UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
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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 JUNE 30, 2007 |
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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 x Non-accelerated filer o
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 July 30, 2007 was 16,560,100.
GLADSTONE INVESTMENT CORPORATION
TABLE OF CONTENTS
1
GLADSTONE
INVESTMENT CORPORATION
CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES
(UNAUDITED)
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June 30, |
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March 31, |
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2007 |
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2007 |
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ASSETS |
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Non-Control/Non-Affiliate investments (Cost 6/30/07:$186,296,045; 3/31/07:$138,567,741) |
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$ |
185,368,271 |
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$ |
138,168,612 |
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Control investments (Cost 6/30/07: $116,322,372; 3/31/07: $116,302,372) |
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118,310,360 |
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113,016,491 |
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Affiliate investments (Cost 6/30/07: $17,250,000; 3/31/07: $19,750,000) |
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17,947,445 |
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19,762,500 |
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Total investments at fair value (Cost 6/30/07: $319,868,417; 3/31/07: $274,620,113) |
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321,626,076 |
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270,947,603 |
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Cash and cash equivalents |
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34,596,442 |
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37,788,941 |
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Interest receivable |
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1,839,196 |
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1,306,090 |
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Prepaid insurance |
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24,553 |
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83,819 |
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Deferred finance costs |
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423,120 |
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627,960 |
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Due from Custodian |
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4,391,158 |
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12,694,985 |
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Due from Adviser |
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20,383 |
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Other assets |
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179,030 |
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120,434 |
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TOTAL ASSETS |
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$ |
363,079,575 |
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$ |
323,590,215 |
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LIABILITIES |
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Due to Administrator |
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$ |
207,814 |
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$ |
162,244 |
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Due to Adviser |
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286,561 |
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Borrowings under line of credit |
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134,400,000 |
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100,000,000 |
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Accrued expenses |
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752,602 |
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523,698 |
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Other liabilities |
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98,406 |
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85,764 |
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Total Liabilities |
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135,745,383 |
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100,771,706 |
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NET ASSETS |
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$ |
227,334,192 |
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$ |
222,818,509 |
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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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230,067,811 |
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230,096,572 |
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Net unrealized appreciation (depreciation) of investment portfolio |
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1,757,659 |
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(3,672,510 |
) |
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Distributions in excess of net investment income |
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(4,507,838 |
) |
(3,622,113 |
) |
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Total Net Assets |
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$ |
227,334,192 |
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$ |
222,818,509 |
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Net assets per share |
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$ |
13.73 |
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$ |
13.46 |
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THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
2
GLADSTONE INVESTMENT
CORPORATION
CONSOLIDATED SCHEDULE OF INVESTMENTS
JUNE 30, 2007
(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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Syndicated Loans: |
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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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$ |
4,818,185 |
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$ |
4,795,192 |
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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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3,744,596 |
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3,709,627 |
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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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1,487,309 |
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1,486,856 |
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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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2,980,932 |
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2,992,388 |
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Brock Holdings II, Inc. |
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Service - industrial specialty maintenance |
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Senior Term Debt (7.4%, Due 8/2013) (3) (5) |
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2,994,702 |
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2,992,500 |
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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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3,624,445 |
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3,628,050 |
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CRC Health Group, Inc. |
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Service - substance abuse treatment |
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Senior Term Debt (7.6%, Due 2/2012) (3) |
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9,955,202 |
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9,950,818 |
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Critical Homecare Solutions, Inc. |
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Service - home therapy and respiratory treatment |
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Senior Term Debt (8.6%, Due 1/2012) (3) (5) |
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3,947,139 |
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3,950,000 |
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CST Industries Acquisition, Inc. |
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Manufacturing - metal storage units |
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Senior Term Debt (8.1%, Due 8/2013) (3) |
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994,369 |
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997,463 |
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Dealer Computer Services, Inc. |
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Manufacturing & ervice - systems for automotive retailers |
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Senior Term Debt (7.4%, Due 9/2013) (3) |
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1,954,865 |
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1,953,286 |
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Generac Acquisition Corp. |
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Manufacturing - standby power products |
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Senior Term Debt (7.9%, Due 11/2013) (5) |
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4,967,404 |
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4,851,000 |
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Graham Packaging Holdings Company |
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Manufacturing - plastic containers |
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Senior Term Debt (7.6%, Due 11/2013) |
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10,473,750 |
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10,486,842 |
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HMTBP Acquisition II Corp. |
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Service - aboveground storage tanks |
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Senior Term Debt (7.6%, Due 11/2013) |
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3,990,000 |
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3,990,000 |
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Hudson Products Holdings, Inc. |
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Manufacturing - heat transfer solutions |
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Senior Term Debt (8.4%, Due 12/2013) (3) |
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6,065,392 |
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6,063,684 |
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Huish Detergents, Inc. |
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Manufacturing - household cleaning products |
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Senior Term Debt (7.3%, Due 4/2014) (3) |
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2,000,000 |
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1,985,000 |
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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) |
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1,230,450 |
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1,228,070 |
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KIK Custom Products, Inc. |
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Manufacturing - consumer products |
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Senior Term Debt (7.6%, Due 5/2014) (3) |
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1,000,000 |
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985,000 |
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Kronos, Inc. |
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Service - workforce management solutions |
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Senior Term Debt (7.6%, Due 6/14) (3) |
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2,000,000 |
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1,992,500 |
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Lexicon Marketing USA, Inc. |
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Service - marketing to Hispanic community |
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Senior Term Debt (7.8%, Due 5/2012) (3) (5) |
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2,947,745 |
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2,941,844 |
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Local TV Finance, LLC |
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Service - television station operator |
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Senior Term Debt (7.4%, Due 5/2013) (3) |
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1,000,000 |
|
996,250 |
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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) |
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6,422,593 |
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6,362,484 |
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MedAssets, Inc. |
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Service - pharmaceuticals and healthcare GPO |
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Senior Term Debt (7.8%, Due 10/2013) (3) (5) |
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3,484,788 |
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3,478,147 |
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MediMedia USA, LLC |
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Service - healthcare and pharmeceutical marketing |
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Senior Term Debt (7.6%, Due 10/2013) (3) |
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2,248,019 |
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2,241,499 |
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Mitchell International, Inc. |
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Service - automobile insurance claims processing |
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Senior Term Debt (7.4%, Due 3/2014) (3) (5) |
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1,000,250 |
|
997,500 |
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National Mentor Holdings, Inc. |
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Service - home health care |
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Senior Term Debt (7.2%, Due 6/2013) (3) |
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1,986,979 |
|
1,990,790 |
||
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Network Solutions, LLC |
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Service - internet domain solutions |
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Senior Term Debt (7.9%, Due 3/2014) (3) |
|
10,000,000 |
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9,950,000 |
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NPC International Inc. |
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Service - Pizza Hut franchisee |
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Senior Term Debt (7.1%, Due 5/2013) (3) |
|
3,016,872 |
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2,995,367 |
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Open Solutions, Inc. |
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Service - software outsourcing for financial institutions |
|
Senior Term Debt (7.5%, Due 1/2014) (3) |
|
2,511,814 |
|
2,484,836 |
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Ozburn-Hessey Holding Co. LLC |
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Service - third party logistics |
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Senior Term Debt (8.6%, Due 8/2012) (3) |
|
7,718,949 |
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7,678,040 |
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Pinnacle Foods Finance, LLC |
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Manufacturing - branded food products |
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Senior Term Debt (8.1%, Due 4/2014) (3) |
|
4,001,318 |
|
4,000,000 |
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PTS Acquisition Corp. |
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Manufacturing - drug delivery and packaging technologies |
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Senior Term Debt (7.6%, Due 4/2014) (3) |
|
7,000,000 |
|
6,991,250 |
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QTC Acquisition, Inc. |
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Service - outsourced disability evaluations |
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Senior Term Debt (7.6%, Due 11/2012) (3) |
|
2,001,820 |
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2,000,000 |
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Radio Systems Corporation |
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Service - design electronic pet containment products |
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Senior Term Debt (8.1%, Due 9/2013) (3) |
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1,984,482 |
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1,999,888 |
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Rally Parts, Inc. |
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Manufacturing - aftermarket motorcycle parts and accessories |
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Senior Term Debt (7.9%, Due 11/2013) (3) |
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2,503,516 |
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2,487,500 |
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RPG Holdings, Inc. |
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Manufacturing and design - greeting cards |
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Senior Term Debt (9.1%, Due 12/2011) (3) |
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4,553,126 |
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4,278,958 |
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SafeNet, Inc. |
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Service - chip encryption products |
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Senior Term Debt (7.9%, Due 4/2014) (3) |
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3,001,528 |
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2,970,000 |
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SGS International, Inc. |
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Service - digital imaging and graphics |
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Senior Term Debt (7.9%, Due 12/2011) (3) |
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1,607,478 |
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1,600,627 |
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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) |
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498,760 |
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501,231 |
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3
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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Survey Sampling, LLC |
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Service - telecommunications-based sampling |
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Senior Term Debt (7.9%, Due 5/2011) (3) (5) |
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$ |
3,245,858 |
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$ |
3,212,324 |
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Synagro Technologies, Inc. |
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Service - waste treatment and recycling |
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Senior Term Debt (7.4%, Due 3/2014) (3) |
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502,349 |
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500,000 |
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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) |
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4,940,191 |
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4,875,750 |
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US Investigative Services, Inc. |
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Service - background investigations |
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Senior Term Debt (8.1%, Due 9/2012) (3) |
|
10,892,705 |
|
10,828,384 |
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United Surgical Partners International, Inc. |
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Service - outpatient surgical provider |
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Senior Term Debt (7.4%, Due 4/2014) (3) |
|
1,326,290 |
|
1,319,659 |
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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 2/2013) (3) |
|
2,936,555 |
|
2,947,567 |
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WaveDivision Holdings, LLC |
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Service - cable |
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Senior Term Debt (7.9%, Due 6/2014) (3) (5) |
|
1,925,274 |
|
1,920,000 |
||
|
|
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West Corporation |
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Service - business process outsourcing |
|
Senior Term Debt (7.8%, Due 10/2013) (3) |
|
11,458,046 |
|
11,430,100 |
||
|
|
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Subtotal - Syndicated Loans |
|
|
|
|
|
$ |
174,946,045 |
|
$ |
174,018,271 |
|
|
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|
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Non-syndicated loans |
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|
|
|
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||
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|
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|
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B-Dry, LLC |
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Service - basement waterproofer |
|
Senior Term Debt (10.2%, Due 11/2007) (6) |
|
250,000 |
|
250,000 |
||
|
|
|
|
Senior Term Debt (10.2%, Due 5/2014) (6) |
|
10,800,000 |
|
10,800,000 |
||
|
|
|
|
Common Stock Warrants (4) (6) |
|
300,000 |
|
300,000 |
||
|
|
|
|
|
|
11,350,000 |
|
11,350,000 |
||
|
|
|
|
|
|
|
|
|
||
Total Non-Control/Non-Affiliate Investments |
|
|
|
|
|
$ |
186,296,045 |
|
$ |
185,368,271 |
|
|
|
|
|
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|
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|
||
CONTROL INVESTMENTS |
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|
|
|
|
|
|
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||
|
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|
|
|
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|
||
A. Stucki Company |
|
Manufacturing - railroad cars and accessories |
|
Senior Term Debt (9.8% Due 3/2012) |
|
$ |
15,000,000 |
|
$ |
15,000,000 |
|
|
|
|
Senior Term Debt (12.1% Due 3/2012) |
|
11,000,000 |
|
11,000,000 |
||
|
|
|
|
Senior Subordinated Term Debt (13% Due 3/2014) |
|
5,485,760 |
|
5,485,760 |
||
|
|
|
|
Preferred Stock (4) |
|
4,386,686 |
|
4,483,794 |
||
|
|
|
|
Common Stock (4) |
|
129,956 |
|
3,989,352 |
||
|
|
|
|
|
|
36,002,402 |
|
39,958,906 |
||
|
|
|
|
|
|
|
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|
||
Acme Cryogenics Corporation |
|
Manufacturing - manifolds and pipes for industrial gasses |
|
Senior Subordinated Term Debt (11.5% Due 3/2013) |
|
14,500,000 |
|
14,500,000 |
||
|
|
|
|
Redeemable Preferred Stock |
|
6,983,785 |
|
7,254,898 |
||
|
|
|
|
Common Stock |
|
1,045,181 |
|
3,821,983 |
||
|
|
|
|
Common Stock Warrants (4) |
|
24,686 |
|
141,420 |
||
|
|
|
|
|
|
22,553,652 |
|
25,718,301 |
||
|
|
|
|
|
|
|
|
|
||
Chase II Holdings Corp. |
|
Manufacturing - traffic doors |
|
Revolving Credit Facility (9.8% Due 3/2008) (7) |
|
2,380,000 |
|
2,380,000 |
||
|
|
|
|
Senior Term Debt (9.8%, Due 3/2011) |
|
10,725,000 |
|
10,725,000 |
||
|
|
|
|
Senior Term Debt (12.0% Due 3/2011) |
|
7,960,000 |
|
7,960,000 |
||
|
|
|
|
Subordinated Term Debt (13% Due 3/2013) |
|
6,167,810 |
|
6,167,810 |
||
|
|
|
|
Redeemable Preferred Stock (4) |
|
6,960,806 |
|
4,245,986 |
||
|
|
|
|
Common Stock Warrants (4) |
|
61,384 |
|
|
||
|
|
|
|
|
|
34,255,000 |
|
31,478,796 |
||
|
|
|
|
|
|
|
|
|
||
Hailey Transport Corporation |
|
Retail and Service - school buses and parts |
|
Senior Subordinated Term Debt (12.0%, Due 1/2012) |
|
4,000,000 |
|
4,000,000 |
||
|
|
|
|
Preferred Stock (4) |
|
2,500,000 |
|
133,154 |
||
|
|
|
|
|
|
6,500,000 |
|
4,133,154 |
||
|
|
|
|
|
|
|
|
|
||
Quench Holdings Corp. |
|
Service - sales, installation and service |
|
Revolving Credit Facility (9.3%, Due 3/2009) (8) |
|
1,050,000 |
|
1,050,000 |
||
|
|
of water coolers |
|
Senior Term Debt (9.3%, Due 3/2011) |
|
4,750,000 |
|
4,750,000 |
||
|
|
|
|
Subordinated Term Debt (11.5%, Due 3/2011) |
|
7,955,000 |
|
7,955,000 |
||
|
|
|
|
Common Stock (4) |
|
3,256,318 |
|
3,266,203 |
||
|
|
|
|
|
|
17,011,318 |
|
17,021,203 |
||
|
|
|
|
|
|
|
|
|
||
Total Control Investments |
|
|
|
|
|
$ |
116,322,372 |
|
$ |
118,310,360 |
|
|
|
|
|
|
|
|
|
||
AFFILIATE INVESTMENTS |
|
|
|
|
|
|
|
|
||
|
|
|
|
|
|
|
|
|
||
Noble Logistics, Inc. |
|
Service - aftermarket auto parts delivery |
|
Revolving Credit Facility (9.3%, Due 12/2009) (9) |
|
$ |
|
|
$ |
|
|
|
|
|
Senior Term Debt (9.3%, Due 12/2011) |
|
7,000,000 |
|
7,000,000 |
||
|
|
|
|
Senior Term Debt (11.3% Due 3/2011) |
|
7,000,000 |
|
7,000,000 |
||
|
|
|
|
Preferred Stock (4) |
|
1,750,000 |
|
1,897,431 |
||
|
|
|
|
Common Stock (4) |
|
1,500,000 |
|
2,050,014 |
||
|
|
|
|
|
|
17,250,000 |
|
17,947,445 |
||
|
|
|
|
|
|
|
|
|
||
Total Affiliate Investments |
|
|
|
|
|
$ |
17,250,000 |
|
$ |
17,947,445 |
|
|
|
|
|
|
|
|
|
||
Total Investments |
|
|
|
|
|
$ |
319,868,417 |
|
$ |
321,626,076 |
(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 June 30, 2007 and due date represents the contractual maturity date.
(3) Marketable securities are valued based on the indicative bid price, as of June 30, 2007, 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 June 30, 2007.
(6) Fair value is equal to cost due to recent acquisition.
(7) Total available under the revolving credit facility is $3,500,000, of which $1,120,000 remains undrawn at June 30, 2007.
(8) Total available under the revolving credit facility is $1,500,000, of which $450,000 remains undrawn at June 30, 2007.
(9) Total available under the revolving credit facility is $2,000,000.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
4
GLADSTONE INVESTMENT
CORPORATION
CONSOLIDATED SCHEDULE OF INVESTMENTS
March
31, 2007
(UNAUDITED)
Company (1) |
|
Industry |
|
Investment (2) |
|
Cost |
|
Fair Value |
||
|
|
|
|
|
|
|
|
|
||
NON-CONTROL/NON-AFFILIATE INVESTMENTS |
|
|
|
|
|
|
|
|
||
|
|
|
|
|
|
|
|
|
||
ACS Media, LLC |
|
Service - directory advertising |
|
Senior Term Debt (7.9%, Due 11/2013) (3) |
|
$ |
4,857,421 |
|
$ |
4,857,822 |
|
|
|
|
|
|
|
|
|
||
Activant |
|
Service - enterprise software and services |
|
Senior Term Debt (7.4%, Due 5/2013) (3) |
|
3,745,496 |
|
3,714,281 |
||
|
|
|
|
|
|
|
|
|
||
American Safety Razor Company Inc. |
|
Manufacturing - razors and blades |
|
Senior Term Debt (7.9%, Due 7/2013) (3) |
|
1,491,154 |
|
1,492,472 |
||
|
|
|
|
|
|
|
|
|
||
Aramark Corp. |
|
Service - vending services |
|
Senior Term Debt (7.5%, Due 1/2014) (10) |
|
921,289 |
|
925,895 |
||
|
|
|
|
Letter of Credit (5.3%, Due 1/2014) (10) |
|
65,841 |
|
66,170 |
||
|
|
|
|
|
|
|
|
|
||
Aspect Software, Inc. |
|
Service - call center software |
|
Senior Term Debt (8.4%, Due 7/2011) (3) |
|
2,988,647 |
|
2,999,925 |
||
|
|
|
|
|
|
|
|
|
||
Brock Holdings II, Inc. |
|
Service - industrial specialty maintenance |
|
Senior Term Debt (7.3%, Due 8/2013) (3) (5) |
|
3,000,000 |
|
3,003,750 |
||
|
|
|
|
|
|
|
|
|
||
Compsych Investments Corp. |
|
Service - independent employee assistance programs |
|
Senior Term Debt (8.1%, Due 2/2012) (3) (5) |
|
3,875,254 |
|
3,879,300 |
||
|
|
|
|
|
|
|
|
|
||
CRC Health Group, Inc. |
|
Service - substance abuse treatment |
|
Senior Term Debt (7.9%, Due 2/2012) (3) |
|
9,993,754 |
|
10,010,307 |
||
|
|
|
|
|
|
|
|
|
||
Critical Homecare Solutions, Inc. |
|
Service - home therapy and respiratory treatment |
|
Senior Term Debt (8.6%, Due 1/2012) (3) (5) |
|
2,000,000 |
|
2,000,000 |
||
|
|
|
|
|
|
|
|
|
||
CST Industries Acquisition, Inc. |
|
Manufacturing - metal storage units |
|
Senior Term Debt (8.5%, Due 8/2013) (3) |
|
996,946 |
|
999,975 |
||
|
|
|
|
|
|
|
|
|
||
Dealer Computer Services, Inc. |
|
Manufacturing & Service - systems for automotive retailers |
|
Senior Term Debt (7.4%, Due 9/2013) (3) |
|
1,042,760 |
|
1,044,063 |
||
|
|
|
|
|
|
|
|
|
||
Dresser Holdings, Inc. |
|
Manufacturing - oilfield & energy products |
|
Senior Term Debt (8.1%, Due 10/2013) (3) |
|
3,868,905 |
|
3,851,943 |
||
|
|
|
|
|
|
|
|
|
||
Generac Acquisition Corp. |
|
Manufacturing - standby power products |
|
Senior Term Debt (7.9%, Due 11/2013) (5) |
|
2,593,800 |
|
2,611,957 |
||
|
|
|
|
|
|
|
|
|
||
Hudson Products Holdings, Inc. |
|
Manufacturing - heat transfer solutions |
|
Senior Term Debt (8.1%, Due 12/2013) (3) |
|
2,358,550 |
|
2,363,866 |
||
|
|
|
|
|
|
|
|
|
||
IPC Information Systems, LLC |
|
Manufacturing - specialized telephony systems |
|
Senior Term Debt (7.9%, Due 9/2013) (3) |
|
263,045 |
|
262,319 |
||
|
|
|
|
|
|
|
|
|
||
J. Crew Operating Corp. |
|
Retail - apparel |
|
Senior Term Debt (7.2%, Due 5/2013) (3) |
|
1,405,990 |
|
1,407,018 |
||
|
|
|
|
|
|
|
|
|
||
Latham Manufacturing Corp. |
|
Manufacturing - swimming pool components accessories |
|
Senior Term Debt (8.5%, Due 6/2012) (3) |
|
2,427,162 |
|
2,375,520 |
||
|
|
|
|
|
|
|
|
|
||
Lexicon Marketing USA, Inc. |
|
Service - marketing to Hispanic community |
|
Senior Term Debt (7.8%, Due 5/2012) (3) (5) |
|
2,971,543 |
|
3,006,325 |
||
|
|
|
|
|
|
|
|
|
||
LVI Services, Inc. |
|
Service - asbestos and mold remediation |
|
Senior Term Debt (10.3%, Due 11/2010) (3) (5) |
|
6,440,352 |
|
6,330,492 |
||
|
|
|
|
|
|
|
|
|
||
Madison River Capital LLC |
|
Service - communications and information |
|
Senior Term Debt (7.6%, Due 7/2012) (3) |
|
5,727,708 |
|
5,702,357 |
||
|
|
|
|
|
|
|
|
|
||
Maidenform, Inc. |
|
Manufacturing - intimate apparel |
|
Senior Term Debt (7.1%, Due 5/2010) (3) |
|
2,569,252 |
|
2,573,084 |
||
|
|
|
|
|
|
|
|
|
||
MedAssets, Inc. |
|
Service - pharmaceuticals and healthcare GPO |
|
Senior Term Debt (7.8%, Due 10/2013) (3) (5) |
|
3,493,734 |
|
3,504,342 |
||
|
|
|
|
|
|
|
|
|
||
MediMedia USA, LLC |
|
Service - healthcare and pharmeceutical marketing |
|
Senior Term Debt (7.9%, Due 10/2013) (3) |
|
1,185,613 |
|
1,180,462 |
||
|
|
|
|
|
|
|
|
|
||
National Mentor Holdings, Inc. |
|
Service - home health care |
|
Senior Term Debt (7.4%, Due 6/2013) (3) |
|
1,987,027 |
|
1,985,825 |
||
|
|
|
|
|
|
|
|
|
||
NPC International Inc. |
|
Service - Pizza Hut franchisee |
|
Senior Term Debt (7.1%, Due 5/2013) (3) |
|
3,017,479 |
|
2,995,367 |
||
|
|
|
|
|
|
|
|
|
||
Nutro Products, Inc. |
|
Manufacturing - pet food |
|
Senior Term Debt (7.4%, Due 4/2012) (3) |
|
2,442,961 |
|
2,421,809 |
||
|
|
|
|
|
|
|
|
|
||
Open Solutions, Inc. |
|
Service - software outsourcing for financial institutions |
|
Senior Term Debt (7.5%, Due 1/2014) (3) |
|
2,518,294 |
|
2,506,250 |
||
|
|
|
|
|
|
|
|
|
||
Ozburn-Hessey Holding Co. LLC |
|
Service - third party logistics |
|
Senior Term Debt (8.6%, Due 8/2012) (3) |
|
7,764,943 |
|
7,711,178 |
||
|
|
|
|
|
|
|
|
|
||
Patriot Media & Communications CNJ, LLC |
|
Service - telecommunications |
|
Senior Term Debt (7.4%, Due 3/2013) (3) |
|
4,147,228 |
|
4,105,476 |
||
|
|
|
|
|
|
|
|
|
||
QTC Acquisition, Inc. |
|
Service - outsourced disability evaluations |
|
Senior Term Debt (8.1%, Due 11/2012) (3) |
|
1,996,592 |
|
1,997,199 |
||
|
|
|
|
|
|
|
|
|
||
Radio Systems Corporation |
|
Service - design electronic pet containment products |
|
Senior Term Debt (8.1%, Due 9/2013) (3) |
|
1,989,421 |
|
1,999,950 |
||
|
|
|
|
|
|
|
|
|
||
Rally Parts, Inc. |
|
Manufacturing - aftermarket motorcycle parts and accessories |
|
Senior Term Debt (7.9%, Due 11/2013) (3) |
|
1,313,285 |
|
1,319,792 |
||
|
|
|
|
|
|
|
|
|
||
RPG Holdings, Inc. |
|
Manufacturing and design - greeting cards |
|
Senior Term Debt (8.9%, Due 12/2011) (3) |
|
5,001,100 |
|
4,900,000 |
||
|
|
|
|
|
|
|
|
|
||
SGS International, Inc. |
|
Service - digital imaging and graphics |
|
Senior Term Debt (7.9%, Due 12/2011) (3) |
|
1,611,921 |
|
1,616,724 |
||
|
|
|
|
|
|
|
|
|
||
Stolle Machinery Company |
|
Manufacturing - can-making equipment and parts |
|
Senior Term Debt (7.9%, Due 9/2012) (3) |
|
500,100 |
|
502,491 |
||
5
Company (1) |
|
Industry |
|
Investment (2) |
|
Cost |
|
Fair Value |
||
|
|
|
|
|
|
|
|
|
||
NON-CONTROL/NON-AFFILIATE INVESTMENTS (Continued) |
|
|
|
|
|
|
|
|
||
|
|
|
|
|
|
|
|
|
||
Survey Sampling, LLC |
|
Service - telecommunications-based sampling |
|
Senior Term Debt (7.9%, Due 5/2011) (3) |
|
3,309,714 |
|
3,282,178 |
||
|
|
|
|
|
|
|
|
|
||
Triad Laboratory Alliance, LLC |
|
Service - regional medical laboratories |
|
Senior Term Debt (8.6%, Due 12/2011) (3) (5) |
|
4,953,549 |
|
4,912,813 |
||
|
|
|
|
|
|
|
|
|
||
US Investigative Services, Inc. |
|
Service - background investigations |
|
Senior Term Debt (7.9%, Due 9/2012) (3) |
|
10,923,253 |
|
10,910,191 |
||
|
|
|
|
|
|
|
|
|
||
Wastequip, Inc. |
|
Service - process and transport waste materials |
|
Senior Term Debt (7.6%, Due 2/2013) (3) |
|
2,066,465 |
|
2,081,963 |
||
|
|
|
|
|
|
|
|
|
||
WaveDivision Holdings, LLC |
|
Service - cable |
|
Senior Term Debt (7.8%, Due 6/2014) (3) |
|
1,925,440 |
|
1,929,600 |
||
|
|
|
|
|
|
|
|
|
||
West Corporation |
|
Service - business process outsourcing |
|
Senior Term Debt (7.8%, Due 10/2013) (3) |
|
10,814,753 |
|
10,826,161 |
||
|
|
|
|
|
|
|
|
|
||
Total Non-Control/Non-Affiliate Investments |
|
|
|
|
|
$ |
138,567,741 |
|
$ |
138,168,612 |
|
|
|
|
|
|
|
|
|
||
CONTROL INVESTMENTS |
|
|
|
|
|
|
|
|
||
|
|
|
|
|
|
|
|
|
||
A. Stucki Company |
|
Manufacturing - railroad cars and accessories |
|
Senior Term Debt (9.8% Due 3/2012) (6) |
|
15,000,000 |
|
15,000,000 |
||
|
|
|
|
Senior Term Debt (12.1% Due 3/2012) (6) |
|
11,000,000 |
|
11,000,000 |
||
|
|
|
|
Senior Subordinated Term Debt (13% Due 3/2014) (6) |
|
5,485,760 |
|
5,485,760 |
||
|
|
|
|
Preferred Stock (4) (6) |
|
4,386,686 |
|
4,386,686 |
||
|
|
|
|
Common Stock (4) (6) |
|
129,956 |
|
129,956 |
||
|
|
|
|
|
|
36,002,402 |
|
36,002,402 |
||
|
|
|
|
|
|
|
|
|
||
Acme Cryogenics Corporation |
|
Manufacturing - manifolds and pipes for industrial gasses |
|
Senior Subordinated Term Debt (11.5% Due 3/2013) (5) (6) |
|
$ |
14,500,000 |
|
$ |
14,481,875 |
|
|
|
|
Redeemable Preferred Stock (4) (6) |
|
6,983,785 |
|
6,983,785 |
||
|
|
|
|
Common Stock (4) (6) |
|
1,045,181 |
|
1,045,181 |
||
|
|
|
|
Common Stock Warrants (4) (6) |
|
24,686 |
|
24,686 |
||
|
|
|
|
|
|
22,553,652 |
|
22,535,527 |
||
|
|
|
|
|
|
|
|
|
||
Chase II Holdings Corp. |
|
Manufacturing - traffic doors |
|
Revolving Credit Facility (9.8% Due 3/2008) (7) |
|
1,900,000 |
|
1,900,000 |
||
|
|
|
|
Senior Term Debt (9.8%, Due 3/2011) (5) |
|
11,000,000 |
|
11,000,000 |
||
|
|
|
|
Senior Term Debt (12.0% Due 3/2011) (5) |
|
8,000,000 |
|
8,000,000 |
||
|
|
|
|
Subordinated Term Debt (13% Due 3/2013) (5) |
|
6,167,810 |
|
6,167,810 |
||
|
|
|
|
Redeemable Preferred Stock (4) |
|
6,960,806 |
|
3,120,070 |
||
|
|
|
|
Common Stock Warrants (4) |
|
61,384 |
|
|
||
|
|
|
|
|
|
34,090,000 |
|
30,187,880 |
||
|
|
|
|
|
|
|
|
|
||
Hailey Transport Corporation |
|
Retail and Service - school buses and parts |
|
Senior Subordinated Term Debt (12.0%, Due 1/2012) (5) |
|
4,000,000 |
|
4,000,000 |
||
|
|
|
|
Preferred Stock (4) |
|
2,500,000 |
|
3,184,874 |
||
|
|
|
|
|
|
6,500,000 |
|
7,184,874 |
||
|
|
|
|
|
|
|
|
|
||
Quench Holdings Corp. |
|
Service - sales, installation and service |
|
Revolving Credit Facility (9.3%, Due 3/2009) (5) (8) |
|
1,900,000 |
|
1,900,000 |
||
|
|
of water coolers |
|
Senior Term Debt (9.3%, Due 3/2011) (5) |
|
4,000,000 |
|
4,000,000 |
||
|
|
|
|
Subordinated Term Debt (11.5%, Due 3/2011) (5) |
|
8,000,000 |
|
8,000,000 |
||
|
|
|
|
Common Stock (4) |
|
3,256,318 |
|
3,205,808 |
||
|
|
|
|
|
|
17,156,318 |
|
17,105,808 |
||
|
|
|
|
|
|
|
|
|
||
Total Control Investments |
|
|
|
|
|
$ |
116,302,372 |
|
$ |
113,016,491 |
|
|
|
|
|
|
|
|
|
||
AFFILIATE INVESTMENTS |
|
|
|
|
|
|
|
|
||
|
|
|
|
|
|
|
|
|
||
Noble Logistics, Inc. |
|
Service - aftermarket auto parts delivery |
|
Revolving Credit Facility (9.3%, Due 12/2009) (5) (9) |
|
$ |
2,000,000 |
|
$ |
1,995,000 |
|
|
|
|
Senior Term Debt (9.3%, Due 12/2011) (5) (6) |
|
7,000,000 |
|
7,008,750 |
||
|
|
|
|
Senior Term Debt (11.3% Due 3/2011) (5) (6) |
|
7,000,000 |
|
7,008,750 |
||
|
|
|
|
Senior Subordinated Term Debt (12.3% Due 8/2007) (5) (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 |
||
|
|
|
|
|
|
19,750,000 |
|
19,762,500 |
||
|
|
|
|
|
|
|
|
|
||
Total Affiliate Investments |
|
|
|
|
|
$ |
19,750,000 |
|
$ |
19,762,500 |
|
|
|
|
|
|
|
|
|
||
Total Investments |
|
|
|
|
|
$ |
274,620,113 |
|
$ |
270,947,603 |
(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, 2007 and due date represents the contractual maturity date.
(3) Marketable securities are valued based on the indicative bid price, as of March 31, 2007, 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 March 31, 2007.
(6) Fair value is equal to cost due to recent acquisition.
(7) Total available under the revolving credit facility is $3,500,000 of which $1,600,000 remains undrawn as of March 31, 2007.
(8) Total available under the revolving credit facility is $2,000,000, of which $100,000 remains undrawn at March 31, 2007.
(9) Total available under the revolving credit facility is $2,000,000, which was fully drawn at March 31, 2007.
(10) Subsequent to March 31, 2007, the investment in the portfolio company was sold at the fair value reflected herein.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
6
GLADSTONE INVESTMENT
CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
|
|
Three months ended |
|
Three months ended |
|
||
|
|
June 30, 2007 |
|
June 30, 2006 |
|
||
|
|
|
|
|
|
||
INVESTMENT INCOME |
|
|
|
|
|
||
Interest income |
|
|
|
|
|
||
Non-Control/Non-Affiliate investments |
|
$ |
3,248,555 |
|
$ |
1,964,480 |
|
Control investments |
|
2,564,992 |
|
1,190,302 |
|
||
Affiliate investments |
|
426,563 |
|
|
|
||
Cash and cash equivalents |
|
53,692 |
|
708,340 |
|
||
Total interest income |
|
6,293,802 |
|
3,863,122 |
|
||
Other income |
|
6,127 |
|
316 |
|
||
Total investment income |
|
6,299,929 |
|
3,863,438 |
|
||
|
|
|
|
|
|
||
EXPENSES |
|
|
|
|
|
||
Base management fee |
|
359,689 |
|
801,309 |
|
||
Loan servicing fee |
|
1,194,418 |
|
|
|
||
Administration fee |
|
207,814 |
|
115,389 |
|
||
Interest expense |
|
1,414,262 |
|
|
|
||
Amortization of deferred finance costs |
|
209,840 |
|
|
|
||
Professional fees |
|
155,666 |
|
79,748 |
|
||
Stockholder related costs |
|
37,889 |
|
93,766 |
|
||
Insurance expense |
|
62,941 |
|
72,611 |
|
||
Directors fees |
|
54,800 |
|
43,250 |
|
||
Taxes and licenses |
|
41,807 |
|
57,107 |
|
||
General and administrative expenses |
|
56,134 |
|
19,094 |
|
||
Expenses before credit from Adviser |
|
3,795,260 |
|
1,282,274 |
|
||
Credits to base management fee (Refer to Note 4) |
|
(383,875 |
) |
|
|
||
Total expenses net of credit to management fee |
|
3,411,385 |
|
1,282,274 |
|
||
NET INVESTMENT INCOME |
|
2,888,544 |
|
2,581,164 |
|
||
|
|
|
|
|
|
||
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS |
|
|
|
|
|
||
Realized (loss) gain on sale of Non-Control/Non-Affiliate investments |
|
(48,247 |
) |
3,273 |
|
||
Net unrealized depreciation of Non-Control/Non-Affiliate investments |
|
(528,645 |
) |
(1,139,711 |
) |
||
Net unrealized appreciation (depreciation) of Control Investments |
|
5,273,869 |
|
(167,678 |
) |
||
Net unrealized appreciation of Affiliate Investments |
|
684,945 |
|
|
|
||
Net gain (loss) on investments |
|
5,381,922 |
|
(1,304,116 |
) |
||
|
|
|
|
|
|
||
|
|
|
|
|
|
||
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS |
|
$ |
8,270,466 |
|
$ |
1,277,048 |
|
|
|
|
|
|
|
||
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS PER COMMON SHARE: |
|
|
|
|
|
||
Basic and Diluted |
|
$ |
0.50 |
|
$ |
0.08 |
|
|
|
|
|
|
|
||
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.
7
GLADSTONE INVESTMENT CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS
(UNAUDITED)
|
|
Three months ended |
|
Three months ended |
|
||
|
|
June 30, 2007 |
|
June 30, 2006 |
|
||
Operations: |
|
|
|
|
|
||
Net investment income |
|
$ |
2,888,544 |
|
$ |
2,581,164 |
|
Realized (loss) gain on sale of investments |
|
(48,247 |
) |
3,273 |
|
||
Unrealized appreciation (depreciation) of portfolio |
|
5,430,169 |
|
(1,307,389 |
) |
||
Increase in net assets from operations |
|
8,270,466 |
|
1,277,048 |
|
||
|
|
|
|
|
|
||
Capital transactions: |
|
|
|
|
|
||
Issuance of common stock |
|
|
|
|
|
||
Shelf offering costs |
|
(28,761 |
) |
|
|
||
Dividends from net investment income |
|
(3,726,022 |
) |
(3,477,621 |
) |
||
Total decrease in net assets from capital transactions |
|
(3,754,783 |
) |
(3,477,621 |
) |
||
|
|
|
|
|
|
||
Total increase (decrease) in net assets |
|
4,515,683 |
|
(2,200,573 |
) |
||
|
|
|
|
|
|
||
Net Assets |
|
|
|
|
|
||
Beginning of period |
|
222,818,509 |
|
229,841,697 |
|
||
End of period |
|
$ |
227,334,192 |
|
$ |
227,641,124 |
|
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
8
GLADSTONE INVESTMENT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
|
|
Three months ended |
|
Three months ended |
|
||
|
|
June 30, 2007 |
|
June 30, 2006 |
|
||
|
|
|
|
|
|
||
CASH FLOWS FROM OPERATING ACTIVITIES |
|
|
|
|
|
||
|
|
|
|
|
|
||
Net increase in net assets resulting from operations |
|
$ |
8,270,466 |
|
$ |
1,277,048 |
|
Adjustments to reconcile net increase in net assets resulting from operations to net cash used in operating activities: |
|
|
|
|
|
||
|
|
|
|
|
|
||
Purchase of investments |
|
(72,601,227 |
) |
(33,665,549 |
) |
||
Principal repayments of investments |
|
21,358,187 |
|
874,222 |
|
||
Proceeds from the sale of investments |
|
5,809,471 |
|
15,551,727 |
|
||
Net unrealized (appreciation) depreciation of investment portfolio |
|
(5,430,169 |
) |
1,307,389 |
|
||
Net realized loss (gain) on sales of investments |
|
48,247 |
|
(3,273 |
) |
||
Net amortization of premiums and discounts |
|
137,018 |
|
37,656 |
|
||
Amortization of deferred finance costs |
|
209,840 |
|
|
|
||
Increase in interest receivable |
|
(533,106 |
) |
(150,429 |
) |
||
Increase in due from custodian |
|
8,303,827 |
|
|
|
||
Increase in prepaid assets |
|
(38,616 |
) |
(36,138 |
) |
||
Decrease in other assets |
|
39,286 |
|
85,611 |
|
||
Increase (decrease) in other liabilities |
|
12,642 |
|
(314 |
) |
||
Increase in administration fee payable to Administrator |
|
45,570 |
|
5,387 |
|
||
Increase in base management fee payable to Adviser |
|
279,493 |
|
1,035,860 |
|
||
Increase in loan servicing fee payable to Adviser |
|
27,451 |
|
|
|
||
Increase in accounts payable |
|
|
|
11,583 |
|
||
Increase (decrease) in accrued expenses |
|
228,904 |
|
(242,155 |
) |
||
Net cash used in operating activities |
|
(33,832,716 |
) |
(13,911,375 |
) |
||
|
|
|
|
|
|
||
CASH FLOWS FROM FINANCING ACTIVITIES |
|
|
|
|
|
||
|
|
|
|
|
|
||
Borrowings from line of credit |
|
89,100,000 |
|
|
|
||
Repayments of line of credit |
|
(54,700,000 |
) |
|
|
||
Deferred finance costs |
|
(5,000 |
) |
|
|
||
Shelf offering registration costs |
|
(28,761 |
) |
|
|
||
Distributions paid |
|
(3,726,022 |
) |
(3,477,621 |
) |
||
Net cash provided by (used in) financing activities |
|
30,640,217 |
|
(3,477,621 |
) |
||
|
|
|
|
|
|
||
NET DECREASE IN CASH AND CASH EQUIVALENTS (1) |
|
(3,192,499 |
) |
(17,388,996 |
) |
||
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD |
|
37,788,941 |
|
75,672,605 |
|
||
CASH AND CASH EQUIVALENTS, END OF PERIOD |
|
$ |
34,596,442 |
|
$ |
58,283,609 |
|
(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.
9
GLADSTONE INVESTMENT CORPORATION
FINANCIAL HIGHLIGHTS
(UNAUDITED)
|
|
Three months ended |
|
Three months ended |
|
||
|
|
June 30, 2007 |
|
June 30, 2006 |
|
||
Per Share Data (1) |
|
|
|
|
|
||
Balance at beginning of period |
|
$ |
13.46 |
|
$ |
13.88 |
|
|
|
|
|
|
|
||
Income from investment operations: |
|
|
|
|
|
||
Net investment income (2) |
|
0.17 |
|
0.16 |
|
||
Realized (loss) gain on sale of investments (2) |
|
|
|
|
|
||
Net unrealized appreciation (depreciation) of investments (2) |
|
0.33 |
|
(0.08 |
) |
||
Total from investment operations |
|
0.50 |
|
0.08 |
|
||
Distributions |
|
(0.23 |
) |
(0.21 |
) |
||
Net asset value at end of period |
|
$ |
13.73 |
|
$ |
13.75 |
|
|
|
|
|
|
|
||
Per share market value at beginning of period |
|
$ |
14.87 |
|
$ |
14.90 |
|
Per share market value at end of period |
|
14.21 |
|
15.00 |
|
||
Total Return (3) |
|
-2.93 |
% |
2.13 |
% |
||
Shares outstanding at end of period |
|
16,560,100 |
|
16,560,100 |
|
||
|
|
|
|
|
|
||
Ratios/Supplemental Data |
|
|
|
|
|
||
Net assets at end of period |
|
$ |
227,334,192 |
|
$ |
227,641,124 |
|
Average net assets (4) |
|
$ |
222,928,553 |
|
$ |
227,718,666 |
|
Ratio of expenses to average net assets (5) (6) |
|
6.81 |
% |
2.25 |
% |
||
Ratio of net expenses to average net assets (5) (7) |
|
6.12 |
% |
2.25 |
% |
||
Ratio of net investment income to average net assets (5) |
|
5.18 |
% |
4.53 |
% |
(1) Based on actual shares outstanding at the end of the corresponding period.
(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.
(5) Amounts are annualized.
(6) Ratio of expenses to average net assets is computed using expenses before credit from the Adviser.
(7) Ratio of net expenses to average net assets is computed using total expenses net of credits to the management fee.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
10
GLADSTONE INVESTMENT CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2007
(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 (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. 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, 2007, as filed with the Securities and Exchange Commission (SEC) on May 31, 2007.
Basis of Presentation
The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated.
Consolidation
Under Article 6 of Regulation S-X under the Securities Act of 1933, as amended, and the authoritative accounting guidance provided by the AICPA Audit and Accounting Guide for Investment Companies, the Company is not permitted to consolidate any subsidiary or other entity that is not an investment company.
Use of Estimates
The consolidated financial statements have been prepared in accordance with GAAP that require management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results may differ from those estimates.
11
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 June 30, 2007 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.
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 contractual 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 certain participations in syndicated loans, are valued at the indicative bid price on or near the valuation date from the respective originating syndication agents trading desk. Debt and equity securities that are not publicly traded, or for which a limited market does not exist, 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.
The procedures for the determination of value of the Companys debt securities that that are not publicly traded and that are issued to portfolio companies where the Company has no equity, or equity-like securities, rely on the opinions of value submitted to us by Standard & Poors Securities Evaluations, Inc. (SPSE). The Company may also submit paid in kind (PIK) interest to SPSE for valuation when it is determined the PIK interest is likely to be received. 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 at 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. Lastly, the Company adds any amortized original issue discount (OID) interest to the fair value, 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, recent sales to third parties of similar securities, the comparison to publicly traded securities, discounted cash flow or other pertinent factors. In gathering the sales to third parties of similar securities, the Company may reference industry statistics and use outside experts.
Debt securities that are issued to portfolio companies where the Company has equity, or equity-like securities are valued at cost, if there is adequate total enterprise value determined when valuing the Companys equity securities of the portfolio company. Fair values are discounted for any shortfall of total enterprise value over the total debt outstanding for the borrower.
The Board of Directors then reviews whether the Adviser has followed its established procedures for determinations of fair value, and votes whether or not to accept the recommended valuation of the Companys investment portfolio.
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
12
securities for the Company, the Adviser also determines a recommendation for the fair value of these investments, if any, 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 June 30, 2007. 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 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 certain 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 credited 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.
Realized Gain or Loss and Unrealized Appreciation or Depreciation of Portfolio Investments
Realized gain or loss is recognized when an investment is disposed of and is computed as the difference between the Companys cost basis in the investment at the disposition date and the net proceeds received from such disposition. Unrealized appreciation or depreciation displays the difference between the fair 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 its 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.
In June 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxesan interpretation of FASB Statement No. 109, (FIN 48), 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. FIN 48 is effective as of the beginning of an entitys first fiscal year that begins after December 15, 2006. The Company adopted this Interpretation on April 1, 2007. The adoption of FIN 48 did not have an impact on the Companys consolidated financial statements.
13
Recent Accounting Pronouncements
In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (SFAS 159). SFAS 159 allows entities to measure at fair value many financial instruments and certain other assets and liabilities that are not otherwise required to be measured at fair value. SFAS 159 is effective for fiscal years beginning after November 15, 2007. The Company is currently evaluating the impact of this pronouncement on its consolidated financial statements.
In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, Fair Value Measurements (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 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 for quantifying misstatements. The adoption of SAB 108 did not have an impact on the Companys consolidated financial statements.
In February 2006, the FASB issued SFAS No. 155, Accounting for Certain Hybrid Financial Instrume