Table of Contents

Filed Pursuant to Rule 497
File No. 333-181879

 

The information in this preliminary prospectus supplement is not complete and may be changed. A registration statement relating to these securities has been filed with and declared effective by the Securities and Exchange Commission. This preliminary prospectus supplement and the accompanying prospectus are not an offer to sell and are not soliciting offers to buy these securities in any state where such offer or sale is not permitted.

 

SUBJECT TO COMPLETION, DATED NOVEMBER 3, 2014

PRELIMINARY PROSPECTUS SUPPLEMENT

(to Prospectus dated September 4, 2014)

$            

 

    % Series B Cumulative Term Preferred Stock

Liquidation Preference $25 Per Share

 

 

We are offering             shares of our     % Series B Cumulative Term Preferred Stock (“Series B Term Preferred Stock”). We will pay monthly dividends on the Series B Term Preferred Stock at an annual rate of     % of the $25 liquidation preference per share, or $         per share of Series B Term Preferred Stock per year, on the last business day of each month, commencing on December 31, 2014.

We are required to redeem all of the outstanding Series B Term Preferred Stock on December 31, 2021, at a redemption price equal to $25 per share, plus an amount equal to accumulated but unpaid dividends, if any, to, but excluding, the date of redemption. We will also be required to redeem all of the outstanding Series B Term Preferred Stock at a redemption price equal to $25 per share, plus an amount equal to accumulated but unpaid dividends, if any, to, but excluding, the date of redemption in the event of certain events that constitute a Change of Control (as described in this prospectus supplement) of the company. If we fail to maintain Asset Coverage of at least 200% (as described in this prospectus supplement), we will redeem a sufficient number of shares of our 7.125% Series A Cumulative Term Preferred Stock (“Series A Term Preferred Stock”) (traded on the NASDAQ Global Select Market (“NASDAQ”) under the symbol “GAINP”), Series B Term Preferred Stock, and any other outstanding shares of preferred stock issued by us (collectively, the “Preferred Stock”) in an amount at least equal to the lesser of shares of (1) the minimum number of shares of Preferred Stock necessary to cause us to meet our required Asset Coverage and (2) the maximum number of Preferred Stock that we can redeem out of cash legally available for such redemption. At any time on or after December 31, 2017, at our sole option, we may redeem the Series B Term Preferred Stock at a redemption price of $25 per share of Series B Term Preferred Stock, plus any accumulated but unpaid dividends, if any, on the Series B Term Preferred Stock to, but excluding, the date of redemption. We cannot effect any amendment, alteration or repeal of our obligation to redeem all of the Series B Term Preferred Stock on December 31, 2021 without the prior unanimous consent of the holders of Series B Term Preferred Stock.

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

We have applied to have the Series B Term Preferred Stock listed on the NASDAQ under the symbol “GAINO.” Our common stock is traded on the NASDAQ under the symbol “GAIN” and our Series A Term Preferred Stock is traded on the NASDAQ under the symbol “GAINP.” On October 31, 2014, the last sale price of our common stock as reported on NASDAQ was $7.35 per share and the last sale price of our Series A Term Preferred Stock as reported on NASDAQ was $26.16 per share, respectively. The Series B Term Preferred Stock will not be convertible into our common stock or any other security of our company.

The securities in which we invest generally would be rated below investment grade if they were rated by rating agencies. Below investment grade securities, which are often referred to as “junk,” have predominantly speculative characteristics with respect to the issuer’s capacity to pay interest and repay principal. They may also be difficult to value and illiquid.

 

 

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

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

 

		PER SHARE				TOTAL(2)
Public offering price		$				$
Underwriting discounts and commissions		$				$
Proceeds before expenses, to us(1)		$				$

 

(1)	Total expenses of the offering payable by us, excluding underwriting discounts and commissions, are estimated to be $        .

(2)

We have granted the underwriters a 30-day option to purchase up to an additional             shares of Series B Term Preferred Stock from us on the same terms and conditions set forth above solely to cover overallotments, if any. If such option is exercised in full, the total public offering price will be $        , the total underwriting discounts and commissions will be $         and total proceeds, before expenses, to us would be $        . See “Underwriting” on page S-68 of this prospectus supplement.

The underwriters expect to deliver the Series B Term Preferred Stock on or about                     , 2014.

 

 

Sole Book-Running Manager

Janney Montgomery Scott

Lead Manager

Sterne Agee

Co-Managers

 

BB&T Capital Markets		J.J.B. Hilliard, W.L. Lyons, LLC		Wunderlich Securities, Inc.		Ladenburg Thalmann

Prospectus Supplement dated                     , 2014

---

Table of Contents

ABOUT THIS PROSPECTUS SUPPLEMENT

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

We also file annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements and other information with the SEC under the Securities Exchange Act of 1934, as amended, or the Exchange Act. You may inspect such reports, proxy statements and other information, as well as this prospectus supplement, the accompanying prospectus and the exhibits and schedules to the registration statement of which the accompanying prospectus is a part, at the public reference facilities maintained by the SEC at 100 F Street, N.E., Washington, D.C. 20549. You may obtain information about the operation of the public reference facilities by calling the SEC at 1-800-SEC-0330. The SEC maintains a website that contains reports, proxy statements and other information regarding registrants, including us, that file such information electronically with the SEC. The address of the SEC’s website is http://www.sec.gov. You may also obtain copies of such material from the Public Reference Section of the SEC at 100 F Street, N.E., Washington, D.C. 20549, at prescribed rates.

You may request a free copy of this prospectus supplement, the accompanying prospectus, our annual reports to stockholders, when available, and other information about us, and make stockholder inquiries by calling (866) 366-5745 or by writing to us at 1521 Westbranch Drive, Suite 100, McLean, Virginia 22102, or from our website (http://www.GladstoneInvestment.com). The information contained in, or that can be accessed through, our website is not part of this prospectus supplement or the accompanying prospectus. We make available free of charge on our website our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC. We also furnish to our stockholders annual reports, which include annual financial information that has been examined and reported on, with an opinion expressed, by our independent registered public accounting firm.

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

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

You should rely only on the information contained in this prospectus supplement and the accompanying prospectus in making an investment decision. We have not authorized any other person to provide you with different or inconsistent information. If anyone provides you with different or inconsistent information, you should not rely on it. We are not, and the underwriters are not, making an offer to sell the Series B Term Preferred Stock in any jurisdiction where such an offer or sale is not permitted. The information appearing in this prospectus supplement and in the accompanying prospectus is accurate only as of the dates on their respective covers, regardless of the time of delivery or any sale of the Series B Term Preferred Stock.

---

Table of Contents

TABLE OF CONTENTS

 

		PAGE
Prospectus Supplement
Prospectus Supplement Summary			S-1
Risk Factors			S-10
Special Note Regarding Forward-Looking Statements			S-17
Use of Proceeds			S-18
Ratio of Earnings to Combined Fixed Charges and Preferred Dividends			S-19
Capitalization			S-20
Selected Financial Information			S-21
Selected Quarterly Financial Data			S-23
Management’s Discussion and Analysis of Financial Condition and Results of Operations			S-24
Supplemental Portfolio Information			S-48
Management			S-56
Description of the Series B Term Preferred Stock			S-57
Underwriting			S-69
Additional Material U.S. Federal Income Tax Considerations			S-73
Custodian, Transfer Agent, Dividend Disbursing Agent and Redemption and Paying Agent			S-73
Miscellaneous			S-74
Where You Can Find More Information			S-74
Legal Matters			S-74
Experts			S-74
Index to Interim Condensed Consolidated Financial Statements			SF-1
Appendix A: Form of Certificate of Designation Establishing and Fixing the Preferences of     % Series B Cumulative Term Preferred Stock			SA-1
Prospectus
Prospectus Summary			1
Additional Information			10
Risk Factors			12
Special Note Regarding Forward-Looking Statements			33
Use of Proceeds			33
Price Range of Common Stock and Distributions			33
Share Price Data
Consolidated Selected Financial and Other Data			36
Selected Quarterly Financial Data			38
Management’s Discussion and Analysis of Financial Condition and Results of Operations			39
Sales of Common Stock Below Net Asset Value			71
Senior Securities			77
Business			79
Portfolio Companies			92
Management			98
Control Persons and Principal Stockholders			112
Dividend Reinvestment Plan			115
Material U.S. Federal Income Tax Considerations			116
Regulation as a Business Development Company			119
Description of Our Securities			122
Certain Provisions of Delaware Law and of Our Certificate of Incorporation and Bylaws			127
Share Repurchases			130
Plan of Distribution			131
Custodian, Transfer and Dividend Paying Agent and Registrar			132
Brokerage Allocation and Other Practices			133
Proxy Voting Policies and Procedures			133
Legal Matters			135
Experts			135
Index to Consolidated Financial Statements			F-1

---

Table of Contents

 

S-1

---

Table of Contents

 

S-2

---

Table of Contents

 

S-3

---

Table of Contents

 

S-4

---

Table of Contents

 

S-5

---

Table of Contents

 

S-6

---

Table of Contents

 

S-7

---

Table of Contents

 

S-8

---

Table of Contents

 

S-9

---

Table of Contents

RISK FACTORS

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

Risks of Investing in Preferred Stock

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

Preferred stock pays dividends at a fixed dividend rate. Prices of fixed income investments vary inversely with changes in market yields. The market yields on securities comparable to the Series B Term Preferred Stock may increase, which would likely result in a decline in the secondary market price of the Series B Term Preferred Stock prior to December 31, 2021, which we refer to as the Mandatory Term Redemption Date. This risk may be even more significant in light of low currently prevailing market interest rates. For additional information concerning dividends on the Series B Term Preferred Stock, see “Description of the Series B Term Preferred Stock—Dividends and Dividend Periods.”

There may be no initial secondary trading market due to delayed listing, and even after listing a liquid secondary trading market may not develop.

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

The Series B Term Preferred Stock will not be rated.

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

 

S-10

---

Table of Contents

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

We may voluntarily redeem some or all of the Series B Term Preferred Stock on or after December 31, 2017, which is four years before the Mandatory Term Redemption Date. We also may be forced to redeem some or all of the Series B Term Preferred Stock to meet regulatory requirements and the Asset Coverage requirements of such shares. We are also required to redeem all of the Series B Term Preferred Stock upon a Change of Control Triggering Event. Any such redemptions may occur at a time that is unfavorable to holders of the Series B Term Preferred Stock. We may have an incentive to redeem the Series B Term Preferred Stock voluntarily before the Mandatory Term Redemption Date if market conditions allow us to issue other Preferred Stock or debt securities at a rate that is lower than the Fixed Dividend Rate on the Series B Term Preferred Stock, or for other reasons. For further information regarding our ability to redeem the Series B Term Preferred Stock, see “Description of the Series B Term Preferred Stock—Redemption” and “—Asset Coverage.”

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

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

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

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

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

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

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

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

Holders of Series B Term Preferred Stock will bear dividend risk.

We may be unable to pay dividends on the Series B Term Preferred Stock under some circumstances. The terms of our indebtedness preclude the payment of dividends in respect of equity securities, including the Series B Term Preferred Stock, under certain conditions.

 

S-11

---

Table of Contents

We face Asset Coverage risks in our investment activities.

The Asset Coverage that we maintain on our Preferred Stock, including the Series B Term Preferred Stock, will be based upon a calculation of the value of our portfolio holdings. Our portfolio investments are, and we expect a large percentage of such investments will continue to be, in the form of securities that are not publicly traded. The fair value of securities and other investments that are not publicly traded is generally not readily determinable. Our Board of Directors has established an investment valuation policy and consistently applied valuation procedures to determine the fair value of these securities on a quarterly basis. The procedures for the determination of value of many of our debt securities rely on opinions of value submitted to us by Standard & Poor’s Securities Evaluations, Inc., or SPSE, as corroborated by our internal valuation team, the use of internally developed discounted cash flow, or DCF, methodologies, or internal methodologies based on the total enterprise value, or TEV, of the issuer, which we use for certain of our equity investments. SPSE will only evaluate the debt portion of investments for which we specifically request an evaluation, and SPSE may decline to provide requested evaluations for any reason in its sole discretion.

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

Our use of these fair value methods is inherently subjective and is based on estimates and assumptions regarding each security. In the event that we are required to sell a security, we may ultimately sell for an amount materially less than the estimated fair value calculated by us or SPSE, or determined using TEV or the DCF methodology. As a result, a risk exists that the Asset Coverage attributable to the Preferred Stock, including the Series B Term Preferred Stock, may be materially lower than what is calculated based upon the fair valuation of our portfolio securities in accordance with our valuation policies. See “Risk Factors—Risks Related to Our Investments—Because the loans we make and equity securities we receive when we make loans are not publicly traded, there is uncertainty regarding the value of our privately held securities that could adversely affect our determination of our NAV” on page 22 of the accompanying prospectus.

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

We generally make investments in private companies whose securities are not traded in any public market. Substantially all of the investments we presently hold and the investments we expect to acquire in the future are, and will be, subject to legal and other restrictions on resale and will otherwise be less liquid than publicly traded securities. The illiquidity of our investments may make it difficult for us to obtain cash equal to the value at which we record our investments quickly if a need arises. If we are unable to obtain sufficient liquidity prior to the Mandatory Term Redemption Date or a Change of Control Triggering Event, we may be forced to engage in a partial redemption or to delay a required redemption. If such a partial redemption or delay were to occur, the market price of the Series B Term Preferred Stock might be adversely affected.

 

S-12

---

Table of Contents

We finance our investments with borrowed money and senior securities, which will magnify the potential for gain or loss on amounts invested and may increase the risk of investing in us.

The following table illustrates the effect of leverage on returns from an investment in our Common Stock assuming various annual returns on our portfolio, net of expenses. The calculations in the table below are hypothetical, and actual returns may be higher or lower than those appearing in the table below.

 

		ASSUMED RETURN ON OUR PORTFOLIO (NET OF EXPENSES)
		(10)%				(5)%				0%				5%				10%
Corresponding return to common stockholder(1)				%				%				%				%				%

 

(1)

The hypothetical return to common stockholders is calculated by multiplying our total assets as of September 30, 2014, by the assumed rates of return and subtracting all interest accrued on our debt, adjusted for the assumed dividends declared on the Series B Term Preferred Stock to be issued in this offering; and then dividing the resulting difference by our total assets attributable to common stock. Based on $361.2 million in total assets, $87.8 million in debt outstanding at cost, $5.1 million in a secured borrowing, $40 million in aggregate liquidation preference of Series A Term Preferred Stock, and $224.8 million in net assets as of September 30, 2014.

Based on an outstanding indebtedness of $92.9 million as of September 30, 2014, and the effective annual interest rate of 4.01% as of that date, and aggregate liquidation preference of our Series A Term Preferred Stock of $40.0 million, our investment portfolio at fair value would have been required to experience an annual return of at least 1.65% to cover annual interest payments on our outstanding debt and the Preferred Stock.

Other Risks

In addition to regulatory limitations on our ability to raise capital, our credit facility contains various covenants that, if not complied with, could accelerate our repayment obligations under the facility, thereby materially and adversely affecting our liquidity, financial condition, results of operations and ability to pay distributions. In addition, we are obligated to redeem our Series A Term Preferred Stock in February 2017. If we do not have sufficient funds to redeem the Series A Term Preferred Stock, or if we do not have sufficient funds remaining following such redemption, we may experience an adverse effect on our business, financial condition and results of operations and our ability to meet our payment obligations under the credit facility and monthly dividend obligations with respect to our Preferred Stock.

We will have a continuing need for capital to finance our loans. We are party to a credit facility, which provides us with a revolving credit line facility of $185.0 million, of which $87.8 million was drawn as of September 30, 2014. The credit facility permits us to fund additional loans and investments as long as we are within the conditions set forth in the credit agreement. As a result of the credit facility, we are subject to certain limitations on the type of loan investments we make, including restrictions on geographic concentrations, sector concentrations, loan size, dividend payout, payment frequency and status, and average life. The credit agreement also requires us to comply with other financial and operational covenants, which require us to, among other things, maintain certain financial ratios, including asset and interest coverage and a minimum net worth. As of September 30, 2014, we were in compliance with these covenants; however, our continued compliance with these covenants depends on many factors, some of which are beyond our control. Current market conditions have forced us to write down the value of a portion of our assets as required by the 1940 Act and fair value accounting rules. These are not realized losses, but constitute adjustment in asset values for purposes of financial reporting and for collateral value for the credit facility. As assets are marked down in value, the amount we can borrow on the credit facility decreases.

In particular, depreciation in the valuation of our assets, which valuation is subject to changing market conditions that remain very volatile, affects our ability to comply with the covenants under the credit facility. As of September 30, 2014, our net assets were $224.8 million, down from $226.8 million at June 30, 2014, and up from

 

S-13

---

Table of Contents

$220.8 million at March 31, 2014. The increase in our net assets is primarily a result of unrealized appreciation over the respective periods. The minimum net worth covenant contained in the credit agreement requires our net assets to be at least $170.0 million plus 50% of all equity and subordinated debt raised after June 26, 2014 minus 50% of all equity and subordinated debt retired or redeemed after June 26, 2014, which equates to $170 million as of September 30, 2014. Despite the recent increase in our net assets, the fair value of our investment portfolio remains less than the cost basis by approximately $65.2 million. Given the slow recovery and general volatility in the capital markets, the cumulative unrealized depreciation in our portfolio may increase in future periods and threaten our ability to comply with the minimum net worth covenant and other covenants under the credit facility. Accordingly, there are no assurances that we will continue to comply with these covenants. Under the credit facility, we are also required to maintain our status as a BDC under the 1940 Act and as a RIC under the Code. Our failure to satisfy these covenants could result in foreclosure by our lenders, which would accelerate our repayment obligations under the facility and thereby have a material adverse effect on our business, liquidity, financial condition, results of operations and ability to pay distributions to our stockholders.

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

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

As of September 30, 2014, we had $40.0 million outstanding of Series A Term Preferred Stock and $87.8 million of borrowings outstanding under our credit facility. We intend to use the proceeds from this offering to repay borrowings under our credit facility, then to make investments in buyouts and recapitalizations of small and mid-sized companies in accordance with our investment strategy, with any remaining proceeds to be used for other general corporate purposes. Shares of our Preferred Stock are considered senior securities and our amount of senior securities outstanding will therefore increase as a result of this offering.

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

 

•

making it more difficult for us to meet our payment and other obligations under our credit facility;

 

•

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

 

•

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

 

•

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

 

•

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

 

S-14

---

Table of Contents

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

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

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

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

In addition, we may issue debt securities, other evidences of indebtedness (including borrowings under our credit facility), senior securities representing indebtedness and senior securities that are stock up to the maximum amount permitted by the 1940 Act. The 1940 Act currently permits us, as a BDC, to issue senior securities representing indebtedness and senior securities that are stock (such as our Preferred Stock), in amounts such that our asset coverage, as defined in Section 18(h) of the 1940 Act, is at least 200% immediately after each issuance of such senior security. The issuance of additional senior securities in this offering may increase the likelihood of our failing to meet the asset coverage requirements of the 1940 Act, especially while our Series A Term Preferred Stock remains outstanding. Our ability to pay distributions, issue senior securities or repurchase shares of our common stock would be restricted if the asset coverage on each of our senior securities is not at least 200%. If the aggregate value of our assets declines, we might be unable to satisfy that 200% requirement. To satisfy the 200% asset coverage requirement in the event that we are seeking to pay a distribution, we might either have to (i) liquidate a portion of our loan portfolio to repay a portion of our indebtedness or (ii) issue common stock. This may occur at a time when a sale of a portfolio asset may be disadvantageous, or when we have limited access to capital markets on agreeable terms. In addition, any amounts that we use to service our indebtedness or for offering expenses will not be available for distributions to stockholders. Furthermore, if we have to issue common stock at below net asset value (“NAV”) per common share, any non-participating common stockholders will be subject to dilution.

Pending legislation may allow us to incur additional leverage.

As a BDC, we are generally not permitted to incur indebtedness (which includes senior securities representing indebtedness and senior securities that are stock) unless immediately after such borrowing we have an asset coverage (as defined in Section 18(h) of the 1940 Act) of at least 200.0% (i.e. the amount of borrowings may not

 

S-15

---

Table of Contents

exceed 50.0% of the value of our assets). Various pieces of legislation that have been introduced during the current session of the U.S. House of Representatives, if passed, would modify this section of the 1940 Act and increase the amount of such indebtedness that BDCs may incur by modifying the percentage from 200.0% to 150.0% and making the asset coverage requirement inapplicable for senior securities that are stock, such as preferred stock. Our Preferred Stock is currently considered a senior security that is stock and so for this 200.0% asset coverage threshold is included as total indebtedness. However, if this proposed legislation is passed, the 1940 Act may not limit our ability to issue Preferred Stock in the future. As a result, we may be able to issue an increased amount of senior securities and incur additional indebtedness in the future, and therefore, your risk of an investment in us may increase. There can be no assurance whether or not this proposed legislation will be passed in the current form, or at all.

 

S-16

---

Table of Contents

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

All statements contained in this prospectus supplement or the accompanying prospectus, other than historical facts, may constitute “forward-looking statements.” These statements may relate to future events or our future performance or financial condition. In some cases, you can identify forward-looking statements by terminology such as “may,” “might,” “believe,” “will,” “provided,” “anticipate,” “future,” “could,” “growth,” “plan,” “intend,” “expect,” “should,” “would,” “if,” “seek,” “possible,” “potential,” “likely” or the negative of such terms or comparable terminology. These forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by such forward-looking statements. Such factors include:

 

•

further adverse changes in the economy and the capital markets;

 

•

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

 

•

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

 

•

changes in our business strategy;

 

•

availability, terms and deployment of capital;

 

•

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

 

•

the degree and nature of our competition;

 

•

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

 

•

those factors described in the “Risk Factors” section of this prospectus supplement and the accompanying prospectus.

We caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, after the date of this prospectus supplement or the accompanying prospectus, except as otherwise required by applicable law. The forward-looking statements contained or incorporated by reference in this prospectus supplement and the accompanying prospectus are excluded from the safe harbor protection provided by the Private Securities Litigation Reform Act of 1995 and Section 27A of the Securities Act.

 

S-17

---

Table of Contents

USE OF PROCEEDS

We estimate that the net proceeds to us of this offering will be approximately $             million, after the payment of underwriting discounts and commissions of $             million and estimated offering expenses of $             payable by us. We intend to use the net proceeds from this offering to repay borrowings outstanding under our credit facility. Amounts repaid under our credit facility remain available for future borrowings and we may use the proceeds of future borrowings under our credit facility to make investments in accordance with our investment strategy and for other general corporate purposes. Our credit facility matures on June 26, 2019, and, as of September 30, 2014, was accruing interest at an annual rate equal to the 30-day LIBOR plus a premium of 3.25% (which was an effective interest rate of approximately 3.44% as of September 30, 2014). As of September 30, 2014, $87.8 million was drawn on the credit facility.

We have granted the underwriters the right to purchase up to              additional shares of Series B Term Preferred Stock at the public offering price, less underwriting discounts and commissions, within 30 days of the date of this prospectus supplement solely to cover overallotments, if any. If the underwriters exercise such option in full, the estimated net proceeds to us, after the payment of underwriting discounts and commissions of $             million and estimated offering expenses of $             payable by us, will be $            . We anticipate that substantially all of the net proceeds of this offering will be utilized in the manner described above within three months of the completion of such offering. Pending such utilization, we intend to invest the net proceeds of the offering primarily in cash, cash equivalents, U.S. government securities and other high-quality debt investments that mature in one year or less from the date of investment, consistent with the requirements for continued qualification as a RIC for federal income tax purposes.

 

S-18

---

Table of Contents

RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED DIVIDENDS

 

		FOR THE SIX MONTHS ENDED SEPTEMBER 30,				FOR THE YEARS ENDED MARCH 31,
		2014				2014				2013				2012				2011				2010
		(Dollars in thousands)
Net investment income		$	9,063			$	19,307			$	16,488			$	13,743			$	16,171			$	10,598
Add: fixed charges and preferred dividends			3,419				5,949				4,768				1,425				1,181				3,602
Less: preferred dividends			(1,425	)			(2,850	)			(2,850	)			(198	)			—				—
Earnings		$	11,057			$	22,406			$	18,406			$	14,970			$	17,352			$	14,200
Fixed charges and preferred distributions:
Interest expense		$	1,458			$	2,075			$	1,127			$	768			$	690			$	1,984
Amortization of deferred financing fees			536				1,024				791				459				491				1,618
Preferred distributions			1,425				2,850				2,850				198				—				—
Total fixed charges and preferred distributions		$	3,419			$	5,949			$	4,768			$	1,425			$	1,181			$	3,602
Ratio of earnings to combined fixed charges and preferred distributions			3.2x				3.8x				3.9x				10.5x				14.7x				3.9x

Computation of Pro Forma Ratio of Earnings to Combined Fixed Charges and Preferred Distributions After Adjustment for issuance of the Series B Term Preferred Stock

 

		FOR THE SIX MONTHS ENDED SEPTEMBER 30, 2014				FOR THE YEAR ENDED MARCH 31, 2014
Net investment income		$	9,063			$	19,307
Add: fixed charges and preferred distributions(A), as above			3,419				5,949
Less: preferred dividends(A), as above			(1,425	)			(2,850	)
Adjustments:
Pro forma decrease of interest expense and amortization of deferred financing fees(C)
Pro forma fixed charges
Pro forma preferred distributions(B)
Total pro forma fixed charges and preferred distributions(B)
Pro forma earnings		$
Pro forma ratio of earnings to combined fixed charges and preferred distributions(B)

 

(A)	Preferred dividends on Series A Term Preferred Stock.

(B)	Preferred dividends on Series B Term Preferred Stock.

(C)	Pro forma decrease in interest expense is limited as the weighted average balance on our revolving line of credit was $87.8 million and $61.3 million for the six months ended September 30, 2014 and the fiscal year ended March 31, 2014, respectively.

 

S-19

---

Table of Contents

CAPITALIZATION

The following table sets forth our capitalization as of September 30, 2014:

 

•

on an actual basis; and

 

•

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

 

		AS OF SEPTEMBER 30, 2014
		ACTUAL				AS ADJUSTED
		(Unaudited)
		(Dollars in thousands)
Borrowings, at cost
Borrowings under line of credit		$	87,750			$
Secured borrowings			5,096				5,096
Total borrowings			92,846
Preferred Stock
Series A Term Preferred Stock, $.001 par value per share; $25 liquidation preference per share; 1,610,000 shares authorized, 1,600,000 shares issued and outstanding		$	40,000			$	40,000
Series B Term Preferred Stock, $.001 par value per share; $25 liquidation preference per share; 0 shares authorized, issued and outstanding, actual;              shares authorized,              shares issued and outstanding, as adjusted(1)			—
Net Assets Applicable to Common Stockholders
Common stock, $.001 par value per share, 100,000,000 shares authorized, actual, and as adjusted; 26,475,958 shares issued and outstanding, actual and as adjusted(2)		$	26			$	26
Capital in excess of par value			287,062
Cumulative net unrealized depreciation of investments			(65,179	)			(65,179	)
Cumulative net unrealized depreciation of other			(74	)			(74	)
Net investment income in excess of distributions			3,148				3,148
Accumulated net realized losses			(210	)			(210	)
Total Net Assets Available to Common Stockholders		$	224,773			$
Total Capitalization		$	361,174			$

 

(1)	Assumes a total of $         million of aggregate underwriting discounts and commissions and $         of estimated offering costs payable by us in connection with this offering will be capitalized and amortized over the life of the Series B Term Preferred Stock.

(2)	None of these outstanding shares are held by us or for our account.

The following are our outstanding classes of securities as of September 30, 2014.

 

TITLE OF CLASS		AMOUNT AUTHORIZED				AMOUNT HELD BY US OR FOR OUR ACCOUNT				AMOUNT OUTSTANDING (EXCLUSIVE OF AMOUNTS HELD BY US OR FOR OUR  ACCOUNT)
Common Stock			100,000,000				—				26,475,958
Series A Term Preferred Stock			1,610,000				—				1,600,000

 

S-20

---

Table of Contents

SELECTED FINANCIAL INFORMATION

The following consolidated selected financial data for the fiscal years ended March 31, 2014, 2013, 2012, 2011 and 2010 are derived from our consolidated financial statements that have been audited by PricewaterhouseCoopers, LLP, an independent registered public accounting firm. The consolidated selected financial data for the six months ended September 30, 2013 and 2014 are derived from our unaudited condensed consolidated financial statements included in this prospectus. The “other unaudited data” included at the bottom of the table are also unaudited. The data should be read in conjunction with our consolidated financial statements and notes thereto and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus supplement and the accompanying prospectus.

 

		Six Months Ended September 30,								Year Ended March 31,
		2014				2013				2014				2013				2012				2011				2010
		(Dollar amounts in thousands, except per share data)
Statement of operations data:
Total investment income		$	18,908			$	18,757			$	36,264			$	30,538			$	21,242			$	26,064			$	20,785
Total expenses net of credits from Adviser			9,845				8,496				16,957				14,050				7,499				9,893				10,187
Net investment income			9,063				10,261				19,307				16,488				13,743				16,171				10,598
Net gain (loss) on investments			4,404				(1,841	)			(20,636	)			791				8,223				268				(21,669	)
Net increase (decrease) in net assets resulting from operations		$	13,467			$	8,420			$	(1,329	)		$	17,279			$	21,966			$	16,439			$	(11,071	)
Per share data(A):
Net increase (decrease) in net assets resulting from operations per common share—basic and diluted		$	0.51			$	0.32			$	(0.05	)		$	0.71			$	0.99			$	0.74			$	(0.50	)
Net investment income before net gain (loss) on investments per common share—basic and diluted			0.34				0.39				0.73				0.68				0.62				0.73				0.48
Cash distributions declared per common share			0.36				0.30				0.71				0.60				0.61				0.48				0.48
Statement of assets and liabilities data:
Total assets		$	361,174			$	347,095			$	330,694			$	379,803			$	325,297			$	241,109			$	297,161
Net assets			224,773				241,440				220,837				240,963				207,216				198,829				192,978
Net asset value per common share			8.49				9.12				8.34				9.10				9.38				9.00				8.74
Common shares outstanding			26,475,958				26,475,958				26,475,958				26,475,958				22,080,133				22,080,133				22,080,133
Weighted common shares outstanding—basic and diluted			26,475,958				26,475,958				26,475,958				24,189,148				22,080,133				22,080,133				22,080,133
Senior securities data(B):
Borrowings under credit facility at cost		$	87,750			$	34,000			$	61,250			$	31,000			$	—			$	—			$	27,800
Short term loan			—				22,005				—				58,016				76,005				40,000				75,000
Mandatorily redeemable preferred stock			40,000				40,000				40,000				40,000				40,000				—				—
Asset coverage(C)			264	%			328	%			298	%			272	%			268	%			534	%			281	%
Asset coverage per unit(D)		$	2,636			$	3,276			$	2,978			$	2,725			$	2,676			$	5,344			$	2,814
Other unaudited data:
Number of portfolio companies			30				24				29				21				17				17				16
Average size of portfolio company investment at cost		$	13,736			$	14,760			$	13,225			$	15,544			$	15,670			$	11,600			$	14,223
Principal amount of new investments			29,345				56,020				132,291				87,607				91,298				43,634				4,788
Proceeds from loan repayments and investments sold			790				53,004				83,415				28,424				27,185				97,491				90,240
Weighted average yield on investments(E)			12.58	%			12.56	%			12.61	%			12.51	%			12.32	%			11.36	%			11.02	%
Total return(F)			1.84				0.54				24.26				4.73				5.58				38.56				79.80

 

S-21

---

Table of Contents

(A)	Per share data for net (decrease) increase in net assets resulting from operations is based on the weighted average common stock outstanding for both basic and diluted.

(B)	See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for more information regarding our level of indebtedness.

(C)	As a BDC, we are generally required to maintain asset coverage (as defined in Section 18(h) of the 1940 Act) of at least 200% on our senior securities representing indebtedness and our senior securities that are stock. Our Preferred Stock is a senior security that is stock.

(D)	Asset coverage per unit is the asset coverage expressed in terms of dollar amounts per one thousand dollars of indebtedness.

(E)	Weighted average yield on investments equals interest income on investments divided by the weighted average interest-bearing debt investment balance throughout the year.

(F)	Total return equals the increase (decrease) of the ending market value over the beginning market value plus monthly distributions divided by the monthly beginning market value.

 

S-22

---

Table of Contents

SELECTED QUARTERLY FINANCIAL DATA

The following tables set forth certain quarterly financial information for each of the eight quarters in the two years ended March 31, 2014 and the first two quarters of the fiscal year ending March 31, 2015. The information was derived from our unaudited consolidated financial statements. Results for any quarter are not necessarily indicative of results for the past fiscal year or for any future quarter.

 

		Quarter Ended
Fiscal Year 2015		June 30, 2014				September 30, 2014
Total investment income		$	9,837			$	9,071
Net investment income			4,859				4,204
Net increase in net assets resulting from operations			10,770				2,697
Net increase in net assets resulting from operations per weighted average common share—basic & diluted		$	0.41			$	0.10

 

		Quarter Ended
Fiscal Year 2014		June 30, 2013				September 30, 2013				December 31, 2013				March 31, 2014
Total investment income		$	7,398			$	11,359			$	8,696			$	8,811
Net investment income			4,033				6,228				4,402				4,644
Net (decrease) increase in net assets resulting from operations			(6,519	)			14,939				(10,686	)			937
Net (decrease) increase in net assets resulting from operations per weighted average common share—basic & diluted		$	(0.25	)		$	0.57			$	(0.40	)		$	0.03
		Quarter Ended
Fiscal Year 2013		June 30, 2012				September 30, 2012				December 31, 2012				March 31, 2013
Total investment income		$	5,905			$	6,974			$	7,184			$	10,475
Net investment income			3,238				3,451				3,952				5,847
Net (decrease) increase in net assets resulting from operations			(3,017	)			(353	)			4,699				15,950
Net (decrease) increase in net assets resulting from operations per weighted average common share—basic & diluted		$	(0.13	)		$	(0.02	)		$	0.18			$	0.60

 

S-23

---

Table of Contents

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(Dollar amounts in thousands, except per share data or unless otherwise indicated)

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 we anticipate will 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 hope will appreciate over time so that we can sell them for capital gains. We expect that our investment allocation over time will consist of approximately 80% in debt securities and 20% in equity securities. As of September 30, 2014, our investment allocation was 72% in debt securities and 28% in equity securities, at cost.

We focus on investing in small and medium-sized private U.S. businesses that meet certain of the following criteria which we believe will give us the best potential to sell our equity positions at a later date for capital gains: the potential for growth in cash flow, adequate assets for loan collateral, experienced management teams with a significant ownership interest in the borrower, profitable operations based on the borrower’s cash flow and reasonable capitalization of the borrower (usually by leveraged buyout funds or venture capital funds). We anticipate that liquidity in our equity position will be achieved through a merger or acquisition of the borrower, a public offering of the borrower’s stock or by exercising our right to require the borrower to repurchase our warrants, though there can be no assurance that we will always have these rights. We lend to borrowers that need funds 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 “Series A 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 (the “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.

 

S-24

---

Table of Contents

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 have impacted our liquidity options and increased our cost of debt and equity capital. In addition, the federal government shutdown in October 2013 combined with the uncertainty surrounding the ability of the federal government to address its fiscal condition in both the short 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.

Portfolio Activity

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. During the three months ended September 30, 2014, we invested a total of $21.9 million in two new deals, and subsequent to September 30, 2014, we invested $24.4 million in another new deal. These new investments, along with the capital raising efforts discussed below, have allowed us to invest $356.4 million in 22 new proprietary debt and equity deals since October 2010.

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 generally do not recognize success fees as income until they are received in cash. Due to their contingent nature, there are no guarantees that we will be able to collect any or all of these success fees or know the timing of such collections. As a result, as of September 30, 2014, we had unrecognized success fees of $21.0 million, or $0.79 per common share, which do not meet the recognition criteria under the relevant accounting guidance.

The improved investing environment 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 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-oriented investment success and exemplify 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 and pay a $0.03 per common share one-time special distribution in fiscal year 2012, a $0.05 per common share one-time special distribution in November 2013, and a $0.05 per common share one-time special distribution payable in December 2014.

With the four liquidity events that have generated $54.5 million in realized gains since June 2010, we have nearly overcome our cumulative realized losses since inception that were primarily incurred during the recession and in connection with the sale of performing loans at a realized loss to pay off a former lender. We took the opportunity during the fiscal year ended March 31, 2014, to strategically sell our investments in two of our portfolio companies, ASH Holding Corp. (“ASH”) 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 $1.8 million, respectively, as well as the write off our equity investments in Noble Logistics, Inc. (“Noble”), which resulted in a realized loss of $3.4 million. These sales and write off, 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 realized gains and reduced our non-accruals outstanding.

 

S-25

---

Table of Contents

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 increases to our revolving line of credit (our “Credit Facility”) and by accessing the capital markets in the form of public offerings of stock. For example, in October 2012, we issued 4.4 million shares of common stock for gross proceeds of $33 million. Regarding our Credit Facility over the last two years, we have successfully extended the revolving period multiple times, most recently to June 2017, increased the commitment from $60 million to $185 million and reduced the interest rate margin from 3.75% to 3.25%.

Although we were able to access the capital markets during 2012, 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 October 27, 2014, the closing market price of our common stock was $7.27, which represented a 14.4% discount to our September 30, 2014 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 the1940 Act, which generally prohibit the issuance and sale of our common stock at an issuance price below the then current NAV per share without stockholder approval, other than through sales to our then-existing stockholders pursuant to a rights offering.

At our 2014 Annual Meeting of Stockholders held on August 7, 2014, our stockholders approved a proposal authorizing us to issue and sell shares of our common stock at a price below our then current NAV per share, subject to certain limitations, including that the number of 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 2014 stockholder authorization is in effect for one year from the date of stockholder approval. Prior to the August 2014 stockholder authorization, we sought and obtained stockholder approval concerning a similar proposal at the Annual Meeting of Stockholders held in August 2012, and with our Board of Directors’ subsequent approval, we issued shares of our common stock in October and November 2012 at a price per share below the then current NAV per share. The resulting proceeds, in part, have allowed us to grow the portfolio by making new investments, generate additional income through these new investments, provide us additional equity capital to help ensure continued compliance with regulatory tests and increase our debt capital while still complying with our applicable debt-to-equity ratios.

Regulatory Compliance

Our ability to seek external debt financing, to the extent that it is available under current market conditions, is further subject to the asset coverage limitations of the 1940 Act, which require us to have an asset coverage ratio (as defined in Section 18(h) of the 1940 Act), of at least 200% on our senior securities representing indebtedness and our senior securities that are stock, which we refer to collectively as “Senior Securities.” As of September 30, 2014, our asset coverage ratio was 264%. Our status as a RIC under Subchapter M of the Code, in addition to other requirements, also requires us, at the close of each quarter of the taxable year, to meet an asset diversification test, which requires that at least 50% of the value of our assets consists of cash, cash items, U.S. government securities or certain other qualified securities (the “50% threshold”). In the past, we have obtained this ratio by entering into a short-term loan at quarter end to purchase qualifying assets; however, a short term loan was not necessary at the end of the quarter ended September 30, 2014. Until the composition of our assets is above the required 50% threshold on a consistent basis by a significant margin, we may have to continue to obtain short-term loans on a quarterly basis. When deployed, 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.

Investment Highlights

During the six months ended September 30, 2014, we disbursed $21.9 million in new debt and equity investments and extended $7.4 million of investments to existing portfolio companies through revolver draws or

 

S-26

---

Table of Contents

additions to term notes. From our initial public offering in June 2005 through September 30, 2014, we have made 221 investments in 109 companies for a total of approximately $956.9 million, before giving effect to principal repayments on investments and divestitures.

Investment Activity

During the six months ended September 30, 2014, the following significant transactions occurred:

 

•

In May 2014, NDLI Acquisition Inc. completed the purchase of certain of Noble’s assets out of bankruptcy. The resulting entity was listed as one portfolio company under NDLI Inc. on our Condensed Consolidated Schedules of Investments beginning in the period ended June 30, 2014.

 

•

In August 2014, we made a $1.8 million equity investment in Tread Real Estate Corp. (“TREC”), which purchased the building owned by another one of our portfolio companies, Tread. This building has subsequently been leased back to Tread.

 

•

In September 2014, we invested $20.2 million in Cambridge Sound Management, Inc. (“CSM”) through a combination of debt and equity. CSM, based in Waltham, Massachusetts, is the developer of sound systems and solutions.

Subsequent to September 30, 2014, the following significant transaction occurred:

 

•

In October 2014, we invested $24.4 million in Old World Christmas, Inc. (“OWC”) through a combination of debt and equity. OWC, headquartered in Spokane, Washington, is a designer and distributor of an extensive collection of blown glass Christmas ornaments, table top figurines, vintage-style light covers and nostalgic greeting cards into the independent gift channel.

Recent Developments

Credit Facility Extension and Expansion

On June 26, 2014, we, through our wholly-owned subsidiary, Business Investment, entered into Amendment No. 1 to the Fifth Amended and Restated Credit Agreement originally entered into on April 30, 2013, with Key Equipment Finance Inc., as administrative agent, lead arranger and a lender (the “Administrative Agent”), Branch Banking and Trust Company (“BB&T”) as a lender and managing agent, and the Adviser, as servicer, to extend the revolving period and reduce the interest rate of the line of credit. The revolving period was extended 14 months to June 26, 2017, and if not renewed or extended by June 26, 2017, all principal and interest will be due and payable on or before June 26, 2019 (two years after the revolving period end date). In addition, we have retained the two one-year extension options, to be agreed upon by all parties, which may be exercised on or before June 26, 2015 and 2016, respectively, and upon exercise, the options would extend the revolving period to June 26, 2018 and 2019 and the maturity date to June 26, 2020 and 2021, respectively. Subject to certain terms and conditions, the Credit Facility can be expanded by up to $145 million, to a total facility amount of $250 million, through additional commitments of existing or new committed lenders. Advances under the Credit Facility generally bear interest at 30-day LIBOR, plus 3.25% per annum, down from 3.75% prior to the amendment, and the Credit Facility includes an unused fee of 0.50% on undrawn amounts. Once the revolving period ends, the interest rate margin increases to 3.75% for the period from June 26, 2017 to June 26, 2018, and further increases to 4.25% through maturity. We incurred fees of $0.4 million in connection with this amendment.

On September 19, 2014, we further increased our borrowing capacity under the Credit Facility from $105 million to $185 million by entering into Joinder Agreements pursuant to the Credit Facility, by and among Business Investment, the Administrative Agent, the Adviser and each of East West Bank, Manufacturers and Traders Trust, Customers Bank and Talmer Bank and Trust. We incurred fees of $0.8 million in connection with this expansion.

 

S-27

---

Table of Contents

RESULTS OF OPERATIONS

Comparison of the Three Months Ended September 30, 2014, to the Three Months Ended September 30, 2013

 

		For the Three Months Ended September 30,
		2014				2013				$ Change				% Change
INVESTMENT INCOME
Interest income		$	8,570			$	7,706			$	864				11.2	%
Other income			501				3,653				(3,152	)			(86.3	)
Total investment income			9,071				11,359				(2,288	)			(20.1	)
EXPENSES
Base management fee			1,744				1,561				183				11.7
Incentive fee			1,051				1,557				(506	)			(32.5	)
Administration fee			209				156				53				34.0
Interest and dividend expense			1,432				1,309				123				9.4
Amortization of deferred financing costs			282				256				26				10.2
Other			755				626				129				20.6
Expenses before credits from Adviser			5,473				5,465				8				0.1
Other credits to Adviser fees			(606	)			(334	)			(272	)			(81.4	)
Total expenses net of credits to fees			4,867				5,131				(264	)			(5.1	)
NET INVESTMENT INCOME			4,204				6,228				(2,024	)			(32.5	)
UNREALIZED (LOSS) GAIN:
Net realized (loss) gain on investments			(12	)			24,804				(24,816	)			NM
Net unrealized depreciation of investments			(1,495	)			(15,684	)			14,189				(90.5	)
Net unrealized depreciation of other			—				(409	)			409				100.0
Net realized and unrealized (loss) gain on investments and other			(1,507	)			8,711				(10,218	)			NM
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS		$	2,697			$	14,939			$	(12,242	)			(81.9	)
BASIC AND DILUTED PER COMMON SHARE:
Net investment income		$	0.16			$	0.24			$	(0.08	)			(33.3	)%
Net increase in net assets resulting from operations		$	0.10			$	0.57			$	(0.47	)			(82.5	)

NM = Not Meaningful

Investment Income

Total investment income decreased by 20.1% for the three months ended September 30, 2014, as compared to the prior year period. This decrease was due to a decrease in other income, which primarily consisted of success fee and dividend income resulting from our exit of Venyu during the three months ended September 30, 2013. The decrease in other income was partially offset by an increase in interest income resulting from an increase in the size of our portfolio during the three months ended September 30, 2014.

Interest income from our investments in debt securities increased 11.2% for the three months ended September 30, 2014, 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 September 30, 2014, was approximately $270.9 million, compared to approximately $242.8 million for the prior year period. This increase was primarily due to approximately $92.9 million in new investments originated after September 30, 2013, including Alloy Die

 

S-28

---

Table of Contents

Casting Corp. (“ADC”), Behrens Manufacturing, LLC (“Behrens”), Meridian Rack & Pinion, Inc. (“Meridian”), Head Country Inc. (“Head Country”), Edge Adhesives Holdings, Inc. (“Edge”), TREC, and CSM. At September 30, 2014, loans of one portfolio company, Tread Corp. (Tread”), were on non-accrual, with an aggregate weighted average principal balance of $12.0 million. At September 30, 2013, loans to two portfolio companies, ASH and Tread, were on non-accrual, with an aggregate weighted average principal balance of $26.1 million during the three months ended September 30, 2013. The weighted average yield on our interest-bearing investments was 12.6% for the three months ended September 30, 2014 and 2013, excluding cash and cash equivalents and receipts recorded as other income. The weighted average yield varies from period to period, based on the current stated interest rate on interest-bearing investments.

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

 

		As of September 30, 2014								Three months ended September 30, 2014
Portfolio Company		Fair Value				% of Portfolio				Investment Income				% of Total Investment Income
Acme Cryogenics, Inc.		$	27,139				7.8	%		$	426				4.7	%
SOG Specialty Knives and Tools, LLC			23,989				6.9				670				7.4
Cambridge Sound Management, LLC(A)			20,175				5.8				6				0.1
Jackrabbit, Inc.			19,327				5.6				380				4.2
Edge Adhesives Holdings, Inc.			18,074				5.2				440				4.9
Subtotal—five largest investments			108,704				31.3				1,922				21.3
Other portfolio companies			238,197				68.7				7,149				78.7
Total investment portfolio		$	346,901				100.0	%		$	9,071				100.0	%

 

		As of September 30, 2013								Three months ended September 30, 2013
Portfolio Company		Fair Value				% of Portfolio				Investment Income				% of Total Investment Income
Acme Cryogenics, Inc.		$	27,771				9.7	%		$	426				3.8	%
Galaxy Tool Holding Corp.			24,156				8.4				535				4.7
SOG Specialty Knives and Tools, LLC			24,131				8.4				670				5.9
Schylling Investments, LLC(A)			20,000				7.0				312				2.7
Channel Technologies Group, LLC			19,642				6.8				468				4.1
Subtotal—five largest investments(B)			115,700				40.3				2,411				21.2
Other portfolio companies			171,512				59.7				8,948				78.8
Total investment portfolio		$	287,212				100.0	%		$	11,359				100.0	%

 

(A)	New investment during the applicable period.

(B)	We exited Venyu in August 2013. Investment income for Venyu for the three months ended September 30, 2013 was $3.7 million, or 32.6% of total investment income.

Other income decreased 86.3% from the prior year period. During the three months ended September 30, 2014, other income primarily consisted of $0.2, $0.2, and $0.1 million resulting from prepayments of success fees received from ASH, Frontier Packaging, Inc. (“Frontier”), and Mathey Investments, Inc. (“Mathey”), respectively. During the three months ended September 30, 2013, other income primarily consisted of $3.3 million in success fee and dividend income received in connection with the exit of Venyu and $0.3 million in success fee income resulting from prepayments received from Cavert II Holding Corp. (“Cavert”).

Expenses

Total expenses, excluding any voluntary and irrevocable credits to the base management and incentive fees, increased 0.1% for the three months ended September 30, 2014, as compared to the prior year period, primarily

 

S-29

---

Table of Contents

due to an increase in the base management fee, interest expense, and other expenses as compared to the prior year period. This was partially offset by a decrease in the incentive fee for the three months ended September 30, 2014, as compared to the prior year period.

The base management fee increased for the three months ended September 30, 2014, as compared to the prior year period, as a result of the increased size of our portfolio over the respective periods. An incentive fee of $1.1 million was earned by the Adviser during the three months ended September 30, 2014, compared to an incentive fee of $1.6 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 September 30,
		2014				2013
Average gross assets subject to base management fee(A)		$	348,800			$	312,200
Multiplied by prorated annual base management fee of 2%			0.5	%			0.5	%
Base management fee(B)			1,744				1,561
Other credits to Adviser fees(B)			(606	)			(334	)
Net base management fee		$	1,138			$	1,227
Incentive fee(B)		$	1,051			$	1,557

 

(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.

Interest and dividend expense increased 9.4% for the three months ended September 30, 2014, as compared to the prior year period , primarily due to increased average borrowings under the Credit Facility. The average balance outstanding on our Credit Facility during the three months ended September 30, 2014, was $64.9 million, as compared to $41.4 million in the prior year period. The increase in average borrowings under the Credit Facility was partially offset by the decrease in interest rate due to an amendment of the Credit facility that occurred June 26, 2014.

Other expenses increased 20.6% for the three months ended September 30, 2014, as compared to the prior year period, primarily due to an increase in legal expenses, as compared to the prior year period.

 

		Three months ended September 30, 2014
Portfolio Company		Realized (Loss)				Unrealized Appreciation (Depreciation)				Reversal of Unrealized Depreciation (Appreciation)				Net Gain (Loss)
Funko, LLC		$	—			$	3,116			$	—			$	3,116
Jackrabbit, Inc.			—				2,364				—				2,364
SBS, Industries, LLC			—				2,323				—				2,323
Alloy Die Casting Corp.			—				1,682				—				1,682
Mathey Investments, Inc.			—				1,628				—				1,628
Frontier Packaging, Inc.			—				1,034				—				1,034
Ginsey Home Solutions, Inc.			—				640				—				640
Tread Corp.			—				467				—				467
B-Dry, LLC			—				(251	)			—				(251	)
Drew Foam Company, Inc.			—				(338	)			—				(338	)
Head Country Inc.			—				(399	)			—				(399	)
Mitchell Rubber Products, Inc.			—				(452	)			—				(452	)
Behrens Manufacturing, LLC			—				(548	)			—				(548	)

 

S-30

---

Table of Contents

		Three months ended September 30, 2014
Portfolio Company		Realized (Loss)				Unrealized Appreciation (Depreciation)				Reversal of Unrealized Depreciation (Appreciation)				Net Gain (Loss)
Country Club Enterprises, LLC			—				(626	)			—				(626	)
NDLI Inc.			—				(1,297	)			—				(1,297	)
Acme Cryogenics, Inc.			—				(1,306	)			—				(1,306	)
Danco Acquisition Corp.			—				(1,367	)			—				(1,367	)
SOG Specialty K&T, LLC			—				(1,398	)			—				(1,398	)
Galaxy Tool Holding Corp.			—				(6,666	)			—				(6,666	)
Other, net (<$250 Net)			(12	)			(101	)			—				(113	)
Total		$	(12	)		$	(1,495	)		$	—			$	(1,507	)

Realized and Unrealized (Loss) Gain on Investments

Realized (Loss) Gain

During the three months ended September 30, 2014, we recorded a realized loss of $12 relating to post-closing adjustments on previous investment exits. During the three months ended September 30, 2013, we recorded a realized gain of $24.8 million related to the Venyu exit.

Unrealized (Depreciation) Appreciation

During the three months ended September 30, 2014, we recorded net unrealized depreciation on investments in the aggregate amount of $1.5 million. The unrealized appreciation (depreciation) across our investments for the three months ended September 30, 2014, were as follows:

The primary change in our net unrealized depreciation of $1.5 million for the three months ended September 30, 2014, was a decrease in the equity valuation of one of our portfolio companies, Galaxy Tool Holding Corp. (“Galaxy”), due to a decrease in company performance. This was partially offset by increased performance in several of our portfolio companies and, to a lesser extent, an increase in certain comparable multiples used to estimate the fair value of our investments.

 

		Three months ended September 30, 2013
Portfolio Company		Realized Gain				Unrealized Appreciation (Depreciation)				Reversal of Unrealized Appreciation				Net Gain (Loss)
Venyu Solutions, Inc.(A)		$	24,804			$	—			$	(17,374	)		$	7,430
Channel Technologies Group, LLC			—				3,372				—				3,372
Jackrabbit, Inc.			—				3,261				—				3,261
Country Club Enterprises, LLC			—				1,565				—				1,565
Star Seed, Inc.			—				926				—				926
Acme Cryogenics, Inc.			—				864				—				864
Frontier Packaging, Inc.			—				757				—				757
Funko, LLC			—				396				—				396
B-Dry, LLC			—				(502	)			—				(502	)
Mitchell Rubber Products, Inc.			—				(629	)			—				(629	)
Ginsey Home Solutions, Inc.			—				(800	)			—				(800	)
Drew Foam Company, Inc.			—				(998	)			—				(998	)
Quench Holdings Corp.			—				(1,648	)			—				(1,648	)
SBS, Industries, LLC			—				(2,291	)			—				(2,291	)
SOG Specialty K&T, LLC			—				(2,767	)			—				(2,767	)
Other, net (<$250 Net)			—				184				—				184
Total		$	24,804			$	1,690			$	(17,374	)		$	9,120

 

(A)	Venyu was sold in August 2013.

 

S-31

---

Table of Contents

During the three months ended September 30, 2013, we recorded net unrealized depreciation on investments in the aggregate amount of $15.7 million, which included the reversal of $17.4 million in aggregate unrealized appreciation, related to the Venyu exit. Excluding reversals, we had $1.7 million in net unrealized appreciation for the three months ended September 30, 2013.

The realized gains and unrealized appreciation (depreciation) across our investments for the three months ended September 30, 2013, were as follows:

Excluding reversals, the primary changes in our net unrealized appreciation of $1.7 million for the three months ended September 30, 2013, were due to increased equity valuations in several of our portfolio companies, primarily due to increased portfolio company performance and, to a lesser extent, an increase in certain comparable multiples used to estimate the fair value of our investments.

Over our entire investment portfolio, we recorded approximately $2.0 million of net unrealized depreciation on our debt positions and $0.5 million of net unrealized appreciation on our equity holdings for the three months ended September 30, 2014. At September 30, 2014, the fair value of our investment portfolio was less than our cost basis by approximately $65.2 million, as compared to $63.7 million at June 30, 2014, representing net unrealized depreciation of $1.5 million for the three months ended September 30, 2014. We believe that our aggregate investment portfolio is valued at a depreciated value due to the lingering effects of the recent recession on the performance of certain of our portfolio companies. Our entire portfolio was fair valued at 84.2% of cost as of September 30, 2014. The unrealized depreciation of our investments does not have an impact on our current ability to pay distributions to stockholders; however, it may be an indication of future realized losses, which could ultimately reduce our income available for distribution.

Unrealized Appreciation on Other

There was no unrealized appreciation on our Credit Facility recognized for the three months ended September 30, 2014. During the three months ended September 30, 2013, there was net unrealized appreciation of $0.4 million on our Credit Facility. The Credit Facility was fair valued at $87.8 million and $61.7 million as of September 30 and March 31, 2014, respectively.

 

S-32

---

Table of Contents

Comparison of the Six Months Ended September 30, 2014, to the Six Months Ended September 30, 2013

 

		Six Months Ended September 30,
		2014				2013				$ Change				% Change
INVESTMENT INCOME
Interest income		$	16,974			$	14,888			$	2,086				14.0	%
Other income			1,934				3,869				(1,935	)			(50.0	)
Total investment income			18,908				18,757				151				0.8
EXPENSES
Base management fee			3,410				3,110				300				9.6
Incentive fee			2,266				1,722				544				31.6
Administration fee			444				399				45				11.3
Interest and dividend expense			2,883				2,499				384				15.4
Amortization of deferred financing fees			536				499				37				7.4
Other			1,294				1,112				182				16.4
Expenses before credits from Adviser			10,833				9,341				1,492				16.0
Other credits to Adviser fees			(988	)			(845	)			(143	)			(16.9	)
Total expenses net of credits to fee			9,845				8,496				1,349				15.9
NET INVESTMENT INCOME			9,063				10,261				(1,198	)			(11.7	)
REALIZED AND UNREALIZED (LOSS) GAIN ON:
Net realized (loss) gain on sale of investments			(12	)			24,804				(24,816	)			NM
Net unrealized appreciation (depreciation) on investments			3,965				(27,090	)			31,055				NM
Net unrealized depreciation on other			451				445				6				1.3
Net gain (loss) on investments and other			4,404				(1,841	)			6,245				NM
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS		$	13,467			$	8,420			$	5,047				59.9
BASIC AND DILUTED PER COMMON SHARE:
Net investment income		$	0.34			$	0.39			$	(0.05	)			(12.8	)
Net increase in net assets resulting from operations		$	0.51			$	0.32			$	0.19				59.4

NM = Not Meaningful

Total investment income increased by 0.8% for the six months ended September 30, 2014, as compared to the prior year period. This increase was primarily due an overall increase in interest income in the six months ended September 30, 2014, as a result of an increase in the size of our loan portfolio during the six months ended September 30, 2014. This was partially offset by a decrease in other income during the six months ended September 30, 2014 as compared to the prior year period, due to success fee and dividend income resulting from our exit from Venyu during the six months ended September 30, 2013.

 

		As of September 30, 2014								Six Months Ended September 30, 2014
Portfolio Company		Fair Value				% of Portfolio				Investment Income				% of Total Investment Income
Acme Cryogenics, Inc.		$	27,139				7.8	%		$	848				4.5	%
SOG Specialty Knives and Tools, LLC			23,989				6.9				1,366				7.2
Cambridge Sound Management, LLC(A)			20,175				5.8				6				0.0
Jackrabbit, Inc.			19,327				5.6				755				4.0
Edge Adhesives Holdings, Inc.			18,074				5.2				847				4.5
Subtotal—five largest investments			108,704				31.3				3,822				20.2
Other portfolio companies			238,197				68.7				15,086				79.8
Total investment portfolio		$	346,901				100.0	%		$	18,908				100.0	%

 

S-33

---

Table of Contents

Interest income from our investments in debt securities increased 14.0% for the six months ended September 30, 2014, 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 six months ended September 30, 2014, was approximately $269.2 million, compared to approximately $236.4 million for the prior year period. This increase was primarily due to approximately $92.9 million in new investments originated after September 30, 2013, including ADC, Behrens, Meridian, Head Country, Edge, TREC, and CSM. At September 30, 2014, loans to one portfolio company, Tread, were on non-accrual, with an aggregate weighted average principal balance of $12.0 million. As of September 30, 2013, loans to two portfolio companies, ASH and Tread, were on non-accrual, with an aggregate weighted average principal balance of $25.8 million during the six months ended September 30, 2013. The weighted average yield on our interest-bearing investments was 12.6% for the six months ended September 30, 2014 and 2013, excluding cash and cash equivalents and receipts recorded as other income. The weighted average yield varies from period to period, based on the current stated interest rate on interest-bearing investments.

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 September 30, 2013								Six Months Ended September 30, 2013
Portfolio Company		Fair Value				% of Portfolio				Investment Income				% of Total Investment Income
Acme Cryogenics, Inc.		$	27,771				9.7	%		$	848				4.5	%
Galaxy Tool Holding Corp.			24,156				8.4				1,065				5.7
SOG Specialty Knives and Tools, LLC			24,131				8.4				1,332				7.1
Schylling Investments, LLC(A)			20,000				7.0				312				1.7
Channel Technologies Group, LLC			19,642				6.8				926				4.9
Subtotal—five largest investments(B)			115,700				40.3				4,483				23.9
Other portfolio companies			171,512				59.7				14,274				76.1
Total investment portfolio		$	287,212				100.0	%		$	18,757				100.0	%

 

(A)	New investment during the applicable period.

(B)	We exited Venyu in August 2013. Investment income for Venyu for the six months ended September 30, 2013 was $4.3 million, or 23.1% of total investment income.

Other income decreased 50.0% from the prior year period. During the six months ended September 30, 2014, other income primarily consisted of $1.3 million of dividend income received from Mathey. During the six months ended September 30, 2013, other income primarily consisted of $3.3 million in success fee and dividend income received in connection with the exit of Venyu.

Expenses

Total expenses, excluding any voluntary and irrevocable credits to the base management and incentive fees, increased 16.0% for the six months ended September 30, 2014, as compared to the prior year period, primarily due to an increase in the base management fee, incentive fee and interest expense, as compared to the prior year period.

The base management fee increased for the six months ended September 30, 2014, 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 $2.3 million was earned by the Adviser during the six months ended September 30, 2014, compared to $1.7 million for the prior year period. The base management and incentive fees are computed quarterly, as described

 

S-34

---

Table of Contents

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:

 

		Six Months Ended September 30,
		2014				2013
Average gross assets subject to base management fee(A)		$	341,000			$	311,000
Multiplied by prorated annual base management fee of 2%			1.0	%			1.0	%
Base management fee(B)			3,410				3,110
Other credits to Advisor fees(B)			(988	)			(845	)
Net base management fee		$	2,422			$	2,265
Incentive fee(B)		$	2,266			$	1,722

 

(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.

Interest and dividend expense increased 15.4% for the six months ended September 30, 2014, as compared to the prior year period , primarily due to increased average borrowings under the Credit Facility. The average balance outstanding on our Credit Facility during the six months ended September 30, 2014, was $62.7 million, as compared to $37.1 million in the prior year period. The increase in average borrowings under the Credit Facility was partially offset by the decrease in interest rate due to an amendment of the Credit facility that occurred June 26, 2014.

 

		Six months ended September 30, 2014
Portfolio Company		Realized (Loss)				Unrealized Appreciation (Depreciation)				Reversal of Unrealized (Appreciation) Depreciation				Net Gain (Loss)
Jackrabbit, Inc.		$	—			$	6,364			$	—			$	6,364
NDLI Inc.			—				4,464				—				4,464
Funko, LLC			—				3,445				—				3,445
Mathey Investments, Inc.			—				2,309				—				2,309
SBS, Industries, LLC			—				1,843				—				1,843
Edge Adhesives Holdings, Inc.			—				868				—				868
Alloy Die Casting Corp.			—				610				—				610
Drew Foam Company, Inc.			—				418				—				418
Frontier Packaging, Inc.			—				327				—				327
B-Dry, LLC			—				(262	)			—				(262	)
Tread Corp.			—				(283	)			—				(283	)
Quench Holdings Corp.			—				(303	)			—				(303	)
Country Club Enterprises, LLC			—				(781	)			—				(781	)
Channel Technologies Group, LLC			—				(1,012	)			—				(1,012	)
Ginsey Home Solutions, Inc.			—				(1,612	)			—				(1,612	)
Head Country Inc.			—				(2,243	)			—				(2,243	)
Mitchell Rubber Products, Inc.			—				(2,283	)			—				(2,283	)
Danco Acquisition Corp.			—				(2,511	)			—				(2,511	)
SOG Specialty K&T, LLC			—				(2,650	)			—				(2,650	)
Galaxy Tool Holding Corp.			—				(2,992	)			—				(2,992	)
Other, net (<$250 Net)			(12	)			249				—				237
Total		$	(12	)		$	3,965			$	—			$	3,953

 

S-35

---

Table of Contents

Realized and Unrealized (Loss) Gain on Investments

Realized (Loss) Gain

During the six months ended September 30, 2014, we recorded a realized loss of $12 relating to post-closing adjustments on the previous investment exits. During the six months ended September 30, 2013, we recorded a realized gain of $24.8 million related to the Venyu sale.

Unrealized Appreciation (Depreciation)

During the six months ended September 30, 2014, we recorded net unrealized appreciation on investments in the aggregate amount of $4.0 million. The unrealized appreciation (depreciation) across our investments for the six months ended September 30, 2014, were as follows:

The primary changes in our net unrealized appreciation for the six months ended September 30, 2014, were due to an increase in equity valuations in several of our portfolio companies, primarily due to an increase portfolio company performance and increases in certain comparable multiples used to estimate the fair value of our investments.

During the six months ended September 30, 2013, we recorded net unrealized depreciation on investments in the aggregate amount of $27.1 million, which included the reversal of $17.4 million in aggregate unrealized appreciation, related to the Venyu sale. Excluding reversals, we had $9.7 million in net unrealized depreciation for the six months ended September 30, 2013.

The realized gains and unrealized appreciation (depreciation) across our investments for the six months ended September 30, 2013, were as follows:

 

		Six months ended September 30, 2013
Portfolio Company		Realized Gain				Unrealized (Depreciation) Appreciation				Reversal of Unrealized (Appreciation) Depreciation				Net Gain (Loss)
Venyu Solutions, Inc.(A)		$	24,804			$	(1,596	)		$	(17,374	)		$	5,834
Galaxy Tool Holding Corp.			—				3,280				—				3,280
Jackrabbit, Inc.			—				3,261				—				3,261
Channel Technologies Group, LLC			—				3,152				2				3,154
Frontier Packaging, Inc.			—				1,852				—				1,852
Country Club Enterprises, LLC			—				1,584				—				1,584
Star Seed, Inc.			—				926				—				926
Acme Cryogenics, Inc.			—				430				—				430
Funko, LLC			—				396				—				396
Noble Logistics, Inc.			—				(383	)			—				(383	)
Tread Corp.			—				(1,000	)			—				(1,000	)
Precision Southeast, Inc.			—				(1,059	)			—				(1,059	)
Mitchell Rubber Products, Inc.			—				(1,554	)			—				(1,554	)
Drew Foam Company, Inc.			—				(2,166	)			—				(2,166	)
SBS, Industries, LLC			—				(2,808	)			—				(2,808	)
B-Dry, LLC			—				(3,512	)			—				(3,512	)
Ginsey Home Solutions, Inc.			—				(4,502	)			—				(4,502	)
SOG Specialty K&T, LLC			—				(5,691	)			—				(5,691	)
Other, net (<$250 Net)			—				(328	)			—				(328	)
Total		$	24,804			$	(9,718	)		$	(17,372	)		$	(2,286	)

 

(A)	Venyu was sold in August 2013.

 

S-36

---

Table of Contents

The primary changes in our net unrealized depreciation for the six months ended September 30, 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.

Over our entire investment portfolio, we recorded, in the aggregate, approximately $3.5 million and $0.5 million of net unrealized appreciation on our debt and equity investments, respectively, for the six months ended September 30, 2014. As of September 30, 2014, the fair value of our investment portfolio was less than our cost basis by approximately $65.2 million, as compared to $69.2 million at March 31, 2014, representing net unrealized appreciation of $4.0 million for the six months ended September 30, 2014. We believe that our aggregate investment portfolio is valued at a depreciated value due to the lingering effects of the recent recession on the performance of certain of our portfolio companies. Our entire portfolio was fair valued at 84.2% of cost as of September 30, 2014. The unrealized depreciation of our investments does not have an impact on our current ability to pay distributions to stockholders; however, it may be an indication of future realized losses, which could ultimately reduce our income available for distribution.

Net Unrealized Depreciation on Other

For the six months ended September 30, 2014 and 2013, we recorded $0.5 million and $0.4 million, respectively, of net unrealized depreciation on our Credit Facility.

LIQUIDITY AND CAPITAL RESOURCES

Operating Activities

Net cash (used in) provided by operating activities for the six months ended September 30, 2014, was approximately $(16.8) million, as compared to $3.4 million during the six months ended September 30, 2013. Even though we disbursed $56.0 million in the prior year period to purchase investments compared to $29.3 million in the current period, the prior year period had significant cash inflows from the sale of Venyu to offset the purchase of investments. The sale of Venyu resulted in proceeds of $30.8 million and principal repayments of $19.0 million. 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 Series A Term Preferred Stock, management fees to the Adviser, and other entity-level expenses.

As of September 30, 2014, we had equity investments in or loans to 30 private companies with an aggregate cost basis of approximately $412.1 million. As of September 30, 2013, we had equity investments in or loans to 24 private companies with an aggregate cost basis of approximately $354.2 million. The following table summarizes our total portfolio investment activity during the six months ended September 30, 2014 and 2013:

 

		Six Months Ended September 30,
		2014				2013
Beginning investment portfolio, at fair value		$	314,393			$	286,482
New investments			21,925				54,590
Disbursements to existing portfolio companies			7,362				1,400
Increase in investment balance due to PIK			58				30
Scheduled principal repayments			—				(110	)
Unscheduled principal repayments			(802	)			(22,090	)
Proceeds from sales			12				(30,804	)
Net realized (loss) gain			(12	)			24,804
Net unrealized appreciation (depreciation)			3,965				(9,718	)
Reversal of net unrealized appreciation			—				(17,372	)
Ending investment portfolio, at fair value		$	346,901			$	287,212

 

S-37

---

Table of Contents

The following table summarizes the contractual principal repayment and maturity of our investment portfolio by fiscal year, assuming no voluntary prepayments, as of September 30, 2013:

 

						Amount
For the remaining six months ending March 31:		2015				$	43,144
For the fiscal year ending March 31:		2016					44,103
		2017					24,915
		2018					74,632
		2019					84,181
		Thereafter					27,645
				Total contractual repayments		$	298,620
		Investments in equity securities					113,460
				Total cost basis of investments held at September 30, 2014:		$	412,080

Financing Activities

Net cash provided by financing activities for the six months ended September 30, 2014, was approximately $15.3 million, which consisted primarily of $26.5 million of net borrowings on our Credit Facility, partially offset by $9.5 million in distributions to common stockholders. Net cash used in financing activities for the six months ended September 30, 2013, was approximately $42.1 million and consisted primarily of net repayments of our short-term borrowings of $36.0 million and distributions to common stockholders of $7.9 million, partially offset by $3.0 million in net borrowings from our Credit Facility.

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 $0.06 per common share for each of the six months from April 2014 through September 2014. In October 2014, our Board of Directors also declared a monthly distribution of $0.06 per common share for each of October, November and December 2014 as well as a one-time special distribution of $0.05 in December 2014. Our Board of Directors declared these distributions based on estimates of net taxable income for the fiscal year ending March 31, 2015.

For the fiscal year ended March 31, 2014, our distributions to common stockholders totaled $18.8 million, and were less than our taxable income over the same year. At March 31, 2014, we elected to treat $3.9 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. 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 Series A Term Preferred Stock for each of the six months from April 2014 through September 2014. In October 2014, our Board of Directors also declared a monthly distribution of $0.1484375 per preferred share for each of October, November and December 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

 

S-38

---

Table of Contents

SEC declared effective on July 26, 2012. On June 7, 2013, we filed Post-Effective Amendment No. 2 to the registration statement, which the SEC declared effective on July 26, 2013. On June 3, 2014, we filed Post-Effective Amendment No. 3 to the registration statement, and subsequently filed a Post-Effective Amendment No. 4 to the registration statement on September 2, 2014, which the SEC declared effective on September 4, 2014. The registration statement permits us to issue, through one or more transactions, up to an aggregate of $300 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 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 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 overallotments, 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 October 27, 2014, the closing market price of our common stock was $7.27 per share, representing a 14.4% discount to our NAV of $8.49 as of September 30, 2014. To the extent that our common stock continues to trade at a market price below our NAV per common share, we will generally be precluded from raising equity capital through public offerings of our common stock, other than pursuant to stockholder approval or through a rights offering to existing common stockholders. At our 2014 Annual Meeting of Stockholders held on August 7, 2014, our stockholders approved a proposal authorizing us to issue and sell shares of our common stock at a price below our then current NAV per common share for a period of one year from the date of such approval, provided that our Board of Directors makes certain determinations prior to any such sale.

Series A Term Preferred Stock

Pursuant to our prior registration statement on Form N-2 (File No. 333-160720), in March 2012, we completed an offering of 1.6 million shares of Series A Term Preferred Stock at a public offering price of $25.00 per share. Gross proceeds totaled $40 million, and net proceeds, after deducting underwriting discounts and offering expenses borne by us were $38 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 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.

The Series A Term Preferred Stock provides for a fixed dividend equal to 7.125% per year, payable monthly (which equates to $2.9 million per year). We are required to redeem all of the outstanding Series A Term Preferred Stock on February 28, 2017, for cash at a redemption price equal to $25.00 per share plus an amount equal to accumulated but unpaid dividends, if any, to the date of redemption. The Series A 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 Series A Term Preferred Stock have been paid in full. The Series A Term Preferred Stock is not convertible into our common

 

S-39

---

Table of Contents

stock or any other security. In addition, three other potential redemption triggers are as follows: (1) upon the occurrence of certain events that would constitute a change in control of us, we would be required to redeem all of the outstanding Series A Term Preferred Stock; (2) if we fail to maintain an asset coverage ratio of at least 200%, we are required to redeem a portion of the outstanding Series A Term Preferred Stock or otherwise cure the ratio redemption trigger and (3) at our sole option, at any time on or after February 28, 2016, we may redeem some or all of the Series A Term Preferred Stock.

The Series A 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 June 26, 2014, we, through our wholly-owned subsidiary, Business Investment, entered into Amendment No. 1 to the Fifth Amended and Restated Credit Agreement originally entered into on April 30, 2013, with Key Equipment Finance Inc., as administrative agent, lead arranger and a lender (the “Administrative Agent”), Branch Banking and Trust Company (“BB&T”) as a lender and managing agent, and the Adviser, as servicer, to extend the revolving period and reduce the interest rate of the line of credit (the “Credit Facility”). The revolving period was extended 14 months to June 26, 2017, and if not renewed or extended by June 26, 2017, all principal and interest will be due and payable on or before June 26, 2019 (two years after the revolving period end date). In addition, we have retained the two one-year extension options, to be agreed upon by all parties, which may be exercised on or before June 26, 2015 and 2016, respectively, and upon exercise, the options would extend the revolving period to June 26, 2018 and 2019 and the maturity date to June 26, 2020 and 2021, respectively. Subject to certain terms and conditions, the Credit Facility can be expanded by up to $145 million, to a total facility amount of $250 million, through additional commitments of existing or new committed lenders. Advances under the Credit Facility generally bear interest at 30-day LIBOR, plus 3.25% per annum, down from 3.75% prior to the amendment, and the Credit Facility includes an unused fee of 0.50% on undrawn amounts. Once the revolving period ends, the interest rate margin increases to 3.75% for the period from June 26, 2017 to June 26, 2018, and further increases to 4.25% through maturity. We incurred fees of $0.4 million in connection with this amendment.

On September 19, 2014, we further increased our borrowing capacity under the Credit Facility from $105 million to $185 million by entering into Joinder Agreements pursuant to the Credit Facility, by and among Business Investment, the Administrative Agent, the Adviser and each of East West Bank, Manufacturers and Traders Trust, Customers Bank and Talmer Bank and Trust. We incurred fees of $0.8 million in connection with this expansion.

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, 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 million plus 50% of all equity and subordinated debt raised after June 26, 2014 minus 50% of all equity and subordinated debt retired or redeemed after June 26, 2014, which equates to $170 million as of September 30, 2014, (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 September 30, 2014, and as defined in the performance guaranty of our Credit Facility, we had a minimum net worth of $264.8

 

S-40

---

Table of Contents

million, an asset coverage of 264% and an active status as a BDC and RIC. As of October 28, 2014, we were in compliance with all covenants.

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 million. We incurred a premium fee of $75 in conjunction with this agreement. The interest rate cap agreement effectively limits the interest rate on a portion of the borrowings pursuant to the terms of 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.

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 September 30 and March 31, 2014 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 $2.7 million of obligations of Country Club Enterprises, LLC (“CCE”). As of September 30, 2014, 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 September 30, 2014, at cost:

 

		Payments Due by Period
Contractual Obligations(A)		Total				Less than 1 Year				1-3 Years				3-5 Years				More than 5 Years
Credit Facility			87,750				—				—				87,750				—
Series A Term Preferred Stock			40,000				—				—				40,000				—
Secured borrowing			5,096				—				—				5,096				—
Interest payments on obligations(B)			26,082				6,732				11,884				7,466				—
Total		$	158,928			$	6,732			$	11,884			$	140,312			$	—

 

(A)	Excludes our unused line of credit commitments and guaranties to our portfolio companies in the aggregate amount of $5.4 million.

(B)	Includes interest payments due on our Credit Facility and dividend obligations on the Series A Term Preferred Stock. Dividend payments on the Series A Term Preferred Stock assume quarterly declarations and monthly distributions through the date of mandatory redemption.

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 generally do not recognize success fees as income until they are received in cash. Due to their contingent nature, there are no guarantees that we will be able to collect any or all of these success fees or know the timing of such collections. As a result, as of September 30, 2014, we had unrecognized success fees of $21.0 million, or $0.79 per common share, which do not meet the recognition criteria under the relevant accounting guidance.

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,

 

S-41

---

Table of Contents

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 our investments and the related amounts of unrealized appreciation and depreciation of investments recorded in our Condensed Consolidated Financial Statements.

Accounting Recognition

We record our investments at fair value in accordance with the Financial Accounting Standards Board (the “FASB”) Accounting Standards Codification Topic 820, “ Fair Value Measurements and Disclosures” (“ASC 820”) and the 1940 Act. Investment transactions are recorded on the trade date. Realized gains or losses are measured by the difference between the net proceeds from the repayment or sale and amortized cost basis of the investment, without regard to unrealized depreciation or appreciation previously recognized, and include investments charged off during the period, net of recoveries. Unrealized depreciation or appreciation primarily reflect the change in investment fair values, including the reversal of previously recorded unrealized depreciation or appreciation when gains or losses are realized.

In accordance with ASC 820, our investments’ fair value is determined to be the price that would be received for an investment in a current sale, which assumes an orderly transaction between market participants on the measurement date. This fair value definition focuses on exit price in the principal, or most advantageous, market and prioritizes, within a measurement of fair value, the use of market-based inputs over entity-specific inputs. ASC 820 also establishes the following three-level hierarchy for fair value measurements based upon the transparency of inputs to the valuation of a financial instrument as of the measurement date.

 

•

Level 1—inputs to the valuation methodology are quoted prices (unadjusted) for identical financial instruments in active markets;

 

•

Level 2—inputs to the valuation methodology include quoted prices for similar financial instruments in active or inactive markets and inputs that are observable for the financial instrument, either directly or indirectly, for substantially the full term of the financial instrument. Level 2 inputs are in those markets for which there are few transactions, the prices are not current, little public information exists or instances where prices vary substantially over time or among brokered market makers; and

 

•

Level 3—inputs to the valuation methodology are unobservable and significant to the fair value measurement. Unobservable inputs are those inputs that reflect assumptions that market participants would use when pricing the financial instrument and can include the Valuation Team’s own assumptions based upon the best available information.

When a determination is made to classify our investments within Level 3 of the valuation hierarchy, such determination is based upon the significance of the unobservable factors to the overall fair value measurement. However, Level 3 financial instruments typically include, in addition to the unobservable, or Level 3, inputs, observable inputs (or, components that are actively quoted and can be validated to external sources). The level in the fair value hierarchy within which the fair value measurement falls is determined based on the lowest level input that is significant to the fair value measurement. As of September 30 and March 31, 2014, all of our investments were valued using Level 3 inputs and during the six months ended September 30, 2014 and 2013, there were no investments transferred in to or out of Level 1, 2 or 3.

Board Responsibility

In accordance with the 1940 Act, our Board of Director has the ultimate responsibility for reviewing and approving, in good faith, the fair value of our investments based on our established investment valuation policy

 

S-42

---

Table of Contents

(the “Policy”). Our Board of Directors reviews valuation recommendations that are provided by professionals of the Adviser and Administrator with oversight and direction from the Valuation Team. There is no single standard for determining fair value (especially for privately-held businesses), as fair value depends upon the specific facts and circumstances of each individual investment. In determining the fair value of our investments, the Valuation Team, led by the Valuation Officer, uses the Policy, which has been approved by our Board of Directors, and each quarter our Board of Directors reviews the Policy to determine if changes thereto are advisable and also reviews whether the Valuation Team has applied the Policy consistently.

Use of Third Party Valuation Firms

The Valuation Team engages third party valuation firms to provide independent assessments of fair value of certain of our investments. Currently, the third-party service provider Standard & Poor’s Securities Evaluation, Inc. (“SPSE”) provides estimates of fair value on the majority of our debt investments.

The Valuation Team generally assigns SPSE’s estimates of fair value to our debt investments where we do not have the ability to effectuate a sale of the applicable portfolio company. The Valuation Team corroborates SPSE’s estimates of fair value using one or more of the valuation techniques discussed below. The Valuation Team’s estimates of value on a specific debt investment may significantly differ from SPSE’s. When this occurs, our Board of Directors reviews whether the Valuation Team has followed the Policy and whether the Valuation Team’s recommended value is reasonable in light of the Policy and other facts and circumstances and then votes to accept or reject the Valuation Team’s recommended valuation.

Valuation Techniques

In accordance with ASC 820, the Valuation Team uses the following techniques when valuing our investment portfolio:

 

•

Total Enterprise Value—In determining the fair value using a total enterprise value (“TEV”), the Valuation Team first calculates the TEV of the portfolio company by incorporating some or all of the following factors: the portfolio company’s ability to make payments and other specific portfolio company attributes; the earnings of the portfolio company (the trailing or projected twelve month revenue or earnings before interest, taxes, depreciation and amortization (“EBITDA”)); EBITDA or revenue multiples obtained from our indexing methodology whereby the original transaction EBITDA or revenue multiple at the time of our closing is indexed to a general subset of comparable disclosed transactions and EBITDA or revenue multiples from recent sales to third parties of similar securities in similar industries; a comparison to publicly traded securities in similar industries; and other pertinent factors. To gather information regarding these factors, the Valuation Team generally references industry statistics and may use outside experts. Once the TEV is determined for a portfolio company, the Valuation Team then allocates the TEV to the portfolio company’s securities in order of their relative priority in the capital structure. Generally, the Valuation Team uses TEV to value our equity investments and, in the circumstances where we have the ability to effectuate a sale of a portfolio company, our debt investments.

TEV is primarily calculated using EBITDA or revenue multiples; however, TEV may also be calculated using a discounted cash flow (“DCF”) analysis whereby future expected cash flows of the portfolio company are discounted to determine a net present value using estimated risk-adjusted discount rates, which incorporate adjustments for nonperformance and liquidity risks. Generally, the Valuation Team uses the DCF to calculate the TEV to corroborate estimates of value for our equity investments, where we do not have the ability to effectuate a sale of a portfolio company or for debt of credit impaired portfolio companies.

 

•

Yield Analysis—The Valuation Team generally determines the fair value of our debt investments using the yield analysis, which includes a DCF calculation and the Valuation Team’s own assumptions,

 

S-43

---

Table of Contents

including, but not limited to, estimated remaining life, current market yield, current leverage, and interest rate spreads. This technique develops a modified discount rate that incorporates risk premiums including, among other things, increased probability of default, increased loss upon default and increased liquidity risk. Generally, the Valuation Team uses the yield analysis to corroborate both estimates of value provided by SPSE and market quotes.

In addition to the above valuation techniques, the Valuation Team may also consider other factors when determining fair values of our investments, including, but not limited to: the nature and realizable value of the collateral, including external parties’ guaranties; any relevant offers or letters of intent to acquire the portfolio company; and the markets in which the portfolio company operates. If applicable, new debt and equity investments made during the three months ended September 30, 2014 are generally valued at original cost basis. Fair value measurements of our investments may involve subjective judgments and estimates and due to the inherent uncertainty of determining these fair values, the fair value of our investments may fluctuate from period to period. Additionally, changes in the market environment and other events that may occur over the life of the investment may cause the gains or losses ultimately realized on these investments to be different than the valuations currently assigned. Further, such investments are generally subject to legal and other restrictions on resale or otherwise are less liquid than publicly traded securities. If we were required to liquidate a portfolio investment in a forced or liquidation sale, we could realize significantly less than the value at which it is recorded.

Credit Monitoring and Risk Rating

The Adviser monitors a wide variety of key credit statistics that provide information regarding our portfolio companies to help us assess credit quality and portfolio performance and, in some instances, that is used as inputs in our valuation techniques. We, through the Adviser, participate in periodic board meetings of our portfolio companies in which we hold board seats 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 certain credit statistics.

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. During the three months ended June 30, 2014, we modified our risk rating model to incorporate additional factors in our qualitative and quantitative analysis. While the overall process did not change, we believe the additional factors enhance the quality of the risk ratings of our investments. No adjustments were made to prior periods as a result of this modification due to the immaterial effect on the overall portfolio ratings.

 

S-44

---

Table of Contents

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.

 

Adviser’s System		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
10		Baa3		BBB-		PD is 5% and the EL is 1% to 2%
9		Ba1		BB+		PD is 10% and the EL is 2% to 3%
8		Ba2		BB		PD is 16% and the EL is 3% to 4%
7		Ba3		BB-		PD is 17.8% and the EL is 4% to 5%
6		B1		B+		PD is 22% and the EL is 5% to 6.5%
5		B2		B		PD is 25% and the EL is 6.5% to 8%
4		B3		B-		PD is 27% and the EL is 8% to 10%
3		Caa1		CCC+		PD is 30% and the EL is 10% to 13.3%
2		Caa2		CCC		PD is 35% and the EL is 13.3% to 16.7%
1		Caa3		CC		PD is 65% and the EL is 16.7% to 20%
0		N/A		D		PD is 85% or there is a payment 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 September 30 and March 31, 2014, Tread was the only portfolio investment 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 September 30 and March 31, 2014, representing 100%, of the principal balance of all loans in our portfolio at the end of each period:

 

Rating		As of September 30, 2014				As of March 31, 2014
Highest			9.2				9.1
Average			6.2				5.7
Weighted Average			6.3				5.2
Lowest			2.8				2.6

 

S-45

---

Table of Contents

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 the discussion under the caption entitled “Material U.S. Federal Income Tax Considerations” in the accompanying prospectus. 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 $0.2 million as of March 31, 2014.

Revenue 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 management’s judgment. Generally, non-accrual loans are restored to accrual status when past-due principal and interest are paid, and, in management’s judgment, are likely to remain current, or due to a restructuring, the interest income is deemed to be collectible. As of September 30, 2014, our loans to Tread were on non-accrual, with an aggregate debt cost basis of $12.0 million, or 4.0% of the cost basis of all debt investments in our portfolio, and an aggregate fair value of $0. As of March 31, 2014, our loans to Tread were on non-accrual, with an aggregate debt cost basis of $11.7 million, or 4.2% of the cost basis of all debt investments in our portfolio, and an aggregate fair value of $0.

PIK interest, computed at the contractual rate specified in the loan agreement, is added to the principal balance of the loan and recorded as interest income. During the three and six months ended September 30, 2014, we recorded PIK income of $29 and $58, respectively. During the three and six months ended September 30, 2013, we recorded PIK income of $29 and $39, respectively.

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 $0.5 million of success fees for the three and six months ended September 30, 2014, respectively. During the three months ended September 30, 2014, we received success fees

 

S-46

---

Table of Contents

of $0.2 million from each of ASH and Frontier and $0.1 million from Mathey. We recorded $2.1 million and $2.3 million of success fees during the three and six months ended September 30, 2013, respectively. During the three months ended September 30, 2013, we received $0.3 million Cavert in success fee prepayments and we received $1.8 million related to the exit of Venyu.

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. For the three and six months ended September 30, 2014, we recorded $1.4 million of dividend income from Mathey. For the three and six months ended September 30, 2013, we recorded $1.4 million in dividend income related to the exit of Venyu.

Both dividend and success fee income are recorded in Other income in our accompanying Condensed Consolidated Statements of Operations.

 

S-47

---

Table of Contents

SUPPLEMENTAL PORTFOLIO INFORMATION

PORTFOLIO COMPANIES

The following table sets forth certain information as of September 30, 2014, regarding each portfolio company in which we had a debt or equity security as of such date. All such investments have been made in accordance with our investment policies and procedures described in this prospectus. Pursuant to the 1940 Act, we must maintain at least 70% of our total assets in qualifying assets. See “—Regulation as a BDC—Qualifying Assets,” in the accompanying prospectus for a discussion of the types of qualifying assets in which we are permitted to invest pursuant to Section 55(a) of the 1940 Act. Therefore, the 1940 Act permits us to invest up to 30% of our assets in other non-qualifying assets. As of September 30, 2014, we did not have any investments in non-qualifying assets.

 

Company(A)		Industry		Investment		Percentage of Class Held on a Fully Diluted Basis				Cost				Fair Value
										(Dollar amounts in thousands)
										(unaudited)
NON-CONTROL/NON-AFFILIATE INVESTMENTS:
Auto Safety House, LLC     2630 W. Buckey Rd.     Phoenix, AZ 85009		Automobile		Line of Credit, $1,000 available						$	5,000			$	4,900
											5,000				4,900
B-Dry, LLC     13876 Cravath Place     Woodbridge, VA 22191		Personal, Food and Miscellaneous Services		Line of Credit, $0 available							750				544
				Senior Term Debt							6,443				4,703
				Senior Term Debt							2,840				2,066
				Common Stock Warrants			5.5	%			300				—
											10,333				7,313
Cavert II Holding Corp.     620 Forum Parkway     Rural Hall, NC 27045		Containers, Packaging, and Glass		Preferred Stock							1,845				3,140
											1,845				3,140
Country Club Enterprises, LLC     29 Tobey Rd.     W. Wareham, MA 02576		Automobile		Senior Subordinated Term Debt							4,000				4,000
				Preferred Stock			58.4	%			7,725				2,888
											11,725				6,888
Drew Foam Company, Inc.     1093 Highway 278 East     Moticello, AR 71655		Chemicals, Plastics, and Rubber		Senior Term Debt							10,913				10,913
				Preferred Stock			63.2	%			3,375				1,769
				Common Stock			53.7	%			63				—
											14,351				12,682
Frontier Packaging, Inc.     1201 Andover     Park East, Suite 101     Tukwila, WA 98188		Containers, Packaging, and Glass		Senior Term Debt							12,500				12,500
				Preferred Stock			67.8	%			1,373				1,591
				Common Stock			57.6	%			152				1,102
											14,025				15,193
Funko, LLC     1202 Shuksan Way     Everett, WA 98203		Personal and Non-Durable Consumer Products (Manufacturing Only)		Senior Subordinated Term Debt							7,646				7,817
				Preferred Stock			10.0	%			1,305				5,691
											8,951				13,508

 

S-48

---

Table of Contents

Company(A)		Industry		Investment		Percentage of Class Held on a Fully Diluted Basis				Cost				Fair Value
										(Dollar amounts in thousands)
										(unaudited)
Ginsey Home Solutions, Inc.     2078 Center Square Rd     Swedesboro, NJ 08085		Home and Office Furnishings, Housewares, and Durable Consumer Products		Senior Subordinate Term Debt							13,300				13,300
				Preferred Stock			94.9	%			9,583				1,660
				Common Stock			78.5	%			8				—
											22,891				14,960
Jackrabbit, Inc.     471 Industrial Ave.     Rippon, CA 95366		Farming and Agriculture		Senior Term Debt							11,000				11,000
				Preferred Stock			78.7	%			3,556				3,986
				Common Stock			54.9	%			94				4,341
											14,650				19,327
Mathey Investments, Inc.     4344 S. Maybelle Ave.     Tulsa, OK 74107		Machinery (Nonagriculture, Nonconstruction, Nonelectronic)		Senior Term Debt							1,375				1,375
				Senior Term Debt							3,727				3,727
				Senior Term Debt							3,500				3,500
				Common Stock			85.0	%			777				7,204
											9,379				15,806
Mitchell Rubber Products, Inc.     10220 San Sevane Way     Mira Loma, CA 91752		Chemicals, Plastics, and Rubber		Subordinated Term Debt							13,560				12,543
				Subordinated Term Debt							1,500				1,388
				Preferred Stock			31.7	%			2,790				—
				Common Stock			28.8	%			28				—
											17,878				13,931
Precision Southeast, Inc.     P.O. Box 50610		Diversified/Conglomerate Manufacturing		Senior Term Debt							5,617				5,617
4900 Hwy 501				Preferred Stock			90.9	%			1,909				108
Myrtlr Beach, SC 29579				Common Stock			77.3	%			91				—
											7,617				5,725
Quench Holdings Corp.     780 5th Ave., Ste, 110     Kings of Prussia, PA 19046		Home and Office Furnishings, Housewares, and Durable Consumer Products		Common Stock			3.3	%		$	3,397			$	4,753
											3,397				4,753
SBS, Industries, LLC     1843 N. 106th E. Ave     Tulsa, OK 74116		Machinery (Nonagriculture, Nonconstruction, Nonelectronic)		Senior Term Debt							11,355				11,355
				Preferred Stock			90.9	%			1,994				2,527
				Common Stock			76.2	%			221				381
											13,570				14,263

 

S-49

---

Table of Contents

Company(A)		Industry		Investment		Percentage of Class Held on a Fully Diluted Basis				Cost				Fair Value
										(Dollar amounts in thousands)
										(unaudited)
Schylling Investments, LLC     306 Newburyport Tpke     Rowley, MA 01969		Leisure, Amusement, Motion Pictures, Entertainment		Senior Term Debt							13,081				13,081
				Preferred Stock			72.7	%			4,000				—
											17,081				13,081
Star Seed, Inc.     101 N Industrial Ave     Osborne, KS 67473		Farming and Agriculture		Senior Term Debt							7,500				7,500
				Preferred Stock			60.0	%			1,499				—
				Common Stock			54.0	%			1				—
											9,000				7,500
Total Non-Control/Non-Affiliate Investments (represents 49.9% of total investments at fair value)										$	181,693			$	172,970
AFFILIATE INVESTMENTS:
Acme Cryogenics, Inc.     2801 Mitchell Avenue     Allentown, PA 18103		Chemicals, Plastics, and Rubber		Senior Subordinated Term Debt						$	14,500			$	14,500
				Preferred Stock			91.0	%			7,956				12,639
				Common Stock			37.7	%			1,197				—
				Common Stock Warrants			37.7	%			25				—
											23,678				27,139
Alloy Die Casting Corp.     6550 Caballero Blvd     Buena Park, CA 90620		Diversified/Conglomerate Manufacturing		Senior Term Debt							12,215				12,200
				Preferred Stock			70.0	%			4,064				2,619
				Common Stock			62.0	%			41				—
											16,320				14,819
Behrens Manufacturing, LLC 1250 E 8th St. Winona, MN 55987		Diversified/Conglomerate Manufacturing		Senior Term Debt							9,975				9,975
				Preferred Stock			58.5	%			2,922				2,684
											12,897				12,659
Cambridge Sound Management, LLC     404 Wyman St.     Waltham, MA 02451		Home and office Furnishings, Housewares and Durable Consumer Products		Line of Credit, $325 available							675				675
				Senior Term Debt							15,000				15,000
				Preferred Stock			97.3	%			4,500				4,500
											20,175				20,175
Channel Technologies Group, LLC 879 Ward Drive Santa Barbara, CA 93111		Diversified/Conglomerate Manufacturing		Preferred Stock			7.7	%			2,864				2,110
				Common Stock			7.5	%			—				—
											2,864				2,110

 

S-50

---

Table of Contents

Company(A)		Industry		Investment		Percentage of Class Held on a Fully Diluted Basis				Cost				Fair Value
										(Dollar amounts in thousands)
										(unaudited)
Danco Acquisition Corp. 950 George St. Santa Clara, CA 95054		Diversified/Conglomerate Manufacturing		Line of Credit, $550 available							4,000				300
				Senior Term Debt							2,575				193
				Senior Term Debt							8,795				660
				Senior Term Debt							1,150				86
				Preferred Stock			59.5	%			2,500				—
				Common Stock			92.5	%			3				—
											19,023				1,239
Edge Adhesives Holdings, Inc.     5117 Northeast Pkwy Fort Worth, TX 76106		Diversified/Conglomerate Manufacturing		Line of Credit, $345 available							1,155				1,152
				Senior Term Debt							9,300				9,312
				Senior Term Debt							877				877
				Senior Subordinated Term Debt							2,400				2,406
				Preferred Stock			43.4	%			3,474				4,327
											17,206				18,074
Head Country Food Products, Inc. 2116 North Ash St. Ponca City, OK 74601		Beverage, Food and Tobacco		Senior Term Debt							9,050				9,050
				Preferred Stock			88.9	%			4,000				1,757
											13,050				10,807
Meridian Rack & Pinion, Inc.     6740 Cobra Way San Diego, CA 92121		Automobile		Senior Term Debt						$	9,660			$	9,648
				Preferred Stock			54.4	%			3,381				3,613
											13,041				13,261
NDLI Inc. 11335 Clay Rd Ste. 100     Houston, TX 77041		Cargo Transport		Line of Credit, $0 available							1,225				968
				Senior Term Debt							7,227				5,709
				Senior Term Debt							3,650				2,847
				Senior Term Debt							3,650				2,865
				Preferred Stock			100.0	%			3,600				—
				Common Stock			85.0	%			—				—
											19,352				12,389
SOG Specialty K&T, LLC 6521 212th St. SW Lynnwood, WA 98036		Leisure, Amusement, Motion Pictures, Entertainment		Senior Term Debt							6,200				6,200
				Senior Term Debt							12,199				12,199
				Preferred Stock			70.9	%			9,749				5,590
											28,148				23,989

 

S-51

---

Table of Contents

Company(A)		Industry		Investment		Percentage of Class Held on a Fully Diluted Basis				Cost				Fair Value
										(Dollar amounts in thousands)
										(unaudited)
Tread Corp. 176 Eastpark Dr. Roanoke, VA 24019		Oil and Gas		Line of Credit, $496 available							2,754				—
				Senior Subordinated Term Debt							5,000				—
				Senior Subordinated Term Debt							2,750				—
				Senior Subordinated Term Debt							1,000				—
				Senior Subordinated Term Debt							510				—
				Preferred Stock			83.0	%			3,333				—
				Common Stock			89.7	%			501				—
				Common Stock Warrants			89.7	%			3				—
											15,851				—
Total Affiliate Investments (represents 45.1% of total investments at fair value)										$	201,605			$	156,661
CONTROL INVESTMENTS:
Galaxy Tool Holding Corp. 1111 Industrial Rd. Winfield, KS 67156		Aerospace and Defense		Senior Subordinated Term Debt						$	15,520			$	15,520
				Preferred Stock			74.7	%			11,464				—
				Common Stock			55.0	%			48				—
											27,032				15,520
Tread Real Estate Corp.     1521 Westbranch Dr.     Mclean, VA 22102		Buildings and Real Estate		Common Stock			100.0	%			1,750				1,750
											1,750				1,750
Total Control Investments (represents 5.0% of total investments at fair value)										$	28,782			$	17,270
TOTAL INVESTMENTS										$	412,080			$	346,901

 

(A)	Certain of the securities listed above are issued by affiliate(s) of the indicated portfolio company.

Significant Portfolio Companies

Set forth below is a brief description of each portfolio company in which we have made an investment that currently represents greater than 5% of our total assets (excluding cash and cash equivalents pledged to creditors). Because of the relative size of our investments in these companies, we are exposed to a greater degree to the risks associated with these companies.

Acme Cryogenics, Inc.

We currently hold investments, having an aggregate fair value of $27.1 million as of September 30, 2014, in Acme Cryogenics, Inc. and its affiliates, which we collectively refer to as Acme. Our investments in Acme consist of redeemable preferred stock, which we purchased for $8.0 million, common stock and warrants, which we purchased for $1.2 million and a subordinated loan to Acme for $14.5 million that matures on March 27, 2015.

 

S-52

---

Table of Contents

Founded in 1969, Acme manufactures valves, fittings, and manifolds used in regulating the flow of industrial gasses at extremely low temperatures (cryogenic), manufactures vacuum insulated pipe used in the transmission of gasses that have been liquefied; provides on-site system installation, maintenance/inspection, upgrade and repair services; and, repairs cryogenic storage tanks and tank trailers used in storing and transporting liquid nitrogen, oxygen, helium, etc.

Our Adviser has entered into a services agreement with Acme, pursuant to which our Adviser has agreed to advise and provide certain management and consulting services as mutually agreed upon by Acme and our Adviser.

Because of the relative size of this investment, we are significantly exposed to the risks associated with Acme’s business. The industrial gas industry has several large companies that dominate the production and distribution of liquefied gasses. These companies are Acme’s primary customers. Acme is exposed to the risk that these large companies could change their buying patterns, attempt to dictate purchase terms that are unfavorable to Acme, or suffer downturns in their businesses that would lead them to reduce their purchases of Acme’s products and services. Acme purchases metals and other raw materials that are subject to changes in the price levels of these commodities. There is no assurance that Acme can pass price increases on to its customers. Acme is also dependent upon a small group of managers for the execution of its business plan. The death, disability or departure by one or more of these individuals could have a negative impact on its business and operations.

Our vice chairman and chief operating officer, Terry Brubaker, serves as a director and the chairman of Acme’s board. Acme’s principal executive office is located at 2801 Mitchell Avenue, Allentown, Pennsylvania 18103.

Cambridge Sound Management, LLC

We currently hold investments, having an aggregate fair value of $20.2 million as of September 30, 2014, in Cambridge Sound Management, LLC, and its affiliates, which we collectively refer to as Cambridge. Our investments in Cambridge include a $15.0 million first lien term loan, maturing on September 30, 2019, $4.5 million in preferred stock, and a $1.0 million revolving credit facility, of which $0.7 million was drawn as of September 30, 2014, maturing on September 30, 2015.

Cambridge, based in Waltham, Massachusetts, is the developer of Qt Quiet Technology™ sound masking systems. Cambridge offers innovative, simple and intelligently designed solutions to the problems of privacy and acoustic distractions.

Because of the relative size of this investment, we are significantly exposed to the risks associated with Cambridge’s business. Cambridge is specialized in a relatively small market. The company has established itself as an innovator within the industry; however Cambridge is exposed to competition for its acoustical solutions or alternative products used in architectural design. Cambridge is dependent on a small group of managers for the execution of its business plan. The death, disability or departure by one or more of these individuals could have a negative impact on its business and operations.

The Adviser has entered into an advisory services agreement with Cambridge, pursuant to which the Adviser has agreed to assist Cambridge with obtaining or structuring credit facilities, long-term loans or additional equity, to provide advice and administrative support in the management of Cambridge’s credit facilities and other important contractual financial relationships, and to monitor and review Cambridge’s capital structure and financial performance as it relates to raising additional debt and equity capital for growth and acquisitions. The agreement also provides that the Adviser will be available to assist and advise Cambridge in connection with adding key people to the management team that will lead to the development of best industry practices in business promotion, business development and employee and customer relations.

 

S-53

---

Table of Contents

One of the Adviser’s directors of private finance, Erika Highland, is a director of Cambridge. The principal executive offices of Cambridge are located at 404 Wyman Street, Waltham, Massachusetts 02451.

Jackrabbit, Inc.

We currently hold investments, having an aggregate fair value of $19.3 million as of September 30, 2014, in Jackrabbit, Inc. and its affiliates, which we collectively refer to as Jackrabbit. Our investment in Jackrabbit includes a $11.0 million first lien term loan maturing April 1, 2018 and $3.6 million in preferred and common stock.

Jackrabbit, based in Ripon, California, manufactures nut (primarily almond) harvesting equipment. Founded in 1981, the Company has been a leader in its product categories with significant market share in the United States and a large presence in Australia.

Because of the relative size of this investment, we are significantly exposed to the risks associated with Jackrabbit’s business. Jackrabbit is specialized in a relatively small market. The company’s performance will be affected by changes in the demand for its equipment from almond growers and the potential of increased competition with larger manufacturers expanding their product lines and entering into the market. Jackrabbits growth is dependent on the end consumer of the nuts, and if there is any negative changes in consumer consumption that could reduce sales and profitability. Jackrabbit is dependent on a small group of long-time managers for the execution of its business plan. The death, disability or departure by one or more of these individuals could have a negative impact on its business and operations.

The Adviser has entered into an advisory services agreement with Jackrabbit, pursuant to which the Adviser has agreed to assist Jackrabbit with obtaining or structuring credit facilities, long-term loans or additional equity, to provide advice and administrative support in the management of Jackrabbit’s credit facilities and other important contractual financial relationships, and to monitor and review Jackrabbit’s capital structure and financial performance as it relates to raising additional debt and equity capital for growth and acquisitions. The agreement also provides that the Adviser will be available to assist and advise Jackrabbit in connection with adding key people to the management team that will lead to the development of best industry practices in business promotion, business development and employee and customer relations.

One of the Adviser’s managing directors of private finance, Christopher Daniels, and one of our directors of private finance, Marshall Earl, are directors of Jackrabbit. The principal executive offices of Jackrabbit are located at 471 Industrial Avenue, Ripon, California 95366.

Old World Christmas, Inc.

We currently hold investments, having an aggregate fair value of $24.4 million as of October 14, 2014, in Old World Christmas, Inc. and its affiliates, which we collectively refer to as Old World Christmas. Our investment in Old World Christmas includes a $15.8 million first lien term loan maturing October 14, 2019, $6.2 million in preferred stock, and a $3.0 million revolving credit facility, of which $2.4 million was drawn as of October 14, 2014, maturing on April 14, 2015.

Old World Christmas, founded in 1979 and headquartered in Spokane, Washington, is a designer and distributor of an extensive collection of blown glass Christmas ornaments, table top figurines, vintage-style Light Covers and nostalgic greeting cards into the independent gift channel.

Because of the relative size of this investment, we are significantly exposed to the risks associated with Old World Christmas’s business. Old World Christmas has developed strong brand name and reputation within the industry for over thirty years. However, increased competition within the industry, including expansion of

 

S-54

---

Table of Contents

competitor’s product lines, and the demand from the consumer could affect Old World Christmas’s performance. Old World Christmas is dependent on a small group of managers for the execution of its business plan. The death, disability or departure by one or more of these individuals could have a negative impact on its business and operations.

The Adviser has entered into an advisory services agreement with Old World Christmas, pursuant to which the Adviser has agreed to assist Old World Christmas with obtaining or structuring credit facilities, long-term loans or additional equity, to provide advice and administrative support in the management of Old World Christmas’s credit facilities and other important contractual financial relationships, and to monitor and review Old World Christmas’s capital structure and financial performance as it relates to raising additional debt and equity capital for growth and acquisitions. The agreement also provides that the Adviser will be available to assist and advise Old World Christmas in connection with adding key people to the management team that will lead to the development of best industry practices in business promotion, business development and employee and customer relations.

One of the Adviser’s managing directors of private finance, Kyle Largent, is a director of Old World Christmas. The principal executive offices of Old World Christmas are located at 4007 E Main Ave, Spokane, Washington 99202.

SOG Specialty K&T, LLC

We currently hold investments, having an aggregate fair value of $24.0 million as of September, 2014, in SOG Specialty K&T, LLC, which we refer to as SOG. Our investments in SOG include convertible preferred stock, which we purchased for $9.7 million, and two senior term loans with an aggregate principal amount outstanding of $18.4 million, each maturing on September 3, 2017.

SOG, based in Lynnwood, Washington, takes its name from the Studies and Observations Group (the forefathers of the U.S. military’s Special Operations Forces), designs and produces specialty knives and tools for the hunting/outdoors, military/law enforcement and industrial markets.

Because of the relative size of this investment, we are significantly exposed to the risks associated with SOG’s business. The company’s brand has a good reputation among those within the industry; however, it is largely viewed as more of a niche player, with somewhat limited awareness outside of core customer segments. Although it has experienced recent gains in market share, it still lags behind some of its competitors based on overall market size. Thus, SOG could be adversely affected by the aggressive actions of one of those competitors. SOG is dependent on a small group of long-time managers for the execution of its business plan. The death, disability or departure by one or more of these individuals could have a negative impact on its business and operations.

Our Adviser has entered into an advisory services agreement with SOG. Under the terms of the agreement, our Adviser has agreed to assist SOG with obtaining or structuring credit facilities, long term loans or additional equity, to provide advice and administrative support in the management of SOG’s credit facilities and other important contractual financial relationships, and to monitor and review SOG’s capital structure and financial performance as it relates to raising additional debt and equity capital for growth and acquisitions. The agreement also provides that our Adviser will be available to assist and advise SOG in connection with adding key people to the management team that will lead to the development of best industry practices in business promotion, business development and employee and customer relations.

One of our Adviser’s directors, Kyle Largent, is a director of SOG. The principal executive offices of SOG are located at 6521 212^th Street SW, Lynnwood, Washington 98036.

 

S-55

---

Table of Contents

MANAGEMENT

On October 7, 2014, the Board of Directors elected Walter H. Wilkinson, Jr. to the board to fill the directorship vacancy created upon the death of a former director. Mr. Wilkinson was also appointed a member of each of the Company’s Compensation Committee and Ethics, Nominating and Corporate Governance Committee, effective immediately. Mr. Wilkinson, age 68, is an “independent director” within the meaning of NASDAQ Stock Market Marketplace Rule 5605(a)(2) and Section 10A of the Securities and Exchange Act of 1934, as amended. Because Mr. Wilkinson is filling a vacancy on our board, Mr. Wilkinson’s initial term will expire on the date of the Company’s 2015 Annual Meeting of Shareholders.

Mr. Wilkinson is the founder and a general partner of Kitty Hawk Capital, a venture capital firm established in 1980 and based in Charlotte, North Carolina. He has served as a director of RF Micro Devices (Nasdaq:RFMD) since 1992 and has served as the Chairman of the Board of Directors since July 2008. He currently serves on the board of the N.C. State University Foundation and has previously served on the boards of other universities and related organizations. He is a past member and director of the National Venture Capital Association and is a past member and Chairman of the National Association of Small Business Investment Companies. He was founding Chairman of the Carolinas Chapter of the National Association of Corporate Directors (“NACD”), is currently on its board and is a NACD Leadership Fellow, having completed the NACD’s program for corporate directors. During his career he has helped to start or expand dozens of rapidly growing companies in a variety of industries. Mr. Wilkinson serves or has served as a director of numerous venture-backed companies, both public and private.

Mr. Wilkinson was selected as a director for the Company due to his vast experience in various areas of the investment industry as well as his experience in serving on boards of various organizations. With over 35 years of venture capital experience, Mr. Wilkinson also brings a unique perspective to the board. He has overseen the successful growth and evolution of numerous businesses and understands the challenges of leading both private and public companies through changing economic conditions and that boards of directors must work together in a collegial and effective manner to provide appropriate guidance to management.

 

S-56

---

Table of Contents

DESCRIPTION OF THE SERIES B TERM PREFERRED STOCK

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

General

Under our Amended and Restated Certificate of Incorporation, we are authorized to issue 110,000,000 shares of stock, of which 100,000,000 are Common Stock and 10,000,000 are Preferred Stock. In February 2012, we designated 1,610,000 shares of Preferred Stock as Series A Term Preferred Stock and issued 1,600,000 of those shares. In October and November 2014, our Board took action to approve designation of 2,000,000 shares of Preferred Stock as Series B Term Preferred Stock. Terms of the Series B Term Preferred Stock are set forth in the Certificate of Designation.

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

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

Dividends and Dividend Periods

General

The holders of the Series B Term Preferred Stock will be entitled to receive cumulative cash dividends and distributions on such shares, when, as and if declared by, or under authority granted by, our Board of Directors out of funds legally available for payment, in parity with dividends and distributions to holders of the Series A Term Preferred Stock and in preference to dividends and distributions on Common Stock, calculated separately for each monthly dividend period, each a Dividend Period, for the Series B Term Preferred Stock at the Fixed Dividend Rate in effect during such Dividend Period, on an amount equal to the Liquidation Preference for the Series B Term Preferred Stock. The Fixed Dividend Rate is computed on the basis of a 360-day year consisting of twelve 30-day months. Dividends so declared and payable will be paid to the extent permitted under state law and our Amended and Restated Certificate of Incorporation, and to the extent available, in preference to and priority over any dividend declared and payable on Common Stock.

Fixed Dividend Rate

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

 

S-57

---

Table of Contents

Payment of Dividends and Dividend Periods

The first Dividend Period for the Series B Term Preferred Stock will commence on November     , 2014 and end on December 31, 2014, and each subsequent Dividend Period will be a calendar month (or the portion thereof occurring prior to the redemption of such Series B Term Preferred Stock). Dividends will be payable monthly in arrears on the Dividend Payment Date, the last Business Day of the month of the Dividend Period and upon redemption of the Series B Term Preferred Stock. Except for the first Dividend Period, dividends with respect to any monthly Dividend Period will be declared and paid to holders of record of Series B Term Preferred Stock as their names shall appear on our registration books at the close of business on the applicable record date, which shall be such date designated by our Board of Directors that is not more than 20, nor less than seven, calendar days prior to such Dividend Payment Date. Dividends with respect to the first Dividend Period of the Series B Term Preferred Stock will be declared in November 2014 and paid on December 31, 2014 to holders of record of such Series B Term Preferred Stock as their names appear on our registration books at the close of business on                     , 2014.

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

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

Mechanics of Payment of Dividends

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

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

 

S-58

---

Table of Contents

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

Adjustment to Fixed Dividend Rate—Default Period

Subject to the cure provisions below, a Default Period with respect to the Series B Term Preferred Stock will commence on a date we fail to deposit the Deposit Securities to redeem the Series B Term Preferred Stock in any circumstance in which redemption is required or we fail to pay a dividend on the Series B Term Preferred Stock as required as described above (either such failure, a “Default”). A Default Period shall end on the Business Day on which, by 12:00 noon, New York City time, an amount equal to all unpaid dividends and any unpaid redemption price shall have been deposited irrevocably in trust in same-day funds with the Redemption and Paying Agent. In the case of a Default, the applicable dividend rate for each day during the Default Period will be equal to the Default Rate. The Default Rate for any calendar day will be equal to the applicable Dividend Rate in effect on such day plus four percent (4%) per annum.

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

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

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

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

 

S-59

---

Table of Contents

Asset Coverage as described below for which a Notice of Redemption shall have been given or shall have been required to be given in accordance with the terms described herein on or prior to the date of the applicable dividend, distribution, redemption, purchase or acquisition.

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

We may issue debt in one or more classes or series. Under the 1940 Act, we may not (1) declare any dividend with respect to any Preferred Stock if, at the time of such declaration (and after giving effect thereto), Asset Coverage with respect to any of our borrowings that are senior securities representing indebtedness (as defined in the 1940 Act), would be less than 200% (or such other percentage as may in the future be specified in or under the 1940 Act as the minimum Asset Coverage for senior securities representing indebtedness of a closed-end investment company as a condition of declaring dividends on its Preferred Stock) or (2) declare any other distribution on the Preferred Stock or purchase or redeem Preferred Stock if at the time of the declaration or redemption (and after giving effect thereto), Asset Coverage with respect to such borrowings that are senior securities representing indebtedness would be less than 200% (or such higher percentage as may in the future be specified in or under the 1940 Act as the minimum Asset Coverage for senior securities representing indebtedness of a closed-end investment company as a condition of declaring distributions, purchases or redemptions of its shares). “Senior securities representing indebtedness” generally means any bond, debenture, note or similar obligation or instrument constituting a security (other than shares of capital stock) and evidencing indebtedness and could include our obligations under any borrowings. For purposes of determining Asset Coverage for senior securities representing indebtedness in connection with the payment of dividends or other distributions on or purchases or redemptions of stock, the term senior security does not include any promissory note or other evidence of indebtedness issued in consideration of any loan, extension or renewal thereof, made by a bank or other person and privately arranged, and not intended to be publicly distributed. The term senior security also does not include any such promissory note or other evidence of indebtedness in any case where such a loan is for temporary purposes only and in an amount not exceeding 5% of the value of our total assets at the time when the loan is made; a loan is presumed under the 1940 Act to be for temporary purposes if it is repaid within 60 calendar days and is not extended or renewed; otherwise, such loan is presumed not to be for temporary purposes. For purposes of determining whether the 200% statutory Asset Coverage requirements described above apply in connection with dividends or distributions on or purchases or redemptions of Preferred Stock, such Asset Coverage may be calculated on the basis of values calculated as of a time within 48 hours (only including Business Days) next preceding the time of the applicable determination.

Asset Coverage

If we fail to maintain Asset Coverage of at least 200% as of the close of business on the last Business Day of a calendar quarter (meaning the three months ended March 31, June 30, September 30 and December 31), the Series B Term Preferred Stock may become subject to mandatory redemption as provided below. “Asset Coverage” means asset coverage of a class of senior security which is a stock, as defined for purposes of Section 18(h) of the 1940 Act as in effect on the date of the Certificate of Designation, determined on the basis of

 

S-60

---

Table of Contents

values calculated as of a time within two Business Days next preceding the time of such determination. For purposes of this determination, no shares of Series B Term Preferred Stock or other Preferred Stock we have issued, will be deemed to be outstanding for purposes of the computation of Asset Coverage if, prior to or concurrently with such determination, either sufficient Deposit Securities or other sufficient funds (in accordance with the terms of such Preferred Stock) to pay the full redemption price for such Preferred Stock (or the portion thereof to be redeemed) will have been deposited in trust with the Redemption and Paying Agent for such Preferred Stock and the requisite notice of redemption for such Preferred Stock (or the portion thereof to be redeemed) will have been given or sufficient Deposit Securities or other sufficient funds (in accordance with the terms of such Preferred Stock) to pay the full redemption price for such Preferred Stock (or the portion thereof to be redeemed) will have been segregated by us and our custodian, or Custodian, from our assets, by means of appropriate identification on the Custodian’s books and records or otherwise in accordance with the Custodian’s normal procedures. In such event, the Deposit Securities or other sufficient funds so deposited or segregated will not be included as our assets for purposes of the computation of Asset Coverage.

Redemption

Mandatory Term Redemption

We are required to provide for the mandatory redemption, or the Term Redemption, of all of the Series B Term Preferred Stock on the Mandatory Term Redemption Date, at a redemption price equal to the Liquidation Preference, plus an amount equal to accumulated but unpaid dividends thereon (whether or not earned or declared but excluding interest thereon) to, but excluding, the Mandatory Term Redemption Date, which we refer to as the Term Redemption Price. If such Redemption Date occurs after the applicable record date for a dividend but on or prior to the related Dividend Payment Date, the dividend payable on such Dividend Payment Date in respect of such Series B Term Preferred Stock will be payable on such Dividend Payment Date to the holders of record of such shares of Series B Term Preferred Stock at the close of business on the applicable record date, and will not be payable as part of the Redemption Price for such shares of Series B Term Preferred Stock.

Mandatory Redemption for Asset Coverage

If we fail to have Asset Coverage of at least 200% as provided in the Certificate of Designation and such failure is not cured as of the close of business on the Asset Coverage Cure Date, we will fix a redemption date and proceed to redeem the number of shares of Preferred Stock as described below at a price per share equal to the liquidation price per share of the applicable Preferred Stock, which in the case of the Series A and Series B Term Preferred Stock we refer to as the Mandatory Redemption Price and is equal to the Liquidation Preference, plus accumulated but unpaid dividends and distributions thereon (whether or not earned or declared but excluding interest thereon) to, but excluding, the date fixed for redemption by our Board of Directors. We will redeem out of funds legally available the number of shares of Preferred Stock (which may include at our sole option any number or proportion of Preferred Stock) equal to the lesser of (i) the minimum number of shares of Preferred Stock, the redemption of which, if deemed to have occurred immediately prior to the opening of business on the Asset Coverage Cure Date, would result in us having Asset Coverage of at least 200% and (ii) the maximum number of shares of Preferred Stock that can be redeemed out of funds expected to be legally available in accordance with our Amended and Restated Certificate of Incorporation and applicable law, provided further, that in connection with any such redemption for failure to maintain such Asset Coverage ratio, we may redeem such additional number of shares of Preferred Stock that will result in our having an Asset Coverage ratio of up to and including 215%. We will effect a redemption on the date fixed by us, which date will not be later than 90 calendar days after the Asset Coverage Cure Date, except that if we do not have funds legally available for the redemption of all of the required number of shares of Series B Term Preferred Stock and other shares of Preferred Stock which have been designated to be redeemed or we otherwise are unable to effect such redemption on or prior to 90 calendar days after the Asset Coverage Cure Date, we will redeem those shares of Series B Term Preferred Stock and other shares of Preferred Stock which we were unable to redeem on the earliest practicable date on which we are able to effect such redemption.

 

S-61

---

Table of Contents

Optional Redemption

On or after December 31, 2017 (any such date, an Optional Redemption Date), at our sole option, we may redeem, from time to time, in whole or in part, outstanding Series B Term Preferred Stock, at a redemption price equal to the Liquidation Preference, plus an amount equal to all unpaid dividends and distributions accumulated to, but excluding, the Optional Redemption Date (whether or not earned or declared by us, but excluding interest thereon), which we refer to as the Optional Redemption Price.

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

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

Change of Control

If a Change of Control Triggering Event (as defined below) occurs with respect to the Series B Term Preferred Stock, unless we have exercised our option to redeem such Series B Term Preferred Stock as described above, we will be required to redeem all of the outstanding Series B Term Preferred Stock at a price equal to the Liquidation Preference, plus an amount equal to any accumulated and unpaid dividends up to, but excluding, the date of redemption, but without interest, which we refer to as the Change of Control Redemption Price. We will be obligated to do the same with respect to the Series A Term Preferred Stock if a Change of Control Triggering Event occurs.

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

“Change of Control Triggering Event” means the occurrence of any of the following: (1) the direct or indirect sale, lease, transfer, conveyance or other disposition (other than by way of merger or consolidation), in one or more series of related transactions, of all or substantially all of our assets and the assets of the our subsidiaries, taken as a whole, to any Person, other than us or one of our subsidiaries; (2) the consummation of any transaction (including any merger or consolidation) the result of which is that any Person becomes the beneficial owner (as defined in Rules 13d-3 and 13d-5 under the Exchange Act), directly or indirectly, of more than 50% of our outstanding Voting Stock or other Voting Stock into which our Voting Stock is reclassified, consolidated, exchanged or changed, measured by voting power rather than number of shares; (3) we consolidate with, or merge with or into, any Person, or any Person consolidates with, or merges with or into, us, in any such event pursuant to a transaction in which any of our outstanding Voting Stock or the Voting Stock of such other Person is converted into or exchanged for cash, securities or other property, other than any such transaction where the shares of our Voting Stock outstanding immediately prior to such transaction constitute, or are converted into or exchanged for, a majority of the Voting Stock of the surviving Person or any direct or indirect parent company of the surviving Person immediately after giving effect to such transaction; or (4) the adoption of a plan relating to our liquidation or dissolution. Notwithstanding the foregoing, a transaction will not be deemed to involve a Change of Control Triggering Event under clause (2) above if (i) we become a direct or indirect wholly-owned subsidiary of a holding company and (ii)(A) the direct or indirect holders of the Voting Stock of such holding company immediately following that transaction are substantially the same as the holders of our Voting Stock immediately prior to that transaction or (B) immediately following that transaction no Person (other than a holding company satisfying the requirements of this sentence) is the beneficial owner, directly or indirectly, of more than 50% of the Voting Stock of such holding company.

 

S-62

---

Table of Contents

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

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

Redemption Procedures

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

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

If we give a Notice of Redemption, then at any time from and after the giving of such Notice of Redemption and prior to 12:00 noon, New York City time, on the Redemption Date (so long as any conditions precedent to such redemption have been met or waived by us), we will (i) deposit with the Redemption and Paying Agent Deposit Securities having an aggregate Market Value at the time of deposit no less than the redemption price of the shares of Series B Term Preferred Stock to be redeemed on the Redemption Date and (ii) give the Redemption and Paying Agent irrevocable instructions and authority to pay the applicable redemption price to the holders of shares of Series B Term Preferred Stock called for redemption on the Redemption Date. Notwithstanding the foregoing, if the Redemption Date is the Mandatory Term Redemption Date, then such deposit of Deposit Securities will be made no later than 15 calendar days prior to the Mandatory Term Redemption Date.

Upon the date of the deposit of Deposit Securities by us for purposes of redemption of shares of Series B Term Preferred Stock, all rights of the holders of Series B Term Preferred Stock so called for redemption shall cease and terminate except the right of the holders thereof to receive the Term Redemption Price, the Mandatory

 

S-63

---

Table of Contents

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

If any redemption for which a Notice of Redemption has been provided is not made by reason of the absence of our legally available funds in accordance with the Certificate of Designation and applicable law, such redemption shall be made as soon as practicable to the extent such funds become available. No Redemption Default will be deemed to have occurred if we have failed to deposit in trust with the Redemption and Paying Agent the applicable Redemption Price with respect to any shares where (1) the Notice of Redemption relating to such redemption provided that such redemption was subject to one or more conditions precedent and (2) any such condition precedent has not been satisfied at the time or times and in the manner specified in such Notice of Redemption. Notwithstanding the fact that a Notice of Redemption has been provided with respect to any shares of Series B Term Preferred Stock, dividends may be declared and paid on such shares of Series B Term Preferred Stock in accordance with their terms if Deposit Securities for the payment of the Redemption Price of such shares of Series B Term Preferred Stock shall not have been deposited in trust with the Redemption and Paying Agent for that purpose.

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

Liquidation Rights

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

If, upon any liquidation, dissolution or winding up of our affairs, whether voluntary or involuntary, our assets available for distribution among the holders of all Series B Term Preferred Stock, and any other outstanding shares of Preferred Stock, if any, will be insufficient to permit the payment in full to such holders of Series B Term Preferred Stock of the Liquidation Preference, plus accumulated and unpaid dividends and distributions and the amounts due upon liquidation with respect to such other shares of Preferred Stock, then the available assets will be distributed among the holders of such Series B Term Preferred Stock and such other series of Preferred Stock ratably in proportion to the respective preferential liquidation amounts to which they are entitled. In connection with any liquidation, dissolution or winding up of our affairs whether voluntary or involuntary, unless and until the Liquidation Preference on each outstanding share of Series B Term Preferred Stock plus accumulated and unpaid dividends and distributions has been paid in full to the holders of Series B Term

 

S-64

---

Table of Contents

Preferred Stock, no dividends, distributions or other payments will be made on, and no redemption, repurchase or other acquisition by us will be made by us in respect of, the Common Stock.

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

Voting Rights

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

In addition, the holders of outstanding shares of any Preferred Stock, including the Series B Term Preferred Stock, will be entitled, as a class, to the exclusion of the holders of all other securities and classes of Common Stock, to elect two of our directors at all times (regardless of the total number of directors serving on the Board of Directors). We refer to these directors as the Preferred Directors. The holders of outstanding shares of Common Stock and Preferred Stock, including Series B Term Preferred Stock, voting together as a single class, will elect the balance of our directors. Under our bylaws, our directors are divided into three classes. Each class consists, as nearly as possible, of one-third of the total number of directors, and each class has a three-year term. At each annual meeting of our stockholders, the successors to the class of directors whose term expires at such meeting will be elected to hold office for a term expiring at the annual meeting of stockholders held in the third year following the year of their election. One of the Preferred Directors was elected in 2014, and another Preferred Director will be up for election in 2015.

In the event we owe accumulated dividends (whether or not earned or declared) on our Preferred Stock equal to at least two full years of dividends (and sufficient cash or securities have not been deposited with a paying agent for the payment of the accumulated dividends) the number of directors constituting the board will be increased by the smallest number of directors, which we refer to as the New Preferred Directors, that when added to the Preferred Directors will constitute a majority. We will then call a special meeting of holders of the Preferred Stock to permit the election of the New Preferred Directors. The term of the New Preferred Directors will last for so long as we are in arrears on our dividends as described above. The ability of the holders of Preferred Stock to elect the New Preferred Directors will also terminate, subject to reinstatement, once we have a Dividend Payment Date on which we are no longer in arrears on our dividends to the extent described above.

Notwithstanding the foregoing, if: (1) at the close of business on any dividend payment date for dividends on any outstanding share of any Preferred Stock, including any outstanding shares of Series B Term Preferred Stock, accumulated dividends (whether or not earned or declared) on the shares of Preferred Stock, including the Series B Term Preferred Stock, equal to at least two full years’ dividends shall be due and unpaid and sufficient cash or specified securities shall not have been deposited with the Redemption and Paying Agent or other applicable paying agent for the payment of such accumulated dividends; or (2) at any time holders of any shares of Preferred Stock are entitled under the 1940 Act to elect a majority of our directors (a period when either of the foregoing conditions exists, a Voting Period), then the number of members constituting our Board of Directors will automatically be increased by the smallest number that, when added to the two directors elected exclusively by the holders of shares of any Preferred Stock, including the Series B Term Preferred Stock, as described above,

 

S-65

---

Table of Contents

would constitute a majority of our Board of Directors as so increased by such smallest number; and the holders of the shares of Preferred Stock, including the Series B Term Preferred Stock, will be entitled as a class on a one-vote-per-share basis, to elect such additional directors. The terms of office of the persons who are directors at the time of that election will not be affected by the election of the additional directors. If we thereafter shall pay, or declare and set apart for payment, in full all dividends payable on all outstanding shares of Preferred Stock, including Series B Term Preferred Stock, for all past dividend periods, or the Voting Period is otherwise terminated, (1) the voting rights stated above shall cease, subject always, however, to the revesting of such voting rights in the holders of shares of Preferred Stock upon the further occurrence of any of the events described herein, and (2) the terms of office of all of the additional directors so elected will terminate automatically. Any Preferred Stock, including Series B Term Preferred Stock, issued after the date hereof will vote with Series B Term Preferred Stock as a single class on the matters described above, and the issuance of any other Preferred Stock, including Series B Term Preferred Stock, by us may reduce the voting power of the holders of Series B Term Preferred Stock.

As soon as practicable after the accrual of any right of the holders of shares of Preferred Stock to elect additional directors as described above, we will call a special meeting of such holders and notify the Redemption and Paying Agent and/or such other person as is specified in the terms of such Preferred Stock to receive notice, (i) by mailing or delivery by electronic means or (ii) in such other manner and by such other means as are specified in the terms of such Preferred Stock, a notice of such special meeting to such holders, such meeting to be held not less than 10 nor more than 30 calendar days after the date of the delivery by electronic means or mailing of such notice. If we fail to call such a special meeting, it may be called at our expense by any such holder on like notice. The record date for determining the holders of shares of Preferred Stock entitled to notice of and to vote at such special meeting shall be the close of business on the fifth Business Day preceding the calendar day on which such notice is mailed. At any such special meeting and at each meeting of holders of shares of Preferred Stock held during a Voting Period at which directors are to be elected, such holders, voting together as a class (to the exclusion of the holders of all our other securities and classes of capital stock), will be entitled to elect the number of additional directors prescribed above on a one-vote-per-share basis.

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

So long as any shares of Series B Term Preferred Stock are outstanding, we will not, without the affirmative vote or consent of the holders of at least 66 ²⁄₃% of the shares of Series B Term Preferred Stock outstanding at the time, voting as a separate class, file a voluntary application for relief under federal bankruptcy law or any similar

 

S-66

---

Table of Contents

application under state law for so long as we are solvent and does not foresee becoming insolvent. No amendment, alteration or repeal of our obligation to pay the Term Redemption Price on the Term Redemption Date for a series of Term Preferred Stock or to accumulate dividends at the Dividend Rate for that series will be effected without, in each case, the prior unanimous vote or consent of the holders of such series of Preferred Stock.

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

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

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

Issuance of Additional Preferred Stock

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

 

S-67

---

Table of Contents

Actions on Other than Business Days

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

Modification

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

Information Rights

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

 

S-68

---

Table of Contents

UNDERWRITING

Janney Montgomery Scott LLC, Sterne, Agee & Leach, Inc., BB&T Capital Markets, a division of BB&T Securities, LLC, J.J.B. Hilliard, W.L. Lyons, LLC, Wunderlich Securities, Inc. and Ladenburg Thalmann & Co. Inc. are the underwriters of this offering. Subject to the terms and conditions of the underwriting agreement dated November     , 2014, the underwriters have agreed to purchase severally, and we have agreed to sell to the underwriters, the number of Series B Term Preferred Stock set forth opposite their respective names below at the public offering price less the underwriting discounts and commissions on the cover page of this prospectus supplement.

 

		Number of Shares
Underwriters
Janney Montgomery Scott LLC
Sterne, Agee & Leach, Inc.
BB&T Capital Markets, a division of BB&T Securities, LLC
J.J.B. Hilliard, W.L. Lyons, LLC
Wunderlich Securities, Inc.
Ladenburg Thalmann & Co. Inc.
Total

Janney Montgomery Scott LLC is acting as sole book-running manager of this offering and as representative of the underwriters named above.

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

The underwriters propose to offer some of the Series B Term Preferred Stock to the public initially at the offering price per share shown on the cover page of this prospectus supplement and may offer shares to certain dealers at such price less a concession not in excess of $ per share. After the public offering of the Series B Term Preferred Stock, the public offering price and concessions described above may be changed by the underwriters.

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

 

S-69

---

Table of Contents

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

 

PER SHARE

TOTAL

WITHOUT OVERALLOTMENT

WITH OVERALLOTMENT

WITHOUT OVERALLOTMENT

WITH OVERALLOTMENT

Public price offering

$

$

$

$

Underwriting discounts and commissions paid by us

$

$

$

$

Proceeds to us, before expenses

$

$

$

$

We estimate that expenses payable by us in connection with this offering, other than underwriting discounts and commissions referred to above, will be approximately $        . Of this amount, $25,000 represents expenses for which we will reimburse the underwriters for reasonable and accountable out-of-pocket expenses, including reasonable fees for their counsel.

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

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

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

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

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

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

 

S-70

---

Table of Contents

The underwriting agreement provides that we and our directors and executive officers will agree not to, directly or indirectly, sell or otherwise dispose of any of the Series B Term Preferred Stock, Series A Term Preferred Stock or shares of our Common Stock for a period of 60 days after the completion of this offering without the prior written consent of Janney Montgomery Scott LLC, on behalf of the underwriters. We have also agreed to make no such sales during this period except in connection with the issuance of shares of our Common Stock pursuant to our dividend reinvestment plan.

Notwithstanding the foregoing, if (1) during the last 17 days of the 60-day lock-up period, we issue an earnings release or material news or material event relating to us occurs; or (2) prior to the expiration of the 60-day lock-up period, we announce that we will release earnings results during the 16-day period beginning on the last day of the 60-day lock-up period, and, in the case of either clause (1) or (2) immediately above, the safe harbor pursuant to Rule 139 under the Securities Act is not available to the underwriters, then the restrictions set forth above will continue to apply until the expiration of an 18-day period beginning on the date of issuance of such earnings release or the occurrence of the material news or material event.

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

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

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

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

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

 

S-71

---

Table of Contents

Alternative Settlement Cycle

We expect that delivery of the shares of Series B Term Preferred Stock will be made against payment therefor on or about                     , 2014, which will be the fifth business day following the date of the pricing of the Series B Term Preferred Stock (such settlement being herein referred to as “T+5”). Under Rule 15c6-1 promulgated under the Exchange Act, trades in the secondary market generally are required to settle in three business days, unless the parties to any such trade expressly agree otherwise. Accordingly, purchasers who wish to trade the Series B Term Preferred Stock prior to the date of delivery hereunder will be required, by virtue of the fact that the Series B Term Preferred Stock initially will settle in T+5 business days, to specify an alternative settlement arrangement at the time of any such trade to prevent a failed settlement.

Affiliations and Conflicts of Interest

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

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

The principal business address of Janney Montgomery Scott LLC is 1717 Arch Street, Philadelphia, PA 19103. The principal business address of Sterne, Agee & Leach, Inc. is 800 Shades Creek Parkway, Suite 700, Birmingham, AL 35209. The principal business address of BB&T Capital Markets, 901 East Byrd Street, Suite 410, Richmond, VA 23219. The principal business address of J.J.B. Hilliard, W.L. Lyons, LLC is 500 W. Jefferson Street, Louisville, KY 40202. The principal business address of Wunderlich Securities, Inc. is 6000 Poplar Ave., Suite 150, Memphis, TN 38119. The principal business address of Ladenburg Thalmann & Co. Inc. is 570 Lexington Avenue, 12th Floor, New York, NY 10022.

 

S-72

---

Table of Contents

ADDITIONAL MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS

This discussion serves as a supplement to the discussion in the accompanying prospectus under the heading “Material U.S. Federal Income Tax Considerations—Taxation of Our U.S. Stockholders.”

Redemption of our Series B Term Preferred Stock. Gain or loss, if any, recognized by a U.S. stockholder in connection with our redemption of Series B Term Preferred Stock generally will be taxed as gain or loss from a sale or exchange of Series B Term Preferred Stock if the redemption (a) is “not essentially equivalent to a dividend” with respect to the U.S. stockholder, (b) results in a “complete termination” of U.S. stockholder’s ownership of our stock, (c) is “substantially disproportionate” with respect to the U.S. stockholder, or (d) with respect to non-corporate U.S. stockholder, is in “partial liquidation” of us, in each case, within the meaning of the federal income tax laws.

In determining whether any of these alternative tests has been met, stock considered to be owned by the U.S. stockholder by reason of certain constructive ownership rules in the federal income tax laws, as well as stock actually owned by the U.S. stockholder, generally must be taken into account. To the extent that our stock is widely held and publicly traded at any time that we repurchase Series B Term Preferred Stock, we expect that such repurchase generally will be treated as a sale or exchange for federal income tax purposes if it results in a proportionate reduction of the U.S. stockholder’s right to vote, to participate in current earnings and accumulated surplus or to share in our net assets on liquidation. Because the determination as to whether any of the alternative tests described above will be satisfied with respect to the U.S. stockholder depends upon the facts and circumstances at the time that the determination must be made, however, U.S. stockholders are advised to consult their tax advisors to determine their own tax treatment in the event of a redemption of Series B Term Preferred Stock.

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

If a redemption of Series B Term Preferred Stock from a U.S. stockholder is not treated as a sale or exchange for federal income tax purposes, the proceeds of such distribution will be treated for federal income tax purposes as a distribution taxable as a dividend to the extent of our current and accumulated earnings and profits attributable to such Series B Term Preferred Stock at ordinary income rates. See “Material U.S. Federal Income Tax Considerations—Distributions” in the accompanying prospectus.

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

The custodian of our assets is The Bank of New York Mellon Corp. The custodian’s address is: 500 Ross Street, Suite 625, Pittsburgh, PA 15262. Our assets are held under bank custodianship in compliance with the 1940 Act. Securities held through our wholly owned subsidiary, Gladstone Business Investment, LLC, or Business Investment, are held under a custodian agreement with The Bank of New York Mellon Corp., which acts as collateral custodian pursuant to the credit facility with Key Equipment Finance Inc. and certain other parties. The address of the collateral custodian is 500 Ross Street, Suite 625, Pittsburgh, PA 15262. Computershare Inc. acts as our transfer, redemption and dividend paying agent and registrar. The principal business address of Computershare Inc. is 250 Royall Street, Canton, Massachusetts 02021, telephone number 781-575-2000. Computershare Inc. also maintains an internet website at www.computershare.com.

 

S-73

---

Table of Contents

MISCELLANEOUS

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

WHERE YOU CAN FIND MORE INFORMATION

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

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

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

LEGAL MATTERS

The legality of securities offered hereby will be passed upon for us by Bass, Berry & Sims, PLC, Nashville, Tennessee. Certain legal matters will be passed upon for the underwriters by Dechert LLP, Washington, D.C.

EXPERTS

The financial statements as of March 31, 2014 and March 31, 2013 and for each of the three years in the period ended March 31, 2014 and management’s assessment of the effectiveness of internal control over financial reporting (which is included in the Report of Management on Internal Controls) as of March 31, 2014 included in the accompanying prospectus have been so included in reliance on the report of PricewaterhouseCoopers LLP, an independent registered public accounting firm, given on the authority of said firm as experts in auditing and accounting.

 

S-74

---

Table of Contents

INDEX TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Condensed Consolidated Statements of Assets and Liabilities as of September 30, 2014 and March  31, 2014			SF-2
Condensed Consolidated Statements of Operations for the three and six months ended September  30, 2014 and 2013			SF-3
Condensed Consolidated Statements of Changes in Net Assets for the six months ended September  30, 2014 and 2013			SF-4
Condensed Consolidated Statements of Cash Flows for the six months ended September 30, 2014 and 2013			SF-5
Condensed Consolidated Schedules of Investments as of September 30, 2014 and March 31, 2014			SF-6
Notes to Condensed Consolidated Financial Statements			SF-19

 

SF-1

---

Table of Contents

GLADSTONE INVESTMENT CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES

(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

(UNAUDITED)

 

		September 30,				March 31,
		2014				2014
ASSETS
Investments at fair value
Non-Control/Non-Affiliate investments (Cost of $181,693 and $233,895, respectively)		$	172,970			$	205,440
Affiliate investments (Cost of $201,605 and $120,010, respectively)			156,661				87,849
Control investments (Cost of $28,782 and $29,632 respectively)			17,270				21,104
Total investments at fair value (Cost of $412,080 and $383,537, respectively)			346,901				314,393
Cash			3,052				4,553
Restricted cash			3,450				5,314
Interest receivable			1,713				1,289
Due from custodian			1,177				1,704
Deferred financing costs			3,569				2,355
Other assets			1,312				1,086
Total assets		$	361,174			$	330,694
LIABILITIES
Borrowings:
Line of credit at fair value (Cost of $87,750 and $61,250, respectively)		$	87,750			$	61,701
Secured borrowing			5,096				5,000
Total borrowings			92,846				66,701
Mandatorily redeemable preferred stock, $0.001 par value, $25 liquidation preference; 1,610,000 shares authorized, 1,600,000 shares issued and outstanding			40,000				40,000
Accounts payable and accrued expenses			1,055				665
Fees due to Adviser(A)			1,307				1,225
Fee due to Administrator(A)			209				224
Other liabilities			984				1,042
Total liabilities			136,401				109,857
Commitments and contingencies(B)
NET ASSETS
Common stock, $0.001 par value per share, 100,000,000 shares authorized, 26,475,958 shares issued and outstanding		$	26			$	26
Capital in excess of par value			286,866				287,062
Cumulative net unrealized depreciation of investments			(65,179	)			(69,144	)
Cumulative net unrealized depreciation of other			(74	)			(525	)
Net investment income in excess of distributions			3,344				3,616
Accumulated net realized loss			(210	)			(198	)
Total net assets			224,773				220,837
Total liabilities and net assets		$	361,174			$	330,694
NET ASSET VALUE PER SHARE AT END OF PERIOD		$	8.49			$	8.34

 

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

(B)	Refer to Note 10—Commitments and Contingencies for additional information.

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

 

SF-2

---

Table of Contents

GLADSTONE INVESTMENT CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

(UNAUDITED)

 

		Three Months Ended September 30,								Six Months Ended September 30,
		2014				2013				2014				2013
INVESTMENT INCOME
Interest income
Non-Control/Non-Affiliate investments		$	4,494			$	5,216			$	9,751			$	9,893
Affiliate investments			3,540				473				6,156				931
Control investments			535				2,017				1,065				4,063
Cash and cash equivalents			1				—				2				1
Total interest income			8,570				7,706				16,974				14,888
Other income
Non-Control/Non-Affiliate investments			501				25				1,900				241
Affiliate investments			—				333				34				333
Control investments			—				3,295				—				3,295
Total other income			501				3,653				1,934				3,869
Total investment income			9,071				11,359				18,908				18,757
EXPENSES
Base management fee(A)			1,744				1,561				3,410				3,110
Loan servicing fee(A)			1,158				1,116				2,293				2,141
Incentive fee(A)			1,051				1,557				2,266				1,722
Administration fee(A)			209				156				444				399
Interest expense on borrowings			720				597				1,458				1,074
Dividends on mandatorily redeemable preferred stock			712				712				1,425				1,425
Amortization of deferred financing fees			282				256				536				499
Professional fees			305				159				547				280
Other general and administrative expenses			450				467				747				832
Expenses before credits from Adviser			6,631				6,581				13,126				11,482
Credit of loan servicing fee(A)			(1,158	)			(1,116	)			(2,293	)			(2,141	)
Other credits to Adviser fees(A)			(606	)			(334	)			(988	)			(845	)
Total expenses net of credits to fees			4,867				5,131				9,845				8,496
NET INVESTMENT INCOME			4,204				6,228				9,063				10,261
REALIZED AND UNREALIZED (LOSS) GAIN
Net realized (loss) gain:
Control investments			(12	)			24,804				(12	)			24,804
Total net realized (loss) gain			(12	)			24,804				(12	)			24,804
Net unrealized (depreciation) appreciation:
Non-Control/Non-Affiliate investments			9,454				1,258				9,899				(8,378	)
Affiliate investments			(4,283	)			411				(2,941	)			(3,022	)
Control investments			(6,666	)			(17,353	)			(2,993	)			(15,690	)
Other			—				(409	)			451				445
Total net unrealized (depreciation) appreciation			(1,495	)			(16,093	)			4,416				(26,645	)
Net realized and unrealized (loss) gain			(1,507	)			8,711				4,404				(1,841	)
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS		$	2,697			$	14,939			$	13,467			$	8,420
BASIC AND DILUTED PER COMMON SHARE:
Net investment income		$	0.16			$	0.24			$	0.34			$	0.39
Net increase in net assets resulting from operations		$	0.10			$	0.57			$	0.51			$	0.32
Distributions		$	0.18			$	0.15			$	0.36			$	0.30
WEIGHTED AVERAGE SHARES OF COMMON STOCK OUTSTANDING:
Basic and diluted			26,475,958				26,475,958				26,475,958				26,475,958

 

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

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

 

SF-3

---

Table of Contents

GLADSTONE INVESTMENT CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS

(IN THOUSANDS)

(UNAUDITED)

 

		Six Months Ended September 30,
		2014				2013
OPERATIONS:
Net investment income		$	9,063			$	10,261
Net realized (loss) gain of investments			(12	)			24,804
Net unrealized appreciation (depreciation) of investments			3,965				(27,090	)
Net unrealized appreciation of other			451				445
Net increase in net assets from operations			13,467				8,420
DISTRIBUTIONS TO COMMON STOCKHOLDERS:			(9,531	)			(7,943	)
Total increase in net assets			3,936				477
Net assets at beginning of period			220,837				240,963
Net assets at end of period		$	224,773			$	241,440

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

 

SF-4

---

Table of Contents

GLADSTONE INVESTMENT CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN THOUSANDS)

(UNAUDITED)

 

		Six Months Ended September 30,
		2014				2013
CASH FLOWS FROM OPERATING ACTIVITIES
Net increase in net assets resulting from operations		$	13,467			$	8,420
Adjustments to reconcile net increase in net assets resulting from operations to net cash (used in) provided by operating activities:
Purchase of investments			(29,287	)			(55,990	)
Principal repayments of investments			802				22,200
Increase in investment balance due to paid in kind interest			(58	)			(30	)
Net proceeds from the sale of investments			(12	)			30,804
Net realized loss (gain) on investments			12				(24,804	)
Net unrealized (appreciation) depreciation of investments			(3,965	)			27,090
Net unrealized appreciation of other			(451	)			(445	)
Amortization of deferred financing costs			536				499
Decrease (increase) in restricted cash			1,864				(4,851	)
Increase in interest receivable			(424	)			(170	)
Decrease in due from custodian			527				633
Increase in other assets			(226	)			(293	)
Increase (decrease) in accounts payable and accrued expenses			357				(24	)
Increase (decrease) in fees due to Adviser(A)			82				(120	)
Decrease in administration fee due to Administrator(A)			(15	)			(65	)
(Decrease) increase in other liabilities			(58	)			592
Net cash (used in) provided by operating activities			(16,849	)			3,446
CASH FLOWS FROM FINANCING ACTIVITIES