UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
x |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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FOR THE QUARTER ENDED DECEMBER 31, 2006 |
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
COMMISSION FILE NUMBER: 000-51233
GLADSTONE INVESTMENT CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE |
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83-0423116 |
(State or other jurisdiction of incorporation or organization) |
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(I.R.S. Employer Identification No.) |
1521 WESTBRANCH DRIVE, SUITE 200
MCLEAN, VIRGINIA 22102
(Address of principal executive office)
(703) 287-5800
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. Yes x No o.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o Accelerated filer o Non-accelerated filer x
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12 b-2 of the Exchange Act).
Yes o No x
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest practicable date. The number of shares of the issuers Common Stock, $0.001 par value, outstanding as of February 1, 2007 was 16,560,100.
GLADSTONE INVESTMENT CORPORATION
TABLE OF CONTENTS
2
GLADSTONE
INVESTMENT CORPORATION
CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES
(UNAUDITED)
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December 31, 2006 |
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March 31, 2006 |
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ASSETS |
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Non-Control/Non-Affiliate investments (Cost 12/31/06: $141,804,619; 3/31/06: $97,423,004) |
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$ |
140,777,989 |
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$ |
97,585,972 |
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Control investments (Cost 12/31/06: $80,601,004; 3/31/06: $55,846,318) |
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80,188,063 |
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55,796,318 |
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Affiliate investments (Cost 12/31/06: $19,550,000) |
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19,550,000 |
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Total investments at fair value (Cost 12/31/06: $241,955,623; 3/31/06: $153,269,322) |
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240,516,052 |
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153,382,290 |
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Cash and cash equivalents |
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1,890,942 |
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75,672,605 |
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Interest receivable |
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1,444,705 |
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761,388 |
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Due from custodian |
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2,798,620 |
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Deferred finance costs |
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459,347 |
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Prepaid directors fees |
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37,900 |
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Prepaid insurance |
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145,382 |
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99,874 |
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Due from Adviser |
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234,551 |
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Other assets |
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180,114 |
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173,099 |
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TOTAL ASSETS |
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$ |
247,473,062 |
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$ |
230,323,807 |
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LIABILITIES |
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Administration fee payable to Administrator |
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$ |
124,101 |
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$ |
110,002 |
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Fees due to Adviser |
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407,221 |
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Borrowings under line of credit |
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20,000,000 |
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Accrued expenses |
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812,864 |
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367,031 |
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Other liabilities |
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43,120 |
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5,077 |
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Total Liabilities |
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21,387,306 |
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482,110 |
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NET ASSETS |
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$ |
226,085,756 |
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$ |
229,841,697 |
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ANALYSIS OF NET ASSETS: |
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Common stock, $0.001 par value, 100,000,000 shares authorized and 16,560,100 shares issued and outstanding |
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$ |
16,560 |
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$ |
16,560 |
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Capital in excess of par value |
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230,096,572 |
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230,229,279 |
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Net unrealized (depreciation) appreciation of investment portfolio |
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(1,439,571 |
) |
112,968 |
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Distributions in excess of net investment income |
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(2,587,805 |
) |
(517,110 |
) |
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TOTAL NET ASSETS |
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$ |
226,085,756 |
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$ |
229,841,697 |
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NET ASSETS PER SHARE |
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$ |
13.65 |
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$ |
13.88 |
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THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
3
GLADSTONE INVESTMENT
CORPORATION
CONSOLIDATED SCHEDULE OF INVESTMENTS
December 31, 2006
(UNAUDITED)
Company (1) |
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Industry |
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Investment (2) |
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Cost |
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Fair Value |
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NON-CONTROL/NON-AFFILIATE INVESTMENTS |
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ACS Media, LLC |
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Service - directory advertising |
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Senior Term Debt (7.9%, Due 11/2013)(3) |
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$ |
2,627,096 |
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$ |
2,626,550 |
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Activant |
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Service - enterprise software and services |
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Senior Term Debt (7.4%, Due 5/2013)(3) |
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3,848,960 |
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3,792,675 |
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American Safety Razor Company Inc. |
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Manufacturing - razors and blades |
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Senior Term Debt (7.9%, Due 7/2013)(3) |
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1,494,998 |
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1,499,963 |
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Aspect Software, Inc. |
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Service - call center software |
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Senior Term Debt (8.4%, Due 7/2011)(3) |
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2,996,361 |
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2,992,500 |
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Bankruptcy Management Solutions, Inc. |
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Service - software and service to bankrupcy trustees |
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Senior Term Debt (8.1%, Due 7/2012)(3) |
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1,000,942 |
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1,004,981 |
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Brock Holdings II, Inc. |
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Service - industrial specialty maintenance |
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Senior Term Debt (7.9%, Due 8/2013)(3)(5) |
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3,000,480 |
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3,011,203 |
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Compsych Investments Corp. |
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Service - independent employee assistance programs |
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Senior Term Debt (8.1%, Due 2/2012)(3) (5) |
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3,926,043 |
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3,919,775 |
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CRC Health Group, Inc. |
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Service - substance abuse treatment |
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Senior Term Debt (7.9%, Due 2/2012)(3) |
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10,041,596 |
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10,005,278 |
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CST Industries Acquisition, Inc. |
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Manufacturing - metal storage units |
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Senior Term Debt (8.5%, Due 8/2013)(3) |
|
999,523 |
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1,002,488 |
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Dealer Computer Services, Inc. |
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Manufacturing & Service - systems for automotive retailers |
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Senior Term Debt (7.9%, Due 9/2013)(3) |
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1,045,380 |
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1,051,914 |
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Dresser Holdings, Inc. |
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Manufacturing - oilfield & energy products |
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Senior Term Debt (8.1%, Due 10/2013)(3) |
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2,015,898 |
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2,033,537 |
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Generac Acquisition Corp. |
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Manufacturing - standby power products |
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Senior Term Debt (7.8%, Due 11/2013)(3) |
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2,620,000 |
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2,629,825 |
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Graham Packaging Holdings Co. |
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Manufacturing - custom blow molded plastic containers |
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Senior Term Debt (7.6%, Due 10/2011)(3) |
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10,745,127 |
|
10,711,271 |
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||
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Hudson Products Holdings, Inc. |
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Manufacturing - heat transfer solutions |
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Senior Term Debt (8.1%, Due 12/2013)(3) |
|
1,310,000 |
|
1,313,275 |
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||
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IPC Information Systems, LLC |
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Manufacturing - specialized telephony systems |
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Senior Term Debt (7.9%, Due 9/2013)(3) |
|
262,000 |
|
263,310 |
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J. Crew Operating Corp. |
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Retail - apparel |
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Senior Term Debt (7.1%, Due 5/2013)(3) |
|
1,406,089 |
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1,399,999 |
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Latham Manufacturing Corp. |
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Manufacturing - swimming pool components accessories |
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Senior Term Debt (8.9%, Due 6/2012)(3) |
|
2,435,461 |
|
2,369,505 |
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Lexicon Marketing USA, Inc. |
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Service - marketing to Hispanic community |
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Senior Term Debt (7.9%, Due 5/2012)(3) (5) |
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2,979,159 |
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3,006,478 |
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||
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LVI Services, Inc. |
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Service - asbestos and mold remediation |
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Senior Term Debt (10.4%, Due 11/2010)(3) (5) |
|
6,458,112 |
|
5,920,200 |
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Madison River Capital LLC |
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Service - communications and information |
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Senior Term Debt (7.6%, Due 7/2012)(3) |
|
5,729,255 |
|
5,702,357 |
|
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Maidenform, Inc. |
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Manufacturing - intimate apparel |
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Senior Term Debt (7.2%, Due 5/2010)(3) |
|
2,569,468 |
|
2,566,667 |
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MedAssets, Inc. |
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Service - pharmaceuticals and healthcare GPO |
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Senior Term Debt (7.9%, Due 10/2013)(3) (5) |
|
3,502,680 |
|
3,500,000 |
|
||
|
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MediMedia USA, LLC |
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Service - healthcare and pharmeceutical marketing |
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Senior Term Debt (7.8%, Due 10/2013)(3) |
|
1,183,505 |
|
1,180,463 |
|
||
|
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National Mentor Holdings, Inc. |
|
Service - home health care |
|
Senior Term Debt (7.7%, Due 6/2013)(3) |
|
1,991,799 |
|
2,000,503 |
|
||
|
|
|
|
|
|
|
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NPC International Inc. |
|
Service - Pizza Hut franchisee |
|
Senior Term Debt (7.1%, Due 5/2013)(3) |
|
3,018,085 |
|
2,995,367 |
|
||
|
|
|
|
|
|
|
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Nutro Products, Inc. |
|
Manufacturing - pet food |
|
Senior Term Debt (7.4%, Due 4/2012)(3) |
|
2,503,442 |
|
2,484,352 |
|
||
|
|
|
|
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|
|
|
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Ozburn-Hessey Holding Co. LLC |
|
Service - third party logistics |
|
Senior Term Debt (8.6%, Due 8/2012)(3) |
|
7,791,254 |
|
7,714,823 |
|
||
|
|
|
|
|
|
|
|
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Patriot Media & Communications CNJ, LLC |
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Service - telecommunications |
|
Senior Term Debt (7.4%, Due 3/2013)(3) |
|
4,169,901 |
|
4,136,293 |
|
||
|
|
|
|
|
|
|
|
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Radio Systems Corporation |
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Service - design electronic pet containment products |
|
Senior Term Debt (8.1%, Due 9/2013)(3) |
|
1,048,000 |
|
1,051,930 |
|
||
|
|
|
|
|
|
|
|
|
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Rally Parts, Inc. |
|
Manufacturing - aftermarket motorcycle parts and accessories |
|
Senior Term Debt (7.9%, Due 11/2013)(3) |
|
262,000 |
|
262,655 |
|
||
|
|
|
|
|
|
|
|
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RPG Holdings, Inc. |
|
Manufacturing and design - greeting cards |
|
Senior Term Debt (8.9%, Due 12/2011)(3) |
|
5,001,158 |
|
4,975,000 |
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||
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SGS International, Inc. |
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Service - digital imaging and graphics |
|
Senior Term Debt (7.9%, Due 12/2011)(3) |
|
1,616,364 |
|
1,612,774 |
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|
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Stolle Machinery Company |
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Manufacturing - can-making equipment and parts |
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Senior Term Debt (7.9%, Due 9/2012)(3) |
|
262,000 |
|
263,310 |
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4
Company (1) |
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Industry |
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Investment (2) |
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Cost |
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Fair Value |
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NON-CONTROL/NON-AFFILIATE INVESTMENTS (Continued) |
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SunGard Data Systems, Inc. |
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Service & Manufacturing - integrated software and processing solutions and information availability services |
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Senior Term Debt (7.9%, Due 2/2013)(3) |
|
$ |
9,946,579 |
|
$ |
9,960,813 |
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||||||
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Survey Sampling, LLC |
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Service - telecommunications-based sampling |
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Senior Term Debt (8.6%, Due 5/2011)(3) |
|
3,373,571 |
|
3,331,493 |
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||||||||
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Triad Laboratory Alliance, LLC |
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Service - regional medical laboratories |
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Senior Term Debt (8.6%, Due 12/2011)(3) (5) |
|
4,966,908 |
|
4,912,875 |
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US Investigative Services, Inc. |
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Service - background investigations |
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Senior Term Debt (7.9%, Due 10/2012)(3) |
|
10,943,766 |
|
10,927,767 |
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Wastequip, Inc. |
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Service - process and transport waste materials |
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Senior Term Debt (7.6%, Due 7/2011)(3) |
|
5,471,659 |
|
5,390,720 |
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West Corporation |
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Service - business process outsourcing |
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Senior Term Debt (8.1%, Due 10/2013)(3) |
|
5,240,000 |
|
5,253,100 |
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||||||||
Total Non-Control/Non-Affiliate Investments |
|
|
|
$ |
141,804,619 |
|
$ |
140,777,989 |
|
||||||||
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CONTROL INVESTMENTS |
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Acme Cryogenics Corporation |
|
Manufacturing - manifolds and pipes for industrial gasses |
|
Senior Subordinated Term Debt (11.5% Due 3/2013)(6) |
|
$ |
14,500,000 |
|
$ |
14,500,000 |
|
||||||
|
|
|
|
Redeemable Preferred Stock(4) (6) |
|
7,245,634 |
|
7,245,634 |
|
||||||||
|
|
|
|
Common Stock(4) (6) |
|
1,084,366 |
|
1,084,366 |
|
||||||||
|
|
|
|
Common Stock Warrants(4) (6) |
|
24,686 |
|
24,686 |
|
||||||||
|
|
|
|
|
|
22,854,686 |
|
22,854,686 |
|
||||||||
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|
|
|
|
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|
|
|
|
||||||||
Chase II Holdings Corp. |
|
Manufacturing - traffic doors |
|
Revolving Credit Facility(7) |
|
|
|
|
|
||||||||
|
|
|
|
Senior Term Debt (9.9%, Due 3/2011)(5) |
|
12,900,000 |
|
12,835,500 |
|
||||||||
|
|
|
|
Senior Term Debt (12.0% Due 3/2011)(5) |
|
8,000,000 |
|
7,910,000 |
|
||||||||
|
|
|
|
Subordinated Term Debt (13% Due 3/2013)(5) |
|
6,167,810 |
|
6,036,744 |
|
||||||||
|
|
|
|
Redeemable Preferred Stock(4) (6) |
|
6,960,806 |
|
6,960,806 |
|
||||||||
|
|
|
|
Common Stock Warrants(4) (6) |
|
61,384 |
|
61,384 |
|
||||||||
|
|
|
|
|
|
34,090,000 |
|
33,804,434 |
|
||||||||
|
|
|
|
|
|
|
|
|
|
||||||||
Hailey Transport Corporation |
|
Retail and Service - school buses and parts |
|
Senior Subordinated Term Debt (12.0%, Due 1/2012)(5) |
|
4,000,000 |
|
3,900,000 |
|
||||||||
|
|
|
|
Preferred Stock(4) (6) |
|
2,500,000 |
|
2,500,000 |
|
||||||||
|
|
|
|
|
|
6,500,000 |
|
6,400,000 |
|
||||||||
|
|
|
|
|
|
|
|
|
|
||||||||
Quench Holdings Corp. |
|
Service - sales, installation and service of water coolers |
|
Revolving Credit Facility (9.4%, Due 3/2009)(5) (8) |
|
1,900,000 |
|
1,897,625 |
|
||||||||
|
|
|
|
Senior Term Debt (9.4%, Due 3/2011)(5) |
|
4,000,000 |
|
4,005,000 |
|
||||||||
|
|
|
|
Subordinated Term Debt (11.5%, Due 3/2011)(5) |
|
8,000,000 |
|
7,970,000 |
|
||||||||
|
|
|
|
Common Stock(4) (6) |
|
3,256,318 |
|
3,256,318 |
|
||||||||
|
|
|
|
|
|
17,156,318 |
|
17,128,943 |
|
||||||||
|
|
|
|
|
|
|
|
|
|
||||||||
Total Control Investments |
|
|
|
|
|
$ |
80,601,004 |
|
$ |
80,188,063 |
|
||||||
|
|
|
|
|
|
|
|
|
|
||||||||
AFFILIATE INVESTMENTS |
|
|
|
|
|
|
|
|
|
||||||||
|
|
|
|
|
|
|
|
|
|
||||||||
Noble Logistics, Inc. |
|
Service - aftermarket auto parts delivery |
|
Revolving Credit Facility(9) |
|
$ |
1,800,000 |
|
$ |
1,800,000 |
|
||||||
|
|
|
|
Senior Term Debt (9.8%, Due 3/2011)(6) |
|
7,000,000 |
|
7,000,000 |
|
||||||||
|
|
|
|
Senior Term Debt (12.0% Due 3/2011)(6) |
|
7,000,000 |
|
7,000,000 |
|
||||||||
|
|
|
|
Senior Subordinated Term Debt (13% Due 3/2013)(6) |
|
500,000 |
|
500,000 |
|
||||||||
|
|
|
|
Preferred Stock(4) (6) |
|
1,750,000 |
|
1,750,000 |
|
||||||||
|
|
|
|
Common Stock(4) (6) |
|
1,500,000 |
|
1,500,000 |
|
||||||||
|
|
|
|
|
|
19,550,000 |
|
19,550,000 |
|
||||||||
|
|
|
|
|
|
|
|
|
|
||||||||
Total Affiliate Investments |
|
|
|
|
|
$ |
19,550,000 |
|
$ |
19,550,000 |
|
||||||
|
|
|
|
|
|
|
|
|
|
||||||||
Total Investments |
|
|
|
|
|
$ |
241,955,623 |
|
$ |
240,516,052 |
|
||||||
(1) Certain of the listed securities are issued by affiliate(s) of the indicated portfolio company.
(2) Percentage represents the weighted average interest rates in effect at December 31, 2006 and due date represents the contractual maturity date.
(3) Marketable securities are valued based on the indicative bid price, as of December 31, 2006, from the respective originating syndication agents trading desk.
(4) Security is non-income producing.
(5) Valued using Standard & Poors Securities Evaluations, Inc. opinions of value at December 31, 2006.
(6) Fair value is equal to cost due to recent acquisition.
(7) Total available under the revolving credit facility is $500,000 which was undrawn as of December 31, 2006.
(8) Total available under the revolving credit facility is $2,000,000, of which $100,000 remains undrawn at December 31, 2006.
(9) Total available under the revolving credit facility is $2,000,000, of which $200,000 remains undrawn at December 31, 2006.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
5
GLADSTONE
INVESTMENT CORPORATION
CONSOLIDATED SCHEDULE OF INVESTMENTS
March 31, 2006
(UNAUDITED)
Company (1) |
|
Industry |
|
Investment (2) |
|
Cost |
|
Fair Value |
||
|
|
|
|
|
|
|
|
|
||
NON-CONTROL/NON-AFFILIATE INVESTMENTS |
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
||
CRC Health Group, Inc. |
|
Service - substance abuse treatment |
|
Senior Term Debt (6.9%, Due 2/2016)(3) |
|
$ |
5,056,761 |
|
$ |
5,056,250 |
|
|
|
|
|
|
|
|
|
||
Graham Packaging Holdings Co. |
|
Manufacturing - custom blow molded |
|
Senior Term Debt (7.0%, Due 10/2011)(3) |
|
10,071,296 |
|
10,061,087 |
||
|
|
|
|
|
|
|
|
|
||
Hertz Equipment Rental Corporation |
|
Service - car rentals |
|
Senior Term Debt (6.7%, Due 12/2010)(3) |
|
871,388 |
|
876,560 |
||
|
|
|
|
|
|
|
|
|
||
Latham Manufacturing Corp. |
|
Manufacturing - swimming pool components accessories |
|
Senior Term Debt (7.8%, Due 12/2010)(3) |
|
4,454,333 |
|
4,461,188 |
||
|
|
|
|
|
|
|
|
|
||
Le-Natures, Inc. |
|
Marketing & development - natural beverages |
|
Senior Term Debt (7.7%, Due 6/2010)(3) |
|
5,042,467 |
|
5,074,713 |
||
|
|
|
|
|
|
|
|
|
||
LVI Services, Inc. |
|
Service - asbestos and mold remediation |
|
Senior Term Debt (7.3%, Due 11/2010)(3) |
|
6,511,390 |
|
6,540,483 |
||
|
|
|
|
|
|
|
|
|
||
Madison River Capital LLC |
|
Service - communications and information information |
|
Senior Term Debt (6.8%, Due 7/2012)(3) |
|
5,788,660 |
|
5,829,062 |
||
|
|
|
|
|
|
|
|
|
||
Maidenform, Inc. |
|
Manufacturing - intimate apparel |
|
Senior Term Debt (6.5%, Due 5/2010)(3) |
|
3,118,448 |
|
3,122,787 |
||
|
|
|
|
|
|
|
|
|
||
MedAssets, Inc. |
|
Service - pharmaceuticals and healthcare GPO |
|
Senior Term Debt (7.7%, Due 7/2010)(3)(7) |
|
2,340,111 |
|
2,348,526 |
||
|
|
|
|
|
|
|
|
|
||
Ozburn-Hessey Holding Co. LLC |
|
Service - third party logistics |
|
Senior Term Debt (7.3%, Due 8/2012)(3) |
|
6,382,673 |
|
6,376,646 |
||
|
|
|
|
|
|
|
|
|
||
Patriot Media & Communications CNJ, LLC |
|
Service - telecommunications |
|
Senior Term Debt (7.0%, Due 3/2013)(3) |
|
4,360,777 |
|
4,359,125 |
||
|
|
|
|
|
|
|
|
|
||
Revere Industries, LLC |
|
Manufacturing-plastic and metal components |
|
Senior Term Debt (7.6%, Due 9/2010)(3) |
|
3,508,831 |
|
3,504,546 |
||
|
|
|
|
|
|
|
|
|
||
RPG Holdings, Inc. |
|
Manufacturing and design - greeting cards |
|
Senior Term Debt (8.2%, Due 12/2011)(3) |
|
5,001,332 |
|
5,000,000 |
||
|
|
|
|
|
|
|
|
|
||
SGS International, Inc. |
|
Service - digital imaging and graphics |
|
Senior Term Debt (7.2%, Due 12/2011)(3) |
|
1,404,081 |
|
1,415,702 |
||
|
|
|
|
|
|
|
|
|
||
SunGard Data Systems, Inc. |
|
Service & manufacturing - integrated software and processing |
|
Senior Term Debt (7.2%, Due 2/2013)(3) |
|
10,033,531 |
|
10,049,063 |
||
|
|
|
|
|
|
|
|
|
||
Triad Laboratory Alliance, LLC |
|
Service - regional medical laboratories |
|
Senior Term Debt (7.8%, Due 12/2011)(3)(7) |
|
5,006,982 |
|
5,012,438 |
||
|
|
|
|
|
|
|
|
|
||
TexStar Operating, L.P. |
|
Manufacturing - midstream natural gas processing |
|
Senior Term Debt (8.3%, Due 12/2011)(3)(7) |
|
3,000,161 |
|
2,999,981 |
||
|
|
|
|
|
|
|
|
|
||
US Investigative Services, Inc. |
|
Service - background investigations |
|
Senior Term Debt (7.4%, Due 10/2012)(3) |
|
9,948,345 |
|
9,984,478 |
||
|
|
|
|
|
|
|
|
|
||
Wastequip, Inc. |
|
Manufacturing - waste removal equipment |
|
Senior Term Debt (7.0%, Due 7/2011)(3) |
|
5,521,437 |
|
5,513,337 |
||
|
|
|
|
|
|
|
|
|
||
Total Non-Control/Non-Affiliate Investments |
|
|
|
97,423,004 |
|
97,585,972 |
||||
6
Company (1) |
|
Industry |
|
Investment (2) |
|
Cost |
|
Fair Value |
|
||
|
|
|
|
|
|
|
|
|
|
||
CONTROL INVESTMENTS |
|
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
||
Chase II Holdings Corporation |
|
Manufacturing - Traffic doors |
|
Revolving Credit Facility (5) |
|
|
|
|
|
||
|
|
|
|
Senior Term Debt |
|
12,900,000 |
|
12,900,000 |
|
||
|
|
|
|
Senior Term Debt |
|
8,000,000 |
|
8,000,000 |
|
||
|
|
|
|
Subordinated Term Debt |
|
6,167,810 |
|
6,167,810 |
|
||
|
|
|
|
Redeemable Preferred |
|
6,960,806 |
|
6,960,806 |
|
||
|
|
|
|
Common Stock (4) (8) |
|
61,384 |
|
61,384 |
|
||
|
|
|
|
|
|
34,090,000 |
|
34,090,000 |
|
||
|
|
|
|
|
|
|
|
|
|
||
Hailey Transport Corporation |
|
Retail and Service -
school |
|
Senior Subordinated
Term |
|
4,000,000 |
|
3,950,000 |
|
||
|
|
|
|
Common Stock (4) (8) |
|
2,500,000 |
|
2,500,00 |
|
||
|
|
|
|
|
|
6,500,000 |
|
6,450,000 |
|
||
|
|
|
|
|
|
|
|
|
|
||
Quench Holdings Corporation |
|
Service - sales, |
|
Revolving Credit Facility (6) |
|
|
|
|
|
||
|
|
|
|
Senior Term Debt (9.1%, Due 3/2011) |
|
4,000,000 |
|
4,000,000 |
|
||
|
|
|
|
Subordinated Term Debt (11.5%, Due 3/2011) |
|
8,000,000 |
|
8,000,000 |
|
||
|
|
|
|
Common Stock (4) (8) |
|
3,256,318 |
|
3,256,318 |
|
||
|
|
|
|
|
|
15,256,318 |
|
15,256,318 |
|
||
|
|
|
|
|
|
|
|
|
|
||
Total Control Investments |
|
|
|
|
|
55,846,318 |
|
55,796,318 |
|
||
|
|
|
|
|
|
|
|
|
|
||
Total Investments |
|
|
|
|
|
$ |
153,269,322 |
|
$ |
153,382,290 |
|
|
|
|
|
|
|
|
|
|
|
||
Cash equivalents |
|
|
|
|
|
|
|
|
|
||
|
|
Government |
|
US
Treasury Bill |
|
3,989,800 |
|
3,989,800 |
|
||
|
|
|
|
|
|
|
|
|
|
||
|
|
Government |
|
US
Treasury Bill |
|
15,241,694 |
|
15,241,694 |
|
||
|
|
|
|
|
|
|
|
|
|
||
|
|
Government |
|
US
Treasury Bill |
|
35,132,347 |
|
35,132,347 |
|
||
|
|
|
|
|
|
|
|
|
|
||
|
|
Government |
|
US
Treasury Bill |
|
15,243,245 |
|
15,243,245 |
|
||
|
|
|
|
|
|
|
|
|
|
||
Total cash equivalents: |
|
|
|
|
|
69,607,086 |
|
69,607,086 |
|
||
|
|
|
|
|
|
|
|
|
|
||
Total investments and cash equivalents: |
|
|
|
$ |
222,876,408 |
|
$ |
222,989,376 |
|
(1) Certain of the listed securities are issued by affiliate(s) of the indicated portfolio company.
(2) Percentage represents the weighted average interest rates in effect at March 31, 2006 and due date represents the contractual maturity date.
(3) Marketable securities are valued based on the indicative bid price, as of March 31, 2006, from the respective originating syndication agents trading desk.
(4) Security is non-income producing.
(5) Total available under the revolving credit facility is $500,000 which was undrawn as of March 31, 2006.
(6) Total available under the revolving credit facility is $2,000,000 which was undrawn as of March 31, 2006.
(7) Valued using Standard & Poors Securities Evaluations, Inc. opinions of value at March 31, 2006.
(8) Fair value is equal to cost due to recent acquisition.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
7
GLADSTONE
INVESTMENT CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
|
|
For the three |
|
For the three |
|
||
|
|
months ended |
|
months ended |
|
||
|
|
December 31, 2006 |
|
December 31, 2005 |
|
||
|
|
|
|
|
|
||
INVESTMENT INCOME |
|
|
|
|
|
||
Interest income |
|
|
|
|
|
||
Non-Control/Non-Affiliate investments |
|
$ |
2,586,171 |
|
$ |
790,879 |
|
Control investments |
|
1,264,451 |
|
|
|
||
Affiliate investments |
|
114,668 |
|
|
|
||
Cash and cash equivalents |
|
332,586 |
|
1,530,809 |
|
||
Total interest income |
|
4,297,876 |
|
2,321,688 |
|
||
Other income |
|
1,492 |
|
|
|
||
Total investment income |
|
4,299,368 |
|
2,321,688 |
|
||
|
|
|
|
|
|
||
EXPENSES |
|
|
|
|
|
||
Base management fee |
|
551,235 |
|
265,522 |
|
||
Loan servicing fee |
|
508,691 |
|
|
|
||
Administration fee |
|
124,101 |
|
73,424 |
|
||
Directors fees |
|
54,800 |
|
51,000 |
|
||
Professional fees |
|
186,537 |
|
69,570 |
|
||
Insurance expense |
|
60,696 |
|
69,552 |
|
||
Stockholder related costs |
|
28,643 |
|
24,363 |
|
||
Interest expense |
|
68,748 |
|
|
|
||
Amortization of deferred finance costs |
|
91,392 |
|
|
|
||
Taxes and licenses |
|
41,550 |
|
|
|
||
Other expenses |
|
60,132 |
|
15,687 |
|
||
Expenses before credit from Adviser |
|
1,776,525 |
|
569,118 |
|
||
Credit to base management fee for fees collected by Adviser (Refer to Note 3) |
|
(375,225 |
) |
|
|
||
Total expenses net of credit to management fee |
|
1,401,300 |
|
569,118 |
|
||
NET INVESTMENT INCOME |
|
2,898,068 |
|
1,752,570 |
|
||
|
|
|
|
|
|
||
REALIZED AND UNREALIZED LOSS ON INVESTMENTS |
|
|
|
|
|
||
Realized (loss) gain on sale of Non-Control/Non-Affiliate investments |
|
(2,283 |
) |
38,056 |
|
||
Net unrealized depreciation of investment portfolio |
|
(211,242 |
) |
(175,879 |
) |
||
Net loss on investments |
|
(213,525 |
) |
(137,823 |
) |
||
|
|
|
|
|
|
||
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS (Refer to Note 6) |
|
$ |
2,684,543 |
|
$ |
1,614,747 |
|
|
|
|
|
|
|
||
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS PER COMMON SHARE: |
|
|
|
|
|
||
Basic and Diluted |
|
$ |
0.16 |
|
$ |
0.10 |
|
|
|
|
|
|
|
||
SHARES OF COMMON STOCK OUTSTANDING: |
|
|
|
|
|
||
Basic and diluted weighted average shares |
|
16,560,100 |
|
16,560,100 |
|
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
8
GLADSTONE
INVESTMENT CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
|
|
|
|
For the period |
|
||
|
|
|
|
June 22, 2005 |
|
||
|
|
For the nine |
|
(Commencement of |
|
||
|
|
months ended |
|
Operations) to |
|
||
|
|
December 31, 2006 |
|
December 31, 2005 |
|
||
|
|
|
|
|
|
||
INVESTMENT INCOME |
|
|
|
|
|
||
Interest income |
|
|
|
|
|
||
Non-Control/Non-Affiliate investments |
|
$ |
6,938,026 |
|
$ |
984,457 |
|
Control investments |
|
3,711,056 |
|
|
|
||
Affiliate investments |
|
114,668 |
|
|
|
||
Cash and cash equivalents |
|
1,610,506 |
|
3,192,019 |
|
||
Total interest income |
|
12,374,256 |
|
4,176,476 |
|
||
Other income |
|
2,478 |
|
|
|
||
Total investment income |
|
12,376,734 |
|
4,176,476 |
|
||
|
|
|
|
|
|
||
EXPENSES |
|
|
|
|
|
||
Base management fee |
|
2,214,437 |
|
357,630 |
|
||
Loan servicing fee |
|
508,691 |
|
|
|
||
Administration fee |
|
364,351 |
|
178,469 |
|
||
Directors fees |
|
154,300 |
|
103,000 |
|
||
Professional fees |
|
354,325 |
|
135,872 |
|
||
Insurance expense |
|
200,933 |
|
112,030 |
|
||
Stockholder related costs |
|
187,509 |
|
67,901 |
|
||
Interest expense |
|
68,748 |
|
378 |
|
||
Amortization of deferred finance costs |
|
91,392 |
|
|
|
||
Taxes and licenses |
|
139,994 |
|
|
|
||
Other expenses |
|
104,161 |
|
35,920 |
|
||
Expenses before credit from Gladstone Management |
|
4,388,841 |
|
991,200 |
|
||
Credit to management fee for fees collected by Adviser (Refer to Note 3) |
|
(375,225 |
) |
|
|
||
Total expenses net of credit to management fee |
|
4,013,616 |
|
991,200 |
|
||
NET INVESTMENT INCOME |
|
8,363,118 |
|
3,185,276 |
|
||
|
|
|
|
|
|
||
REALIZED AND UNREALIZED LOSS ON INVESTMENTS |
|
|
|
|
|
||
Realized (loss) gain on sale of Non-Control/Non-Affiliate investments |
|
(944 |
) |
38,056 |
|
||
Net unrealized depreciation of investment portfolio |
|
(1,552,539 |
) |
(112,053 |
) |
||
Net loss on investments |
|
(1,553,483 |
) |
(73,997 |
) |
||
|
|
|
|
|
|
||
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS (Refer to Note 6) |
|
$ |
6,809,635 |
|
$ |
3,111,279 |
|
|
|
|
|
|
|
||
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS PER COMMON SHARE: |
|
|
|
|
|
||
Basic and Diluted |
|
$ |
0.41 |
|
$ |
0.19 |
|
|
|
|
|
|
|
||
SHARES OF COMMON STOCK OUTSTANDING: |
|
|
|
|
|
||
Basic and diluted weighted average shares |
|
16,560,100 |
|
16,560,100 |
|
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
9
GLADSTONE
INVESTMENT CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS
(UNAUDITED)
|
|
|
|
For the period |
|
||
|
|
|
|
June 22, 2005 |
|
||
|
|
For the nine |
|
(Commencement of |
|
||
|
|
months ended |
|
Operations) to |
|
||
|
|
December 31, 2006 |
|
December 31, 2005 |
|
||
Operations: |
|
|
|
|
|
||
Net investment income |
|
$ |
8,363,118 |
|
$ |
3,185,276 |
|
Realized (loss) gain on sale of investments |
|
(944 |
) |
38,056 |
|
||
Unrealized depreciation of portfolio |
|
(1,552,539 |
) |
(112,053 |
) |
||
Increase in net assets from operations |
|
6,809,635 |
|
3,111,279 |
|
||
|
|
|
|
|
|
||
Capital transactions: |
|
|
|
|
|
||
Issuance of common stock |
|
|
|
230,244,339 |
|
||
Shelf registration offering costs |
|
(132,707 |
) |
|
|
||
Dividends from net investment income |
|
(10,432,869 |
) |
(2,980,818 |
) |
||
Total change in net assets from capital transactions |
|
(10,565,576 |
) |
227,263,521 |
|
||
|
|
|
|
|
|
||
Total change in net assets |
|
(3,755,941 |
) |
230,374,800 |
|
||
|
|
|
|
|
|
||
Net Assets |
|
|
|
|
|
||
Beginning of period |
|
229,841,697 |
|
1,500 |
|
||
End of period |
|
$ |
226,085,756 |
|
$ |
230,376,300 |
|
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
10
GLADSTONE
INVESTMENT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
|
|
|
|
For the period |
|
||
|
|
|
|
June 22, 2005 |
|
||
|
|
For the nine |
|
(Commencement of |
|
||
|
|
months ended |
|
Operations) to |
|
||
|
|
December 31, 2006 |
|
December 31, 2005 |
|
||
|
|
|
|
|
|
||
CASH FLOWS FROM OPERATING ACTIVITIES |
|
|
|
|
|
||
Net increase in net assets resulting from operations |
|
$ |
6,809,635 |
|
$ |
3,111,279 |
|
Adjustments to reconcile net increase in net assets |
|
|
|
|
|
||
resulting from operations to net cash used in operating activities: |
|
|
|
|
|
||
Purchase of investments |
|
(118,850,626 |
) |
(64,221,339 |
) |
||
Principal repayments of investments |
|
10,448,688 |
|
1,376,483 |
|
||
Proceeds from the sale of investments |
|
19,589,945 |
|
2,038,056 |
|
||
Net unrealized depreciation of investment portfolio |
|
1,552,539 |
|
112,053 |
|
||
Net realized loss (gain) on sales of investments |
|
944 |
|
(38,056 |
) |
||
Net amortization of premiums and discounts |
|
124,748 |
|
21,797 |
|
||
Increase in interest receivable |
|
(683,317 |
) |
(317,233 |
) |
||
Increase in due from custodian |
|
(2,798,620 |
) |
|
|
||
Increase in prepaid assets |
|
(67,993 |
) |
(214,485 |
) |
||
Increase in other assets |
|
(22,429 |
) |
(108,604 |
) |
||
Increase in other liabilities |
|
38,042 |
|
|
|
||
Increase in administration fee payable to Administrator |
|
410,561 |
|
73,424 |
|
||
Increase in base management fee payable to Adviser |
|
14,099 |
|
192,787 |
|
||
Increase in loan servicing fee payable to Adviser |
|
231,211 |
|
|
|
||
Increase in accounts payable |
|
|
|
2,207 |
|
||
Increase in accrued expenses |
|
445,833 |
|
53,933 |
|
||
Net cash used in operating activities |
|
(82,756,740 |
) |
(57,917,698 |
) |
||
|
|
|
|
|
|
||
CASH FLOWS FROM FINANCING ACTIVITIES |
|
|
|
|
|
||
Net proceeds from the issuance of common stock |
|
|
|
230,292,203 |
|
||
Borrowings from line of credit |
|
23,500,000 |
|
|
|
||
Repayments of line of credit |
|
(3,500,000 |
) |
|
|
||
Deferred finance costs |
|
(459,347 |
) |
|
|
||
Shelf offering registration costs |
|
(132,707 |
) |
|
|
||
Distributions paid |
|
(10,432,869 |
) |
(2,980,818 |
) |
||
Decrease in loan payable to affiliate |
|
|
|
(50,000 |
) |
||
Net cash provided by financing activities |
|
8,975,077 |
|
227,261,385 |
|
||
|
|
|
|
|
|
||
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (1) |
|
(73,781,663 |
) |
169,343,687 |
|
||
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD |
|
75,672,605 |
|
3,636 |
|
||
CASH AND CASH EQUIVALENTS, END OF PERIOD |
|
$ |
1,890,942 |
|
$ |
169,347,323 |
|
|
|
|
|
|
|
||
CASH PAID DURING PERIOD FOR INTEREST TO AFFILIATE |
|
$ |
|
|
$ |
378 |
|
(1) Cash and cash equivalents consist of demand deposits and highly liquid investments with original maturities of three months or less when purchased.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
11
GLADSTONE
INVESTMENT CORPORATION
FINANCIAL HIGHLIGHTS
(UNAUDITED)
|
|
For the three |
|
For the three |
|
||
|
|
months ended |
|
months ended |
|
||
|
|
December 31, 2006 |
|
December 31, 2005 |
|
||
Per Share Data (1) |
|
|
|
|
|
||
Balance at beginning of period |
|
$ |
13.71 |
|
$ |
13.93 |
|
|
|
|
|
|
|
||
Income from investment operations: |
|
|
|
|
|
||
Net investment income (2) |
|
0.18 |
|
0.11 |
|
||
Realized gain on sale of investments (2) |
|
|
|
|
|
||
Net unrealized depreciation of investments (2) |
|
(0.02 |
) |
(0.01 |
) |
||
Total from investment operations |
|
0.16 |
|
0.10 |
|
||
Distributions |
|
(0.21 |
) |
(0.12 |
) |
||
Net asset value at end of period |
|
$ |
13.65 |
|
$ |
13.91 |
|
|
|
|
|
|
|
||
Per share market value at beginning of period |
|
$ |
14.46 |
|
$ |
15.05 |
|
Per share market value at end of period |
|
15.31 |
|
13.59 |
|
||
Total return (3) |
|
7.38 |
% |
(6.63 |
%) |
||
Shares outstanding at end of period |
|
16,560,100 |
|
16,560,100 |
|
||
|
|
|
|
|
|
||
Ratios/Supplemental Data |
|
|
|
|
|
||
Net assets at end of period |
|
$ |
226,085,756 |
|
$ |
230,376,300 |
|
Average net assets (4) |
|
$ |
225,338,878 |
|
$ |
229,896,936 |
|
Ratio of expenses to average net assets (annualized) |
|
3.15 |
% |
0.99 |
% |
||
Ratio of net expenses to average net assets (annualized) |
|
2.49 |
% |
0.99 |
% |
||
Ratio of net investment income to average net assets (annualized) |
|
5.14 |
% |
3.05 |
% |
(1) Based on actual shares outstanding.
(2) Based on weighted average basic per share data.
(3) Total return equals the change in the market value of the Companys common stock from the beginning of the period taking into account dividends reinvested in accordance with the terms of our dividend reinvestment plan.
(4) Calculated using the average of the ending monthly net assets for the respective periods.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
12
GLADSTONE
INVESTMENT CORPORATION
FINANCIAL HIGHLIGHTS
(UNAUDITED)
|
|
|
|
For the period |
|
||
|
|
|
|
June 22, 2005 |
|
||
|
|
For the nine |
|
(Commencement of |
|
||
|
|
months ended |
|
Operations) to |
|
||
|
|
December 31, 2006 |
|
December 31, 2005 |
|
||
Per Share Data (1) |
|
|
|
|
|
||
Balance at beginning of period |
|
$ |
13.88 |
|
$ |
|
|
Net proceeds from initial public offering (2) |
|
|
|
13.95 |
|
||
Offering costs |
|
|
|
(0.05 |
) |
||
|
|
|
|
|
|
||
Income from investment operations: |
|
|
|
|
|
||
Net investment income (3) |
|
0.51 |
|
0.20 |
|
||
Realized gain on sale of investments (3) |
|
|
|
|
|
||
Net unrealized depreciation of investments (3) |
|
(0.10 |
) |
(0.01 |
) |
||
Total from investment operations |
|
0.41 |
|
0.19 |
|
||
Distributions |
|
(0.63 |
) |
(0.18 |
) |
||
Net asset value at end of period |
|
$ |
13.65 |
|
$ |
13.91 |
|
|
|
|
|
|
|
||
Per share market value at beginning of period |
|
$ |
14.90 |
|
$ |
15.00 |
|
Per share market value at end of period |
|
15.31 |
|
13.59 |
|
||
Total return (4) |
|
7.28 |
% |
(8.25 |
%) |
||
Shares outstanding at end of period |
|
16,560,100 |
|
16,560,100 |
|
||
|
|
|
|
|
|
||
Ratios/Supplemental Data |
|
|
|
|
|
||
Net assets at end of period |
|
$ |
226,085,756 |
|
$ |
230,376,300 |
|
Average net assets (5) |
|
$ |
226,399,367 |
|
$ |
225,793,817 |
|
Ratio of expenses to average net assets (annualized) |
|
2.59 |
% |
0.75 |
% |
||
Ratio of net expenses to average net assets (annualized) |
|
2.36 |
% |
0.75 |
% |
||
Ratio of net investment income to average net assets (annualized) |
|
4.93 |
% |
2.42 |
% |
(1) Based on actual shares outstanding.
(2) Net of initial underwriting discount of $1.05 per share.
(3) Based on weighted average basic per share data.
(4) Total return equals the change in the market value of the Companys common stock from the beginning of the period taking into account dividends reinvested in accordance with the terms of our dividend reinvestment plan.
(5) Calculated using the average of the ending monthly net assets for the respective periods.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
13
GLADSTONE INVESTMENT CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2006
(UNAUDITED)
NOTE 1. ORGANIZATION
Gladstone Investment Corporation (the Company) was incorporated under the General Corporation Laws of the State of Delaware on February 18, 2005 and completed an initial public offering on June 22, 2005. The Company is a closed-end, non-diversified management investment company that has elected to be treated as a business development company under the Investment Company Act of 1940, as amended (the 1940 Act). In addition, the Company has elected to be treated for tax purposes as a regulated investment company, or RIC, under the Internal Revenue Code of 1986, as amended (the Code). The Companys investment objectives are to achieve a high level of current income and capital gains by investing in debt and equity securities of established private businesses.
Gladstone Business Investment LLC, (Business Investment) a wholly-owned subsidiary of the Company, was established on August 11, 2006 for the sole purpose of owning the Companys portfolio of investments in connection with the establishment of its line of credit facility with Deutsche Bank AG, which recently closed on October 19, 2006. The financial statements of Business Investment are consolidated with those of the Company.
The Company is externally managed by Gladstone Management Corporation (GMC or the Adviser), an unconsolidated affiliate of the Company.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Unaudited Interim Financial Statements
Interim financial statements of the Company are prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) for interim financial information and pursuant to the requirements for reporting on Form 10-Q and Article 10 of Regulation S-X. Accordingly, certain disclosures accompanying annual financial statements prepared in accordance with GAAP are omitted. In the opinion of management, all adjustments, consisting solely of normal recurring accruals, necessary for the fair statement of financial statements for the interim periods have been included. The current periods results of operations are not necessarily indicative of results that ultimately may be achieved for the year. The interim financial statements and notes thereto should be read in conjunction with the financial statements and notes thereto included in the Companys Form 10-K for the fiscal year ended March 31, 2006, as filed with the Securities and Exchange Commission on June 14, 2006.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Classification of Investments
The 1940 Act requires classification of the Companys investments by its respective level of control. As defined in the 1940 Act, Control Investments are investments in those portfolio companies that the Company is deemed to Control. Affiliate Investments are investments in those portfolio companies that are Affiliated Companies of the Company, as defined in the 1940 Act, other than Control Investments. Non-Control/Non-Affiliate Investments are those that are neither Control Investments nor Affiliate Investments. In general, the 1940 Act prescribes that the Company has control over a portfolio company if it owns greater than 25% of the voting securities of the portfolio company. The Company is deemed to be an affiliate of a portfolio company if it owns between 5% and 25% of the voting securities of such portfolio company or has one or more seats on the affiliated companys board of directors. However, if the Company holds 50% or more
14
representation on a portfolio companys board of directors, the Company will be deemed to have control over the portfolio company.
Investment Valuation
The Company carries its investments at fair value, as determined by its Board of Directors. Securities that are publicly traded are valued at the closing price on the valuation date. Securities for which a limited market exists, such as participations in syndicated loans, are valued at the indicative bid price on the valuation date from the respective originating syndication agents trading desk. Debt and equity securities that are not publicly traded are valued at fair value. The Companys Board of Directors has established a valuation policy and consistently applied valuation procedures used to determine the fair value of these securities quarterly. These procedures for the determination of value of 13 of the Companys debt securities rely on the opinions of value submitted to us by Standard & Poors Securities Evaluations, Inc. (SPSE). SPSE will only evaluate the debt portion of the Companys investments for which the Company specifically requests evaluation, and may decline to make requested evaluations for any reason in its sole discretion. SPSE opinions of value are submitted to the Board of Directors along with the Advisers supplemental assessment and recommendation regarding valuation of each of these investments. The Board of Directors then reviews whether the Adviser has followed its established procedures for determinations of fair value, and votes to accept or not accept the recommended valuation of the Companys investment portfolio. The Companys fair valuation procedures provide for valuation of non-convertible debt securities at cost plus amortized original issue discount (OID) plus paid in kind (PIK) interest, if any, unless adverse factors lead to a determination of a lesser valuation. The fair value of convertible debt, equity, success or exit fees or other equity-like securities is determined based on the collateral, the enterprise value of the issuer, the issuers ability to make payments, the earnings of the issuer, sales to third parties of similar securities, the comparison to publicly traded securities, discounted cash flow and other pertinent factors. Due to the uncertainty inherent in the valuation process, such estimates of fair value may differ significantly from the values that would have resulted had a ready market for the securities existed, and the differences could be material. Additionally, changes in the market environment and other events that may occur over the life of the investments may cause the gains or losses ultimately realized on these investments to be different than the valuation currently assigned. Because there is a delay between when the Company closes an investment and when the investment can be evaluated by SPSE, new investments are not valued immediately by SPSE; rather, the Adviser makes its own determination about the recommended value of these investments in accordance with the Companys valuation policy without the input of SPSE during the specific quarter in which the investment is made. Because SPSE does not currently perform independent valuations of mortgage loans or equity securities for the Company, the Adviser also determines a recommendation for the fair value of these investments without the input of SPSE. The Adviser considers a number of qualitative and quantitative factors in current market conditions when performing valuations. The Board of Directors then determines whether or not to accept the Advisers recommendations for the aggregate valuation of the Companys portfolio of investments. The Board of Directors is ultimately responsible for setting the fair value and disclosure of investments in the financial statements.
Interest and Dividend Income Recognition
Interest income, adjusted for amortization of premiums and acquisition costs and for the accretion of discounts, is recorded on the accrual basis to the extent that such amounts are expected to be collected. The Company stops accruing interest on its investments when it is determined that interest is no longer collectible. There were no uncollectible accounts at December 31, 2006. Conditional interest or a success fee is recorded upon full repayment of a loan investment. Dividend income on preferred equity securities is accrued to the extent that such amounts are expected to be collected and that the Company has the option to collect such amounts in cash. To date, the Company has not accrued any dividend income.
Services Provided to Portfolio Companies
The 1940 Act requires that a business development company make available managerial assistance to its portfolio companies by providing significant guidance and counsel concerning the management, operations, or business objectives and policies of the respective portfolio company. The Company provides these and other services to portfolio companies through its Adviser. Currently, neither the Company nor the Adviser receives fees in connection with managerial assistance.
The Adviser receives fees for other services it provides to portfolio companies. These other fees are typically non-recurring, are recognized as revenue when earned and are generally paid directly to the Adviser by the borrower or potential borrower upon closing of the investment. The services the Adviser provides to portfolio companies vary by investment, but generally include a broad array of services, such as investment banking services, arranging bank and equity financing, structuring
15
financing from multiple lenders and investors, reviewing existing credit facilities, restructuring existing investments, raising equity and debt capital, turnaround management, merger and acquisition services and recruiting new management personnel. When the Adviser receives fees for these services, 50% of those fees are credited against the base management fee due to the Adviser from the Company. Any services of this nature subsequent to the closing would typically generate a separate fee at the time of completion.
The Adviser also receives fees for monitoring and reviewing portfolio company investments. These fees are recurring and are generally paid annually or quarterly in advance to the Adviser throughout the life of the investment. Fees of this nature are recorded as revenue by the Adviser when earned and are not credit against the base management fees.
The Company may receive fees for the origination and closing services it provides to portfolio companies through its Adviser. These fees are paid directly to the Company and are recognized as revenue upon closing of the originated investment and are reported as fee income in the consolidated statements of operations.
Cash and Cash Equivalents
The Company considers all short-term, highly liquid investments that are both readily convertible to cash and have a maturity of three months or less at the time of purchase to be cash equivalents. Items classified as cash equivalents include temporary investments in U.S. Treasury bills and can also include commercial paper and money-market funds. All of the Companys cash at December 31, 2006 was deposited with two financial institutions, and the Companys balances exceed federally insurable limits. The Company seeks to mitigate this risk by depositing funds with major financial institutions.
Realized Gain or Loss and Unrealized Appreciation or Depreciation of Portfolio Investments
Realized gain or loss is recognized when an investment is sold and is computed as the difference between the Companys cost basis in the investment at the date of sale and the net proceeds received from such sale. Unrealized appreciation or depreciation reflects the difference between the fair market value of the investment and the cost basis of such investment.
Federal Income Taxes
The Company intends to continue to qualify for treatment as a RIC under subchapter M of the Code. As a RIC, the Company will not be subject to federal income tax on the portion of its taxable income and gains distributed to stockholders. To qualify as a RIC, the Company is required to distribute at least 90% of investment company taxable income, as defined by the Code. The Company intends to distribute at least 90% of its ordinary income, and as a result, no income tax provisions have been recorded. The Company may, but does not intend to, pay out a return of capital.
Recent Accounting Pronouncements
In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, Fair Value Measurments (SFAS 157). SFAS 157 defines fair value, establishes a framework for measuring fair value in GAAP and expands disclosures about fair value measurements. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Company is required to adopt the provisions of SFAS 157 beginning with the fiscal year ended March 31, 2009. The Company is currently evaluating the impact of this pronouncement on its consolidated financial statements.
In September 2006, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No. 108 (SAB 108). SAB 108 addresses how the effects of prior year uncorrected misstatements should be considered when quantifying misstatements in current year financial statements and requires registrants to consider the effect of all carry over and reversing effects of prior year misstatements when quantifying errors in current year financial statements. SAB 108 does not change the SECs previous guidance in SAB No. 99, Materiality, on evaluating the materiality of misstatements. A registrant applying the new guidance for the first time that identifies material errors in existence at the beginning of the first fiscal year ending after November 15, 2006, may correct those errors through a one-time cumulative effect adjustment to beginning-of-year retained earnings. The cumulative effect alternative is available only if the application of the new guidance results in a conclusion that a material error exists as of the beginning of the first fiscal year ending after November 15, 2006, and those misstatements were determined to be immaterial based on a proper application of the registrants previous method
16
for quantifying misstatements. The Company is currently evaluating the impact of this pronouncement on its consolidated financial statements
In June 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxesan interpretation of FASB Statement No. 109, which clarifies the accounting for uncertainty in income taxes recognized in an enterprises financial statements in accordance with SFAS No. 109, Accounting for Income Taxes. SFAS No. 109 is effective as of the beginning of an entitys first fiscal year that begins after December 15, 2006. The Company will adopt this Interpretation effective April 1, 2007. The Company is currently evaluating the impact of this pronouncement on its consolidated financial statements.
In February 2006, the FASB issued SFAS No. 155, Accounting for Certain Hybrid Financial Instruments, an amendment of FASB statements No. 133 and 140 (SFAS No. 155). SFAS No. 155 allows financial instruments that have embedded derivatives to be accounted for as a whole (eliminating the need to bifurcate the derivative from its host) as long as the entire instrument is valued on a fair value basis. The statement also resolves and clarifies other specific SFAS No. 133 and SFAS No. 140 related issues. SFAS No. 155 is effective for all financial instruments acquired or issued after the beginning of an entitys first fiscal year that begins after September 15, 2006. The Company will be required to adopt SFAS No. 155 on April 1, 2007. The Company is currently evaluating the impact of this pronouncement on its consolidated financial statements.
NOTE 3. RELATED PARTY TRANSACTIONS
Investment Advisory and Management Agreement
We have entered into an investment advisory and management agreement with the Adviser (the Advisory Agreement), which is controlled by our chairman and chief executive officer. In accordance with the Advisory Agreement, we pay the Adviser a fee, as compensation for its services, consisting of a base management fee and an incentive fee.
The base management fee is assessed at an annual rate of 2.0% computed on the basis of the average value of the Companys gross invested assets at the end of the two most recently completed quarters, which are total assets less the cash proceeds and cash and cash equivalents from the proceeds of the Companys initial public offering that are not invested in debt and equity securities of portfolio companies. Through December 31, 2006, the base management fee was computed and payable quarterly. Beginning in periods subsequent to December 31, 2006, the base management fee will be computed and payable quarterly and will be assessed at an annual rate of 2.0% computed on the basis of the value of the Companys average gross assets at the end of the two most recently completed quarters, which are total assets, including investments made with proceeds of borrowings, less any uninvested cash or cash equivalents resulting from borrowings. This new calculation was originally scheduled to begin in periods after March 31, 2006; however, on April 11, 2006, July 11, 2006 and October 10, 2006, the Companys Board of Directors accepted voluntary waivers from the Adviser that allowed the current calculation of the base management fee to be effective through June 30, 2006, September 30, 2006 and December 31, 2006, respectively.
On January 9, 2007, the Companys Board of Directors accepted a voluntary waiver from the Adviser to reduce the annual 2.0% base management fee on senior syndicated loan participations to 0.5% to the extent that proceeds resulting from borrowings were used to purchase such syndicated loan participations.
When the Adviser receives fees from portfolio companies, as discussed in Note 2 under Services Provided to Portfolio Companies, 50% of certain of these fees will be credited against the base management fee that the Company would otherwise be required to pay to the Adviser.
For the three and nine months ended December 31, 2006, the Company incurred a base management fee to the Adviser of $551,235 and $2,214,437, respectively. For the three months ended December 31, 2005 and for the period June 22, 2005 (commencement of operations) to December 31, 2005, the Company incurred a base management fee to the Adviser of $265,522 and $357,630, respectively. As of December 31, 2006, $176,010 was unpaid and included in fees due to Adviser in the accompanying consolidated statements of assets and liabilities. For the three and nine months ended December 31, 2006, the Company recognized aggregate credits against the base management fee of $375,225 resulting from investment banking fees paid to the Adviser during the respective periods.
In addition, the Adviser services the loans held by Business Investment, in return for which the Adviser receives a 2.0% annual fee based on the monthly aggregate balance of loans held by Business Investment. Since the Company owns these loans, all loan servicing fees paid to the Adviser are treated as reductions against the 2.0% base management fee payable to
17
the Adviser. Overall, the management fee due to the Adviser cannot exceed 2.0% of total assets (as reduced by cash and cash equivalents pledged to creditors) during any given fiscal year.
For the three and nine months ended December 31, 2006, the Company recorded loan servicing fees to the Adviser of $508,691, of which $231,211 was unpaid at December 31, 2006 and included in fees due to Adviser in the accompanying consolidated statements of assets and liabilities.
The incentive fee consists of two parts: an income-based incentive fee and a capital gains incentive fee. The income-based incentive fee is calculated and payable quarterly in arrears based on the Companys pre-incentive fee net investment income for the immediately preceding calendar quarter. The capital gains incentive fee is determined and payable annually in arrears as of the end of each fiscal year (or upon termination of the Advisory Agreement, as of the termination date) and equals 20.0% of the Companys realized capital gains since inception through the end of the current fiscal year, if any, computed net of all realized capital losses since inception, and unrealized capital depreciation at the end of each fiscal year. Refer to the Companys Form 10-K for the fiscal year ended March 31, 2006 for more information regarding the calculation of the incentive fee.
Because pre-incentive fee net investment income was below the hurdle rate of 1.75% of net assets, no income-based incentive fee was recorded for the three or nine months ended December 31, 2006, the three months ended December 31, 2005 or the period June 22, 2005 (commencement of operations) to December 31, 2005.
Administration Agreement
The Company has entered into an administration agreement (the Administration Agreement) with Gladstone Administration, LLC (Gladstone Administration or the Administrator), a wholly-owned subsidiary of the Adviser. Under the Administration Agreement, the Company pays separately for administrative services. The Administration Agreement provides for payments equal to the Companys allocable portion of the Administrators overhead expenses in performing its obligations under the Administration Agreement, including but not limited to, rent for employees of the Administrator, and the allocable portion of salaries and benefits expenses of the Companys chief financial officer, controller, chief compliance officer, treasurer and their respective staffs. The Company recorded fees to the Administrator on the consolidated statements of operations of $124,101 and $73,424 for the three months ended December 31, 2006 and 2005, respectively. The Company recorded fees to the Administrator on the consolidated statements of operations of $364,351 and $178,469 for the nine months ended December 31, 2006 and the period June 22, 2005 (commencement of operations) to December 31, 2005, respectively. As of December 31, 2006 and March 31, 2006, $124,101 and 110,002, respectively, was unpaid and included in the administration fee payable to Administrator in the accompanying consolidated statements of assets and liabilities.
Loan Payable to Affiliate
On June 30, 2005, the Company repaid a $50,000 loan payable to its chairman and chief executive officer. The demand recourse promissory note accrued interest at the rate of 3.0% per annum and was repaid with accrued interest of $378 using a portion of the net proceeds from the Companys initial public offering.
NOTE 4. LINE OF CREDIT
Through the Companys wholly-owned subsidiary, Business Investment, the Company has obtained a $100 million revolving credit facility (the Credit Facility). On October 19, 2006, the Company executed a Purchase and Sale Agreement pursuant to which it agreed to sell certain loans to Business Investment in consideration of a membership interest therein. Simultaneously, Business Investment executed a Credit Agreement (the Credit Agreement) with Deutsche Bank AG, New York Branch (Deutsche Bank), as administrative agent, pursuant to which Business Investment pledged the loans purchased from the Company to secure future advances by certain institutional lenders. Availability under the Credit Facility will terminate on October 18, 2007, unless extended in the discretion of the lenders, at the request of Business Investment. Interest will be payable monthly during the term of the Credit Facility and principal will be payable out of collections on loans purchased from the Company during the period following the date of which availability for advances has terminated through maturity. The Credit Facility will mature two years following the date on which availability for advances has terminated and on such date, all principal, interest and other amounts owing under the Credit Facility will be due and payable. Interest rates charged on the advances under the facility are based on the rate paid by the lenders on commercial paper notes issued by such lenders to fund some or all of the advances, the London Interbank Offered Rate (LIBOR), the
18
Prime Rate or the Federal Funds Rate, depending on market conditions, and adjust periodically. Available borrowings are subject to various constraints imposed under the Credit Agreement, based on the aggregate loan balance pledged by Business Investment, which varies as loans are added and repaid, regardless of whether such repayments are early prepayment or are made as contractually required.
The Credit Facility contains covenants that require Business Investment to maintain its status as a separate entity; prohibit certain significant corporate transactions (such as mergers, consolidations, liquidations or dissolutions); and restrict material changes to the Companys credit and collection policies. The facility also restricts some of the terms and provisions (including interest rates, terms to maturity and payments schedules) and limits the borrower and industry concentrations of loans that are eligible to secure advances. As of December 31, 2006, Business Investment was in compliance with all of the facility covenants. As of December 31, 2006 there was $20 million of borrowings outstanding on the Credit Facility and the remaining borrowing capacity under the Credit Facility was $80 million.
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 as custodian. Deutsche Bank is also the trustee of the account and once a month remits the collected funds to the Company. At December 31, 2006, the amount due from the custodian was $2,798,620.
The Adviser services the loans pledged under the Credit Facility. As a condition to this servicing arrangement, the Company executed a performance guaranty pursuant to which it guaranteed that the Adviser would comply fully with all of its obligations under the Credit Facility. The performance guaranty requires the Company to maintain a minimum net worth of $100 million and to maintain asset coverage with respect to senior securities representing indebtedness of at least 200%, in accordance with Section 18 of the 1940 Act. As of December 31, 2006, the Company was in compliance with the covenants under the performance guaranty.
NOTE 5. COMMON STOCK
As of December 31, 2006 and March 31, 2006, 100,000,000 shares of $0.001 par value common stock were authorized and 16,560,100 shares were outstanding.
NOTE 6. INCREASE IN NET ASSETS PER SHARE RESULTING FROM OPERATIONS
The following table sets forth the computation of basic and diluted net increase in net assets per share resulting from operations:
|
|
For the three |
|
For the three |
|
For the nine |
|
For the period |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Numerator for basic and diluted net increase in net assets resulting from operations per share |
|
$ |
2,684,543 |
|
$ |
1,614,747 |
|
$ |
6,809,635 |
|
$ |
3,111,279 |
|
|
|
|
|
|
|
|
|
|
|
||||
Denominator for basic and diluted shares |
|
16,560,100 |
|
16,560,100 |
|
16,560,100 |
|
16,560,100 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Basic and diluted net increase in net assets per share resulting from operations |
|
$ |
0.16 |
|
$ |
0.10 |
|
$ |
0.41 |
|
$ |
0.19 |
|
NOTE 7. DIVIDENDS
The Company is required to pay out as a dividend, 90% of its ordinary income and realized net short-term capital gains in excess of realized net short-term capital losses, if any, for each taxable year in order to maintain its status as a RIC under
19
Subtitle A, Chapter 1 of Subchapter M of the Code. It is the policy of the Company to pay out as a dividend up to 100% of those amounts. The amount to be paid out monthly as a dividend is determined by the Board of Directors each quarter and is based on the annual earnings estimated by the management of the Company. Based on that estimate, three monthly dividends are declared each quarter. At year-end the Company may pay a bonus dividend, in addition to the monthly dividends, to ensure that it has paid out at least 90% of its ordinary income and realized net short-term capital gains for the year. Long-term capital gains are composed of success fees, prepayment fees and gains from the sale of securities held from one year or more. The Company intends to retain long-term capital gains from the sale of securities, if any, and not pay them out as dividends, however, the Board of Directors may decide to declare and pay out capital gains during any fiscal year. If the Company decides to retain long-term capital gains, the portion of the retained capital gains will be subject to 35% tax. The Company currently pays a monthly dividend. The tax characteristics of all dividends will be reported to stockholders on Form 1099 at the end of each calendar year. The Companys Board of Directors declared the following monthly dividends for the nine months ended December 31, 2006 and the period June 22, 2005 (commencement of operations) to December 31, 2005:
Fiscal Year 2007
Declaration Date |
|
Record Date |
|
Payment Date |
|
Dividend per Share |
|
|
October 10, 2006 |
|
December 20, 2006 |
|
December 29, 2006 |
|
$ |
0.07 |
|
October 10, 2006 |
|
November 21, 2006 |
|
November 30, 2006 |
|
$ |
0.07 |
|
October 10, 2006 |
|
October 23, 2006 |
|
October 31, 2006 |
|
$ |
0.07 |
|
July 11, 2006 |
|
September 21, 2006 |
|
September 29, 2006 |
|
$ |
0.07 |
|
July 11, 2006 |
|
August 21, 2006 |
|
August 31, 2006 |
|
$ |
0.07 |
|
July 11, 2006 |
|
July 19, 2006 |
|
July 31, 2006 |
|
$ |
0.07 |
|
April 11, 2006 |
|
June 22, 2006 |
|
June 30, 2006 |
|
$ |
0.07 |
|
April 11, 2006 |
|
May 22, 2006 |
|
May 31, 2006 |
|
$ |
0.07 |
|
April 11, 2006 |
|
April 20, 2006 |
|
April 28, 2006 |
|
$ |
0.07 |
|
Fiscal Year 2006
Declaration Date |
|
Record Date |
|
Payment Date |
|
Dividend per Share |
|
|
October 7, 2005 |
|
December 21, 2005 |
|
December 31, 2005 |
|
$ |
0.04 |
|
October 7, 2005 |
|
November 21, 2005 |
|
November 31, 2005 |
|
$ |
0.04 |
|
October 7, 2005 |
|
October 21, 2005 |
|
Octob |