UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

x

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

 

 

 

FOR THE QUARTER ENDED JUNE 30, 2007

 

 

 

o

 

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

 

83-0423116

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification No.)

 

1521 WESTBRANCH DRIVE, SUITE 200
MCLEAN, VIRGINIA 22102
(Address of principal executive office)

 

(703) 287-5800

(Registrant’s 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 issuer’s classes of common stock, as of the latest practicable date. The number of shares of the issuer’s Common Stock, $0.001 par value, outstanding as of July 30, 2007 was 16,560,100.

 




 

GLADSTONE INVESTMENT CORPORATION

TABLE OF CONTENTS

PART I.

 

FINANCIAL INFORMATION

 

 

 

 

 

 

Item 1.

 

Financial Statements (Unaudited)

 

 

 

 

 

 

 

 

 

Consolidated Statements of Assets and Liabilities as of June 30, 2007 and March 31, 2007

 

 

 

 

Consolidated Schedule of Investments as of June 30, 2007

 

 

 

 

Consolidated Schedule of Investments as of March 31, 2007

 

 

 

 

Consolidated Statements of Operations for the three months ended June 30, 2007 and 2006

 

 

 

 

Consolidated Statements of Changes in Net Assets for three months ended June 30, 2007 and 2006

 

 

 

 

Consolidated Statements of Cash Flows for the three months ended June 30, 2007 and 2006

 

 

 

 

Financial Highlights for the three months ended June 30, 2007 and 2006

 

 

 

 

Notes to Consolidated Financial Statements

 

 

 

 

 

 

 

Item 2.

 

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

 

 

 

 

Overview

 

 

 

 

Results of Operations

 

 

 

 

Liquidity and Capital Resources

 

 

 

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

 

 

 

 

 

 

Item 4.

 

Controls and Procedures

 

 

 

 

 

 

 

PART II.

 

OTHER INFORMATION

 

 

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

 

 

 

 

 

 

Item 1A.

 

Risk Factors

 

 

 

 

 

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

 

 

 

 

 

 

Item 3.

 

Defaults Upon Senior Securities

 

 

 

 

 

 

 

Item 4.

 

Submission of Matters to a Vote of Security Holders

 

 

 

 

 

 

 

Item 5.

 

Other Information

 

 

 

 

 

 

 

Item 6.

 

Exhibits

 

 

 

 

 

 

 

SIGNATURES

 

 

 

 

 

 

1




 

GLADSTONE INVESTMENT CORPORATION
CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES
(UNAUDITED)

 

 

June 30,

 

March 31,

 

 

 

2007

 

2007

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

Non-Control/Non-Affiliate investments (Cost 6/30/07:$186,296,045; 3/31/07:$138,567,741)

 

$

185,368,271

 

$

138,168,612

 

Control investments (Cost 6/30/07: $116,322,372; 3/31/07: $116,302,372)

 

118,310,360

 

113,016,491

 

Affiliate investments (Cost 6/30/07: $17,250,000; 3/31/07: $19,750,000)

 

17,947,445

 

19,762,500

 

Total investments at fair value (Cost 6/30/07: $319,868,417; 3/31/07: $274,620,113)

 

321,626,076

 

270,947,603

 

Cash and cash equivalents

 

34,596,442

 

37,788,941

 

Interest receivable

 

1,839,196

 

1,306,090

 

Prepaid insurance

 

24,553

 

83,819

 

Deferred finance costs

 

423,120

 

627,960

 

Due from Custodian

 

4,391,158

 

12,694,985

 

Due from Adviser

 

 

20,383

 

Other assets

 

179,030

 

120,434

 

TOTAL ASSETS

 

$

363,079,575

 

$

323,590,215

 

 

 

 

 

 

 

LIABILITIES

 

 

 

 

 

Due to Administrator

 

$

207,814

 

$

162,244

 

Due to Adviser

 

286,561

 

 

Borrowings under line of credit

 

134,400,000

 

100,000,000

 

Accrued expenses

 

752,602

 

523,698

 

Other liabilities

 

98,406

 

85,764

 

Total Liabilities

 

135,745,383

 

100,771,706

 

NET ASSETS

 

$

227,334,192

 

$

222,818,509

 

 

 

 

 

 

 

ANALYSIS OF NET ASSETS:

 

 

 

 

 

Common stock, $0.001 par value, 100,000,000 shares authorized and 16,560,100 shares issued and outstanding

 

$

16,560

 

$

16,560

 

Capital in excess of par value

 

230,067,811

 

230,096,572

 

Net unrealized appreciation (depreciation) of investment portfolio

 

1,757,659

 

(3,672,510

)

Distributions in excess of net investment income

 

(4,507,838

)

(3,622,113

)

Total Net Assets

 

$

227,334,192

 

$

222,818,509

 

Net assets per share

 

$

13.73

 

$

13.46

 

 

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)

 

Industry

 

Investment (2)

 

Cost

 

Fair Value

 

 

 

 

 

 

 

 

 

NON-CONTROL/NON-AFFILIATE INVESTMENTS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Syndicated Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ACS Media, LLC

 

Service - directory advertising

 

Senior Term Debt (7.9%, Due 11/2013) (3)

 

$

4,818,185

 

$

4,795,192

 

 

 

 

 

 

 

 

 

Activant

 

Service - enterprise software and services

 

Senior Term Debt (7.4%, Due 5/2013) (3)

 

3,744,596

 

3,709,627

 

 

 

 

 

 

 

 

 

American Safety Razor Company Inc.

 

Manufacturing - razors and blades

 

Senior Term Debt (7.9%, Due 7/2013) (3)

 

1,487,309

 

1,486,856

 

 

 

 

 

 

 

 

 

Aspect Software, Inc.

 

Service - call center software

 

Senior Term Debt (8.4%, Due 7/2011) (3)

 

2,980,932

 

2,992,388

 

 

 

 

 

 

 

 

 

Brock Holdings II, Inc.

 

Service - industrial specialty maintenance

 

Senior Term Debt (7.4%, Due 8/2013) (3) (5)

 

2,994,702

 

2,992,500

 

 

 

 

 

 

 

 

 

Compsych Investments Corp.

 

Service - independent employee assistance programs

 

Senior Term Debt (8.1%, Due 2/2012) (3) (5)

 

3,624,445

 

3,628,050

 

 

 

 

 

 

 

 

 

CRC Health Group, Inc.

 

Service - substance abuse treatment

 

Senior Term Debt (7.6%, Due 2/2012) (3)

 

9,955,202

 

9,950,818

 

 

 

 

 

 

 

 

 

Critical Homecare Solutions, Inc.

 

Service - home therapy and respiratory treatment

 

Senior Term Debt (8.6%, Due 1/2012) (3) (5)

 

3,947,139

 

3,950,000

 

 

 

 

 

 

 

 

 

CST Industries Acquisition, Inc.

 

Manufacturing - metal storage units

 

Senior Term Debt (8.1%, Due 8/2013) (3)

 

994,369

 

997,463

 

 

 

 

 

 

 

 

 

Dealer Computer Services, Inc.

 

Manufacturing & ervice - systems for automotive retailers

 

Senior Term Debt (7.4%, Due 9/2013) (3)

 

1,954,865

 

1,953,286

 

 

 

 

 

 

 

 

 

Generac Acquisition Corp.

 

Manufacturing - standby power products

 

Senior Term Debt (7.9%, Due 11/2013) (5)

 

4,967,404

 

4,851,000

 

 

 

 

 

 

 

 

 

Graham Packaging Holdings Company

 

Manufacturing - plastic containers

 

Senior Term Debt (7.6%, Due 11/2013)

 

10,473,750

 

10,486,842

 

 

 

 

 

 

 

 

 

HMTBP Acquisition II Corp.

 

Service - aboveground storage tanks

 

Senior Term Debt (7.6%, Due 11/2013)

 

3,990,000

 

3,990,000

 

 

 

 

 

 

 

 

 

Hudson Products Holdings, Inc.

 

Manufacturing - heat transfer solutions

 

Senior Term Debt (8.4%, Due 12/2013) (3)

 

6,065,392

 

6,063,684

 

 

 

 

 

 

 

 

 

Huish Detergents, Inc.

 

Manufacturing - household cleaning products

 

Senior Term Debt (7.3%, Due 4/2014) (3)

 

2,000,000

 

1,985,000

 

 

 

 

 

 

 

 

 

J. Crew Operating Corp.

 

Retail - apparel

 

Senior Term Debt (7.1%, Due 5/2013) (3)

 

1,230,450

 

1,228,070

 

 

 

 

 

 

 

 

 

KIK Custom Products, Inc.

 

Manufacturing - consumer products

 

Senior Term Debt (7.6%, Due 5/2014) (3)

 

1,000,000

 

985,000

 

 

 

 

 

 

 

 

 

Kronos, Inc.

 

Service - workforce management solutions

 

Senior Term Debt (7.6%, Due 6/14) (3)

 

2,000,000

 

1,992,500

 

 

 

 

 

 

 

 

 

Lexicon Marketing USA, Inc.

 

Service - marketing to Hispanic community

 

Senior Term Debt (7.8%, Due 5/2012) (3) (5)

 

2,947,745

 

2,941,844

 

 

 

 

 

 

 

 

 

Local TV Finance, LLC

 

Service - television station operator

 

Senior Term Debt (7.4%, Due 5/2013) (3)

 

1,000,000

 

996,250

 

 

 

 

 

 

 

 

 

LVI Services, Inc.

 

Service - asbestos and mold remediation

 

Senior Term Debt (10.4%, Due 11/2010) (3) (5)

 

6,422,593

 

6,362,484

 

 

 

 

 

 

 

 

 

MedAssets, Inc.

 

Service - pharmaceuticals and healthcare GPO

 

Senior Term Debt (7.8%, Due 10/2013) (3) (5)

 

3,484,788

 

3,478,147

 

 

 

 

 

 

 

 

 

MediMedia USA, LLC

 

Service - healthcare and pharmeceutical marketing

 

Senior Term Debt (7.6%, Due 10/2013) (3)

 

2,248,019

 

2,241,499

 

 

 

 

 

 

 

 

 

Mitchell International, Inc.

 

Service - automobile insurance claims processing

 

Senior Term Debt (7.4%, Due 3/2014) (3) (5)

 

1,000,250

 

997,500

 

 

 

 

 

 

 

 

 

National Mentor Holdings, Inc.

 

Service - home health care

 

Senior Term Debt (7.2%, Due 6/2013) (3)

 

1,986,979

 

1,990,790

 

 

 

 

 

 

 

 

 

Network Solutions, LLC

 

Service - internet domain solutions

 

Senior Term Debt (7.9%, Due 3/2014) (3)

 

10,000,000

 

9,950,000

 

 

 

 

 

 

 

 

 

NPC International Inc.

 

Service - Pizza Hut franchisee

 

Senior Term Debt (7.1%, Due 5/2013) (3)

 

3,016,872

 

2,995,367

 

 

 

 

 

 

 

 

 

Open Solutions, Inc.

 

Service - software outsourcing for financial institutions

 

Senior Term Debt (7.5%, Due 1/2014) (3)

 

2,511,814

 

2,484,836

 

 

 

 

 

 

 

 

 

Ozburn-Hessey Holding Co. LLC

 

Service - third party logistics

 

Senior Term Debt (8.6%, Due 8/2012) (3)

 

7,718,949

 

7,678,040

 

 

 

 

 

 

 

 

 

Pinnacle Foods Finance, LLC

 

Manufacturing - branded food products

 

Senior Term Debt (8.1%, Due 4/2014) (3)

 

4,001,318

 

4,000,000

 

 

 

 

 

 

 

 

 

PTS Acquisition Corp.

 

Manufacturing - drug delivery and packaging technologies

 

Senior Term Debt (7.6%, Due 4/2014) (3)

 

7,000,000

 

6,991,250

 

 

 

 

 

 

 

 

 

QTC Acquisition, Inc.

 

Service - outsourced disability evaluations

 

Senior Term Debt (7.6%, Due 11/2012) (3)

 

2,001,820

 

2,000,000

 

 

 

 

 

 

 

 

 

Radio Systems Corporation

 

Service - design electronic pet containment products

 

Senior Term Debt (8.1%, Due 9/2013) (3)

 

1,984,482

 

1,999,888

 

 

 

 

 

 

 

 

 

Rally Parts, Inc.

 

Manufacturing - aftermarket motorcycle parts and accessories

 

Senior Term Debt (7.9%, Due 11/2013) (3)

 

2,503,516

 

2,487,500

 

 

 

 

 

 

 

 

 

RPG Holdings, Inc.

 

Manufacturing and design - greeting cards

 

Senior Term Debt (9.1%, Due 12/2011) (3)

 

4,553,126

 

4,278,958

 

 

 

 

 

 

 

 

 

SafeNet, Inc.

 

Service - chip encryption products

 

Senior Term Debt (7.9%, Due 4/2014) (3)

 

3,001,528

 

2,970,000

 

 

 

 

 

 

 

 

 

SGS International, Inc.

 

Service - digital imaging and graphics

 

Senior Term Debt (7.9%, Due 12/2011) (3)

 

1,607,478

 

1,600,627

 

 

 

 

 

 

 

 

 

Stolle Machinery Company

 

Manufacturing - can-making equipment and parts

 

Senior Term Debt (7.9%, Due 9/2012) (3)

 

498,760

 

501,231

 

3




 

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) (5)

 

$

3,245,858

 

$

3,212,324

 

 

 

 

 

 

 

 

 

Synagro Technologies, Inc.

 

Service - waste treatment and recycling

 

Senior Term Debt (7.4%, Due 3/2014) (3)

 

502,349

 

500,000

 

 

 

 

 

 

 

 

 

Triad Laboratory Alliance, LLC

 

Service - regional medical laboratories

 

Senior Term Debt (8.6%, Due 12/2011) (3) (5)

 

4,940,191

 

4,875,750

 

 

 

 

 

 

 

 

 

US Investigative Services, Inc.

 

Service - background investigations

 

Senior Term Debt (8.1%, Due 9/2012) (3)

 

10,892,705

 

10,828,384

 

 

 

 

 

 

 

 

 

United Surgical Partners International, Inc.

 

Service - outpatient surgical provider

 

Senior Term Debt (7.4%, Due 4/2014) (3)

 

1,326,290

 

1,319,659

 

 

 

 

 

 

 

 

 

Wastequip, Inc.

 

Service - process and transport waste materials

 

Senior Term Debt (7.6%, Due 2/2013) (3)

 

2,936,555

 

2,947,567

 

 

 

 

 

 

 

 

 

WaveDivision Holdings, LLC

 

Service - cable

 

Senior Term Debt (7.9%, Due 6/2014) (3) (5)

 

1,925,274

 

1,920,000

 

 

 

 

 

 

 

 

 

West Corporation

 

Service - business process outsourcing

 

Senior Term Debt (7.8%, Due 10/2013) (3)

 

11,458,046

 

11,430,100

 

 

 

 

 

 

 

 

 

Subtotal - Syndicated Loans

 

 

 

 

 

$

174,946,045

 

$

174,018,271

 

 

 

 

 

 

 

 

 

Non-syndicated loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

B-Dry, LLC

 

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

 

 

 

 

 

 

 

 

 

CONTROL INVESTMENTS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

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 agent’s trading desk.

(4)                Security is non-income producing.

(5)                Valued using Standard & Poor’s 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 agent’s trading desk.

(4)                Security is non-income producing.

(5)                Valued using Standard & Poor’s 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 Company’s 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 Company’s 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 Company’s 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 period’s 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 Company’s 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 Company’s cash at June 30, 2007 was deposited with two financial institutions, and the Company’s 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 Company’s 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 company’s board of directors.  However, if the Company holds 50% or more contractual representation on a portfolio company’s 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 agent’s 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 Company’s 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 Company’s 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 & Poor’s 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 Company’s 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 Adviser’s 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 issuer’s 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 Company’s 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 Company’s 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 Company’s 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 Adviser’s recommendations for the aggregate valuation of the Company’s 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 Company’s 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 Taxes—an interpretation of FASB Statement No. 109,” (“FIN 48”), which clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS No. 109, “Accounting for Income Taxes.” FIN 48 is effective as of the beginning of an entity’s 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 Company’s 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 SEC’s 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 registrant’s previous method for quantifying misstatements. The adoption of SAB 108 did not have an impact on the Company’s consolidated financial statements.

In February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instrume