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 DECEMBER 31, 2006

 

 

 

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 o  Non-accelerated filer x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12 b-2 of the Exchange Act).

Yes o No x

Indicate the number of shares outstanding of each of the 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 February 1, 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 December 31, 2006 and March 31, 2006

 

 

 

Consolidated Schedule of Investments as of December 31, 2006

 

 

 

Consolidated Schedule of Investments as of March 31, 2006

 

 

 

Consolidated Statements of Operations for the three months ended December 31, 2006 and 2005

 

 

 

Consolidatd Statements of Operations for the nine months ended December 31, 2006 and for the period June 22, 2005 (Commencement of Operations) to December 31, 2005

 

 

 

Consolidated Statements of Changes in Net Assets for nine months ended December 31, 2006 and for the period June 22, 2005 (Commencement of Operations) to December 31, 2005

 

 

 

Consolidated Statements of Cash Flows for the nine months ended December 31, 2006 and for the period June 22, 2005 (Commencement of Operations) to December 31, 2005

 

 

 

Financial Highlights for the three months ended December 31, 2006 and 2005

 

 

 

Financial Highlights for the nine months ended December 31, 2006 and for the period June 22, 2005 (Commencement of Operations) to December 31, 2005

 

 

 

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

 

 

2




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

 

 

December 31, 2006

 

March 31, 2006

 

ASSETS

 

 

 

 

 

Non-Control/Non-Affiliate investments (Cost 12/31/06: $141,804,619; 3/31/06: $97,423,004)

 

$

140,777,989

 

$

97,585,972

 

Control investments (Cost 12/31/06: $80,601,004; 3/31/06: $55,846,318)

 

80,188,063

 

55,796,318

 

Affiliate investments (Cost 12/31/06: $19,550,000)

 

19,550,000

 

 

Total investments at fair value (Cost 12/31/06: $241,955,623; 3/31/06: $153,269,322)

 

240,516,052

 

153,382,290

 

Cash and cash equivalents

 

1,890,942

 

75,672,605

 

Interest receivable

 

1,444,705

 

761,388

 

Due from custodian

 

2,798,620

 

 

Deferred finance costs

 

459,347

 

 

Prepaid directors fees

 

37,900

 

 

Prepaid insurance

 

145,382

 

99,874

 

Due from Adviser

 

 

234,551

 

Other assets

 

180,114

 

173,099

 

TOTAL ASSETS

 

$

247,473,062

 

$

230,323,807

 

 

 

 

 

 

 

LIABILITIES

 

 

 

 

 

Administration fee payable to Administrator

 

$

124,101

 

$

110,002

 

Fees due to Adviser

 

407,221

 

 

Borrowings under line of credit

 

20,000,000

 

 

Accrued expenses

 

812,864

 

367,031

 

Other liabilities

 

43,120

 

5,077

 

Total Liabilities

 

21,387,306

 

482,110

 

NET ASSETS

 

$

226,085,756

 

$

229,841,697

 

 

 

 

 

 

 

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

 

230,096,572

 

230,229,279

 

Net unrealized (depreciation) appreciation of investment portfolio

 

(1,439,571

)

112,968

 

Distributions in excess of net investment income

 

(2,587,805

)

(517,110

)

TOTAL NET ASSETS

 

$

226,085,756

 

$

229,841,697

 

NET ASSETS PER SHARE

 

$

13.65

 

$

13.88

 

 

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

3




GLADSTONE INVESTMENT CORPORATION
CONSOLIDATED SCHEDULE OF INVESTMENTS
December 31, 2006

(UNAUDITED)

Company (1)

 

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)

 

$

2,627,096

 

$

2,626,550

 

 

 

 

 

 

 

 

 

 

 

Activant

 

Service - enterprise software and services

 

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

 

3,848,960

 

3,792,675

 

 

 

 

 

 

 

 

 

 

 

American Safety Razor Company Inc.

 

Manufacturing - razors and blades

 

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

 

1,494,998

 

1,499,963

 

 

 

 

 

 

 

 

 

 

 

Aspect Software, Inc.

 

Service - call center software

 

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

 

2,996,361

 

2,992,500

 

 

 

 

 

 

 

 

 

 

 

Bankruptcy Management Solutions, Inc.

 

Service - software and service to bankrupcy trustees

 

Senior Term Debt (8.1%, Due 7/2012)(3)

 

1,000,942

 

1,004,981

 

 

 

 

 

 

 

 

 

 

 

Brock Holdings II, Inc.

 

Service - industrial specialty maintenance

 

Senior Term Debt (7.9%, Due 8/2013)(3)(5)

 

3,000,480

 

3,011,203

 

 

 

 

 

 

 

 

 

 

 

Compsych Investments Corp.

 

Service - independent employee assistance programs

 

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

 

3,926,043

 

3,919,775

 

 

 

 

 

 

 

 

 

 

 

CRC Health Group, Inc.

 

Service - substance abuse treatment

 

Senior Term Debt (7.9%, Due 2/2012)(3)

 

10,041,596

 

10,005,278

 

 

 

 

 

 

 

 

 

 

 

CST Industries Acquisition, Inc.

 

Manufacturing - metal storage units

 

Senior Term Debt (8.5%, Due 8/2013)(3)

 

999,523

 

1,002,488

 

 

 

 

 

 

 

 

 

 

 

Dealer Computer Services, Inc.

 

Manufacturing & Service - systems for automotive retailers

 

Senior Term Debt (7.9%, Due 9/2013)(3)

 

1,045,380

 

1,051,914

 

 

 

 

 

 

 

 

 

 

 

Dresser Holdings, Inc.

 

Manufacturing - oilfield & energy products

 

Senior Term Debt (8.1%, Due 10/2013)(3)

 

2,015,898

 

2,033,537

 

 

 

 

 

 

 

 

 

 

 

Generac Acquisition Corp.

 

Manufacturing - standby power products

 

Senior Term Debt (7.8%, Due 11/2013)(3)

 

2,620,000

 

2,629,825

 

 

 

 

 

 

 

 

 

 

 

Graham Packaging Holdings Co.

 

Manufacturing - custom blow molded plastic containers

 

Senior Term Debt (7.6%, Due 10/2011)(3)

 

10,745,127

 

10,711,271

 

 

 

 

 

 

 

 

 

 

 

Hudson Products Holdings, Inc.

 

Manufacturing - heat transfer solutions

 

Senior Term Debt (8.1%, Due 12/2013)(3)

 

1,310,000

 

1,313,275

 

 

 

 

 

 

 

 

 

 

 

IPC Information Systems, LLC

 

Manufacturing - specialized telephony systems

 

Senior Term Debt (7.9%, Due 9/2013)(3)

 

262,000

 

263,310

 

 

 

 

 

 

 

 

 

 

 

J. Crew Operating Corp.

 

Retail - apparel

 

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

 

1,406,089

 

1,399,999

 

 

 

 

 

 

 

 

 

 

 

Latham Manufacturing Corp.

 

Manufacturing - swimming pool components accessories

 

Senior Term Debt (8.9%, Due 6/2012)(3)

 

2,435,461

 

2,369,505

 

 

 

 

 

 

 

 

 

 

 

Lexicon Marketing USA, Inc.

 

Service - marketing to Hispanic community

 

Senior Term Debt (7.9%, Due 5/2012)(3) (5)

 

2,979,159

 

3,006,478

 

 

 

 

 

 

 

 

 

 

 

LVI Services, Inc.

 

Service - asbestos and mold remediation

 

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

 

6,458,112

 

5,920,200

 

 

 

 

 

 

 

 

 

 

 

Madison River Capital LLC

 

Service - communications and information

 

Senior Term Debt (7.6%, Due 7/2012)(3)

 

5,729,255

 

5,702,357

 

 

 

 

 

 

 

 

 

 

 

Maidenform, Inc.

 

Manufacturing - intimate apparel

 

Senior Term Debt (7.2%, Due 5/2010)(3)

 

2,569,468

 

2,566,667

 

 

 

 

 

 

 

 

 

 

 

MedAssets, Inc.

 

Service - pharmaceuticals and healthcare GPO

 

Senior Term Debt (7.9%, Due 10/2013)(3) (5)

 

3,502,680

 

3,500,000

 

 

 

 

 

 

 

 

 

 

 

MediMedia USA, LLC

 

Service - healthcare and pharmeceutical marketing

 

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

 

1,183,505

 

1,180,463

 

 

 

 

 

 

 

 

 

 

 

National Mentor Holdings, Inc.

 

Service - home health care

 

Senior Term Debt (7.7%, Due 6/2013)(3)

 

1,991,799

 

2,000,503

 

 

 

 

 

 

 

 

 

 

 

NPC International Inc.

 

Service - Pizza Hut franchisee

 

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

 

3,018,085

 

2,995,367

 

 

 

 

 

 

 

 

 

 

 

Nutro Products, Inc.

 

Manufacturing - pet food

 

Senior Term Debt (7.4%, Due 4/2012)(3)

 

2,503,442

 

2,484,352

 

 

 

 

 

 

 

 

 

 

 

Ozburn-Hessey Holding Co. LLC

 

Service - third party logistics

 

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

 

7,791,254

 

7,714,823

 

 

 

 

 

 

 

 

 

 

 

Patriot Media & Communications CNJ, LLC

 

Service - telecommunications

 

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

 

4,169,901

 

4,136,293

 

 

 

 

 

 

 

 

 

 

 

Radio Systems Corporation

 

Service - design electronic pet containment products

 

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

 

1,048,000

 

1,051,930

 

 

 

 

 

 

 

 

 

 

 

Rally Parts, Inc.

 

Manufacturing - aftermarket motorcycle parts and accessories

 

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

 

262,000

 

262,655

 

 

 

 

 

 

 

 

 

 

 

RPG Holdings, Inc.

 

Manufacturing and design - greeting cards

 

Senior Term Debt (8.9%, Due 12/2011)(3)

 

5,001,158

 

4,975,000

 

 

 

 

 

 

 

 

 

 

 

SGS International, Inc.

 

Service - digital imaging and graphics

 

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

 

1,616,364

 

1,612,774

 

 

 

 

 

 

 

 

 

 

 

Stolle Machinery Company

 

Manufacturing - can-making equipment and parts

 

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

 

262,000

 

263,310

 

 

4




 

Company (1)

 

Industry

 

Investment (2)

 

Cost

 

Fair Value

 

 

 

 

 

 

 

 

 

NON-CONTROL/NON-AFFILIATE INVESTMENTS (Continued)

 

 

 

 

 

 

 

 

 

 

SunGard Data Systems, Inc.

 

Service & Manufacturing - integrated software and processing solutions and information availability services

 

Senior Term Debt (7.9%, Due 2/2013)(3)

 

$

9,946,579

 

$

9,960,813

 

 

 

 

 

 

 

 

 

 

 

Survey Sampling, LLC

 

Service - telecommunications-based sampling

 

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

 

3,373,571

 

3,331,493

 

 

 

 

 

 

 

 

 

 

 

Triad Laboratory Alliance, LLC

 

Service - regional medical laboratories

 

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

 

4,966,908

 

4,912,875

 

 

 

 

 

 

 

 

 

 

 

US Investigative Services, Inc.

 

Service - background investigations

 

Senior Term Debt (7.9%, Due 10/2012)(3)

 

10,943,766

 

10,927,767

 

 

 

 

 

 

 

 

 

 

 

Wastequip, Inc.

 

Service - process and transport waste materials

 

Senior Term Debt (7.6%, Due 7/2011)(3)

 

5,471,659

 

5,390,720

 

 

 

 

 

 

 

 

 

 

 

West Corporation

 

Service - business process outsourcing

 

Senior Term Debt (8.1%, Due 10/2013)(3)

 

5,240,000

 

5,253,100

 

 

 

 

 

 

 

 

 

 

 

Total Non-Control/Non-Affiliate Investments

 

 

 

$

141,804,619

 

$

140,777,989

 

 

 

 

 

 

 

 

 

 

 

CONTROL INVESTMENTS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Acme Cryogenics Corporation

 

Manufacturing - manifolds and pipes for industrial gasses

 

Senior Subordinated Term Debt (11.5% Due 3/2013)(6)

 

$

14,500,000

 

$

14,500,000

 

 

 

 

 

Redeemable Preferred Stock(4) (6)

 

7,245,634

 

7,245,634

 

 

 

 

 

Common Stock(4) (6)

 

1,084,366

 

1,084,366

 

 

 

 

 

Common Stock Warrants(4) (6)

 

24,686

 

24,686

 

 

 

 

 

 

 

22,854,686

 

22,854,686

 

 

 

 

 

 

 

 

 

 

 

Chase II Holdings Corp.

 

Manufacturing - traffic doors

 

Revolving Credit Facility(7)

 

 

 

 

 

 

 

Senior Term Debt (9.9%, Due 3/2011)(5)

 

12,900,000

 

12,835,500

 

 

 

 

 

Senior Term Debt (12.0% Due 3/2011)(5)

 

8,000,000

 

7,910,000

 

 

 

 

 

Subordinated Term Debt (13% Due 3/2013)(5)

 

6,167,810

 

6,036,744

 

 

 

 

 

Redeemable Preferred Stock(4) (6)

 

6,960,806

 

6,960,806

 

 

 

 

 

Common Stock Warrants(4) (6)

 

61,384

 

61,384

 

 

 

 

 

 

 

34,090,000

 

33,804,434

 

 

 

 

 

 

 

 

 

 

 

Hailey Transport Corporation

 

Retail and Service - school buses and parts

 

Senior Subordinated Term Debt (12.0%, Due 1/2012)(5)

 

4,000,000

 

3,900,000

 

 

 

 

 

Preferred Stock(4) (6)

 

2,500,000

 

2,500,000

 

 

 

 

 

 

 

6,500,000

 

6,400,000

 

 

 

 

 

 

 

 

 

 

 

Quench Holdings Corp.

 

Service - sales, installation and service of water coolers

 

Revolving Credit Facility (9.4%, Due 3/2009)(5) (8)

 

1,900,000

 

1,897,625

 

 

 

 

 

Senior Term Debt (9.4%, Due 3/2011)(5)

 

4,000,000

 

4,005,000

 

 

 

 

 

Subordinated Term Debt (11.5%, Due 3/2011)(5)

 

8,000,000

 

7,970,000

 

 

 

 

 

Common Stock(4) (6)

 

3,256,318

 

3,256,318

 

 

 

 

 

 

 

17,156,318

 

17,128,943

 

 

 

 

 

 

 

 

 

 

 

Total Control Investments

 

 

 

 

 

$

80,601,004

 

$

80,188,063

 

 

 

 

 

 

 

 

 

 

 

AFFILIATE INVESTMENTS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noble Logistics, Inc.

 

Service - aftermarket auto parts delivery

 

Revolving Credit Facility(9)

 

$

1,800,000

 

$

1,800,000

 

 

 

 

 

Senior Term Debt (9.8%, Due 3/2011)(6)

 

7,000,000

 

7,000,000

 

 

 

 

 

Senior Term Debt (12.0% Due 3/2011)(6)

 

7,000,000

 

7,000,000

 

 

 

 

 

Senior Subordinated Term Debt (13% Due 3/2013)(6)

 

500,000

 

500,000

 

 

 

 

 

Preferred Stock(4) (6)

 

1,750,000

 

1,750,000

 

 

 

 

 

Common Stock(4) (6)

 

1,500,000

 

1,500,000

 

 

 

 

 

 

 

19,550,000

 

19,550,000

 

 

 

 

 

 

 

 

 

 

 

Total Affiliate Investments

 

 

 

 

 

$

19,550,000

 

$

19,550,000

 

 

 

 

 

 

 

 

 

 

 

Total Investments

 

 

 

 

 

$

241,955,623

 

$

240,516,052

 

 


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

(2)             Percentage represents the weighted average interest rates in effect at December 31, 2006 and due date represents the contractual maturity date.

(3)             Marketable securities are valued based on the indicative bid price, as of December 31, 2006, from the respective originating syndication agent’s trading desk.

(4)             Security is non-income producing.

(5)             Valued using Standard & Poor’s Securities Evaluations, Inc. opinions of value at December 31, 2006.

(6)             Fair value is equal to cost due to recent acquisition.

(7)             Total available under the revolving credit facility is $500,000 which was undrawn as of December 31, 2006.

(8)             Total available under the revolving credit facility is $2,000,000, of which $100,000 remains undrawn at December 31, 2006.

(9)             Total available under the revolving credit facility is $2,000,000, of which $200,000 remains undrawn at December 31, 2006.

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

5




GLADSTONE INVESTMENT CORPORATION
CONSOLIDATED SCHEDULE OF INVESTMENTS
March 31, 2006
(UNAUDITED)

Company (1)

 

Industry

 

Investment (2)

 

Cost

 

Fair Value

 

 

 

 

 

 

 

 

 

NON-CONTROL/NON-AFFILIATE INVESTMENTS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CRC Health Group, Inc.

 

Service - substance abuse treatment

 

Senior Term Debt (6.9%, Due 2/2016)(3)

 

$

5,056,761

 

$

5,056,250

 

 

 

 

 

 

 

 

 

Graham Packaging Holdings Co.

 

Manufacturing - custom blow molded

 

Senior Term Debt (7.0%, Due 10/2011)(3)

 

10,071,296

 

10,061,087

 

 

 

 

 

 

 

 

 

Hertz Equipment Rental Corporation

 

Service - car rentals

 

Senior Term Debt (6.7%, Due 12/2010)(3)

 

871,388

 

876,560

 

 

 

 

 

 

 

 

 

Latham Manufacturing Corp.

 

Manufacturing - swimming pool components accessories

 

Senior Term Debt (7.8%, Due 12/2010)(3)

 

4,454,333

 

4,461,188

 

 

 

 

 

 

 

 

 

Le-Natures, Inc.

 

Marketing & development - natural beverages

 

Senior Term Debt (7.7%, Due 6/2010)(3)

 

5,042,467

 

5,074,713

 

 

 

 

 

 

 

 

 

LVI Services, Inc.

 

Service - asbestos and mold remediation

 

Senior Term Debt (7.3%, Due 11/2010)(3)

 

6,511,390

 

6,540,483

 

 

 

 

 

 

 

 

 

Madison River Capital LLC

 

Service - communications and information information

 

Senior Term Debt (6.8%, Due 7/2012)(3)

 

5,788,660

 

5,829,062

 

 

 

 

 

 

 

 

 

Maidenform, Inc.

 

Manufacturing - intimate apparel

 

Senior Term Debt (6.5%, Due 5/2010)(3)

 

3,118,448

 

3,122,787

 

 

 

 

 

 

 

 

 

MedAssets, Inc.

 

Service - pharmaceuticals and healthcare GPO

 

Senior Term Debt (7.7%, Due 7/2010)(3)(7)

 

2,340,111

 

2,348,526

 

 

 

 

 

 

 

 

 

Ozburn-Hessey Holding Co. LLC

 

Service - third party logistics

 

Senior Term Debt (7.3%, Due 8/2012)(3)

 

6,382,673

 

6,376,646

 

 

 

 

 

 

 

 

 

Patriot Media & Communications CNJ, LLC

 

Service - telecommunications

 

Senior Term Debt (7.0%, Due 3/2013)(3)

 

4,360,777

 

4,359,125

 

 

 

 

 

 

 

 

 

Revere Industries, LLC

 

Manufacturing-plastic and metal components

 

Senior Term Debt (7.6%, Due 9/2010)(3)

 

3,508,831

 

3,504,546

 

 

 

 

 

 

 

 

 

RPG Holdings, Inc.

 

Manufacturing and design - greeting cards

 

Senior Term Debt (8.2%, Due 12/2011)(3)

 

5,001,332

 

5,000,000

 

 

 

 

 

 

 

 

 

SGS International, Inc.

 

Service - digital imaging and graphics

 

Senior Term Debt (7.2%, Due 12/2011)(3)

 

1,404,081

 

1,415,702

 

 

 

 

 

 

 

 

 

SunGard Data Systems, Inc.

 

Service & manufacturing - integrated software and processing

 

Senior Term Debt (7.2%, Due 2/2013)(3)

 

10,033,531

 

10,049,063

 

 

 

 

 

 

 

 

 

Triad Laboratory Alliance, LLC

 

Service - regional medical laboratories

 

Senior Term Debt (7.8%, Due 12/2011)(3)(7)

 

5,006,982

 

5,012,438

 

 

 

 

 

 

 

 

 

TexStar Operating, L.P.

 

Manufacturing - midstream natural gas processing

 

Senior Term Debt (8.3%, Due 12/2011)(3)(7)

 

3,000,161

 

2,999,981

 

 

 

 

 

 

 

 

 

US Investigative Services, Inc.

 

Service - background investigations

 

Senior Term Debt (7.4%, Due 10/2012)(3)

 

9,948,345

 

9,984,478

 

 

 

 

 

 

 

 

 

Wastequip, Inc.

 

Manufacturing - waste removal equipment

 

Senior Term Debt (7.0%, Due 7/2011)(3)

 

5,521,437

 

5,513,337

 

 

 

 

 

 

 

 

 

Total Non-Control/Non-Affiliate Investments

 

 

 

97,423,004

 

97,585,972

 

6




 

Company (1)

 

Industry

 

Investment (2)

 

Cost

 

Fair Value

 

 

 

 

 

 

 

 

 

 

 

CONTROL INVESTMENTS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Chase II Holdings Corporation

 

Manufacturing - Traffic doors

 

Revolving Credit Facility (5)

 

 

 

 

 

 

 

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

 

12,900,000

 

12,900,000

 

 

 

 

 

Senior Term Debt
(12.0% Due 3/2011)

 

8,000,000

 

8,000,000

 

 

 

 

 

Subordinated Term Debt
(13% Due 3/2013)

 

6,167,810

 

6,167,810

 

 

 

 

 

Redeemable Preferred
Stock (4) (8)

 

6,960,806

 

6,960,806

 

 

 

 

 

Common Stock (4) (8)

 

61,384

 

61,384

 

 

 

 

 

 

 

34,090,000

 

34,090,000

 

 

 

 

 

 

 

 

 

 

 

Hailey Transport Corporation

 

Retail and Service - school
buses and parts

 

Senior Subordinated Term
Debt (12.0%, Due 1/2012) (7)

 

4,000,000

 

3,950,000

 

 

 

 

 

Common Stock (4) (8)

 

2,500,000

 

2,500,00

 

 

 

 

 

 

 

6,500,000

 

6,450,000

 

 

 

 

 

 

 

 

 

 

 

Quench Holdings Corporation

 

Service - sales,
installation and service of water coolers

 

Revolving Credit Facility (6)

 

 

 

 

 

 

 

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

 

4,000,000

 

4,000,000

 

 

 

 

 

Subordinated Term Debt (11.5%, Due 3/2011)

 

8,000,000

 

8,000,000

 

 

 

 

 

Common Stock (4) (8)

 

3,256,318

 

3,256,318

 

 

 

 

 

 

 

15,256,318

 

15,256,318

 

 

 

 

 

 

 

 

 

 

 

Total Control Investments

 

 

 

 

 

55,846,318

 

55,796,318

 

 

 

 

 

 

 

 

 

 

 

Total Investments

 

 

 

 

 

$

153,269,322

 

$

153,382,290

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents

 

 

 

 

 

 

 

 

 

 

 

Government

 

US Treasury Bill
(4.2%, 4/20/2006)

 

3,989,800

 

3,989,800

 

 

 

 

 

 

 

 

 

 

 

 

 

Government

 

US Treasury Bill
(4.4%, 4/27/2006)

 

15,241,694

 

15,241,694

 

 

 

 

 

 

 

 

 

 

 

 

 

Government

 

US Treasury Bill
(4.4%, 5/4/2006)

 

35,132,347

 

35,132,347

 

 

 

 

 

 

 

 

 

 

 

 

 

Government

 

US Treasury Bill
(4.4%, 5/25/2006)

 

15,243,245

 

15,243,245

 

 

 

 

 

 

 

 

 

 

 

Total cash equivalents:

 

 

 

 

 

69,607,086

 

69,607,086

 

 

 

 

 

 

 

 

 

 

 

Total investments and cash equivalents:

 

 

 

$

222,876,408

 

$

222,989,376

 

 


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

(2)             Percentage represents the weighted average interest rates in effect at March 31, 2006 and due date represents the contractual maturity date.

(3)             Marketable securities are valued based on the indicative bid price, as of March 31, 2006, from the respective originating syndication agent’s trading desk.

(4)             Security is non-income producing.

(5)             Total available under the revolving credit facility is $500,000 which was undrawn as of March 31, 2006.

(6)             Total available under the revolving credit facility is $2,000,000 which was undrawn as of March 31, 2006.

(7)             Valued using Standard & Poor’s Securities Evaluations, Inc. opinions of value at March 31, 2006.

(8)             Fair value is equal to cost due to recent acquisition.

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

7




GLADSTONE INVESTMENT CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)

 

 

For the three

 

For the three

 

 

 

months ended

 

months ended

 

 

 

December 31, 2006

 

December 31, 2005

 

 

 

 

 

 

 

INVESTMENT INCOME

 

 

 

 

 

Interest income

 

 

 

 

 

Non-Control/Non-Affiliate investments

 

$

2,586,171

 

$

790,879

 

Control investments

 

1,264,451

 

 

Affiliate investments

 

114,668

 

 

Cash and cash equivalents

 

332,586

 

1,530,809

 

Total interest income

 

4,297,876

 

2,321,688

 

Other income

 

1,492

 

 

Total investment income

 

4,299,368

 

2,321,688

 

 

 

 

 

 

 

EXPENSES

 

 

 

 

 

Base management fee

 

551,235

 

265,522

 

Loan servicing fee

 

508,691

 

 

Administration fee

 

124,101

 

73,424

 

Directors fees

 

54,800

 

51,000

 

Professional fees

 

186,537

 

69,570

 

Insurance expense

 

60,696

 

69,552

 

Stockholder related costs

 

28,643

 

24,363

 

Interest expense

 

68,748

 

 

Amortization of deferred finance costs

 

91,392

 

 

Taxes and licenses

 

41,550

 

 

Other expenses

 

60,132

 

15,687

 

Expenses before credit from Adviser

 

1,776,525

 

569,118

 

Credit to base management fee for fees collected by Adviser (Refer to Note 3)

 

(375,225

)

 

Total expenses net of credit to management fee

 

1,401,300

 

569,118

 

NET INVESTMENT INCOME

 

2,898,068

 

1,752,570

 

 

 

 

 

 

 

REALIZED AND UNREALIZED LOSS ON INVESTMENTS

 

 

 

 

 

Realized (loss) gain on sale of Non-Control/Non-Affiliate investments

 

(2,283

)

38,056

 

Net unrealized depreciation of investment portfolio

 

(211,242

)

(175,879

)

Net loss on investments

 

(213,525

)

(137,823

)

 

 

 

 

 

 

NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS (Refer to Note 6)

 

$

2,684,543

 

$

1,614,747

 

 

 

 

 

 

 

NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS PER COMMON SHARE:

 

 

 

 

 

Basic and Diluted

 

$

0.16

 

$

0.10

 

 

 

 

 

 

 

SHARES OF COMMON STOCK OUTSTANDING:

 

 

 

 

 

Basic and diluted weighted average shares

 

16,560,100

 

16,560,100

 

 

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

8




GLADSTONE INVESTMENT CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)

 

 

 

 

For the period

 

 

 

 

 

June 22, 2005

 

 

 

For the nine

 

(Commencement of

 

 

 

months ended

 

Operations) to

 

 

 

December 31, 2006

 

December 31, 2005

 

 

 

 

 

 

 

INVESTMENT INCOME

 

 

 

 

 

Interest income

 

 

 

 

 

Non-Control/Non-Affiliate investments

 

$

6,938,026

 

$

984,457

 

Control investments

 

3,711,056

 

 

Affiliate investments

 

114,668

 

 

Cash and cash equivalents

 

1,610,506

 

3,192,019

 

Total interest income

 

12,374,256

 

4,176,476

 

Other income

 

2,478

 

 

Total investment income

 

12,376,734

 

4,176,476

 

 

 

 

 

 

 

EXPENSES

 

 

 

 

 

Base management fee

 

2,214,437

 

357,630

 

Loan servicing fee

 

508,691

 

 

Administration fee

 

364,351

 

178,469

 

Directors fees

 

154,300

 

103,000

 

Professional fees

 

354,325

 

135,872

 

Insurance expense

 

200,933

 

112,030

 

Stockholder related costs

 

187,509

 

67,901

 

Interest expense

 

68,748

 

378

 

Amortization of deferred finance costs

 

91,392

 

 

Taxes and licenses

 

139,994

 

 

Other expenses

 

104,161

 

35,920

 

Expenses before credit from Gladstone Management

 

4,388,841

 

991,200

 

Credit to management fee for fees collected by Adviser (Refer to Note 3)

 

(375,225

)

 

Total expenses net of credit to management fee

 

4,013,616

 

991,200

 

NET INVESTMENT INCOME

 

8,363,118

 

3,185,276

 

 

 

 

 

 

 

REALIZED AND UNREALIZED LOSS ON INVESTMENTS

 

 

 

 

 

Realized (loss) gain on sale of Non-Control/Non-Affiliate investments

 

(944

)

38,056

 

Net unrealized depreciation of investment portfolio

 

(1,552,539

)

(112,053

)

Net loss on investments

 

(1,553,483

)

(73,997

)

 

 

 

 

 

 

NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS (Refer to Note 6)

 

$

6,809,635

 

$

3,111,279

 

 

 

 

 

 

 

NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS PER COMMON SHARE:

 

 

 

 

 

Basic and Diluted

 

$

0.41

 

$

0.19

 

 

 

 

 

 

 

SHARES OF COMMON STOCK OUTSTANDING:

 

 

 

 

 

Basic and diluted weighted average shares

 

16,560,100

 

16,560,100

 

 

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

9




GLADSTONE INVESTMENT CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS
(UNAUDITED)

 

 

 

 

For the period

 

 

 

 

 

June 22, 2005

 

 

 

For the nine

 

(Commencement of

 

 

 

months ended

 

Operations) to

 

 

 

December 31, 2006

 

December 31, 2005

 

Operations:

 

 

 

 

 

Net investment income

 

$

8,363,118

 

$

3,185,276

 

Realized (loss) gain on sale of investments

 

(944

)

38,056

 

Unrealized depreciation of portfolio

 

(1,552,539

)

(112,053

)

Increase in net assets from operations

 

6,809,635

 

3,111,279

 

 

 

 

 

 

 

Capital transactions:

 

 

 

 

 

Issuance of common stock

 

 

230,244,339

 

Shelf registration offering costs

 

(132,707

)

 

Dividends from net investment income

 

(10,432,869

)

(2,980,818

)

Total change in net assets from capital transactions

 

(10,565,576

)

227,263,521

 

 

 

 

 

 

 

Total change in net assets

 

(3,755,941

)

230,374,800

 

 

 

 

 

 

 

Net Assets

 

 

 

 

 

Beginning of period

 

229,841,697

 

1,500

 

End of period

 

$

226,085,756

 

$

230,376,300

 

 

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

10




GLADSTONE INVESTMENT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)

 

 

 

 

For the period

 

 

 

 

 

June 22, 2005

 

 

 

For the nine

 

(Commencement of

 

 

 

months ended

 

Operations) to

 

 

 

December 31, 2006

 

December 31, 2005

 

 

 

 

 

 

 

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

 

Net increase in net assets resulting from operations

 

$

6,809,635

 

$

3,111,279

 

Adjustments to reconcile net increase in net assets

 

 

 

 

 

resulting from operations to net cash used in operating activities:

 

 

 

 

 

Purchase of investments

 

(118,850,626

)

(64,221,339

)

Principal repayments of investments

 

10,448,688

 

1,376,483

 

Proceeds from the sale of investments

 

19,589,945

 

2,038,056

 

Net unrealized depreciation of investment portfolio

 

1,552,539

 

112,053

 

Net realized loss (gain) on sales of investments

 

944

 

(38,056

)

Net amortization of premiums and discounts

 

124,748

 

21,797

 

Increase in interest receivable

 

(683,317

)

(317,233

)

Increase in due from custodian

 

(2,798,620

)

 

Increase in prepaid assets

 

(67,993

)

(214,485

)

Increase in other assets

 

(22,429

)

(108,604

)

Increase in other liabilities

 

38,042

 

 

Increase in administration fee payable to Administrator

 

410,561

 

73,424

 

Increase in base management fee payable to Adviser

 

14,099

 

192,787

 

Increase in loan servicing fee payable to Adviser

 

231,211

 

 

Increase in accounts payable

 

 

2,207

 

Increase in accrued expenses

 

445,833

 

53,933

 

Net cash used in operating activities

 

(82,756,740

)

(57,917,698

)

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

 

Net proceeds from the issuance of common stock

 

 

230,292,203

 

Borrowings from line of credit

 

23,500,000

 

 

Repayments of line of credit

 

(3,500,000

)

 

Deferred finance costs

 

(459,347

)

 

Shelf offering registration costs

 

(132,707

)

 

Distributions paid

 

(10,432,869

)

(2,980,818

)

Decrease in loan payable to affiliate

 

 

(50,000

)

Net cash provided by financing activities

 

8,975,077

 

227,261,385

 

 

 

 

 

 

 

NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (1)

 

(73,781,663

)

169,343,687

 

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD

 

75,672,605

 

3,636

 

CASH AND CASH EQUIVALENTS, END OF PERIOD

 

$

1,890,942

 

$

169,347,323

 

 

 

 

 

 

 

CASH PAID DURING PERIOD FOR INTEREST TO AFFILIATE

 

$

 

$

378

 

 


(1)             Cash and cash equivalents consist of demand deposits and highly liquid investments with original maturities of three months or less when purchased.

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

11




GLADSTONE INVESTMENT CORPORATION
FINANCIAL HIGHLIGHTS
(UNAUDITED)

 

 

For the three

 

For the three

 

 

 

months ended

 

months ended

 

 

 

December 31, 2006

 

December 31, 2005

 

Per Share Data (1)

 

 

 

 

 

Balance at beginning of period

 

$

13.71

 

$

13.93

 

 

 

 

 

 

 

Income from investment operations:

 

 

 

 

 

Net investment income (2)

 

0.18

 

0.11

 

Realized gain on sale of investments (2)

 

 

 

Net unrealized depreciation of investments (2)

 

(0.02

)

(0.01

)

Total from investment operations

 

0.16

 

0.10

 

Distributions

 

(0.21

)

(0.12

)

Net asset value at end of period

 

$

13.65

 

$

13.91

 

 

 

 

 

 

 

Per share market value at beginning of period

 

$

14.46

 

$

15.05

 

Per share market value at end of period

 

15.31

 

13.59

 

Total return (3)

 

7.38

%

(6.63

%)

Shares outstanding at end of period

 

16,560,100

 

16,560,100

 

 

 

 

 

 

 

Ratios/Supplemental Data

 

 

 

 

 

Net assets at end of period

 

$

226,085,756

 

$

230,376,300

 

Average net assets (4)

 

$

225,338,878

 

$

229,896,936

 

Ratio of expenses to average net assets (annualized)

 

3.15

%

0.99

%

Ratio of net expenses to average net assets (annualized)

 

2.49

%

0.99

%

Ratio of net investment income to average net assets (annualized)

 

5.14

%

3.05

%

 


(1)             Based on actual shares outstanding.

(2)             Based on weighted average basic per share data.

(3)             Total return equals the change in the market value of the 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.

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

12




GLADSTONE INVESTMENT CORPORATION
FINANCIAL HIGHLIGHTS
(UNAUDITED)

 

 

 

 

For the period

 

 

 

 

 

June 22, 2005

 

 

 

For the nine

 

(Commencement of

 

 

 

months ended

 

Operations) to

 

 

 

December 31, 2006

 

December 31, 2005

 

Per Share Data (1)

 

 

 

 

 

Balance at beginning of period

 

$

13.88

 

$

 

Net proceeds from initial public offering (2)

 

 

13.95

 

Offering costs

 

 

(0.05

)

 

 

 

 

 

 

Income from investment operations:

 

 

 

 

 

Net investment income (3)

 

0.51

 

0.20

 

Realized gain on sale of investments (3)

 

 

 

Net unrealized depreciation of investments (3)

 

(0.10

)

(0.01

)

Total from investment operations

 

0.41

 

0.19

 

Distributions

 

(0.63

)

(0.18

)

Net asset value at end of period

 

$

13.65

 

$

13.91

 

 

 

 

 

 

 

Per share market value at beginning of period

 

$

14.90

 

$

15.00

 

Per share market value at end of period

 

15.31

 

13.59

 

Total return (4)

 

7.28

%

(8.25

%)

Shares outstanding at end of period

 

16,560,100

 

16,560,100

 

 

 

 

 

 

 

Ratios/Supplemental Data

 

 

 

 

 

Net assets at end of period

 

$

226,085,756

 

$

230,376,300

 

Average net assets (5)

 

$

226,399,367

 

$

225,793,817

 

Ratio of expenses to average net assets (annualized)

 

2.59

%

0.75

%

Ratio of net expenses to average net assets (annualized)

 

2.36

%

0.75

%

Ratio of net investment income to average net assets (annualized)

 

4.93

%

2.42

%

 


(1)             Based on actual shares outstanding.

(2)             Net of initial underwriting discount of $1.05 per share.

(3)             Based on weighted average basic per share data.

(4)             Total return equals the change in the market value of the 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.

(5)             Calculated using the average of the ending monthly net assets for the respective periods.

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

 

13




GLADSTONE INVESTMENT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2006
(UNAUDITED)

NOTE 1. ORGANIZATION

Gladstone Investment Corporation (the “Company”) was incorporated under the General Corporation Laws of the State of Delaware on February 18, 2005 and completed an initial public offering on June 22, 2005.   The Company is a closed-end, non-diversified management investment company that has elected to be treated as a business development company under the Investment Company Act of 1940, as amended (the “1940 Act”). In addition, the Company has elected to be treated for tax purposes as a regulated investment company, or RIC, under the Internal Revenue Code of 1986, as amended (the “Code”). The 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, which recently closed on October 19, 2006.  The financial statements of Business Investment are consolidated with those of the Company.

The Company is externally managed by Gladstone Management Corporation (“GMC” or the “Adviser”), an unconsolidated affiliate of the Company.

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Unaudited Interim Financial Statements

Interim financial statements of the Company are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and pursuant to the requirements for reporting on Form 10-Q and Article 10 of Regulation S-X. Accordingly, certain disclosures accompanying annual financial statements prepared in accordance with GAAP are omitted. In the opinion of management, all adjustments, consisting solely of normal recurring accruals, necessary for the fair statement of financial statements for the interim periods have been included. The current 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, 2006, as filed with the Securities and Exchange Commission on June 14, 2006.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Classification of Investments

The 1940 Act requires classification of the 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

14




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 participations in syndicated loans, are valued at the indicative bid price on the valuation date from the respective originating syndication agent’s trading desk.  Debt and equity securities that are not publicly traded 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.  These procedures for the determination of value of 13 of the Company’s debt securities rely on the opinions of value submitted to us by Standard & Poor’s Securities Evaluations, Inc. (“SPSE”). 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 in 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. The Board of Directors then reviews whether the Adviser has followed its established procedures for determinations of fair value, and votes to accept or not accept the recommended valuation of the Company’s investment portfolio. The Company’s fair valuation procedures provide for valuation of non-convertible debt securities at cost plus amortized original issue discount (“OID”) plus paid in kind (“PIK”) interest, if any, unless adverse factors lead to a determination of a lesser valuation.  The fair value of convertible debt, equity, success or exit fees or other equity-like securities is determined based on the collateral, the enterprise value of the issuer, the issuer’s ability to make payments, the earnings of the issuer, sales to third parties of similar securities, the comparison to publicly traded securities, discounted cash flow and other pertinent factors.  Due to the uncertainty inherent in the valuation process, such estimates of fair value may differ significantly from the values that would have resulted had a ready market for the securities existed, and the differences could be material. Additionally, changes in the market environment and other events that may occur over the life of the investments may cause the gains or losses ultimately realized on these investments to be different than the valuation currently assigned.  Because there is a delay between when the Company closes an investment and when the investment can be evaluated by SPSE, new investments are not valued immediately by SPSE; rather, the Adviser makes its own determination about the recommended value of these investments in accordance with the 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 securities for the Company, the Adviser also determines a recommendation for the fair value of these investments without the input of SPSE.  The Adviser considers a number of qualitative and quantitative factors in current market conditions when performing valuations.  The Board of Directors then determines whether or not to accept the 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 December 31, 2006.  Conditional interest or a success fee is recorded upon full repayment of a loan investment. Dividend income on preferred equity securities is accrued to the extent that such amounts are expected to be collected and that the Company has the option to collect such amounts in cash.  To date, the Company has not accrued any dividend income.

Services Provided to Portfolio Companies

The 1940 Act requires that a business development company make available managerial assistance to its portfolio companies by providing significant guidance and counsel concerning the management, operations, or business objectives and policies of the respective portfolio company. The Company provides these and other services to portfolio companies through its Adviser.   Currently, neither the Company nor the Adviser receives fees in connection with managerial assistance.

The Adviser receives fees for other services it provides to portfolio companies.  These other fees are typically non-recurring, are recognized as revenue when earned and are generally paid directly to the Adviser by the borrower or potential borrower upon closing of the investment.  The services the Adviser provides to portfolio companies vary by investment, but generally include a broad array of services, such as investment banking services, arranging bank and equity financing, structuring

15




financing from multiple lenders and investors, reviewing existing credit facilities, restructuring existing investments, raising equity and debt capital, turnaround management, merger and acquisition services and recruiting new management personnel.  When the Adviser receives fees for these services, 50% of those fees are credited against the base management fee due to the Adviser from the Company.  Any services of this nature subsequent to the closing would typically generate a separate fee at the time of completion.

The Adviser also receives fees for monitoring and reviewing portfolio company investments.  These fees are recurring and are generally paid annually or quarterly in advance to the Adviser throughout the life of the investment.  Fees of this nature are recorded as revenue by the Adviser when earned and are not credit against the base management fees.

The Company may receive fees for the origination and closing services it provides to portfolio companies through its Adviser. These fees are paid directly to the Company and are recognized as revenue upon closing of the originated investment and are reported as fee income in the consolidated statements of operations. 

Cash and Cash Equivalents

The Company considers all short-term, highly liquid investments that are both readily convertible to cash and have a maturity of three months or less at the time of purchase to be cash equivalents. Items classified as cash equivalents include temporary investments in U.S. Treasury bills and can also include commercial paper and money-market funds. All of the Company’s cash at December 31, 2006 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.

Realized Gain or Loss and Unrealized Appreciation or Depreciation of Portfolio Investments

Realized gain or loss is recognized when an investment is sold and is computed as the difference between the Company’s cost basis in the investment at the date of sale and the net proceeds received from such sale.  Unrealized appreciation or depreciation reflects the difference between the fair market value of the investment and the cost basis of such investment.

Federal Income Taxes

The Company intends to continue to qualify for treatment as a RIC under subchapter M of the Code. As a RIC, the Company will not be subject to federal income tax on the portion of its taxable income and gains distributed to stockholders. To qualify as a RIC, the Company is required to distribute at least 90% of investment company taxable income, as defined by the Code. The Company intends to distribute at least 90% of its ordinary income, and as a result, no income tax provisions have been recorded. The Company may, but does not intend to, pay out a return of capital.

Recent Accounting Pronouncements

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, Fair Value Measurments (“SFAS 157”).  SFAS 157 defines fair value, establishes a framework for measuring fair value in GAAP and expands disclosures about fair value measurements.  SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years.  The Company is required to adopt the provisions of SFAS 157 beginning with the fiscal year ended March 31, 2009.  The Company is currently evaluating the impact of this pronouncement on its consolidated financial statements.

In September 2006, the Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin No. 108 (“SAB 108”). SAB 108 addresses how the effects of prior year uncorrected misstatements should be considered when quantifying misstatements in current year financial statements and requires registrants to consider the effect of all carry over and reversing effects of prior year misstatements when quantifying errors in current year financial statements. SAB 108 does not change the 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

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for quantifying misstatements. The Company is currently evaluating the impact of this pronouncement on its consolidated financial statements

In June 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109,” 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.” SFAS No. 109 is effective as of the beginning of an entity’s first fiscal year that begins after December 15, 2006. The Company will adopt this Interpretation effective April 1, 2007. The Company is currently evaluating the impact of this pronouncement on its consolidated financial statements.

In February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments, an amendment of FASB statements No. 133 and 140” (SFAS No. 155). SFAS No. 155 allows financial instruments that have embedded derivatives to be accounted for as a whole (eliminating the need to bifurcate the derivative from its host) as long as the entire instrument is valued on a fair value basis. The statement also resolves and clarifies other specific SFAS No. 133 and SFAS No. 140 related issues. SFAS No. 155 is effective for all financial instruments acquired or issued after the beginning of an entity’s first fiscal year that begins after September 15, 2006. The Company will be required to adopt SFAS No. 155 on April 1, 2007. The Company is currently evaluating the impact of this pronouncement on its consolidated financial statements.

NOTE 3. RELATED PARTY TRANSACTIONS

Investment Advisory and Management Agreement

We have entered into an investment advisory and management agreement with the Adviser (the “Advisory Agreement”), which is controlled by our chairman and chief executive officer. In accordance with the Advisory Agreement, we pay the Adviser a fee, as compensation for its services, consisting of a base management fee and an incentive fee.

The base management fee is assessed at an annual rate of 2.0% computed on the basis of the average value of the Company’s gross invested assets at the end of the two most recently completed quarters, which are total assets less the cash proceeds and cash and cash equivalents from the proceeds of the Company’s initial public offering that are not invested in debt and equity securities of portfolio companies.  Through December 31, 2006, the base management fee was computed and payable quarterly.  Beginning in periods subsequent to December 31, 2006, the base management fee will be computed and payable quarterly and will be assessed at an annual rate of 2.0% computed on the basis of the value of the Company’s average gross assets at the end of the two most recently completed quarters, which are total assets, including investments made with proceeds of borrowings, less any uninvested cash or cash equivalents resulting from borrowings.  This new calculation was originally scheduled to begin in periods after March 31, 2006; however, on April 11, 2006, July 11, 2006 and October 10, 2006, the Company’s Board of Directors accepted voluntary waivers from the Adviser that allowed the current calculation of the base management fee to be effective through June 30, 2006, September 30, 2006 and December 31, 2006, respectively. 

On January 9, 2007, the Company’s Board of Directors accepted a voluntary waiver from the Adviser to reduce the annual 2.0% base management fee on senior syndicated loan participations to 0.5% to the extent that proceeds resulting from borrowings were used to purchase such syndicated loan participations. 

When the Adviser receives fees from portfolio companies, as discussed in Note 2 under “Services Provided to Portfolio Companies,” 50% of certain of these fees will be credited against the base management fee that the Company would otherwise be required to pay to the Adviser.

For the three and nine months ended December 31, 2006, the Company incurred a base management fee to the Adviser of $551,235 and $2,214,437, respectively.  For the three months ended December 31, 2005 and for the period June 22, 2005 (commencement of operations) to December 31, 2005, the Company incurred a base management fee to the Adviser of $265,522 and $357,630, respectively.  As of December 31, 2006, $176,010 was unpaid and included in fees due to Adviser in the accompanying consolidated statements of assets and liabilities.  For the three and nine months ended December 31, 2006, the Company recognized aggregate credits against the base management fee of $375,225 resulting from investment banking fees paid to the Adviser during the respective periods.

In addition, the Adviser services the loans held by Business Investment, in return for which the Adviser receives a 2.0% annual fee based on the monthly aggregate balance of loans held by Business Investment.  Since the Company owns these loans, all loan servicing fees paid to the Adviser are treated as reductions against the 2.0% base management fee payable to

17




the Adviser.  Overall, the management fee due to the Adviser cannot exceed 2.0% of total assets (as reduced by cash and cash equivalents pledged to creditors) during any given fiscal year.

For the three and nine months ended December 31, 2006, the Company recorded loan servicing fees to the Adviser of $508,691, of which $231,211 was unpaid at December 31, 2006 and included in fees due to Adviser in the accompanying consolidated statements of assets and liabilities.

The incentive fee consists of two parts: an income-based incentive fee and a capital gains incentive fee. The income-based incentive fee is calculated and payable quarterly in arrears based on the Company’s pre-incentive fee net investment income for the immediately preceding calendar quarter. The capital gains incentive fee is determined and payable annually in arrears as of the end of each fiscal year (or upon termination of the Advisory Agreement, as of the termination date) and equals 20.0% of the Company’s realized capital gains since inception through the end of the current fiscal year, if any, computed net of all realized capital losses since inception, and unrealized capital depreciation at the end of each fiscal year. Refer to the Company’s Form 10-K for the fiscal year ended March 31, 2006 for more information regarding the calculation of the incentive fee.

Because pre-incentive fee net investment income was below the hurdle rate of 1.75% of net assets, no income-based incentive fee was recorded for the three or nine months ended December 31, 2006, the three months ended December 31, 2005 or the period June 22, 2005 (commencement of operations) to December 31, 2005.

Administration Agreement

The Company has entered into an administration agreement (the “Administration Agreement”) with Gladstone Administration, LLC (“Gladstone Administration” or the “Administrator”), a wholly-owned subsidiary of the Adviser. Under the Administration Agreement, the Company pays separately for administrative services.  The Administration Agreement provides for payments equal to the Company’s allocable portion of the Administrator’s overhead expenses in performing its obligations under the Administration Agreement, including but not limited to, rent for employees of the Administrator, and the allocable portion of salaries and benefits expenses of the Company’s chief financial officer, controller, chief compliance officer, treasurer and their respective staffs.   The Company recorded fees to the Administrator on the consolidated statements of operations of $124,101 and $73,424 for the three months ended December 31, 2006 and 2005, respectively. The Company recorded fees to the Administrator on the consolidated statements of operations of $364,351 and $178,469 for the nine months ended December 31, 2006 and the period June 22, 2005 (commencement of operations) to December 31, 2005, respectively. As of December 31, 2006 and March 31, 2006, $124,101 and 110,002, respectively, was unpaid and included in the administration fee payable to Administrator in the accompanying consolidated statements of assets and liabilities.

Loan Payable to Affiliate

On June 30, 2005, the Company repaid a $50,000 loan payable to its chairman and chief executive officer. The demand recourse promissory note accrued interest at the rate of 3.0% per annum and was repaid with accrued interest of $378 using a portion of the net proceeds from the Company’s initial public offering.

NOTE 4. LINE OF CREDIT

Through the Company’s wholly-owned subsidiary, Business Investment, the Company has obtained a $100 million revolving credit facility (the “Credit Facility”).  On October 19, 2006, the Company executed a Purchase and Sale Agreement pursuant to which it agreed to sell certain loans to Business Investment in consideration of a membership interest therein.  Simultaneously, Business Investment executed a Credit Agreement (the “Credit Agreement”) with Deutsche Bank AG, New York Branch (“Deutsche Bank”), as administrative agent, pursuant to which Business Investment pledged the loans purchased from the Company to secure future advances by certain institutional lenders. Availability under the Credit Facility will terminate on October 18, 2007, unless extended in the discretion of the lenders, at the request of Business Investment. Interest will be payable monthly during the term of the Credit Facility and principal will be payable out of collections on loans purchased from the Company during the period following the date of which availability for advances has terminated through maturity.  The Credit Facility will mature two years following the date on which availability for advances has terminated and on such date, all principal, interest and other amounts owing under the Credit Facility will be due and payable.  Interest rates charged on the advances under the facility are based on the rate paid by the lenders on commercial paper notes issued by such lenders to fund some or all of the advances, the London Interbank Offered Rate (“LIBOR”), the

18




Prime Rate or the Federal Funds Rate, depending on market conditions, and adjust periodically.  Available borrowings are subject to various constraints imposed under the Credit Agreement, based on the aggregate loan balance pledged by Business Investment, which varies as loans are added and repaid, regardless of whether such repayments are early prepayment or are made as contractually required.

The Credit Facility contains covenants that require Business Investment to maintain its status as a separate entity; prohibit certain significant corporate transactions (such as mergers, consolidations, liquidations or dissolutions); and restrict material changes to the Company’s credit and collection policies.  The facility also restricts some of the terms and provisions (including interest rates, terms to maturity and payments schedules) and limits the borrower and industry concentrations of loans that are eligible to secure advances.  As of December 31, 2006, Business Investment was in compliance with all of the facility covenants.  As of December 31, 2006 there was $20 million of borrowings outstanding on the Credit Facility and the remaining borrowing capacity under the Credit Facility was $80 million.

The administrative agent also requires that any interest or principal payments on pledged loans be remitted directly by the borrower into a lockbox account with the Bank of New York as custodian.  Deutsche Bank is also the trustee of the account and once a month remits the collected funds to the Company. At December 31, 2006, the amount due from the custodian was $2,798,620. 

The Adviser services the loans pledged under the Credit Facility.  As a condition to this servicing arrangement, the Company executed a performance guaranty pursuant to which it guaranteed that the Adviser would comply fully with all of its obligations under the Credit Facility. The performance guaranty requires the Company to maintain a minimum net worth of $100 million and to maintain “asset coverage” with respect to “senior securities representing indebtedness” of at least 200%, in accordance with Section 18 of the 1940 Act. As of December 31, 2006, the Company was in compliance with the covenants under the performance guaranty.

NOTE 5. COMMON STOCK

As of December 31, 2006 and March 31, 2006, 100,000,000 shares of $0.001 par value common stock were authorized and 16,560,100 shares were outstanding.

NOTE 6. INCREASE IN NET ASSETS PER SHARE RESULTING FROM OPERATIONS

The following table sets forth the computation of basic and diluted net increase in net assets per share resulting from operations:

 

 

For the three
months ended
December 31, 2006

 

For the three
months ended
December 31, 2005

 

For the nine
months ended
December 31, 2006

 

For the period
June 22, 2005
(Commencement of
Operations) to
December 31, 2005

 

 

 

 

 

 

 

 

 

 

 

Numerator for basic and diluted net increase in net assets resulting from operations per share

 

2,684,543

 

1,614,747

 

6,809,635

 

3,111,279

 

 

 

 

 

 

 

 

 

 

 

Denominator for basic and diluted shares

 

16,560,100

 

16,560,100

 

16,560,100

 

16,560,100

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted net increase in net assets per share resulting from operations

 

$

0.16

 

$

0.10

 

$

0.41

 

$

0.19

 

 

NOTE 7. DIVIDENDS

The Company is required to pay out as a dividend, 90% of its ordinary income and realized net short-term capital gains in excess of realized net short-term capital losses, if any, for each taxable year in order to maintain its status as a RIC under

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Subtitle A, Chapter 1 of Subchapter M of the Code. It is the policy of the Company to pay out as a dividend up to 100% of those amounts. The amount to be paid out monthly as a dividend is determined by the Board of Directors each quarter and is based on the annual earnings estimated by the management of the Company. Based on that estimate, three monthly dividends are declared each quarter.  At year-end the Company may pay a bonus dividend, in addition to the monthly dividends, to ensure that it has paid out at least 90% of its ordinary income and realized net short-term capital gains for the year. Long-term capital gains are composed of success fees, prepayment fees and gains from the sale of securities held from one year or more. The Company intends to retain long-term capital gains from the sale of securities, if any, and not pay them out as dividends, however, the Board of Directors may decide to declare and pay out capital gains during any fiscal year.  If the Company decides to retain long-term capital gains, the portion of the retained capital gains will be subject to 35% tax.  The Company currently pays a monthly dividend.  The tax characteristics of all dividends will be reported to stockholders on Form 1099 at the end of each calendar year.  The Company’s Board of Directors declared the following monthly dividends for the nine months ended December 31, 2006 and the period June 22, 2005 (commencement of operations) to December 31, 2005:

 

Fiscal Year 2007

 

Declaration Date

 

Record Date

 

Payment Date

 

Dividend per Share

 

October 10, 2006

 

December 20, 2006

 

December 29, 2006

 

$

0.07

 

October 10, 2006

 

November 21, 2006

 

November 30, 2006

 

$

0.07

 

October 10, 2006

 

October 23, 2006

 

October 31, 2006

 

$

0.07

 

July 11, 2006

 

September 21, 2006

 

September 29, 2006

 

$

0.07

 

July 11, 2006

 

August 21, 2006

 

August 31, 2006

 

$

0.07

 

July 11, 2006

 

July 19, 2006

 

July 31, 2006

 

$

0.07

 

April 11, 2006

 

June 22, 2006

 

June 30, 2006

 

$

0.07

 

April 11, 2006

 

May 22, 2006

 

May 31, 2006

 

$

0.07

 

April 11, 2006

 

April 20, 2006

 

April 28, 2006

 

$

0.07

 

 

Fiscal Year 2006

Declaration Date

 

Record Date

 

Payment Date

 

Dividend per Share

 

October 7, 2005

 

December 21, 2005

 

December 31, 2005

 

$

0.04

 

October 7, 2005

 

November 21, 2005

 

November 31, 2005

 

$