlike paid-in-kind (PIK) income, we do not recognize the fee into income until it is received in cash. As a result, as of December 31, 2013, we had an off-balance sheet success fee receivable of $16.2 million, or
approximately $0.61 per common share. Due to their contingent nature, there are no guarantees that we will be able to collect all of these success fees or know the timing of such collections.
The improved investing environment in the second quarter presented us with an opportunity to realize gains and other income from our investment in Venyu
Solutions, Inc. (Venyu) as a result of its sale in August 2013. As a result of the sale, we received net cash proceeds of $32.2 million, resulting in a realized gain of $24.8 million and dividend income of $1.4 million. In addition, we
received full repayment of our debt investments of $19.0 million and $1.8 million in success fee income. This represents our fourth management-supported buyout liquidity event since June 2010, and in the aggregate, these four liquidity events have
generated $54.5 million in realized gains and $13.1 million in other income, for a total increase to our net assets of $67.6 million. We believe each of these transactions was an equity investment success and support 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. These successes, in part, enabled us to increase the monthly distribution 50% since March 2011, allowed us to
declare a one-time special distribution in fiscal year 2012, and to declare a $0.05 per common share one-time special distribution in November 2013.
With
the four liquidity events that have generated $54.5 million in realized gains since June 2010, we have overcome our cumulative realized losses since inception that were primarily incurred during the recession and in connection with the sale of
performing loans at a realized loss to pay off a former lender. As a result, we are now in a cumulative net realized gain position. We took the opportunity during the three months ended December 31, 2013, to strategically sell two of our
portfolio companies, ASH Holding Corp. (ASH)
33
and Packerland Whey Products, Inc. (Packerland) to existing members of their management teams and other existing owners, respectively, which resulted in realized losses of $11.4
million and $1.7 million, respectively. These sales, while at a realized loss, were accretive to our net asset value in aggregate by $5.7 million, reduced our distribution requirements related to our cumulative realized gains and reduced our
non-accruals outstanding.
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 enhancements to our
revolving line of credit (our Credit Facility) and by accessing the capital markets in the form of public offerings of preferred and common stock. For example, in March 2012, we issued 1.6 million shares of our Term Preferred Stock
for gross proceeds of $40.0 million, and, in October 2012, we issued 4.4 million shares of common stock for gross proceeds of $33.0 million. In October 2012, we extended the maturity date on our Credit Facility an additional year to 2015, and
subsequently, in April and May 2013, we further extended the maturity date another six months into 2016 and increased the commitment amount from $60 million to $105 million.
Although we have been able to access the capital markets over the past two years, we believe market conditions continue to affect the trading price of our
common stock and thus our ability to finance new investments through the issuance of equity. On February 3, 2014, the closing market price of our common stock was $7.88, which represented a 7.2% discount to our December 31, 2013, net asset
value (NAV) per share of $8.49. When our stock trades below NAV, our ability to issue equity is constrained by provisions of the Investment Company Act of 1940 (the 1940 Act), which generally prohibits 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 Annual Meeting of Stockholders held on August 8, 2013, our stockholders ratified 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% of our then outstanding common stock immediately prior to each
such sale, provided that our Board of Directors makes certain determinations prior to any such sale. This August 2013 shareholder authorization is in effect for one year from the date of stockholder approval. Prior to the August 2013 shareholder
authorization, we sought and obtained shareholder approval concerning a similar proposal at the Annual Meeting of Stockholders held in August 2012, and with our Board of Directors approval, we issued shares of our common stock in October and
November 2012 at a price per share below the then current NAV per share. The resulting proceeds, in part, have allowed us to grow the portfolio by making new investments, generate additional income through these new investments, provide us
additional equity capital to help ensure continued compliance with regulatory tests and increase our debt capital while still complying with our applicable debt-to-equity ratios.
Regulatory Compliance
Due to the limited number of
investments in our portfolio, our current asset composition has affected our ability to satisfy certain elements of the rules of the Code, for maintenance of our status as a RIC under the Code. To maintain our status as a RIC, in addition to
other requirements, as of the close of each quarter of our taxable year, we must meet the asset diversification test, which requires that at least 50% of the value of our assets consist of cash, cash items, U.S. government securities or certain
other qualified securities (the 50% threshold). During the nine months ended December 31, 2013, we were at times below the 50% threshold.
Failure to meet the 50% threshold alone will not result in our loss of RIC status. In circumstances where the failure to meet the 50% threshold is the result
of fluctuations in the value of our assets, including as a result of the sale of assets, we will still be deemed to have satisfied the 50% threshold and, therefore, maintain our RIC status, provided that we have not made any new investments,
including additional investments in our existing portfolio companies (such as advances under outstanding lines of credit), since the time that we fell below the 50% threshold. As of December 31, 2013, we satisfied the 50% threshold with our
asset composition, but as a precaution to ensure compliance, we also purchased short-term qualified securities, which were funded through a short-term loan agreement. Subsequent to the December 31, 2013, measurement date, the short-term
qualified securities matured and we repaid the short-term loan. See Recent Developments
Short-Term Loan
for more information regarding this transaction. Subsequent to December 31, 2013, we have continuously
remained in compliance with the 50% threshold, even with the maturity of the short-term qualified securities; however, we continue to remain close to the 50% threshold.
Until the composition of our assets satisfies the required 50% threshold by a significant margin, we will continue to seek to employ similar purchases of
qualified securities using short-term loans that would ensure us to satisfy the 50% threshold. There can be no assurance, however, that we will be able to enter into such a transaction on reasonable terms, if at all.
34
Our ability to seek external debt financing, to the extent that it is available under current market conditions,
is further subject to the asset coverage limitations of the 1940 Act, which require us to have an asset coverage ratio (as defined in Section 18(h) of the 1940 Act), of at least 200% on our senior securities representing indebtedness and our
senior securities that are stock, which we refer to collectively as senior securities. As of December 31, 2013, our asset coverage ratio was 336%. The ratio is impacted, in part, by our need to obtain a short-term loan at quarter
end to satisfy the 50% threshold for our RIC status. Between the quarter end measurement dates, when we do not have a short-term loan outstanding, our leverage and asset coverage ratio improve. However, until the composition of our assets is above
the required 50% threshold on a consistent basis by a significant margin, we will have to continue to obtain short-term loans on a quarterly basis. This strategy, while allowing us to satisfy the 50% threshold for our RIC status, limits our ability
to use increased debt capital to make new investments, due to our asset coverage ratio limitations under the 1940 Act. Our common stock offering in October 2012, was undertaken, in part, to provide us additional equity capital to help ensure
continued compliance with the 200% asset coverage ratio.
Investment Highlights
During the three months ended December 31, 2013, we disbursed $42.3 million in new debt and equity investments and extended $1.9 million of investments to
existing portfolio companies through revolver draws or additions to term notes. From our initial public offering in June 2005 through December 31, 2013, we have made 210 investments in 105 companies for a total of approximately $896.9
million, before giving effect to principal repayments on investments and divestitures.
Investment Activity
During the nine months ended December 31, 2013, the following significant transactions occurred:
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In April 2013, we invested $17.7 million in Jackrabbit, Inc. (Jackrabbit) through a combination of debt and equity. Jackrabbit, headquartered in Ripon, California, is a manufacturer of nut harvesting
equipment.
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In May 2013, we invested $8.8 million in Funko, LLC (Funko) through a combination of debt and equity. Funko, headquartered in Lynnwood, Washington, is a designer, importer and marketer of pop-culture
collectibles. This was our first co-investment with one of our affiliated funds, Gladstone Capital Corporation (Gladstone Capital), pursuant to an exemptive order granted by the SEC in July 2012.
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In June 2013, we invested $9.0 million in Star Seed, Inc. (Star Seed) through a combination of debt and equity. Based in Osborne, Kansas, Star Seed provides its customers with a variety of specialty seeds
and related products.
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In August 2013, we invested $20.0 million in Schylling, Inc. (Schylling) through a combination of debt and equity. Schylling, headquartered in Rowley, Massachusetts, is a premier provider of high quality
specialty toys.
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In August 2013, Venyu was sold. As a result of the sale, we received net cash proceeds of $32.2 million, resulting in a realized gain of approximately $24.8 million and dividend income of $1.4 million. In addition, we
received full repayment of our debt investment of $19 million in principal repayment and $1.9 million in fee income.
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In October 2013, we invested $16.3 million in Alloy Die Casting Co. (ADC) through a combination of debt and equity. ADC, headquartered in Buena Park, California, is a manufacturer of high quality, finished
aluminum and zinc castings for aerospace, defense, aftermarket automotive and industrial applications. Gladstone Capital also participated as a co-investor by providing $7.0 million of debt and equity financing at the same price and terms as our
investment.
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In October 2013, we received full repayment of our debt investments in Channel Technologies Group, LLC (Channel) in the aggregate amount of $16.2 million. We also received prepayment and success fee income
in the amount of $0.8 million. Simultaneously, we invested $1.3 million in additional preferred and common equity securities in Channel.
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In October 2013, ASH, which was on non-accrual, was sold to certain members of its existing management team. As a result of the sale, we received $12 in net cash proceeds, recognized a realized loss of $11.4 million and
have retained a $5.0 million accruing revolving credit facility in ASH.
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In November 2013, Packerland was sold to other existing owners at Packerland. As a result of the sale, we received $0.7 million in net cash proceeds and recognized a realized loss of $1.8 million.
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In December 2013, we received full repayment of our remaining debt investments in Cavert II Holding Corp. (Cavert) in the aggregate amount of $6.1 million. We also received prepayment and success fee income
in the amount of $0.2 million. As of December 31, 2013, we have an equity investment of preferred stock in Cavert with a cost basis of $1.8 million and fair value of $3.0 million.
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In December 2013, Quench Holdings Corp. (Quench) was recapitalized, resulting in all preferred stock holders, including our preferred stock investment of $3.0 million, being converted into common stock.
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In December 2013, we invested $12.9 million in Behrens Manufacturing, LLC (Behrens) through a combination of debt and equity. Behrens, headquartered in Winona, Minnesota, is a manufacturer and marketer of
high quality, classic looking, utility products and containers. Gladstone Capital also participated as a co-investor by providing $5.5 million of debt and equity financing at the same price and terms as our investment.
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In December 2013, we invested $13.0 million in Meridian Rack & Pinion, Inc. (Meridian) through a combination of debt and equity. Meridian, headquartered in San Diego, California, is a provider of
aftermarket and OEM replacement automotive parts, which it sells through both wholesale channels and online at www.BuyAutoParts.com. Gladstone Capital also participated as a co-investor by providing $5.6 million of debt and equity financing at the
same price and terms as our investment.
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Recent Developments
Credit Facility Extension and Expansion
On April 30,
2013, we, through our wholly-owned subsidiary, Business Investment, entered into a fifth amended and restated credit agreement with Key Equipment Finance Inc., as administrative agent, lead arranger and a lender (the Administrative
Agent), Branch Banking and Trust Company as a lender and managing agent, and the Adviser, as servicer, to increase the commitment amount of the Credit Facility from $60.0 million to $70.0 million and to extend the revolving period, which was
extended to April 30, 2016 and, if not renewed or extended by April 30, 2016, all principal and interest will be due and payable on or before April 30, 2017 (one year after the revolving period end date). In addition, there are two
one-year extension options to be agreed upon by all parties, which may be exercised on or before April 30, 2014 and 2015, respectively. Subject to certain terms and conditions, the Credit Facility may be expanded up to a total of $200.0 million
through the addition of other lenders to the facility. Advances under the Credit Facility generally bear interest at 30-day LIBOR, plus 3.75% per annum, and the Credit Facility includes an unused fee of 0.50% on undrawn amounts. We incurred
fees of approximately $0.3 million in connection with this amendment.
On June 12, 2013, we further increased the borrowing capacity under the Credit
Agreement from $70.0 million to $105.0 million by entering into Joinder Agreements pursuant to the Credit Agreement by and among Business Investment, the Administrative Agent, the Adviser and each of Alostar Bank of Commerce and Everbank Commercial
Finance, Inc.
Short-Term Loan
For each quarter end
since December 31, 2009 (the measurement dates), we satisfied the 50% threshold to maintain our status as a RIC, in part, through the purchase of short-term qualified securities, which were funded primarily through a short-term loan
agreement. Subsequent to each of the measurement dates, the short-term qualified securities matured, and we repaid the short-term loan, at which time we again fell below the 50% threshold.
For the December 31, 2013 measurement date, we purchased $10.0 million of short-term United States Treasury Bills (T-Bills) through
Jefferies & Company, Inc. (Jefferies) on December 27, 2013. The T-Bills were purchased on margin using $1.5 million in cash and the proceeds from an $8.5 million short-term loan from Jefferies with an effective annual
interest rate of approximately 1.35%. On January 2, 2014, when the T-Bills matured, we repaid the $8.5 million loan from Jefferies and received the $1.5 million margin payment sent to Jefferies to complete the transaction.
36
RESULTS OF OPERATIONS
Comparison of the Three Months Ended December 31, 2013, to the Three Months Ended December 31, 2012
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For the Three Months Ended December 31,
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2013
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2012
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$ Change
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% Change
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INVESTMENT INCOME
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Interest income
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$
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7,593
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$
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6,482
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$
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1,111
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17.1
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%
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Other income
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1,103
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702
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401
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57.1
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Total investment income
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8,696
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7,184
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1,512
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21.0
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EXPENSES
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Base management fee
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1,515
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1,440
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75
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5.2
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Incentive fee
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1,100
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589
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511
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86.8
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Administration fee
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239
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191
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48
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25.1
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Interest and dividend expense
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1,108
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1,001
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107
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10.7
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Amortization of deferred financing costs
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262
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194
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68
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35.1
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Other
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852
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306
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546
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178.4
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Expenses before credits from Adviser
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5,076
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3,721
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1,355
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36.4
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Credits to fees
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(782
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)
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(489
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)
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(293
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)
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59.9
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Total expenses net of credits to fees
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4,294
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3,232
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1,062
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32.9
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NET INVESTMENT INCOME
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4,402
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3,952
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450
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11.4
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REALIZED AND UNREALIZED (LOSS) GAIN:
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Net realized (loss) gain on investments
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(13,115
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)
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96
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(13,211
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)
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NM
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Net realized loss on investments
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(29
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)
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(29
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)
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NM
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Net unrealized (depreciation) appreciation of investments
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(2,310
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)
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46
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(2,356
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)
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NM
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Net unrealized depreciation of other
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366
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605
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(239
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)
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(39.5
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)
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Net realized and unrealized (loss) gain on investments and other
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(15,088
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)
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747
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(15,835
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)
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NM
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NET (DECREASE) INCREASE IN NET ASSETS RESULTING FROM OPERATIONS
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$
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(10,686
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)
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$
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4,699
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$
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(15,385
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)
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NM
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BASIC AND DILUTED PER COMMON SHARE:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
$
|
0.17
|
|
|
$
|
0.15
|
|
|
$
|
0.02
|
|
|
|
13.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in net assets resulting from operations
|
|
$
|
(0.40
|
)
|
|
$
|
0.18
|
|
|
$
|
(0.58
|
)
|
|
|
NM
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NM = Not Meaningful
Investment Income
Total investment income increased by
21.0% for the three months ended December 31, 2013, as compared to the prior year period. This increase was primarily due an overall increase in interest income in the three months ended December 31, 2013, as a result of an increase in the
size of our loan portfolio, as well as an increase in other income, which primarily consisted of success fee income resulting from the prepayment of debt investments in Channel and Cavert during the three months ended December 31, 2013.
Interest income from our investments in debt securities increased 17.1% for the three months ended December 31, 2013, 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 December 31, 2013, was approximately $237.5 million, compared to approximately $202.7 million for the prior year period. This increase was primarily due to
approximately $97.7 million in new investments originated after December 31, 2012, including Jackrabbit, Funko, Star Seed, Schylling, ADC, Behrens, and Meridian, as well as the recapitalization of Galaxy Tool Holding Corp (Galaxy),
partially offset with the exit of Venyu and the repayments of debt investments of Cavert and Channel. As of December 31, 2013, our loans to Tread Corp. (Tread) were on non-accrual, with an aggregate weighted average principal
balance of $14.1 million during the three months ended December 31, 2013. ASH, which was on non-accrual as of September 30, 2013, was sold to certain members of its existing management team. As a result of the sale, we retained a $5.0
million accruing revolving credit facility in ASH, which is no longer on non-accrual as of December 31, 2013. As of December 31, 2012, loans of two portfolio companies, ASH and Tread, were on non-accrual, with an aggregate weighted average
principal balance of $23.1 million during the three months ended December 31, 2012. The weighted average yield on our interest-bearing investments for both the three months ended December 31, 2013 and 2012, excluding cash and cash
equivalents and receipts recorded as other income, was 12.7%.
37
The following table lists the investment income for our five largest portfolio company investments based on fair
value during the respective periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2013
|
|
|
Three months ended December 31, 2013
|
|
Portfolio Company
|
|
Fair Value
|
|
|
% of Portfolio
|
|
|
Investment
Income
|
|
|
% of Total
Investment Income
|
|
Acme Cryogenics, Inc.
|
|
$
|
27,719
|
|
|
|
9.5
|
%
|
|
$
|
426
|
|
|
|
4.9
|
%
|
SOG Specialty Knives and Tools, LLC
|
|
|
27,271
|
|
|
|
9.4
|
|
|
|
670
|
|
|
|
7.7
|
|
Galaxy Tool Holding Corp.
|
|
|
19,743
|
|
|
|
6.8
|
|
|
|
535
|
|
|
|
6.2
|
|
Alloy Die Casting Corp.
(A)
|
|
|
16,320
|
|
|
|
5.6
|
|
|
|
421
|
|
|
|
4.8
|
|
Schylling Investments, LLC
|
|
|
16,160
|
|
|
|
5.6
|
|
|
|
532
|
|
|
|
6.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotalfive largest investments
|
|
|
107,213
|
|
|
|
36.9
|
|
|
|
2,584
|
|
|
|
29.7
|
|
Other portfolio companies
|
|
|
183,514
|
|
|
|
63.1
|
|
|
|
6,112
|
|
|
|
70.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment portfolio
|
|
$
|
290,727
|
|
|
|
100.0
|
%
|
|
$
|
8,696
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2012
|
|
|
Three months ended December 31, 2012
|
|
Portfolio Company
|
|
Fair Value
|
|
|
% of Portfolio
|
|
|
Investment
Income
|
|
|
% of Total
Investment Income
|
|
SOG Specialty Knives and Tools, LLC
|
|
$
|
30,365
|
|
|
|
11.1
|
%
|
|
$
|
670
|
|
|
|
9.3
|
%
|
Acme Cryogenics, Inc.
|
|
|
27,887
|
|
|
|
10.2
|
|
|
|
1,104
|
|
|
|
15.4
|
|
Venyu Solutions, Inc.
|
|
|
23,976
|
|
|
|
8.8
|
|
|
|
631
|
|
|
|
8.8
|
|
Ginsey Holdings, Inc.
(A)
|
|
|
23,235
|
|
|
|
8.5
|
|
|
|
450
|
|
|
|
6.3
|
|
SBS, Industries, LLC
|
|
|
18,528
|
|
|
|
6.8
|
|
|
|
406
|
|
|
|
5.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotalfive largest investments
|
|
|
123,991
|
|
|
|
45.4
|
|
|
|
3,261
|
|
|
|
45.4
|
|
Other portfolio companies
|
|
|
149,269
|
|
|
|
54.6
|
|
|
|
3,923
|
|
|
|
54.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment portfolio
|
|
$
|
273,260
|
|
|
|
100.0
|
%
|
|
$
|
7,184
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A)
|
New investment during the applicable period.
|
Other income increased 57.1% from the prior year period,
primarily due to $0.2 million and $0.8 million in success fee income resulting from debt investment repayments received from Cavert and Channel, respectively, during the three months ended December 31, 2013. During the three months ended
December 31, 2012, other income primarily consisted of $0.7 million in cash dividends received on preferred shares of Acme Cryogenics, Inc (Acme).
Expenses
Total expenses, excluding any voluntary and
irrevocable credits to the base management and incentive fees, increased 36.4% for the three months ended December 31, 2013, as compared to the prior year period, primarily due to an increase in the base management fee, incentive fee, interest
expense, and other expenses as compared to the prior year period.
The base management fee increased for the three months ended December 31, 2013, as
compared to the prior year period, as a result of the increased size of our portfolio over the respective periods. Additionally, an incentive fee of $1.1 million was earned by the Adviser during the three months ended December 31, 2013,
compared to $0.6 million for the prior year period. The base management and incentive fees are computed quarterly, as described under Investment Advisory and Management Agreement in Note 4 of the notes to our accompanying
Condensed
Consolidated Financial Statements,
and are summarized in the following table:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
December 31,
|
|
|
|
2013
|
|
|
2012
|
|
Average gross assets subject to base management fee
(A)
|
|
$
|
303,000
|
|
|
$
|
288,000
|
|
Multiplied by prorated annual base management fee of 2%
|
|
|
0.5
|
%
|
|
|
0.5
|
%
|
|
|
|
|
|
|
|
|
|
Base management fee
(B)
|
|
|
1,515
|
|
|
|
1,440
|
|
Credit for fees received by Adviser from the portfolio companies
(B)
|
|
|
(782
|
)
|
|
|
(489
|
)
|
|
|
|
|
|
|
|
|
|
Net base management fee
|
|
$
|
733
|
|
|
$
|
951
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incentive fee
(B)
|
|
$
|
1,100
|
|
|
$
|
589
|
|
|
|
|
|
|
|
|
|
|
(A)
|
Average gross 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
Condensed Consolidated Statement of Operations
.
|
38
Interest and dividend expense increased 10.7% for the three months ended December 31, 2013, as compared to
the prior year period
,
primarily due to increased commitment (unused) fees related to the expansion of our Credit Facility from $60.0 million to $105.0 and increased average borrowings under the Credit Facility. The average balance
outstanding on our Credit Facility during the three months ended December 31, 2013, was $19.5 million, as compared to $11.9 million in the prior year period.
Other expenses increased 178.4% for the three months ended December 31, 2013, as compared to prior year period, primarily due to an increase in the
excise tax expense for the calendar year December 31, 2013. The excise tax expense for the calendar year ended December 31, 2013 and 2012 was $0.3 million and $31, respectively. The increase in the excise tax was a result of both an
increased amount of undistributed ordinary income for the calendar year 2013 when compared to the calendar year 2012, as well as an excise tax on undistributed realized capital gains during the calendar year 2013.
Realized and Unrealized Gain (Loss) on Investments
Realized Gain
During the three months ended
December 31, 2013, we recorded a net realized loss of $13.1 million related to the ASH and Packerland exits. During the three months ended December 31, 2012, recorded a realized gain of $0.1 million relating to post-closing adjustments on
previous investment exits.
Unrealized Depreciation
During the three months ended December 31, 2013, we recorded net unrealized depreciation on investments in the aggregate amount of $2.3 million, which
included the reversal of $13.2 million in aggregate unrealized depreciation, primarily related to the sales of ASH and Packerland. Excluding reversals, we had $15.5 million in net unrealized depreciation for the three months ended December 31,
2013.
The realized (losses) gains and unrealized appreciation (depreciation) across our investments for the three months ended December 31, 2013,
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended December 31, 2013
|
|
Portfolio Company
|
|
Realized
(Loss) Gain
|
|
|
Unrealized
Appreciation
(Depreciation)
|
|
|
Reversal of
Unrealized
Depreciation
(Appreciation)
|
|
|
Net Gain
(Loss)
|
|
Auto Safety House, LLC
(A)
|
|
$
|
(11,402
|
)
|
|
$
|
4,938
|
|
|
$
|
11,410
|
|
|
$
|
4,946
|
|
SOG Specialty K&T, LLC
|
|
|
|
|
|
|
3,140
|
|
|
|
|
|
|
|
3,140
|
|
Quench Holdings Corp.
|
|
|
|
|
|
|
2,864
|
|
|
|
|
|
|
|
2,864
|
|
Mitchell Rubber Products, Inc.
|
|
|
|
|
|
|
951
|
|
|
|
|
|
|
|
951
|
|
Packerland Whey Products, Inc.
(B)
|
|
|
(1,754
|
)
|
|
|
|
|
|
|
2,500
|
|
|
|
746
|
|
Cavert II Holding Corp
|
|
|
|
|
|
|
58
|
|
|
|
(175
|
)
|
|
|
(117
|
)
|
Drew Foam Companies, Inc.
|
|
|
|
|
|
|
(480
|
)
|
|
|
|
|
|
|
(480
|
)
|
B-Dry, LLC
|
|
|
|
|
|
|
(502
|
)
|
|
|
|
|
|
|
(502
|
)
|
Channel Technologies Group, LLC
|
|
|
|
|
|
|
(232
|
)
|
|
|
(583
|
)
|
|
|
(815
|
)
|
SBS, Industries, LLC
|
|
|
|
|
|
|
(1,606
|
)
|
|
|
|
|
|
|
(1,606
|
)
|
Country Club Enterprises, LLC
|
|
|
|
|
|
|
(1,777
|
)
|
|
|
|
|
|
|
(1,777
|
)
|
Mathey Investments, Inc.
|
|
|
|
|
|
|
(1,806
|
)
|
|
|
|
|
|
|
(1,806
|
)
|
Star Seed, Inc.
|
|
|
|
|
|
|
(1,862
|
)
|
|
|
|
|
|
|
(1,862
|
)
|
Precision Southeast, Inc.
|
|
|
|
|
|
|
(2,168
|
)
|
|
|
|
|
|
|
(2,168
|
)
|
Ginsey Holdings, Inc.
|
|
|
|
|
|
|
(2,229
|
)
|
|
|
|
|
|
|
(2,229
|
)
|
Jackrabbit, Inc.
|
|
|
|
|
|
|
(3,245
|
)
|
|
|
|
|
|
|
(3,245
|
)
|
Noble Logistics, Inc
|
|
|
|
|
|
|
(3,448
|
)
|
|
|
|
|
|
|
(3,448
|
)
|
Schylling Investments, LLC
|
|
|
|
|
|
|
(3,840
|
)
|
|
|
|
|
|
|
(3,840
|
)
|
Galaxy Tool Holding Corp.
|
|
|
|
|
|
|
(4,413
|
)
|
|
|
|
|
|
|
(4,413
|
)
|
Other, net (<$250 Net)
|
|
|
41
|
|
|
|
195
|
|
|
|
|
|
|
|
236
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(13,115
|
)
|
|
$
|
(15,462
|
)
|
|
$
|
13,152
|
|
|
$
|
(15,425
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A)
|
ASH equity investment was sold in October 2013.
|
(B)
|
Packerland investment was sold in November 2013.
|
Excluding reversals, the primary changes in our net
unrealized depreciation of $15.5 million for the three months ended December 31, 2013, were due to decreased equity valuations in several of our portfolio companies, primarily due to a decrease in certain comparable multiples used to estimate
the fair value of our investments and a decrease in portfolio company performance.
39
During the three months ended December 31, 2012, we recorded net unrealized appreciation on investments in
the aggregate amount of $46. The realized gains (losses) and unrealized appreciation (depreciation) across our investments for the three months ended December 31, 2012 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended December 31, 2012
|
|
Portfolio Company
|
|
Realized
Gain (Loss)
|
|
|
Unrealized
Appreciation
(Depreciation)
|
|
|
Reversal of
Unrealized
(Appreciation)
Depreciation
|
|
|
Net Gain
(Loss)
|
|
Galaxy Tool Holding Corp.
|
|
$
|
|
|
|
$
|
4,635
|
|
|
$
|
|
|
|
$
|
4,635
|
|
Mathey Investments, Inc.
|
|
|
|
|
|
|
2,767
|
|
|
|
|
|
|
|
2,767
|
|
Drew Foam Companies, Inc.
|
|
|
|
|
|
|
1,923
|
|
|
|
|
|
|
|
1,923
|
|
Country Club Enterprises, LLC
|
|
|
|
|
|
|
1,736
|
|
|
|
|
|
|
|
1,736
|
|
Acme Cryogenics, Inc.
|
|
|
|
|
|
|
1,673
|
|
|
|
|
|
|
|
1,673
|
|
Venyu Solutions, Inc.
|
|
|
|
|
|
|
1,313
|
|
|
|
|
|
|
|
1,313
|
|
Precision Southeast, Inc.
|
|
|
|
|
|
|
1,103
|
|
|
|
|
|
|
|
1,103
|
|
Ginsey Holdings, Inc.
|
|
|
|
|
|
|
783
|
|
|
|
|
|
|
|
783
|
|
SOG Specialty K&T, LLC
|
|
|
|
|
|
|
634
|
|
|
|
|
|
|
|
634
|
|
SBS, Industries, LLC
|
|
|
|
|
|
|
301
|
|
|
|
|
|
|
|
301
|
|
Packerland Whey Products, Inc.
|
|
|
|
|
|
|
(505
|
)
|
|
|
|
|
|
|
(505
|
)
|
Noble Logistics, Inc.
|
|
|
|
|
|
|
(766
|
)
|
|
|
|
|
|
|
(766
|
)
|
B-Dry, LLC
|
|
|
|
|
|
|
(1,263
|
)
|
|
|
|
|
|
|
(1,263
|
)
|
Mitchell Rubber Products, Inc.
|
|
|
|
|
|
|
(1,390
|
)
|
|
|
|
|
|
|
(1,390
|
)
|
Danco Acquisition Corp.
|
|
|
|
|
|
|
(1,485
|
)
|
|
|
|
|
|
|
(1,485
|
)
|
Quench Holdings Corp.
|
|
|
|
|
|
|
(1,633
|
)
|
|
|
|
|
|
|
(1,633
|
)
|
Tread Corp.
|
|
|
|
|
|
|
(9,750
|
)
|
|
|
|
|
|
|
(9,750
|
)
|
Other, net (<$250 Net)
|
|
|
96
|
|
|
|
(30
|
)
|
|
|
|
|
|
|
66
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
96
|
|
|
$
|
46
|
|
|
$
|
|
|
|
$
|
142
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The primary changes in our net unrealized appreciation for the three months ended December 31, 2012, were due to
increased equity valuations in several of our portfolio companies, primarily due to increased portfolio company performance, partially offset by decreases in certain comparable multiples used to estimate the fair value of our investments, as well as
notable depreciation of our debt investments in Tread, primarily due to decreased portfolio company performance. We placed our debt investments in Tread on non-accrual during the three months ended December 31, 2012.
Over our entire investment portfolio, we recorded, in the aggregate, approximately $9.2 million of net unrealized appreciation on our debt positions and $11.5
million of net unrealized depreciation on our equity holdings for the three months ended December 31, 2013. As of December 31, 2013, the fair value of our investment portfolio was less than our cost basis by approximately $69.3 million, as
compared to $67.2 million at September 30, 2013, representing net unrealized depreciation of $2.3 million for the three months ended December 31, 2013. We believe that our aggregate investment portfolio was valued at a depreciated value
due to the lingering effects of the recent recession on the performance of certain of our portfolio companies. Our entire portfolio was fair valued at 80.7% of cost as of December 31, 2013. The unrealized depreciation of our investments does
not have an impact on our current ability to pay distributions to stockholders; however, it may be an indication of future realized losses, which could ultimately reduce our income available for distribution.
Unrealized Appreciation on Other
The net unrealized
depreciation on our Credit Facility for the three months ended December 31, 2013 and 2012, was $0.4 million and $0.6 million, respectively. The Credit Facility was fair valued at $36.2 million and $31.9 million as of December 31 and
March 31, 2013, respectively.
40
Comparison of the Nine Months Ended December 31, 2013, to the Nine Months Ended December 31, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended December 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
$ Change
|
|
|
% Change
|
|
INVESTMENT INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
22,481
|
|
|
$
|
18,453
|
|
|
$
|
4,028
|
|
|
|
21.8
|
%
|
Other income
|
|
|
4,972
|
|
|
|
1,609
|
|
|
|
3,363
|
|
|
|
209.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment income
|
|
|
27,453
|
|
|
|
20,062
|
|
|
|
7,391
|
|
|
|
36.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Base management fee
|
|
|
4,625
|
|
|
|
3,939
|
|
|
|
686
|
|
|
|
17.4
|
|
Incentive fee
|
|
|
2,822
|
|
|
|
1,130
|
|
|
|
1,692
|
|
|
|
149.7
|
|
Administration fee
|
|
|
638
|
|
|
|
564
|
|
|
|
74
|
|
|
|
13.1
|
|
Interest and dividend expense
|
|
|
3,607
|
|
|
|
3,002
|
|
|
|
605
|
|
|
|
20.2
|
|
Amortization of deferred financing fees
|
|
|
761
|
|
|
|
597
|
|
|
|
164
|
|
|
|
27.5
|
|
Other
|
|
|
1,964
|
|
|
|
1,378
|
|
|
|
586
|
|
|
|
42.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses before credits from Adviser
|
|
|
14,417
|
|
|
|
10,610
|
|
|
|
3,807
|
|
|
|
35.9
|
|
Credits to fees
|
|
|
(1,627
|
)
|
|
|
(1,189
|
)
|
|
|
(438
|
)
|
|
|
36.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses net of credits to fee
|
|
|
12,790
|
|
|
|
9,421
|
|
|
|
3,369
|
|
|
|
35.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INVESTMENT INCOME
|
|
|
14,663
|
|
|
|
10,641
|
|
|
|
4,022
|
|
|
|
37.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
REALIZED AND UNREALIZED LOSS ON:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized gain on sale of investments
|
|
|
11,689
|
|
|
|
848
|
|
|
|
10,841
|
|
|
|
1,278.4
|
|
Net realized loss on other
|
|
|
(29
|
)
|
|
|
(41
|
)
|
|
|
12
|
|
|
|
(29.3
|
)
|
Net unrealized depreciation on investments
|
|
|
(29,400
|
)
|
|
|
(9,555
|
)
|
|
|
(19,845
|
)
|
|
|
207.7
|
|
Net unrealized depreciation (appreciation) on other
|
|
|
811
|
|
|
|
(563
|
)
|
|
|
1,374
|
|
|
|
NM
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss on investments and other
|
|
|
(16,929
|
)
|
|
|
(9,311
|
)
|
|
|
(7,618
|
)
|
|
|
81.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS
|
|
$
|
(2,266
|
)
|
|
$
|
1,330
|
|
|
$
|
(3,596
|
)
|
|
|
NM
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BASIC AND DILUTED PER COMMON SHARE:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
$
|
0.55
|
|
|
$
|
0.45
|
|
|
$
|
0.10
|
|
|
|
22.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in net assets resulting from operations
|
|
$
|
(0.09
|
)
|
|
$
|
0.06
|
|
|
$
|
(0.14
|
)
|
|
|
NM
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NM = Not Meaningful
Total investment income increased by 36.8% for the nine months ended December 31, 2013, as compared to the prior year period. This increase was primarily
due an overall increase in interest income in the nine months ended December 31, 2013, as a result of an increase in the size of our loan portfolio and holding higher-yielding debt investments during the nine months ended December 31,
2013, as well as an increase in other income, which primarily consisted of success fee and dividend income resulting from our exit from Venyu, as well as the success fee income from the debt investment repayments of Cavert and Channel during the
nine months ended December 31, 2013.
Interest income from our investments in debt securities increased 21.8% for the nine months ended
December 31, 2013, 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 nine months ended December 31, 2013, was approximately $236.7 million, compared to approximately $194.9 million for the prior
year period. This increase was primarily due to approximately $97.7 million in new investments originated after December 31, 2012, including Jackrabbit, Funko, Star Seed, Schylling, ADC, Behrens, and Meridian, as well as the recapitalization of
Galaxy, partially offset with the exit of Venyu and the repayment of debt investments of Cavert and Channel. As of December 31, 2013, our loans to Tread were on non-accrual. ASH, which was on non-accrual as of September 30, 2013, was sold
to certain members of its existing management team. As a result of the sale, we retained a $5.0 million accruing revolving credit facility in ASH, which is no longer on non-accrual as of December 31, 2013. The non-accrual aggregate weighted
average principal balance was $22.4 million during the nine months ended December 2013. As of December 31, 2012, loans to two portfolio companies, ASH and Tread, were on non-accrual, with an aggregate weighted average $19.1 million during the
nine months ended December 31, 2013 and 2012, respectively. The weighted average yield on our interest-bearing investments for both the nine months ended December 31, 2013 and 2012, excluding cash and cash equivalents and receipts recorded
as other income, was 12.6%
41
The following table lists the investment income from investments for our five largest portfolio company
investments based on fair value during the respective periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2013
|
|
|
Nine Months Ended December 31, 2013
|
|
Portfolio Company
|
|
Fair Value
|
|
|
% of Portfolio
|
|
|
Investment
Income
|
|
|
% of Total
Investment Income
|
|
Acme Cryogenics, Inc.
|
|
$
|
27,719
|
|
|
|
9.5
|
%
|
|
$
|
1,274
|
|
|
|
4.6
|
%
|
SOG Specialty Knives and Tools, LLC
|
|
|
27,271
|
|
|
|
9.4
|
|
|
|
2,002
|
|
|
|
7.3
|
|
Galaxy Tool Holding Corp.
|
|
|
19,743
|
|
|
|
6.8
|
|
|
|
1,601
|
|
|
|
5.8
|
|
Alloy Die Casting Corp.
(A)
|
|
|
16,320
|
|
|
|
5.6
|
|
|
|
421
|
|
|
|
1.5
|
|
Schylling Investments, LLC
(A)
|
|
|
16,160
|
|
|
|
5.6
|
|
|
|
844
|
|
|
|
3.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotalfive largest investments
|
|
|
107,213
|
|
|
|
36.9
|
|
|
|
6,142
|
|
|
|
22.3
|
|
Other portfolio companies
|
|
|
183,514
|
|
|
|
63.1
|
|
|
|
21,311
|
|
|
|
77.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment portfolio
|
|
$
|
290,727
|
|
|
|
100.0
|
%
|
|
$
|
27,453
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2012
|
|
|
Nine Months Ended December 31, 2012
|
|
Portfolio Company
|
|
Fair Value
|
|
|
% of Portfolio
|
|
|
Investment
Income
|
|
|
% of Total
Investment Income
|
|
SOG Specialty Knives and Tools, LLC
|
|
$
|
30,365
|
|
|
|
11.1
|
%
|
|
$
|
2,002
|
|
|
|
10.0
|
%
|
Acme Cryogenics, Inc.
|
|
|
27,887
|
|
|
|
10.2
|
|
|
|
1,951
|
|
|
|
9.7
|
|
Venyu Solutions, Inc.
|
|
|
23,976
|
|
|
|
8.8
|
|
|
|
1,885
|
|
|
|
9.4
|
|
Ginsey Holdings, Inc.
(A)
|
|
|
23,235
|
|
|
|
8.5
|
|
|
|
891
|
|
|
|
4.4
|
|
SBS, Industries, LLC
|
|
|
18,528
|
|
|
|
6.8
|
|
|
|
1,214
|
|
|
|
6.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotalfive largest investments
|
|
|
123,991
|
|
|
|
45.4
|
|
|
|
7,943
|
|
|
|
39.6
|
|
Other portfolio companies
|
|
|
149,269
|
|
|
|
54.6
|
|
|
|
12,119
|
|
|
|
60.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment portfolio
|
|
$
|
273,260
|
|
|
|
100.0
|
%
|
|
$
|
20,062
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A)
|
New investment during the applicable period.
|
Other income increased 209.0% from the prior year period,
primarily due to $3.3 million in success fee and dividend income received in connection with the exit of Venyu and $0.8 million and $0.2 million in success fee income resulting from prepayments received from Channel and Cavert, respectively, during
the nine months ended December 31, 2013. During the nine months ended December 31, 2012, other income primarily consisted of $0.7 million in cash dividends received on preferred shares of Acme. In addition, other income included Mathey
Investments, Inc.s (Matheys) and Caverts elections to each prepay $0.4 million of success fees.
Expenses
Total expenses, excluding any voluntary and irrevocable credits to the base management and incentive fees, increased 35.9% for the nine months ended
December 31, 2013, as compared to the prior year period, primarily due to an increase in the base management fee, incentive fee, interest expense, and other expenses as compared to the prior year period.
The base management fee increased for the nine months ended December 31, 2013, as compared to the prior year period, as a result of the increased size of
our portfolio over the respective periods. Additionally, an incentive fee of $2.8 million was earned by the Adviser during the nine months ended December 31, 2013, compared to $1.1 million for the prior year period. The base management and
incentive fees are computed quarterly, as described under Investment Advisory and Management Agreement in Note 4 of the notes to our accompanying
Condensed Consolidated Financial Statements
and are summarized in the following
table:
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended December 31,
|
|
|
|
2013
|
|
|
2012
|
|
Average gross assets subject to base management fee
(A)
|
|
$
|
308,333
|
|
|
$
|
262,600
|
|
Multiplied by prorated annual base management fee of 2%
|
|
|
1.5
|
%
|
|
|
1.5
|
%
|
|
|
|
|
|
|
|
|
|
Base management fee
(B)
|
|
|
4,625
|
|
|
|
3,939
|
|
Credit for fees received by Adviser from the portfolio companies
(B)
|
|
|
(1,627
|
)
|
|
|
(1,189
|
)
|
|
|
|
|
|
|
|
|
|
Net base management fee
|
|
$
|
2,998
|
|
|
$
|
2,750
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incentive fee
(B)
|
|
$
|
2,822
|
|
|
$
|
1,130
|
|
|
|
|
|
|
|
|
|
|
(A)
|
Average gross 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
Condensed Consolidated Statement of Operations
.
|
42
Interest and dividend expense increased 20.2% for the nine months ended December 31, 2013, as compared to
the prior year period
,
primarily due to increased commitment (unused) fees related to the expansion of our Credit Facility from $60.0 million to $105.0 and increased average borrowings under the Credit Facility. The average balance
outstanding on our Credit Facility during the nine months ended December 31, 2013, was $31.1 million, as compared to $17.3 million in the prior year period.
Other expenses increased 42.5% for the nine months ended December 31, 2013, as compared to prior year period, primarily due to an increase in the excise
tax and dead deal expenses. The excise tax expense for the calendar year ended December 31, 2013 and 2012 was $0.3 million and $31, respectively. The increase in the excise tax was a result of both an increased amount of undistributed ordinary
income for the calendar year 2013 when compared to the calendar year 2012, as well as an excise tax on undistributed realized capital gains during the calendar year 2013.
Realized and Unrealized Gain (Loss) on Investments
Realized Gain
During the nine months ended
December 31, 2013, we recorded a net realized gain of $11.7 million related to the $24.8 million gain on the Venyu sale, partially offset by the realized losses of $11.4 million and $1.7 million related to the equity sales of ASH and
Packerland, respectively. During the nine months ended December 31, 2012, we recorded a realized gain of $0.8 million relating to post-closing adjustments on the previous investment exit of A. Stucki Holding Corp. (A. Stucki).
Unrealized Depreciation
During the nine months ended
December 31, 2013, we recorded net unrealized depreciation on investments in the aggregate amount of $29.4 million, which included the reversal of a net $4.2 million in net unrealized appreciation, related to the sale of Venyu, ASH, and
Packerland, and debt repayments of Cavert and Channel. Excluding reversals, we had $25.2 million in net unrealized depreciation for the nine months ended December 31, 2013.
The realized gains (losses) and unrealized appreciation (depreciation) across our investments for the nine months ended December 31, 2013, were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended December 31, 2013
|
|
Portfolio Company
|
|
Realized
Gain (Loss)
|
|
|
Unrealized
Appreciation
(Depreciation)
|
|
|
Reversal of
Unrealized
(Appreciation)
Depreciation
|
|
|
Net Gain
(Loss)
|
|
Venyu Solutions, Inc.
(A)
|
|
$
|
24,804
|
|
|
$
|
(1,596
|
)
|
|
$
|
(17,374
|
)
|
|
$
|
5,834
|
|
Auto Safety House, LLC
(B)
|
|
|
(11,402
|
)
|
|
|
4,938
|
|
|
|
11,410
|
|
|
|
4,946
|
|
Quench Holdings Corp.
|
|
|
|
|
|
|
2,824
|
|
|
|
|
|
|
|
2,824
|
|
Channel Technologies Group, LLC
|
|
|
|
|
|
|
2,921
|
|
|
|
(583
|
)
|
|
|
2,338
|
|
Frontier Packaging, Inc.
|
|
|
|
|
|
|
1,734
|
|
|
|
|
|
|
|
1,734
|
|
Funko, LLC
|
|
|
|
|
|
|
1,043
|
|
|
|
|
|
|
|
1,043
|
|
Packerland Whey Products, Inc.
(C)
|
|
|
(1,754
|
)
|
|
|
(369
|
)
|
|
|
2,500
|
|
|
|
377
|
|
Cavert II Holding Corp
|
|
|
|
|
|
|
145
|
|
|
|
(175
|
)
|
|
|
(30
|
)
|
Mitchell Rubber Products, Inc.
|
|
|
|
|
|
|
(602
|
)
|
|
|
|
|
|
|
(602
|
)
|
Star Seed, Inc.
|
|
|
|
|
|
|
(936
|
)
|
|
|
|
|
|
|
(936
|
)
|
Tread Corp.
|
|
|
|
|
|
|
(1,110
|
)
|
|
|
|
|
|
|
(1,110
|
)
|
Galaxy Tool Holding Corp.
|
|
|
|
|
|
|
(1,133
|
)
|
|
|
|
|
|
|
(1,133
|
)
|
Mathey Investments, Inc.
|
|
|
|
|
|
|
(1,697
|
)
|
|
|
|
|
|
|
(1,697
|
)
|
SOG Specialty K&T, LLC
|
|
|
|
|
|
|
(2,551
|
)
|
|
|
|
|
|
|
(2,551
|
)
|
Drew Foam Company, Inc.
|
|
|
|
|
|
|
(2,645
|
)
|
|
|
|
|
|
|
(2,645
|
)
|
Precision Southeast, Inc.
|
|
|
|
|
|
|
(3,227
|
)
|
|
|
|
|
|
|
(3,227
|
)
|
Noble Logistics, Inc.
|
|
|
|
|
|
|
(3,832
|
)
|
|
|
|
|
|
|
(3,832
|
)
|
Schylling Investments, LLC
|
|
|
|
|
|
|
(3,840
|
)
|
|
|
|
|
|
|
(3,840
|
)
|
B-Dry, LLC
|
|
|
|
|
|
|
(4,013
|
)
|
|
|
|
|
|
|
(4,013
|
)
|
SBS, Industries, LLC
|
|
|
|
|
|
|
(4,414
|
)
|
|
|
|
|
|
|
(4,414
|
)
|
Ginsey Home Solutions, Inc.
|
|
|
|
|
|
|
(6,731
|
)
|
|
|
|
|
|
|
(6,731
|
)
|
Other, net (<$250 Net)
|
|
|
41
|
|
|
|
(87
|
)
|
|
|
|
|
|
|
(46
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
11,689
|
|
|
$
|
(25,178
|
)
|
|
$
|
(4,222
|
)
|
|
$
|
(17,711
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A)
|
Venyu was sold in August 2013.
|
(B)
|
ASH equity investment was sold in October 2013.
|
(C)
|
Packerland equity investment was sold in November 2013.
|
43
The primary changes in our net unrealized depreciation for the nine months ended December 31, 2013, were due
to decreased equity valuations in several of our portfolio companies, primarily due to decreased portfolio company performance and decreases in certain comparable multiples used to estimate the fair value of our investments.
During the nine months ended December 31, 2012, we recorded net unrealized depreciation on investments in the aggregate amount of $9.6 million. The
realized gains (losses) and unrealized appreciation (depreciation) across our investments for the nine months ended December 31, 2012 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended December 31, 2012
|
|
Portfolio Company
|
|
Realized
Gain (Loss)
|
|
|
Unrealized
Appreciation
(Depreciation)
|
|
|
Reversal of
Unrealized
(Appreciation)
Depreciation
|
|
|
Net Gain
(Loss)
|
|
Galaxy Tool Holding Corp.
|
|
$
|
|
|
|
$
|
9,231
|
|
|
$
|
|
|
|
$
|
9,231
|
|
Country Club Enterprises, LLC
|
|
|
|
|
|
|
8,662
|
|
|
|
|
|
|
|
8,662
|
|
Mathey Investments, Inc.
|
|
|
|
|
|
|
3,774
|
|
|
|
|
|
|
|
3,774
|
|
Precision Southeast, Inc.
|
|
|
|
|
|
|
2,011
|
|
|
|
|
|
|
|
2,011
|
|
Drew Foam Companies, Inc.
|
|
|
|
|
|
|
1,923
|
|
|
|
|
|
|
|
1,923
|
|
SBS, Industries, LLC
|
|
|
|
|
|
|
1,524
|
|
|
|
|
|
|
|
1,524
|
|
A. Stucki Holding Corp.
|
|
|
860
|
|
|
|
|
|
|
|
|
|
|
|
860
|
|
Ginsey Holdings, Inc.
|
|
|
|
|
|
|
783
|
|
|
|
|
|
|
|
783
|
|
Venyu Solutions, Inc.
|
|
|
|
|
|
|
646
|
|
|
|
|
|
|
|
646
|
|
SOG Specialty K&T, LLC
|
|
|
|
|
|
|
269
|
|
|
|
|
|
|
|
269
|
|
Acme Cryogenics, Inc.
|
|
|
|
|
|
|
(414
|
)
|
|
|
|
|
|
|
(414
|
)
|
ASH Holdings Corp.
|
|
|
|
|
|
|
(695
|
)
|
|
|
|
|
|
|
(695
|
)
|
Channel Technologies Group, LLC
|
|
|
|
|
|
|
(1,231
|
)
|
|
|
|
|
|
|
(1,231
|
)
|
Quench Holdings Corp.
|
|
|
|
|
|
|
(1,667
|
)
|
|
|
|
|
|
|
(1,667
|
)
|
B-Dry, LLC
|
|
|
|
|
|
|
(1,937
|
)
|
|
|
|
|
|
|
(1,937
|
)
|
Packerland Whey Products, Inc.
|
|
|
|
|
|
|
(1,996
|
)
|
|
|
|
|
|
|
(1,996
|
)
|
Mitchell Rubber Products, Inc.
|
|
|
|
|
|
|
(2,491
|
)
|
|
|
|
|
|
|
(2,491
|
)
|
Noble Logistics, Inc.
|
|
|
|
|
|
|
(5,653
|
)
|
|
|
|
|
|
|
(5,653
|
)
|
Danco Acquisition Corp.
|
|
|
|
|
|
|
(7,023
|
)
|
|
|
|
|
|
|
(7,023
|
)
|
Tread Corp.
|
|
|
|
|
|
|
(15,491
|
)
|
|
|
|
|
|
|
(15,491
|
)
|
Other, net (<$250 Net)
|
|
|
(12
|
)
|
|
|
220
|
|
|
|
|
|
|
|
208
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
848
|
|
|
$
|
(9,555
|
)
|
|
$
|
|
|
|
$
|
(8,707
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The primary changes in our net unrealized depreciation for the nine months ended December 31, 2012, were due to notable
depreciation of our debt investments in Danco Acquisition Corp. (Danco) and in our debt and equity investments in Tread and Noble Logistics, Inc. (Noble), primarily due to decreased portfolio company performance and, to a
lesser extent, a decrease in certain comparable multiples used to estimate the fair value of our investments. This depreciation was partially offset by increased appreciation in Galaxy, Country Club Enterprises, LLC (CCE) and Mathey,
primarily due to increased portfolio company performance.
Over our entire investment portfolio, we recorded, in the aggregate, approximately $4.7 million
of net unrealized appreciation on our debt positions and $34.1 million of net unrealized depreciation on our equity holdings for the nine months ended December 31, 2013. As of December 31, 2013, the fair value of our investment portfolio
was less than our cost basis by approximately $69.3 million, as compared to $39.9 million at March 31, 2013, representing net unrealized depreciation of $29.4 million for the nine months ended December 31, 2013. We believe that our
aggregate investment portfolio was valued at a depreciated value due to the lingering effects of the recent recession on the performance of certain of our portfolio companies. Our entire portfolio was fair valued at 80.7% of cost as of
December 31, 2013. The unrealized depreciation of our investments does not have an impact on our current ability to pay distributions to stockholders; however, it may be an indication of future realized losses, which could ultimately reduce our
income available for distribution.
Realized and Unrealized (Loss) Gain on Other
Realized Loss on Interest Rate Cap
For the nine months
ended December 31, 2013 and 2012, we recorded a net realized loss of $29 and $41, respectively, due to the expiration of interest rate cap agreements.
Net Unrealized Depreciation (Appreciation) on Borrowings
For the nine months ended December 31, 2013 and 2012, we recorded $0.8 million and $(0.6) million, respectively, of net unrealized depreciation
(appreciation).
44
LIQUIDITY AND CAPITAL RESOURCES
Operating Activities
Net cash used in operating
activities for the nine months ended December 31, 2013, was approximately $11.3 million, as compared to $53.4 million during the nine months ended December 31, 2012. This decrease in cash used in operating activities was primarily due to
an increase in principal repayments and sales proceeds of $53.5 million over the prior year period, largely due to our exit of Venyu in August 2013. Our cash flows from operations generally come from cash collections of interest and dividend income
from our portfolio companies, as well as cash proceeds received through repayments of loan investments and sales of equity investments. These cash collections are primarily used to pay distributions to our stockholders, interest payments on our
Credit Facility, dividend payments on our Term Preferred Stock, management fees to our Adviser, and other entity-level expenses.
As of December 31,
2013, we had equity investments in or loans to 26 private companies with an aggregate cost basis of approximately $360.1 million. As of December 31, 2012, we had equity investments in or loans to 21 private companies with an aggregate cost
basis of approximately $323.6 million. The following table summarizes our total portfolio investment activity during the nine months ended December 31, 2013 and 2012:
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended December 31,
|
|
|
|
2013
|
|
|
2012
|
|
Beginning investment portfolio, at fair value
|
|
$
|
286,482
|
|
|
$
|
225,652
|
|
New investments
|
|
|
96,848
|
|
|
|
68,004
|
|
Disbursements to existing portfolio companies
|
|
|
3,286
|
|
|
|
12,635
|
|
Increase in investment balance due to PIK
|
|
|
58
|
|
|
|
|
|
Scheduled principal repayments
|
|
|
(110
|
)
|
|
|
(362
|
)
|
Unscheduled principal repayments
|
|
|
(46,524
|
)
|
|
|
(20,751
|
)
|
Proceeds from sales
|
|
|
(31,602
|
)
|
|
|
(3,187
|
)
|
Net realized gain
|
|
|
11,689
|
|
|
|
848
|
|
Net unrealized depreciation
|
|
|
(25,178
|
)
|
|
|
(9,555
|
)
|
Reversal of net unrealized appreciation
|
|
|
(4,222
|
)
|
|
|
|
|
Other cash activity, net
|
|
|
|
|
|
|
(24
|
)
|
|
|
|
|
|
|
|
|
|
Ending investment portfolio, at fair value
|
|
$
|
290,727
|
|
|
$
|
273,260
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes the contractual principal repayment and maturity of our investment portfolio by fiscal year,
assuming no voluntary prepayments, as of December 31, 2013:
|
|
|
|
|
|
|
|
|
|
|
Amount
|
|
For the remaining three months ending March 31:
|
|
2014
|
|
$
|
8,602
|
|
For the fiscal year ending March 31:
|
|
2015
|
|
|
57,106
|
|
|
|
2016
|
|
|
21,788
|
|
|
|
2017
|
|
|
43,314
|
|
|
|
2018
|
|
|
51,983
|
|
|
|
Thereafter
|
|
|
79,018
|
|
|
|
|
|
|
|
|
|
|
Total contractual repayments
|
|
$
|
261,811
|
|
|
|
Investments in equity securities
|
|
|
98,255
|
|
|
|
|
|
|
|
|
|
|
Total cost basis of investments held as of December 31, 2013:
|
|
$
|
360,066
|
|
|
|
|
|
|
|
|
Financing Activities
Net
cash used in financing activities for the nine months ended December 31, 2013, was approximately $59.5 million and consisted primarily of net repayments of our short-term borrowings of $49.5 million and distributions to common stockholders of
$14.0 million, partially offset by $5.2 million in net borrowings from our Credit Facility. Net cash provided by financing activities for the nine months ended December 31, 2012 was approximately $18.2 million and consisted primarily of $31.1
million in net proceeds from our common stock offering.
Distributions
To qualify to be taxed as a RIC and thus avoid corporate level tax on the income we distribute to our stockholders, we are required under Subchapter M of the
Code, to distribute at least 90% of our ordinary income and short-term capital gains to our stockholders on an annual basis. In accordance with these requirements, we declared and paid monthly cash distributions of $0.05 per common share for the six
months from April 2013 through September 2013. In October 2013, our Board of Directors declared a monthly distribution of $0.06 per common share for each of October, November and December 2013. Distributions for the quarter ending December 31, 2013
represent a 20% increase from the distributions declared by our Board of Directors for the quarter ended September 30, 2013.
45
Subsequent to September 30, 2013, our Board of Directors additionally declared a one-time special distribution of $0.05 per common share for November 2013. In January 2014, our Board of
Directors also declared a monthly distribution of $0.06 per common share for each of January, February and March 2014. Our Board of Directors declared these distributions based on estimates of net taxable income for the fiscal year.
For the fiscal year ended March 31, 2013, which includes the three months ended December 31, 2012, our distributions to common stockholders totaled
approximately $13.6 million. Distributions to common stockholders declared for the fiscal year ended March 31, 2013, were comprised 100% from ordinary income and none from a return of capital. At year-end, we elected to treat $3.1 million of
the first distribution paid after year-end as having been paid in the prior year, in accordance with Section 855(a) of the Code. The characterization of the common distributions declared and paid for the fiscal year ending March 31, 2014
will be determined at year end and cannot be determined at this time. Additionally, the covenants in our Credit Facility generally restrict the amount of distributions that we can pay out to be no greater than our net investment income.
We also declared and paid monthly cash distributions of $0.1484375 per share of Term Preferred Stock for each of the nine months from April 2013 through
December 2013. In January 2014, our Board of Directors also declared a monthly distribution of $0.1484375 per preferred share for each of January, February and March 2014. In accordance with accounting principles generally accepted in the U.S.
(GAAP), we treat these monthly distributions as an operating expense. For tax purposes, these preferred distributions are deemed to be paid entirely out of ordinary income to preferred stockholders.
Equity
Registration Statement
We filed a registration statement on Form N-2 (File No. 333-181879) with the SEC on June 4, 2012, and subsequently filed a Pre-effective
Amendment No. 1 to the registration statement on July 17, 2012, which the SEC declared effective on July 26, 2012. On June 7, 2013, we filed Post-Effective Amendment No. 2 to the registration statement, which the SEC
declared effective on July 26, 2013. The registration statement permits us to issue, through one or more transactions, up to an aggregate of $300.0 million in securities, consisting of common stock, preferred stock, subscription rights, debt
securities and warrants to purchase common stock, including through a combined offering of two or more of such securities.
Common Stock
Pursuant to our registration statement on Form N-2 (Registration No. 333-181879), on October 5, 2012, we completed a public offering of
4.0 million shares of our common stock at a public offering price of $7.50 per share, which was below then current NAV of $8.65 per share. Gross proceeds totaled $30.0 million and net proceeds, after deducting underwriting discounts and
offering expenses borne by us, were $28.3 million, which was used to repay borrowings under our Credit Facility. In connection with the offering, the underwriters exercised their option to purchase an additional 395,825 shares at the public offering
price to cover over-allotments, which resulted in gross proceeds of $3.0 million and net proceeds, after deducting underwriting discounts, of $2.8 million.
We anticipate issuing equity securities to obtain additional capital in the future. However, we cannot determine the terms of any future equity issuances or
whether we will be able to issue equity on terms favorable to us, or at all. When our common stock is trading below NAV per share, as it has consistently since September 30, 2008, the 1940 Act places regulatory constraints on our ability to
obtain additional capital by issuing common stock. Generally, the 1940 Act provides that we may not issue and sell our common stock at a price below our NAV per common share, other than to our then existing common stockholders pursuant to a rights
offering, without first obtaining approval from our stockholders and our independent directors. On February 3, 2014, the closing market price of our common stock was $7.88 per share, representing a 7.2% discount to our NAV of $8.49 as of
December 31, 2013. 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 Annual Meeting of Stockholders held on August 8, 2013, our stockholders ratified 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.
Term Preferred Stock
Pursuant to our prior registration
statement on Form N-2 (Registration No. 333-160720), in March 2012, we completed an offering of 1.6 million shares of Term Preferred Stock at a public offering price of $25.00 per share. Gross proceeds totaled $40.0 million, and net
proceeds, after deducting underwriting discounts and offering expenses borne by us were approximately $38.0 million, a portion of which was used to repay borrowings under our Credit Facility, with the remaining proceeds being held to make additional
investments and for general corporate purposes. We incurred $2.0 million in total offering costs related to the offering, which have been recorded as an asset in accordance with GAAP and are being amortized over the redemption period ending
February 28, 2017.
46
The Term Preferred Stock provides for a fixed dividend equal to 7.125% per year, payable monthly (which
equates to approximately $2.9 million per year). We are required to redeem all of the outstanding Term Preferred Stock on February 28, 2017, for cash at a redemption price equal to $25.00 per share plus an amount equal to accumulated but unpaid
dividends, if any, to the date of redemption. The Term Preferred Stock has a preference over our common stock with respect to dividends, whereby no distributions are payable on our common stock unless the stated dividends, including any accrued and
unpaid dividends, on the Term Preferred Stock have been paid in full. The 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 Term Preferred Stock; 2) if we fail to maintain an asset coverage ratio of at least 200%, we are required to redeem a
portion of the outstanding Term Preferred Stock or otherwise cure the ratio redemption trigger and 3) at our sole option, at any time on or after February 28, 2016, we may redeem some or all of the Term Preferred Stock.
The Term Preferred Stock has been recorded as a liability in accordance with GAAP and, as such, affects our asset coverage, exposing us to additional leverage
risks.
Revolving Credit Facility
On April 30,
2013, we, through our wholly-owned subsidiary, Business Investment, entered into a fifth amended and restated credit agreement with Key Equipment Finance Inc., as administrative agent, lead arranger and a lender (the Administrative
Agent), Branch Banking and Trust Company as a lender and managing agent, and the Adviser, as servicer, to increase the commitment amount of the revolving line of credit (the Credit Facility) from $60.0 million to $70.0 million and
to extend the revolving period, which was extended to April 30, 2016 and, if not renewed or extended by April 30, 2016, all principal and interest will be due and payable on or before April 30, 2017 (one year after the revolving
period end date). In addition, there are two one-year extension options to be agreed upon by all parties, which may be exercised on or before April 30, 2014 and 2015, respectively. Subject to certain terms and conditions, the Credit Facility
may be expanded up to a total of $200.0 million through the addition of other lenders to the facility. Advances under the Credit Facility generally bear interest at 30-day LIBOR, plus 3.75% per annum, and the Credit Facility includes an unused
fee of 0.50% on undrawn amounts. We incurred fees of approximately $0.3 million in connection with this amendment.
On June 12, 2013, we further
increased the borrowing capacity under the Credit Agreement from $70.0 million to $105.0 million by entering into Joinder Agreements pursuant to the Credit Agreement by and among Business Investment, the Administrative Agent, the Adviser and each of
Alostar Bank of Commerce and Everbank Commercial Finance, Inc.
The 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 facility generally also limits payments as distributions to the aggregate net investment income for each of the twelve month periods ending March 31, 2014, 2015, 2016 and 2017. We are also subject to certain limitations on the type of loan
investments we can make, including restrictions on geographic concentrations, sector concentrations, loan size, dividend payout, payment frequency and status, average life and lien property. The Credit Facility also requires us to comply with other
financial and operational covenants, which obligate us to, among other things, maintain certain financial ratios, including asset and interest coverage, a minimum net worth and a minimum number of obligors required in the borrowing base of the
credit agreement. Additionally, we are subject to a performance guaranty that requires us to maintain (i) a minimum net worth of $170.0 million plus 50% of all equity and subordinated debt raised after April 30, 2013, which equates to
$170.0 million as of December 31, 2013, (ii) asset coverage with respect to senior securities representing indebtedness of at least 200%, in accordance with Section 18 of the 1940 Act and (iii) our status
as a BDC under the 1940 Act and as a RIC under the Code. As of December 31, 2013, and as defined in the performance guaranty of our Credit Facility, we had a minimum net worth of $264.7 million, an asset coverage of 336% and an active status as
a BDC and RIC. As of February 3, 2014, we were in compliance with all covenants.
In December 2011, we entered into a forward interest rate cap
agreement, effective May 2012, for a notional amount of $50.0 million. We incurred a premium fee of $29 in conjunction with this agreement, which expired in October 2013 and has resulted in a $29 realized loss for the three months ending
December 31, 2013. In July 2013, we entered into a forward interest rate cap agreement, effective October 2013 and expiring April 2016, for a notional amount of $45.0 million. We incurred a premium fee of $75 in conjunction with this agreement.
Both of these interest rate cap agreements effectively limit the interest rate on a portion of the borrowings pursuant to the terms of the Credit Facility.
The Administrative Agent also requires that any interest or principal payments on pledged loans be remitted directly by the borrower into a lockbox account,
with The Bank of New York Mellon Trust Company, N.A. as custodian. The Administrative Agent is also the trustee of the account and generally remits the collected funds to us once a month.
47
Short-Term Loan
Similar to previous quarter ends, to maintain our status as a RIC, we purchased $10.0 million of short-term United States Treasury Bills (T-Bills)
through Jefferies & Company, Inc. (Jefferies) on December 27, 2013. The T-Bills were purchased on margin using $1.5 million in cash and the proceeds from a $8.5 million short-term loan from Jefferies with an effective
annual interest rate of approximately 1.35%. On January 2, 2014, when the T-Bills matured, we repaid the $10.0 million loan from Jefferies and received the $1.5 million margin payment sent to Jefferies to complete the transaction.
Contractual Obligations and Off-Balance Sheet Arrangements
We have lines of credit to certain of our portfolio companies that have not been fully drawn. Since these lines of credit have expiration dates and we expect
many will never be fully drawn, the total line of credit commitment amounts do not necessarily represent future cash requirements. We estimate the fair value of the unused line of credit commitments as of December 31, 2013 and 2012 to be
minimal.
In addition to the lines of credit to our portfolio companies, we have also extended certain guaranties on behalf of some our portfolio
companies, whereby we have guaranteed an aggregate of $3.8 million of obligations of ASH and CCE. As of December 31, 2013, we have not been required to make any payments on any of the guaranties, and we consider the credit risks to be remote
and the fair value of the guaranties to be minimal.
The following table shows our contractual obligations as of December 31, 2013, at cost:
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Payments Due by Period
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Less than
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|
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More than
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Contractual Obligations
(A)
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|
Total
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1 Year
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1-3 Years
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|
3-5 Years
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|
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5 Years
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|
Short-term loan
(B)
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|
$
|
8,501
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|
|
$
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8,501
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|
|
$
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|
|
|
$
|
|
|
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$
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|
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Credit Facility
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|
|
36,200
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|
|
|
|
|
|
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36,200
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|
|
|
|
|
|
|
|
|
Term Preferred Stock
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|
|
40,000
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|
|
|
|
|
|
|
|
|
|
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40,000
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|
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Other secured borrowings
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5,000
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|
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|
|
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5,000
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|
|
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|
Interest payments on obligations
(C)
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|
|
14,605
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|
|
|
4,991
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|
|
|
8,796
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|
|
|
818
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|
|
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|
|
|
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|
|
|
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|
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Total
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$
|
104,306
|
|
|
$
|
13,492
|
|
|
$
|
44,996
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|
|
$
|
45,818
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|
|
$
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|
|
|
|
|
|
|
|
|
|
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|
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(A)
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Excludes our unused line of credit commitments and guaranties to our portfolio companies in the aggregate amount of $6.9 million.
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(B)
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Repaid January 2, 2014.
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(C)
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Includes interest payments due on our Credit Facility and dividend obligations on the Term Preferred Stock. Dividend payments on the Term Preferred Stock assume quarterly declarations and monthly distributions through
the date of mandatory redemption.
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The majority of our debt securities in our portfolio have a success fee component, which can enhance the
yield on our debt investments. Unlike PIK income, we do not recognize the fee into income until it is received in cash. As a result, as of December 31, 2013, we have an off-balance sheet success fee receivable of $16.2 million, or approximately
$0.61 per common share. There is no guarantee that we will be able to collect any or all of our success fee receivables due to their contingent nature. It is also impossible to predict the timing of such collections.
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. We have identified our investment valuation process as our most critical
accounting policy.
Investment Valuation
The most
significant estimate inherent in the preparation of our consolidated financial statements is the valuation of investments and the related amounts of unrealized appreciation and depreciation of investments recorded.
General Valuation Policy:
We value our investments in accordance with the requirements of the 1940 Act. As discussed more fully below, we value
securities for which market quotations are readily available and reliable at their market value. We value all other securities and assets at fair value, as determined in good faith by our Board of Directors. Such determination of fair values may
involve subjective judgments and estimates.
The Financial Accounting Standards Board (FASB) Accounting Standards Codification
(ASC) 820, Fair Value Measurements and Disclosures, defines fair value, establishes a framework for measuring fair value and expands disclosures about assets and liabilities measured at fair value. ASC 820 provides a
consistent definition of fair value that focuses on exit price in the principal, or
48
most advantageous, market and prioritizes, within a measurement of fair value, the use of market-based inputs over entity-specific inputs. ASC 820 also establishes the following three-level
hierarchy for fair value measurements based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date.
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Level 1
inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets;
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|
Level 2
inputs to the valuation methodology include quoted prices for similar assets and liabilities in active or inactive markets and inputs that are observable for the asset or liability, either
directly or indirectly, for substantially the full term of the financial instrument. Level 2 inputs are in those markets for which there are few transactions, the prices are not current, little public information exists or instances where prices
vary substantially over time or among brokered market makers; and
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Level 3
inputs to the valuation methodology are unobservable and significant to the fair value measurement. Unobservable inputs are those inputs that reflect assumptions that market participants
would use when pricing the asset or liability and can include the Advisers assumptions based upon the best available information.
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As
of December 31 and March 31, 2013, all of our investments were valued using Level 3 inputs. See Note 3
Investments
in our accompanying notes to our
Condensed Consolidated Financial Statements
included elsewhere in this
report for additional information regarding fair value measurements and our application of ASC 820.
The Adviser uses generally accepted valuation
techniques to value our portfolio unless it has specific information about the value of an investment to determine otherwise. From time to time we may accept an appraisal of a business in which we hold securities. These appraisals are expensive and
occur infrequently but provide a third-party valuation opinion that may differ in results, techniques and scope used to value our investments. When these specific, third-party appraisals are obtained, the Adviser would use estimates of value
provided by such appraisals and its own assumptions, including estimated remaining life, current market yield and interest rate spreads of similar securities as of the measurement date, to value our investments.
In determining the value of our investments, the Adviser has established an investment valuation policy (the Policy). The Policy has been approved
by our Board of Directors, and each quarter, our Board of Directors reviews the Policy to determine if changes thereto are advisable and also reviews whether the Adviser has applied the Policy consistently and votes whether to accept the recommended
valuation of our investment portfolio. Such determination of fair values may involve subjective judgments and estimates.
The Policy applies to publicly
traded securities, securities for which a limited market exists and securities for which no market exists. However, because our investment portfolio for the past several years has not included publicly-traded securities or securities for which a
limited market exists, the following is just a summary of the Policy as it relates to securities for which no market exists.
Valuation Methods:
Publicly traded securities:
The Adviser determines the value of a publicly traded security based on the closing price for the security on the
exchange or securities market on which it is listed and primarily traded on the valuation date. To the extent that we own a restricted security that is not freely tradable, but for which a public market otherwise exists, the Adviser will use the
market value of that security adjusted for any decrease in value resulting from the restrictive feature. As of December 31 and March 31, 2013, we did not have any investments in publicly traded securities.
Securities for which a limited market exists:
The Adviser values securities that are not traded on an established secondary securities market, but for
which a limited market for the security exists, such as certain participations in, or assignments of, syndicated loans, at the quoted bid price, which are non-binding. In valuing these assets, the Adviser assesses trading activity in an asset class
and evaluates variances in prices and other market insights to determine if any available quoted prices are reliable. In general, if the Adviser concludes that quotes based on active markets or trading activity may be relied upon, firm bid prices
are requested; however, if firm bid prices are unavailable, the Adviser bases the value of the security upon the indicative bid price (IBP) offered by the respective originating syndication agents trading desk, or secondary desk,
on or near the valuation date. To the extent that the Adviser uses the IBP as a basis for valuing the security, it may take further steps to consider additional information to validate that price in accordance with the Policy, including but not
limited to reviewing a range of indicative bids to the extent the Adviser has ready access to such qualified information.
In the event these limited
markets become illiquid such that market prices are no longer readily available, the Adviser will value our syndicated loans using alternative methods, such as estimated net present values of the future cash flows or discounted cash flows
(DCF). The use of a DCF methodology follows that prescribed by ASC 820, which provides guidance on the use of a reporting entitys own assumptions about future cash flows and risk-adjusted discount rates when relevant observable
inputs, such as quotes in active markets, are not available. When relevant observable market data does not exist, an alternative outlined in ASC 820 is the valuation of investments based on DCF. For the purposes of using DCF to provide fair value
estimates, the Adviser considers multiple inputs such as a risk-adjusted discount rate that incorporates adjustments that market participants would make both for
49
nonperformance and liquidity risks. As such, the Adviser develops a modified discount rate approach that incorporates risk premiums including, among other things, increased probability of
default, higher loss given default or increased liquidity risk. The DCF valuations applied to the syndicated loans provide an estimate of what the Adviser believes a market participant would pay to purchase a syndicated loan in an active market,
thereby establishing a fair value. The Adviser applies the DCF methodology in illiquid markets until quoted prices are available or are deemed reliable based on trading activity.
Securities for which no market exists:
The valuation methodology for securities for which no market exists falls into four categories:
(A) portfolio investments comprised solely of debt securities; (B) portfolio investments in controlled companies comprised of a bundle of securities, which can include debt and equity securities; (C) portfolio investments in
non-controlled companies comprised of a bundle of investments, which can include debt and equity securities; and (D) portfolio investments comprised of non-publicly traded non-control equity securities of other funds.
(A)
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Portfolio investments comprised solely of debt securities:
Debt securities that are not publicly traded on an established securities market, or for which a market does not exist (Non-Public Debt
Securities), and that are issued by portfolio companies in which we have no equity or equity-like securities, are fair valued utilizing opinions of value submitted to the Adviser by Standard & Poors Securities Evaluations, Inc.
(SPSE) and its own assumptions in the absence of observable market data, including synthetic credit ratings, estimated remaining life, current market yield and interest rate spreads of similar securities as of the measurement date. The
Adviser may also submit PIK interest to SPSE for its evaluation when it is determined that PIK interest is likely to be received.
|
In the case of Non-Public Debt Securities, the Adviser has engaged SPSE to submit opinions of value for our debt securities that are issued by
portfolio companies in which we own no equity, or equity-like securities. SPSE will only evaluate the debt portion of our investments for which the Adviser specifically requests evaluation, and may decline to make requested evaluations for any
reason, at its sole discretion. Quarterly, the Adviser collects data with respect to the investments (which includes portfolio company financial and operational performance and the information described below under
Credit
Information
, the risk ratings of the loans described below under
Loan Grading and Risk Rating
and the factors described hereunder). This portfolio company data is then forwarded to SPSE for review and analysis.
SPSE makes its independent assessment of the data that the Adviser has assembled and assesses its independent data to form an opinion as to what they consider to be the market values for the securities. With regard to its work, SPSE has issued the
following paragraph:
SPSE provides evaluated price opinions which are reflective of what SPSE believes the bid side of the market would
be for each loan after careful review and analysis of descriptive, market and credit information. Each price reflects SPSEs best judgment based upon careful examination of a variety of market factors. Because of fluctuation in the market and
in other factors beyond its control, SPSE cannot guarantee these evaluations. The evaluations reflect the market prices, or estimates thereof, on the date specified. The prices are based on comparable market prices for similar securities. Market
information has been obtained from reputable secondary market sources. Although these sources are considered reliable, SPSE cannot guarantee their accuracy.
SPSE opinions of the value of our debt securities that are issued by portfolio companies in which we do not own equity, or equity-like
securities are submitted to our Board of Directors along with the Advisers supplemental assessment and recommendation regarding valuation of each of these investments. The Adviser generally accepts the opinion of value given by SPSE; however,
in certain limited circumstances, such as when the Adviser may learn new information regarding an investment between the time of submission to SPSE and the date of our Board of Directors assessment, the Advisers conclusions as to value
may differ from the opinion of value delivered by SPSE. Our Board of Directors then reviews whether the Adviser has followed its established procedures for determinations of fair value and votes to accept or reject the recommended valuation of our
investment portfolio.
Because there is a delay between when we close an investment and when the investment can be evaluated by SPSE, new
loans are not valued immediately by SPSE; rather, the Adviser makes its own determination about the value of these investments in accordance with our Policy using the methods described herein.
(B)
|
Portfolio investments in controlled companies comprised of a bundle of securities, which can include debt and equity securities:
The fair value of these investments is determined based on the total enterprise
value (TEV) of the portfolio company, or issuer, utilizing a liquidity waterfall approach under ASC 820 for our Non-Public Debt Securities and equity or equity-like securities (e.g., preferred equity, common equity or other equity-like
securities) that are purchased together as part of a package, where we control or could gain control through an option or warrant security; both the debt and equity securities of the portfolio investment would exit in the mergers and acquisitions
market as the principal market, generally through a sale or recapitalization of the portfolio company. We generally exit the debt and equity securities of an issuer at the same time. Applying the liquidity waterfall approach to all of our
investments in an issuer, the Adviser first calculates the TEV of the issuer by incorporating some or all of the following factors:
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|
|
the issuers ability to make payments;
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50
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|
|
the earnings of the issuer;
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|
|
|
recent sales to third parties of similar securities;
|
|
|
|
the comparison to publicly traded securities; and
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|
|
|
DCF or other pertinent factors.
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In gathering the sales to third parties of similar securities,
the Adviser generally references industry statistics and may use outside experts. TEV is only an estimate of value and may not be the value received in an actual sale. Once the Adviser has estimated the TEV of the issuer, it will subtract the value
of all the debt securities of the issuer, which are valued at the contractual principal balance. Fair values of these debt securities are discounted for any shortfall of TEV over the total debt outstanding for the issuer. Once the values for all
outstanding senior securities, which include all the debt securities, have been subtracted from the TEV of the issuer, the remaining amount, if any, is used to determine the value of the issuers equity or equity-like securities. If, in the
Advisers judgment, the liquidity waterfall approach does not accurately reflect the value of the debt component, the Adviser may recommend that we use a valuation by SPSE, or, if that is unavailable, a DCF valuation technique.
(C)
|
Portfolio investments in non-controlled companies comprised of a bundle of securities, which can include debt and equity securities:
The Adviser values Non-Public Debt Securities that are purchased together with
equity or equity-like securities from the same portfolio company, or issuer, for which we do not control or cannot gain control as of the measurement date, using a hypothetical secondary market as our principal market. In accordance with ASC 820 (as
amended by the FASBs Accounting Standards Update No. 2011-04, Fair
Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting
Standards (IFRS)
, (ASU 2011-04)), the Adviser has defined our unit of account at the investment level (either debt or equity) and as such determines our fair value of these non-control investments
assuming the sale of an individual security using the standalone premise of value. As such, the Adviser estimates the fair value of the debt component using estimates of value provided by SPSE and the its own assumptions in the absence of observable
market data, including synthetic credit ratings, estimated remaining life, current market yield and interest rate spreads of similar securities as of the measurement date. For equity or equity-like securities of investments for which we do not
control or cannot gain control as of the measurement date, the Adviser estimates the fair value of the equity based on factors such as the overall value of the issuer, the relative fair value of other units of account including debt, or other
relative value approaches. Consideration is also given to capital structure and other contractual obligations that may impact the fair value of the equity. Furthermore, the Adviser may utilize comparable values of similar companies, recent
investments and indices with similar structures and risk characteristics or DCF valuation techniques and, in the absence of other observable market data, its own assumptions.
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(D)
|
Portfolio investments comprised of non-publicly traded non-control equity securities of other funds:
The Adviser generally values any uninvested capital of the non-control fund at par value and values any
invested capital at the NAV provided by the non-control fund.
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Due to the uncertainty inherent in the valuation process, such estimates of
fair value may differ significantly and materially from the values that would have been obtained had a ready market for the securities existed. Additionally, changes in the market environment and other events that may occur over the life of the
investments may cause the gains or losses ultimately realized on these investments to be different than the valuations currently assigned. There is no single standard for determining fair value in good faith, as fair value depends upon circumstances
of each individual case. In general, fair value is the amount that the Adviser might reasonably expect us to receive upon the current sale of the security in an orderly transaction between market participants at the measurement date.
Other Valuation Considerations
From time to time,
depending on certain circumstances, the Adviser may use the following valuation considerations, including but not limited to:
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the nature and realizable value of the collateral;
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|
|
the portfolio companys earnings and cash flows and its ability to make payments on its obligations;
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|
|
the markets in which the portfolio company does business;
|
|
|
|
the comparison to publicly traded companies; and
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|
|
|
DCF and other relevant factors.
|
Because such valuations, particularly valuations of private securities and
private companies, are not susceptible to precise determination, may fluctuate over short periods of time, and may be based on estimates, the Advisers determinations of fair value may differ from the values that might have actually resulted
had a readily available market for these securities been available.
51
Credit Information:
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. We and the Adviser generally participate in the periodic board meetings of our portfolio companies in which we hold Control and Affiliate investments and
also generally 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 the credit statistics.
Loan Grading and Risk Rating:
As part of our valuation procedures above, we risk rate all of our investments in debt securities. We use a proprietary
risk rating system. Our risk rating system uses a scale of 0 to >10, with >10 being the lowest probability of default. This system is used to estimate the probability of default on debt securities and the expected loss if there is a default.
These types of systems are referred to as risk rating systems and are used by banks and rating agencies. The risk rating system covers both qualitative and quantitative aspects of the business and the securities we hold.
We seek to have our risk rating system mirror the risk rating systems of major risk rating organizations, such as those provided by a Nationally Recognized
Statistical Rating Organization (NRSRO). While we seek to mirror the NRSRO systems, we cannot provide any assurance that our risk rating system will provide the same risk rating as an NRSRO for these securities. The following chart is an
estimate of the relationship of our risk rating system to the designations used by two NRSROs as they risk rate debt securities of major companies. Because our system rates debt securities of companies that are unrated by any NRSRO, there can be no
assurance that the correlation to the NRSRO set out below is accurate. We believe our risk rating would be significantly higher than a typical NRSRO risk rating because the risk rating of the typical NRSRO is designed for larger businesses. However,
our risk rating has been designed to risk rate the securities of smaller businesses that are not rated by a typical NRSRO. Therefore, when we use our risk rating on larger business securities, the risk rating is higher than a typical NRSRO rating.
We believe the primary difference between our risk rating and the rating of a typical NRSRO is that our risk rating uses more quantitative determinants and includes qualitative determinants that we believe are not used in the NRSRO rating. It is our
understanding that most debt securities of
medium-sized
companies do not exceed the grade of BBB on a 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 scale begins with the designation >10 as the best risk rating which may be equivalent to a BBB or Baa2 from an NRSRO, however, no assurance can be given that a >10 on the scale is equal to a BBB or Baa2 on an NRSRO
scale.
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Advisers System
|
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First NRSRO
|
|
Second NRSRO
|
|
Description
(A)
|
>10
|
|
Baa2
|
|
BBB
|
|
Probability of Default (PD) during the next ten years is 4% and the Expected Loss upon Default (EL) is 1% or less
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10
|
|
Baa3
|
|
BBB-
|
|
PD is 5% and the EL is 1% to 2%
|
9
|
|
Ba1
|
|
BB+
|
|
PD is 10% and the EL is 2% to 3%
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8
|
|
Ba2
|
|
BB
|
|
PD is 16% and the EL is 3% to 4%
|
7
|
|
Ba3
|
|
BB-
|
|
PD is 17.8% and the EL is 4% to 5%
|
6
|
|
B1
|
|
B+
|
|
PD is 22% and the EL is 5% to 6.5%
|
5
|
|
B2
|
|
B
|
|
PD is 25% and the EL is 6.5% to 8%
|
4
|
|
B3
|
|
B-
|
|
PD is 27% and the EL is 8% to 10%
|
3
|
|
Caa1
|
|
CCC+
|
|
PD is 30% and the EL is 10% to 13.3%
|
2
|
|
Caa2
|
|
CCC
|
|
PD is 35% and the EL is 13.3% to 16.7%
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1
|
|
Caa3
|
|
CC
|
|
PD is 65% and the EL is 16.7% to 20%
|
0
|
|
N/A
|
|
D
|
|
PD is 85% or there is a payment default and the EL is greater than 20%
|
(A)
|
The default rates set forth are for a ten year term debt security. If a debt security is less than ten years, then the probability of default is adjusted to a lower percentage for the shorter period, which may move the
security higher on this risk rating scale.
|
The above scale gives an indication of the probability of default and the magnitude of the
expected loss if there is a default. Generally, our policy is to stop accruing interest on an investment if we determine that interest is no longer collectable. As of December 31, 2013, Tread was the only portfolio investment on non-accrual
with an aggregate fair value of $0. As of March 31, 2013, two investments, ASH and Tread, were on non-accrual with an aggregate fair value of $0. Additionally, we do not risk rate our equity securities.
The following table lists the risk ratings for all proprietary loans in our portfolio as of December 31 and March 31, 2013, representing
approximately 100.0%, of the principal balance of all loans in our portfolio at the end of each period:
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|
|
|
|
|
|
|
|
Rating
|
|
As of December 31,
2013
|
|
|
As of March 31,
2013
|
|
Highest
|
|
|
9.1
|
|
|
|
7.4
|
|
Average
|
|
|
5.7
|
|
|
|
5.2
|
|
Weighted Average
|
|
|
5.6
|
|
|
|
5.3
|
|
Lowest
|
|
|
2.6
|
|
|
|
1.3
|
|
As of December 31 and March 31, 2013, we did not have any non-proprietary loans in our investment portfolio.
52
Tax Status
Federal Income Taxes
We intend to continue to qualify for
treatment as a RIC under Subtitle A, Chapter 1 of Subchapter M of the Code. As a RIC, we are not subject to federal income tax on the portion of our taxable income and gains distributed to stockholders. To qualify as a RIC, we must meet certain
source-of-income, asset diversification and annual distribution requirements. For more information regarding the requirements we must meet as a RIC, see Business Environment. Under the annual distribution requirements, we are
required to distribute to stockholders at least 90% of our investment company taxable income, as defined by the Code. Our practice has been to pay out as distributions up to 100% of that amount.
In an effort to limit certain excise taxes imposed on RICs, we generally distribute during each calendar year, an amount at least equal to the sum of
(1) 98% of our ordinary income for the calendar year, (2) 98.2% of our capital gains in excess of capital losses for the one-year period ending on October 31 of the calendar year and (3) any ordinary income and capital gains in
excess of capital losses for preceding years that were not distributed during such years. However, we did incur an excise tax of $0.3 million and $31 for the calendar years ended December 31, 2013 and 2012, respectively. Under the RIC
Modernization Act (the RIC Act), we are permitted to carry forward capital losses incurred in taxable years beginning after March 31, 2011, for an unlimited period. However, any losses incurred during those future taxable years must
be used prior to the losses incurred in pre-enactment taxable years, which carry an expiration date. Additionally, post-enactment capital loss carryforwards will retain their character as either short-term or long-term capital losses rather than
only being considered short-term as permitted under previous regulation. Our total capital loss carryforward balance was $8.7 million as of March 31, 2013, and, as a result of the net $11.7 million capital gain related to the Venyu, ASH and
Packerland exits during the nine months ended December 31, 2013, we expect that all losses incurred in pre-enactment taxable years will be fully utilized during the fiscal year ending March 31, 2014.
Revenue Recognition
Interest Income Recognition
Interest income, adjusted for amortization of premiums, amendment fees and acquisition costs and the accretion of discounts, is recorded on the
accrual basis to the extent that such amounts are expected to be collected. Generally, when a loan becomes 90 days or more past due, or if our qualitative assessment indicates that the debtor is unable to service its debt or other obligations, we
will place the loan on non-accrual status and cease recognizing interest income on that loan until the borrower has demonstrated the ability and intent to pay contractual amounts due. However, we remain contractually entitled to this interest.
Interest payments received on non-accrual loans may be recognized as income or applied to the cost basis, depending upon managements judgment. Generally, non-accrual loans are restored to accrual status when past-due principal and interest are
paid, and, in managements judgment, are likely to remain current, or due to a restructuring, the interest income is deemed to be collectible. As of December 31, 2013, our loans to Tread were on non-accrual, with an aggregate debt cost
basis of $12.1 million, or 4.6% of the cost basis of all debt investments in our portfolio, and an aggregate fair value of $0. As of March 31, 2013, ASH and Tread were on non-accrual, with an aggregate debt cost basis of $24.9 million, or 10.4%
of the cost basis of all debt investments in our portfolio, and an aggregate fair value of $0.
PIK interest, computed at the contractual rate specified
in the loan agreement, is added to the principal balance of the loan and recorded as interest income. To maintain our status as a RIC, this non-cash source of income must be included in our calculation of distributable income for purposes of
complying with our distribution requirements, even though we have not yet collected the cash. During the three and nine months ended December 31, 2013, we recorded PIK income of $29 and $68, respectively. We did not hold any loans in our
portfolio that contained a PIK provision as of December 31, 2012 and no PIK income was recorded during the three and nine months ended December 31, 2012.
Other Income Recognition
We generally record success
fees upon receipt of cash. Success fees are contractually due upon a change of control in a portfolio company. We recorded $1.1 million and $3.4 million of success fees during the three and nine months ended December 31, 2013, respectively.
During the three months ended December 31, 2013, we received $0.8 million and $0.2 million in success fees related to the debt repayments of Channel and Cavert, respectively. During the three and nine months ended December, 30, 2012, we
recorded $0 and $0.8 million of success fees, respectively, representing prepayments received from Mathey and Cavert.
We accrue dividend income on
preferred and common equity securities to the extent that such amounts are expected to be collected and if we have the option to collect such amounts in cash or other consideration. No dividend income was recorded during the three months ended
December 31, 2013. For the nine months ended December 31, 2013, we recorded $1.4 million in dividend income related to the exit of Venyu. We recorded $0.7 and $0.8 million in dividend income during the three and nine months ended
December 31, 2012, respectively, on accrued preferred shares of Acme and Drew Foam Company, Inc.
Both dividends and success fees are recorded in
Other income in our accompanying
Condensed Consolidated Statements of Operations
.
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