##### 



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 þ
    
    Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
 For the Quarter Ended March 31, 2006
 o
    
    Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
 Commission File Number: 0-51459
 PATRIOT CAPITAL FUNDING, INC.
  Delaware
(State or other jurisdiction of
incorporation or organization)
    
    74-3068511
(I.R.S. Employer
Identification No.)274 Riverside AvenueWestport, CT
    
    06880(Address of principal executive office)
    
    (Zip Code)
 (203) 429-2700
 þ o
  Large Accelerated Filer o
    
    Accelerated Filer o
    
    Non-Accelerated Filer þ
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##### 



PATRIOT CAPITAL FUNDING, INC.
 FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2006
 TABLE OF CONTENTS
 PART I
    
    FINANCIAL INFORMATION
    
    
    1Item 1.
    
    Financial Statements (unaudited)
    
    
    1Consolidated Balance Sheets for March 31, 2006 and December 31, 2005
    
    
    1Consolidated Statements of Operations for the three months ended March 31, 2006 and 2005
    
    
    2Consolidated Statement of Stockholders Equity for the three months ended March 31, 2006
    
    
    3Consolidated Statements of Cash Flows for the three months ended March 31, 2006 and 2005
    
    
    4Consolidated Schedule of Investments as of March 31, 2006
    
    
    5Consolidated Schedule of Investments as of December 31, 2005
    
    
    8Notes to Consolidated Financial Statements
    
    
    10Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    16Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    26Item 4.
    
    Controls and Procedures
    
    
    26PART II
    
    OTHER INFORMATION
    
    
    27Item 1.
    
    Legal Proceedings
    
    
    27Item 1A.
    
    Risk Factors
    
    
    27Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    27Item 3.
    
    Defaults upon Senior Securities
    
    
    27Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    27Item 5.
    
    Other Information
    
    
    27Item 6.
    
    Exhibits
    
    
    27Signatures
    
    
    28




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##### 



PART I. FINANCIAL INFORMATION
 Item 1. Financial Statements
 Patriot Capital Funding, Inc.
 Consolidated Balance Sheets
 (unaudited)
 March 31,
    
    December 31,2006
    
    2005ASSETSInvestments at fair value:Investments in debt securities
(cost of $179,983,176  2006,
$144,154,600  2005)
    
    $
    175,474,230
    
    
    $
    140,395,654Investments
in equity securities (cost of $1,403,883  2006,
$1,077,550  2005)
    
    
    1,267,300
    
    
    
    995,300Unearned income
    
    
    (3,099,617
    )
    
    
    (3,439,295
    )Total investments
    
    
    173,641,913
    
    
    
    137,951,659Cash and cash equivalents
    
    
    4,206,230
    
    
    
    2,371,841Restricted cash
    
    
    3,250,550
    
    
    
    7,806,328Interest receivable
    
    
    1,209,318
    
    
    
    867,475Other assets
    
    
    1,566,500
    
    
    
    1,658,690TOTAL ASSETS
    
    $
    183,874,511
    
    
    $
    150,655,993LIABILITIES AND STOCKHOLDERS EQUITYLIABILITIESBorrowings
    
    $
    52,400,000
    
    
    $
    21,650,000Interest payable
    
    
    385,018
    
    
    
    60,334Dividends payable
    
    
    3,519,630
    
    
    
    Accounts payable, accrued expenses and other
    
    
    885,118
    
    
    
    1,793,294TOTAL LIABILITIES
    
    
    57,189,766
    
    
    
    23,503,628STOCKHOLDERS EQUITYCommon stock, $.01 par value, 49,000,000 shares authorized;
12,136,655 shares issued and outstanding at
March 31, 2006, and December 31, 2005
    
    
    121,367
    
    
    
    121,367Paid-in capital
    
    
    136,365,164
    
    
    
    136,267,552Accumulated net investment loss
    
    
    (1,722,157
    )
    
    
    (1,912,061
    )Distributions
in excess of net investment income
    
    
    (3,483,297
    )
    
    
    (3,483,297
    )Accumulated other comprehensive income
    
    
    49,197
    
    
    
    Net unrealized depreciation on investments
    
    
    (4,645,529
    )
    
    
    (3,841,196
    )TOTAL STOCKHOLDERS EQUITY
    
    
    126,684,745
    
    
    
    127,152,365TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    183,874,511
    
    
    $
    150,655,993NET ASSET VALUE PER COMMON SHARE
    
    $
    10.44
    
    
    $
    10.48
  1




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##### 



Patriot Capital Funding, Inc.
Consolidated Statements of Operations
(unaudited)
 Three Months EndedMarch 31,2006
    
    2005INVESTMENT INCOMEInterest and dividend income
    
    $
    5,439,771
    
    
    $
    2,307,237Fees
    
    
    70,068
    
    
    
    31,000Other investment income
    
    
    713,449
    
    
    
    Total Investment Income
    
    
    6,223,288
    
    
    
    2,338,237EXPENSESCompensation expense
    
    
    868,747
    
    
    
    428,350Consulting fees
    
    
    
    
    
    
    250,000Interest
    
    
    969,131
    
    
    
    1,052,340Professional fees
    
    
    200,069
    
    
    
    69,313General and administrative
    
    
    475,807
    
    
    
    267,466Total Expenses
    
    
    2,513,754
    
    
    
    2,067,469Net Investment Income
    
    
    3,709,534
    
    
    
    270,768Net unrealized appreciation (depreciation) on investments
    
    
    (804,333
    )
    
    
    850,461NET INCOME
    
    $
    2,905,201
    
    
    $
    1,121,229Earnings per share, basic and diluted
    
    $
    0.24
    
    
    $
    0.29Weighted average shares outstanding, basic and diluted
    
    
    12,136,655
    
    
    
    3,847,902
  2




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##### 



Patriot Capital Funding, Inc.
Consolidated Statement of Stockholders Equity
(unaudited)
 Accumulated
    
    
    
    
    
    
    
    
    
    
    NetNet
    
    
    Distributions
    
    
    Accumulated
    
    
    UnrealizedInvestment
    
    
    in Excess of
    
    
    Other
    
    
    Appreciation
    
    
    TotalComprehensive
    
    
    Common
    
    
    Paid-in
    
    
    Income
    
    
    Net Investment
    
    
    Comprehensive
    
    
    (Depreciation)
    
    
    StockholdersIncome
    
    
    Stock
    
    
    Capital
    
    
    (Loss)
    
    
    Income
    
    
    Income
    
    
    on Investments
    
    
    EquityBalance, December 31, 2005
    
    $
    
    
    
    $
    121,367
    
    
    $
    136,267,552
    
    
    $
    (1,912,061
    )
    
    
$(3,483,297
    )
    
    $
    
    
    
    
    $(3,841,196
    )
    
    $
    127,152,365Unrealized gain on
interest rate swap
    
    
    49,197
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    49,197
    
    
    
    
    
    
    
    49,197Stock option compensation
    
    
    
    
    
    
    
    
    
    
    97,612
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    97,612Distributions declared
($0.29 per common share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,519,630
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,519,630
    )Net income
    
    
    3,709,534
    
    
    
    
    
    
    
    
    
    
    
    3,709,534
    
    
    
    
    
    
    
    
    
    
    
    (804,333
    )
    
    
    2,905,201Comprehensive Income
    
    $
    3,758,731Balance, March 31, 2006
    
    
    
    
    
    $
    121,367
    
    
    $
    136,365,164
    
    
    $
    (1,722,157
    )
    
    
    $(3,483,297
    )
    
    $
    49,197
    
    
    
    $(4,645,529
    )
    
    $
    126,684,745
  3




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##### 



Patriot Capital Funding, Inc.
Consolidated Statements of Cash Flows
(unaudited)
 Three Months EndedMarch 31,2006
    
    2005CASH FLOWS FROM OPERATING ACTIVITIES:Net income
    
    $
    2,905,201
    
    
    $
    1,121,229Adjustments to reconcile net income to net cash provided
by (used for) operating activities:Depreciation and amortization
    
    
    117,385
    
    
    
    5,748Change in interest receivable
    
    
    (341,843
    )
    
    
    (9,262
    )Change in unrealized depreciation on investments
    
    
    804,333
    
    
    
    (850,461
    )Payment-in-kind interest
    
    
    (551,977
    )
    
    
    (373,961
    )Stock based compensation expense
    
    
    97,612
    
    
    
    Change in unearned income
    
    
    (339,678
    )
    
    
    1,421Change in interest payable
    
    
    324,684
    
    
    
    120,827Change in management fee payable
    
    
    
    
    
    
    250,000Change in other assets
    
    
    6,573
    
    
    
    (119,301
    )Change in
accounts payable, accrued expenses and other
    
    
    (908,176
    )
    
    
    9,314Net cash provided by operating activities
    
    
    2,114,114
    
    
    
    155,554CASH FLOWS FROM INVESTING ACTIVITIES:Funded investments
    
    
    (51,497,394
    )
    
    
    (4,900,000
    )Principal repayments on investments
    
    
    15,894,462
    
    
    
    927,500Purchase of furniture and equipment
    
    
    (29,966
    )
    
    
    Net cash used for investing activities
    
    
    (35,632,898
    )
    
    
    (3,972,500
    )CASH FLOWS FROM FINANCING ACTIVITIES:Borrowings
    
    
    109,300,000
    
    
    
    4,900,000Repayments on borrowings
    
    
    (78,550,000
    )
    
    
    (2,320,833
    )Deferred offering costs
    
    
    47,395
    
    
    
    Net decrease in restricted cash
    
    
    4,555,778
    
    
    
    Net cash provided by financing activities
    
    
    35,353,173
    
    
    
    2,579,167NET
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS
    
    
    1,834,389
    
    
    
    (1,237,779
    )CASH AND CASH EQUIVALENTS AT:Beginning of Period
    
    
    2,371,841
    
    
    
    2,491,477End of Period
    
    $
    4,206,230
    
    
    $
    1,253,698Supplemental information:Interest paid
    
    $
    644,448
    
    
    $
    931,513
  4




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##### 



Patriot Capital Funding, Inc.
Consolidated Schedule of Investments
(unaudited)
March 31, 2006
 Company(1)
    
    Industry
    
    Investment
    
    Principal
    
    Cost
    
    Fair Value(3)Agent Media Corporation
    
    Publisher of insurance
industry periodicals
    
    Senior Secured Term Loan A
(10.7%, Due 9/08)
    
    $
    1,250,000
    
    
    $
    1,250,000
    
    
    $
    1,250,000Senior Secured Term Loan B (2)
(16.0%, Due 9/09)
    
    
    2,130,105
    
    
    
    2,130,105
    
    
    
    2,130,105Common Stock Warrants, Less
than 5% of Co. (4)
    
    
    
    
    
    
    31,000
    
    
    
    63,500Allied Defense Group, Inc.
    
    Diversified defense company
    
    Common Stock Warrants, Less
than 5% of Co. (4)
    
    
    
    
    
    
    463,168
    
    
    
    522,400Borga, Inc.
    
    Manufacturer of pre-fabricated metal
building systems
    
    Senior Secured Term Loan A 
(8.1%, Due 3/09)
    
    
    1,846,000
    
    
    
    1,846,000
    
    
    
    1,846,000Senior Secured Term Loan B
(11.1%, Due 5/10)
    
    
    1,829,000
    
    
    
    1,829,000
    
    
    
    1,829,000Senior Secured Term Loan C (2)
(16.0%, Due 5/10)
    
    
    7,260,182
    
    
    
    7,260,182
    
    
    
    7,260,182Common Stock Warrants, Less
than 5% of Co. (4)
    
    
    
    
    
    
    20,250
    
    
    
    84,400Copperhead Chemical
Company, Inc.
    
    Manufacturer of
bulk pharmaceuticals
    

Senior Subordinated Debt (2)
(15.3%, Due 11/10)
    
    
    4,706,644
    
    
    
    4,706,644
    
    
    
    4,706,644Dover Saddlery, Inc.
    
    Equestrian products
catalog retailer
    

Senior Subordinated Debt (2)
(11.5%, Due 9/09)
    
    
    3,000,000
    
    
    
    3,000,000
    
    
    
    3,000,000Common Stock Warrants, Less
than 5% of Co. (4)
    
    
    
    
    
    
    148,200
    
    
    
    157,800Eight OClock Coffee Company
    
    Leading manufacturer, distributor,
and marketer of coffee
    
    Junior Secured Term Loan 
(11.7%, Due 11/12)
    
    
    6,500,000
    
    
    
    6,500,000
    
    
    
    6,500,000Encore Legal Solutions, Inc.
    
    Legal document
management services
    
    Junior Secured Term Loan A 
(11.8%, Due 12/08)
    
    
    4,310,000
    
    
    
    4,310,000
    
    
    
    4,310,000Junior Secured Term Loan B
(10.7%, Due 12/09)
    
    
    6,927,125
    
    
    
    6,927,125
    
    
    
    6,927,125Senior Subordinated Debt (2)
(17.0%, Due 5/10)
    
    
    4,983,818
    
    
    
    4,983,818
    
    
    
    4,983,818Common Stock Warrants, Less
than 5% of Co. (4)
    
    
    
    
    
    
    350,000
    
    
    
    72,600
 5




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##### 



Company(1)
    
    Industry
    
    Investment
    
    Principal
    
    Cost
    
    Fair Value(3)EXL Acquisition Corp.
    

Manufacturer
of lab testing supplies
    
    Revolving Line of Credit 
(9.3%, Due 3/12)
    
    
    47,394
    
    
    
    47,394
    
    
    
    47,394Senior Secured Term Loan A 
(9.8%, Due 3/11)
    
    
    8,000,000
    
    
    
    8,000,000
    
    
    
    8,000,000Senior Secured Term Loan B 
(10.3%, Due 3/12)
    
    
    2,400,000
    
    
    
    2,400,000
    
    
    
    2,400,000Senior Secured Term Loan D (2)
(15.0%, Due 3/12)
    
    
    5,006,667
    
    
    
    5,006,667
    
    
    
    5,006,667Common
Stock  Class A (4)
    
    
    
    
    
    
    2,475
    
    
    
    2,475Common
Stock  Class B (4)
    
    
    
    
    
    
    247,525
    
    
    
    247,525Fairchild Industrial Products, Co.
    
    Manufacturer of industrial controls
and power transmission products
    
    Senior Secured Term Loan A
(8.7%, Due 7/10)
    
    
    9,320,000
    
    
    
    9,320,000
    
    
    
    9,320,000Senior Secured Term Loan B
(10.7%, Due 7/11)
    
    
    2,812,500
    
    
    
    2,812,500
    
    
    
    2,812,500Senior Subordinated Debt (2)
(15.5%, Due 7/11)
    
    
    5,361,822
    
    
    
    5,361,822
    
    
    
    5,361,822Impact Products, LLC
    

Distributor
of janitorial supplies
    

Junior Secured Term Loan B
(9.2%, Due 9/12)
    
    
    7,500,000
    
    
    
    7,500,000
    
    
    
    7,500,000Senior
Subordinated Debt (2)
(13.5%, Due 9/12)
    
    
    5,512,130
    
    
    
    5,512,130
    
    
    
    5,512,130Innovative Concepts in
Entertainment, Inc.
    

Manufacturer
of coin operated games
    
    Senior Secured Term Loan A
(8.8%, Due 2/11)
    
    
    6,000,000
    
    
    
    6,000,000
    
    
    
    6,000,000Senior Secured Term Loan B
(9.3%, Due 2/11)
    
    
    3,600,000
    
    
    
    3,600,000
    
    
    
    3,600,000Senior Secured Term Loan C
(13.0%, Due 8/11)
    
    
    3,900,000
    
    
    
    3,900,000
    
    
    
    3,900,000Interstate Highway Sign
Corporation
    
    Manufacturer of
highway and roadway signs
    
    Senior Secured Term Loan
(11.6%, Due 12/09)
    
    
    1,280,000
    
    
    
    1,280,000
    
    
    
    1,280,000Senior Subordinated Debt (2)
(18.0%, Due 12/09)
    
    
    5,895,977
    
    
    
    5,758,946
    
    
    
    1,250,000Common Stock Warrants, Less
than 5% of Co.(4)
    
    
    
    
    
    
    59,932
    
    
    
    Keltner Enterprises, LLC (5)
    
    Manufacturer of automotive
oils, chemicals and parts
    
    Senior Subordinated Debt (2)
(14.0%, Due 12/11)
    
    
    3,850,000
    
    
    
    3,850,000
    
    
    
    3,850,000L.A. Spas, Inc.
    
    Manufacturer of above
ground spas
    
    Senior Subordinated Debt (2)
(15.5%, Due 1/10)
    
    
    6,835,891
    
    
    
    6,835,891
    
    
    
    6,835,891Common Stock Warrants, Less
than 5% of Co.(4)
    
    
    
    
    
    
    5,000
    
    
    
    Prince Mineral Company,
Inc.
    
    Manufacturer of
pigments
    
    Junior Secured Term Loan 
(11.0%, Due 3/11)
    
    
    3,600,000
    
    
    
    3,600,000
    
    
    
    3,600,000Senior Subordinated Debt (2)
(17.0%, Due 9/11)
    
    
    10,330,864
    
    
    
    10,330,864
    
    
    
    10,330,864
 6




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##### 



Company(1)
    
    Industry
    
    Investment
    
    Principal
    
    Cost
    
    Fair Value(3)Quartermaster, Inc.
    

Retailer of uniforms and tactical
equipment to law enforcement and
security professionals
    
    Revolving Line of Credit
(10.0%, Due 12/10)
    
    
    500,000
    
    
    
    500,000
    
    
    
    500,000Senior Secured Term Loan A
(9.2%, Due 12/10)
    
    
    6,000,000
    
    
    
    6,000,000
    
    
    
    6,000,000Senior Secured Term Loan B
(10.4%, Due 12/10)
    
    
    2,600,000
    
    
    
    2,600,000
    
    
    
    2,600,000Senior Secured Term Loan C (2)
(15.0%, Due 12/11)
    
    
    3,127,414
    
    
    
    3,127,414
    
    
    
    3,127,414R-O-M Corporation
    
    Manufacturer of doors, ramps and bulk
heads for fire trucks and food
transportation
    
    Senior Secured Term Loan A
(9.5%, Due 12/09)
    
    
    3,400,000
    
    
    
    3,400,000
    
    
    
    3,400,000Senior Secured Term Loan B
(10.5%, Due 12/10)
    
    
    3,400,000
    
    
    
    3,400,000
    
    
    
    3,400,000Senior Subordinated Debt (2)
(16.0%, Due 12/10)
    
    
    7,010,797
    
    
    
    7,010,797
    
    
    
    7,010,797Robert Rothschild Farm, Inc.
    
    Manufacturer of
specialty food products
    
    Senior Secured Term Loan B
(8.8%, Due 7/10)
    
    
    5,000,000
    
    
    
    5,000,000
    
    
    
    5,000,000Senior Subordinated Debt (2)
(16.3%, Due 1/12)
    
    
    4,747,079
    
    
    
    4,747,079
    
    
    
    4,747,079Sidumpr Trailer Company
    
    Manufacturer of
side dump trailers
    
    Senior Secured Term Loan A
(10.3%, Due 1/11)
    
    
    2,800,000
    
    
    
    2,800,000
    
    
    
    2,800,000Senior Secured Term Loan B
(13.3%, Due 1/11)
    
    
    2,350,000
    
    
    
    2,350,000
    
    
    
    2,350,000Senior Secured Term Loan C (2)
(14.0%, Due 7/11)
    
    
    3,113,798
    
    
    
    3,113,798
    
    
    
    3,113,798Senior Subordinated Debt
(12.0%, Due 1/12)
    
    
    75,000
    
    
    
    75,000
    
    
    
    75,000Preferred
Stock (2)
    
    
    76,308
    
    
    
    76,308
    
    
    
    76,308Common
Stock (4)
    
    
    25
    
    
    
    25
    
    
    
    40,292Total Investments
    
    
    
    
    
    
    
    
    
    
    181,387,059
    
    
    
    176,741,530Unearned Income
    
    
    
    
    
    
    
    
    
    
    (3,099,617
    )
    
    
    (3,099,617
    )Total Investments Net of
Unearned Income
    
    
    
    
    
    
    
    
    
    $
    178,287,442
    
    
    $
    173,641,913
 
 (1)
    
    The Company does not control, and is not an affiliate of, any of our portfolio companies, each as defined in the Investment Company Act of 1940, as
amended (the 1940 Act). In general, under the 1940 Act, the Company would control a portfolio company if the Company owned 25% or more of its voting
securities and would be an affiliate of a portfolio company if the Company owned 5% or more of its voting securities.(2)
    
    Principal amount includes payment-in-kind (PIK) interest.(3)
    
    Fair value is determined in good faith by our board of directors.(4)
    
    Non-income producing.(5)
    
    Some of the investments listed are issued by an affiliate of the listed portfolio company.  7




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##### 



PATRIOT CAPITAL FUNDING, INC.
Consolidated Schedule of Investments
December 31, 2005
 Company(1)
    
    Industry
    
    Investment
    
    Principal
    
    
    Cost
    
    
    Fair Value(3)Agent Media Corporation
    
Publisher of insurance
industry periodicals
    
Senior Secured Term Loan A
(11.8%, Due 9/08)
    
    $
    1,375,000
    
    
    $
    1,375,000
    
    
    $
    1,375,000Senior
Secured Term Loan B (2)
(16.0%, Due 9/09)
    
    
    2,109,015
    
    
    
    2,109,015
    
    
    
    2,109,015Common Stock Warrants, Less
than
5% of Co.(4)
    
    
    
    
    
    
    31,000
    
    
    
    49,900Allied Defense Group, Inc.
    
    Diversified defense company
    
Senior Secured Term Loan 
(11.5%, Due 11/10)
    
    
    14,000,000
    
    
    
    14,000,000
    
    
    
    14,000,000Common Stock Warrants, Less
than
5% of Co.(4)
    
    
    
    
    
    
    463,168
    
    
    
    573,800Borga, Inc.
    
Manufacturer of pre-fabricated
metal building systems
    
Senior Secured Term Loan A 
(7.7%, Due 3/09)
    
    
    2,046,000
    
    
    
    2,046,000
    
    
    
    2,046,000Senior Secured Term Loan B 
(10.7%, Due 5/10)
    
    
    1,835,250
    
    
    
    1,835,250
    
    
    
    1,835,250Senior Secured Term Loan C
(2)
(16.0%, Due 5/10)
    
    
    7,188,062
    
    
    
    7,188,062
    
    
    
    7,188,062Common Stock Warrants, Less
than
5% of Co.(4)
    
    
    
    
    
    
    20,250
    
    
    
    89,600Copperhead Chemical
Company, Inc.
    
Manufacturer of
bulk pharmaceuticals
    
Senior Subordinated Debt (2)
(15.3%, Due 11/10)
    
    
    4,668,608
    
    
    
    4,668,608
    
    
    
    4,668,608Dover Saddlery, Inc.
    
Equestrian products
catalog retailer
    
Senior Subordinated Debt (2)
(11.5%, Due 9/09)
    
    
    3,000,000
    
    
    
    3,000,000
    
    
    
    3,000,000Common Stock Warrants, Less
than
5% of Co.(4)
    
    
    
    
    
    
    148,200
    
    
    
    178,600Eight OClock Coffee Company
    
Leading manufacturer, distributor,
and marketer of coffee
    
Junior Secured Term Loan 
(11.4%, Due 11/12)
    
    
    6,500,000
    
    
    
    6,500,000
    
    
    
    6,500,000Encore Legal Solutions, Inc.
    
Legal document
management services
    
Junior Secured Term Loan A
(9.8%, Due 12/08)
    
    
    4,660,000
    
    
    
    4,660,000
    
    
    
    4,660,000Junior Secured Term Loan B
(8.3%, Due 12/09)
    
    
    6,944,625
    
    
    
    6,944,625
    
    
    
    6,944,625Senior Subordinated Debt (2)
(15.0%, Due 5/10)
    
    
    4,946,718
    
    
    
    4,946,718
    
    
    
    4,946,718Common Stock Warrants, Less
than
5% of Co. (4)
    
    
    
    
    
    
    350,000
    
    
    
    103,400Fairchild Industrial Products, Co.
    
Manufacturer of industrial controls
and power transmission products
    
Senior Secured Term Loan A
(8.0%, Due 7/10)
    
    
    9,670,000
    
    
    
    9,670,000
    
    
    
    9,670,000Senior Secured Term Loan B
(10.0%, Due 7/11)
    
    
    2,818,750
    
    
    
    2,818,750
    
    
    
    2,818,750Senior Subordinated Debt
(15.5%, Due 7/11)
    
    
    5,355,000
    
    
    
    5,355,000
    
    
    
    5,355,000
 8




---



##### 



Company(1)
    
    Industry
    
    Investment
    
    Principal
    
    
    Cost
    
    
    Fair Value(3)Interstate Highway Sign
Corporation
    
    Manufacturer of
highway and roadway
signs
    
    Senior Secured Term Loan
(10.5%, Due 12/09)
    
    
    1,360,000
    
    
    
    1,360,000
    
    
    
    1,360,000Senior Subordinated Debt (2)
(18.0%, Due 12/09)
    
    
    5,837,409
    
    
    
    5,758,946
    
    
    
    2,000,000Common Stock Warrants, Less
than
5% of Co.(4)
    
    
    
    
    
    
    59,932
    
    
    
    Keltner Enterprises, LLC (5)
    
    Manufacturer of automotive
oils, chemicals and parts
    
    Senior Subordinated Debt (2)
(14.0%, Due 12/11)
    
    
    3,850,000
    
    
    
    3,850,000
    
    
    
    3,850,000L.A. Spas, Inc.
    
    Manufacturer of above
ground spas
    
    Senior Subordinated Debt (2)
(15.5%, Due 1/10)
    
    
    6,776,424
    
    
    
    6,776,424
    
    
    
    6,776,424Common Stock Warrants, Less
than
5% of Co. (4)
    
    
    
    
    
    
    5,000
    
    
    
    Prince Mineral Company,
Inc.
    
    Manufacturer of
pigments
    
    Junior Secured Term Loan 
(11.0%, Due 3/11)
    
    
    3,600,000
    
    
    
    3,600,000
    
    
    
    3,600,000Senior Subordinated Debt (2)
(17.0%, Due 9/11)
    
    
    10,228,579
    
    
    
    10,228,579
    
    
    
    10,228,579Quartermaster, Inc.
    
    Retailer of uniforms and tactical
equipment to law enforcement and
security professionals
    
    Revolving Line of Credit
(9.5%, Due 12/10)
    
    
    250,000
    
    
    
    250,000
    
    
    
    250,000Senior Secured Term Loan A
(9.2%, Due 12/10)
    
    
    6,000,000
    
    
    
    6,000,000
    
    
    
    6,000,000Senior Secured Term Loan B
(10.4%, Due 12/10)
    
    
    2,600,000
    
    
    
    2,600,000
    
    
    
    2,600,000Senior Secured Term
Loan C (2) 
(15.0%, Due 12/11)
    
    
    3,104,133
    
    
    
    3,104,133
    
    
    
    3,104,133Robert Rothschild Farm, Inc.
    
    Manufacturer of
specialty food products
    
    Senior Secured Term Loan B
(8.5%, Due 7/10)
    
    
    5,000,000
    
    
    
    5,000,000
    
    
    
    5,000,000Senior Subordinated Debt (2)
(16.3%, Due 1/12)
    
    
    4,697,171
    
    
    
    4,697,171
    
    
    
    4,697,171R-O-M Corporation
    
    Manufacturer of doors,
ramps and bulk heads for fire trucks
and food transportation
    
    Senior Secured Term Loan A
(8.8%, Due 12/09)
    
    
    3,400,000
    
    
    
    3,400,000
    
    
    
    3,400,000Senior Secured Term Loan B
(9.8%, Due 12/10)
    
    
    3,400,000
    
    
    
    3,400,000
    
    
    
    3,400,000Senior Subordinated Debt (2)
(16.0%, Due 12/10)
    
    
    7,012,319
    
    
    
    7,012,319
    
    
    
    7,012,319Total Investments
    
    
    
    
    
    
    
    
    
    
    145,232,150
    
    
    
    141,390,954Unearned Income
    
    
    
    
    
    
    
    
    
    
    (3,439,295
    )
    
    
    (3,439,295
    )Total Investments Net of Unearned
Income
    
    
    
    
    
    
    
    
    
    $
    141,792,855
    
    
    $
    137,951,659
 
 (1)
    
    The Company does not control, and is not an affiliate of, any of our portfolio
companies, each as defined in the Investment Company Act of 1940, as amended (the 1940
Act). In general, under the 1940 Act, the Company would control a portfolio company if
the Company owned 25% or more of its voting securities and would be an affiliate of a
portfolio company if the Company owned 5% or more of its voting securities.(2)
    
    Principal amount includes payment-in-kind (PIK) interest.(3)
    
    Fair value is determined in good faith by the Companys board of directors.(4)
    
    Non-income producing.(5)
    
    Some of the investments listed are issued by an affiliate of the listed portfolio company.  9




---



##### 



Patriot Capital Funding, Inc.
Notes to Consolidated Financial Statements
(unaudited)
  Description of Business
   Basis of Presentation
    Interest, Dividends, Fees, and Other Investment Income
  Dividends Paid
    As Reported
    
    
    Reclassification
    
    
    As ReclassifiedAccumulated net investment loss
    
    $
    (5,395,358
    )
    
    $
    3,483,297
    
    
    $
    (1,912,061
    )Distributions in excess of net
investment income
    
    
    
    
    
    
    (3,483,297
    )
    
    
    (3,483,297
    )
 10




---



##### 



March 31, 2006
    
    
    December 31, 2005Cost
    
    
    Fair Value
    
    
    Cost
    
    
    Fair ValueCommercial loans
    
    $
    179,983,176
    
    
    $
    175,474,230
    
    
    $
    144,154,600
    
    
    $
    140,395,654Investments in equity securities
    
    
    1,403,883
    
    
    
    1,267,300
    
    
    
    1,077,550
    
    
    
    995,300Subtotal
    
    
    181,387,059
    
    
    
    176,741,530
    
    
    
    145,232,150
    
    
    
    141,390,954Unearned income
    
    
    (3,099,617
    )
    
    
    (3,099,617
    )
    
    
    (3,439,295
    )
    
    
    (3,439,295
    )Total
    
    $
    178,287,442
    
    
    $
    173,641,913
    
    
    $
    141,792,855
    
    
    $
    137,951,659
    March 31, 2006
    
    
    December 31, 2005Cost
    
    
    % (1)
    
    
    Fair Value
    
    
    % (1)
    
    
    Cost
    
    
    % (1)
    
    
    Fair Value
    
    
    % (1)Senior Secured Debt
    
    $
    85,845,646
    
    
    
    47.3
    
    
    $
    85,845,646
    
    
    
    48.6
    %
    
    $
    63,052,077
    
    
    
    43.4
    %
    
    $
    63,052,077
    
    
    
    44.6
    %Junior Secured Debt
    
    
    28,837,125
    
    
    
    15.9
    
    
    
    28,837,125
    
    
    
    16.3
    
    
    
    21,704,625
    
    
    
    15.0
    
    
    
    21,704,625
    
    
    
    15.3Subordinated Debt
    
    
    65,300,405
    
    
    
    36.0
    
    
    
    60,791,459
    
    
    
    34.4
    
    
    
    59,397,898
    
    
    
    40.9
    
    
    
    55,638,952
    
    
    
    39.4Warrants / Equity
    
    
    1,403,883
    
    
    
    0.8
    
    
    
    1,267,300
    
    
    
    0.7
    
    
    
    1,077,550
    
    
    
    0.7
    
    
    
    995,300
    
    
    
    0.7Total
    
    $
    181,387,059
    
    
    
    100.0
    %
    
    $
    176,741,530
    
    
    
    100.0
    %
    
    $
    145,232,150
    
    
    
    100.0
    %
    
    $
    141,390,954
    
    
    
    100.0
    %
 
 (1)
    
    Represents percentage of total portfolio.  March 31, 2006
    
    
    December 31, 2005Cost
    
    
    % (1)
    
    
    Fair Value
    
    
    % (1)
    
    
    Cost
    
    
    % (1)
    
    
    Fair Value
    
    
    % (1)Manufacturing
    
    $
    112,116,129
    
    
    
    61.8
    %
    
    $
    107,651,668
    
    
    
    60.9
    %
    
    $
    74,921,696
    
    
    
    51.6
    %
    
    $
    71,172,168
    
    
    
    50.3
    %Distribution
    
    
    16,862,130
    
    
    
    9.3
    
    
    
    16,862,130
    
    
    
    9.5
    
    
    
    3,850,000
    
    
    
    2.6
    
    
    
    3,850,000
    
    
    
    2.7Service
    
    
    16,570,943
    
    
    
    9.1
    
    
    
    16,293,543
    
    
    
    9.2
    
    
    
    16,901,343
    
    
    
    11.6
    
    
    
    16,654,743
    
    
    
    11.8Consumer / Retail Goods
    
    
    31,963,584
    
    
    
    17.6
    
    
    
    31,968,184
    
    
    
    18.1
    
    
    
    31,580,928
    
    
    
    21.8
    
    
    
    31,606,328
    
    
    
    22.4Publishing
    
    
    3,411,105
    
    
    
    1.9
    
    
    
    3,443,605
    
    
    
    2.0
    
    
    
    3,515,015
    
    
    
    2.4
    
    
    
    3,533,915
    
    
    
    2.5Defense
    
    
    463,168
    
    
    
    0.3
    
    
    
    522,400
    
    
    
    0.3
    
    
    
    14,463,168
    
    
    
    10.0
    
    
    
    14,573,800
    
    
    
    10.3Total
    
    $
    181,387,059
    
    
    
    100.0
    %
    
    $
    176,741,530
    
    
    
    100.0
    %
    
    $
    145,232,150
    
    
    
    100.0
    %
    
    $
    141,390,954
    
    
    
    100.0
    %
 
 (1)
    
    Represents percentage of total portfolio.    11




---



##### 



Accounting for Stock Issued to
Employees.
    12




---



##### 



Three Months Ended March 31,2006
    
    2005Net income
    
    $
    2,905,201
    
    
    $
    1,121,229Weighted average common shares outstanding, basic and diluted
    
    
    12,136,655
    
    
    
    3,847,902Earnings per common share, basic and diluted
    
    $
    0.24
    
    
    $
    0.29
               13




---



##### 



January 1, 2006 to
    
    
    August 1, 2005 toMarch 31, 2006
    
    
    March 31, 2006GAAP Net
Investment Income
    
    $
    3,709,534
    
    
    $
    3,686,653Tax timing
differences of:Origination
fees
    
    
    (221,799
    )
    
    
    587,842Stock
compensation expense and bonus accruals
    
    
    378,635
    
    
    
    173,854Tax
Distributable Income
    
    $
    3,866,370
    
    
    $
    4,448,349
   For the Three Months EndedMarch 31,Per Share Data:
    
    2006
    
    
    2005Net asset value at beginning of period
    
    $
    10.48
    
    
    $
    7.10Net investment income (loss)
    
    
    .31
    
    
    
    .07Net change in unrealized depreciation
on investments
    
    
    (.07
    )
    
    
    .22Distributions from net investment income
    
    
    (.29
    )
    
    
    Stock based compensation expense
    
    
    .01
    
    
    
    Net asset value at end of period
    
    $
    10.44
    
    
    $
    7.39Total Net Asset Value Return (1)
    
    
    5.1
    %
    
    
    4.1
    %Per share market value, December 31, 2005
    
    $
    12.20Per share market value, March 31, 2006
    
    $
    12.50
 14




---



##### 



For the Three Months EndedMarch 31,Per Share Data:
    
    2006
    
    
    2005Total Market Value Return (2)
    
    
    4.8
    %
    
    
    Shares outstanding at end of period
    
    
    12,136,655
    
    
    
    3,847,902Ratios and Supplemental Data:Net assets at end of period
    
    $
    126,684,745
    
    
    $
    28,433,147Average net assets
    
    
    127,884,666
    
    
    
    27,872,533Ratio of operating expenses to average
net assets (annualized)
    
    
    7.9
    %
    
    
    29.7
    %Ratio of net investment income (loss) to
average net assets (annualized)
    
    
    11.6
    %
    
    
    3.9
    %Average borrowings outstanding
    
    $
    50,355,556
    
    
    $
    41,138,884Average amount of borrowings per
share
    
    $
    4.15
    
    
    $
    10.69
 
 (1)
    
    The total net asset value return (not annualized) reflects the change in net asset
value of a share of stock. On July 27, 2005, the Company merged Patriot and Wilton, and
effected a stock split. As a result, the Companys financial statements reflect 3,847,902
shares issued and outstanding for the periods prior to the merger. On August 2, 2005, the
Company closed its initial public offering of 7,190,477 shares of common stock and on
August 15, 2005, the underwriters exercised their option to purchase an additional
1,078,572 shares of common stock.(2)
    
    The total market value return (not annualized) reflects the change in the ending market
value per share plus dividends, divided by the beginning market value per share.     15




---



##### 



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
   
    
    Our future operating results;
    
    Our business prospects and the prospects of our portfolio companies;
    
    The impact of the investments that we expect to make;
    
    The ability of our portfolio companies to achieve their objectives;
    
    Our expected financings and investments;
    
    The adequacy of our cash resources and working capital; and
    
    The timing of cash flows, if any, from the operations of our portfolio companies.
  
    
    changes in the economy;
    
    risks associated with possible disruption in our operations or the economy generally due to terrorism; and
    
    future changes in laws or regulations and conditions in our operating areas.
  Overview
   16




---



##### 



Portfolio Composition
   March 31, 2006
    
    
    December 31, 2005Beginning portfolio at fair value
    
    $
    141,390,954
    
    
    $
    67,677,751Originations/draws/purchases
    
    
    51,172,394
    
    
    
    88,850,000Investments in equity securities
    
    
    325,000
    
    
    
    575,490Investment pay-downs
    
    
    (15,894,462
    )
    
    
    (14,572,867
    )Increase in payment-in-kind interest
    
    
    551,977
    
    
    
    1,825,755Decrease in fair value of investments
    
    
    (804,333
    )
    
    
    (2,965,175
    )Ending portfolio at fair value
    
    $
    176,741,530
    
    
    $
    141,390,954
  March 31, 2006
    
    
    December 31, 2005Investments at
    
    
    Percentage of
    
    
    Investments at
    
    
    Percentage ofFair Value
    
    
    Total Portfolio
    
    
    Fair Value
    
    
    Total PortfolioSenior secured revolving lines of credit
    
    $
    547,394
    
    
    
    0.3
    %
    
    $
    250,000
    
    
    
    0.2
    %Senior secured term loans
    
    
    85,298,252
    
    
    
    48.3
    
    
    
    62,802,077
    
    
    
    44.4Junior secured term loans
    
    
    28,837,125
    
    
    
    16.3
    
    
    
    21,704,625
    
    
    
    15.3Senior subordinated debt
    
    
    60,791,459
    
    
    
    34.4
    
    
    
    55,638,952
    
    
    
    39.4Investments in equity securities
    
    
    1,267,300
    
    
    
    0.7
    
    
    
    995,300
    
    
    
    0.7Totals
    
    $
    176,741,530
    
    
    
    100.0
    %
    
    $
    141,390,954
    
    
    
    100.0
    %
  17




---



##### 



March 31, 2006
    
    
    December 31, 2005Cost
    
    
    % (1)
    
    
    Fair Value
    
    
    % (1)
    
    
    Cost
    
    
    % (1)
    
    
    Fair Value
    
    
    % (1)Manufacturing
    
    $
    112,116,129
    
    
    
    61.8
    %
    
    $
    107,651,668
    
    
    
    60.9
    %
    
    $
    74,921,696
    
    
    
    51.6
    %
    
    $
    71,172,168
    
    
    
    50.3
    %Distribution
    
    
    16,862,130
    
    
    
    9.3
    
    
    
    16,862,130
    
    
    
    9.5
    
    
    
    3,850,000
    
    
    
    2.6
    
    
    
    3,850,000
    
    
    
    2.7Service
    
    
    16,570,943
    
    
    
    9.1
    
    
    
    16,293,543
    
    
    
    9.2
    
    
    
    16,901,343
    
    
    
    11.6
    
    
    
    16,654,743
    
    
    
    11.8Consumer / Retail Goods
    
    
    31,963,584
    
    
    
    17.6
    
    
    
    31,968,184
    
    
    
    18.1
    
    
    
    31,580,928
    
    
    
    21.8
    
    
    
    31,606,328
    
    
    
    22.4Publishing
    
    
    3,411,105
    
    
    
    1.9
    
    
    
    3,443,605
    
    
    
    2.0
    
    
    
    3,515,015
    
    
    
    2.4
    
    
    
    3,533,915
    
    
    
    2.5Defense
    
    
    463,168
    
    
    
    0.3
    
    
    
    522,400
    
    
    
    0.3
    
    
    
    14,463,168
    
    
    
    10.0
    
    
    
    14,573,800
    
    
    
    10.3Total
    
    $
    181,387,059
    
    
    
    100.0
    %
    
    $
    176,741,530
    
    
    
    100.0
    %
    
    $
    145,232,150
    
    
    
    100.0
    %
    
    $
    141,390,954
    
    
    
    100.0
    %
 
 (1)
    
    Represents percentage of total portfolio.   Portfolio Asset Quality
   18




---



##### 



March 31, 2006
    
    December 31, 2005Investments at
    
    Percentage of
    
    Investments at
    
    Percentage ofInvestment Rating
    
    Fair Value
    
    Total Portfolio
    
    Fair Value
    
    Total Portfolio1
    
    $
    20,815,287
    
    
    
    11.9
    %
    
    $
    16,069,312
    
    
    
    11.5
    %2
    
    
    129,072,109
    
    
    
    73.5
    
    
    
    102,189,918
    
    
    
    72.83
    
    
    24,336,834
    
    
    
    13.9
    
    
    
    20,136,424
    
    
    
    14.34
    
    
    
    
    
    
    
    
    
    
    2,000,000
    
    
    
    1.45
    
    
    1,250,000
    
    
    
    0.7
    
    
    
    
    
    
    
    Totals
    
    $
175,474,230
    
    

100.0
    %
    
$
140,395,654
    
    
    
    100.0
    %
 Loans and Debt Securities on Non-Accrual Status
  Results of Operations
  Comparison for the three months ended March 31, 2006 and 2005
 Total Investment Income
    Expenses
   19




---



##### 



Realized Gains (Losses) on Sale of Investments
  Net Change in Unrealized Appreciation or Depreciation on Investments
     Net Income
  20




---



##### 



Financial Condition, Liquidity and Capital Resources
 Cash, Cash Equivalents and Restricted Cash
   Liquidity and Capital Resources
      21




---



##### 



Borrowings
 Credit Agreement.
 Revolving Credit Agreement.
 Demand Note.
 Securitization Revolving Credit Facility.
  Regulated Investment Company Status and Dividends
    22




---



##### 



Critical Accounting Policies
  Valuation of Portfolio Investments
        23




---



##### 



Fee Income Recognition
  Payment-in-Kind or PIK Interest
   Three MonthsEndedMarch 31, 2006Beginning PIK balance
    
    $
    2,174,974PIK interest earned during the period
    
    
    551,977PIK payments during the period
    
    
    (109,462
    )Ending PIK balance
    
    $
    2,617,489
  Interest Income Recognition
  24




---



##### 



Off-Balance Sheet Arrangements
   Contractual Obligations
  Related Party Transactions
       Recent Developments
    25




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##### 



Item 3. Quantitative and Qualitative Disclosures about Market Risk
  Item 4. Controls and Procedures
 (a)
    
    As of the end of the period covered by this report, we carried out an evaluation,
under the supervision and with the participation of our management, including our Chief
Executive Officer and our Chief Financial Officer, of the effectiveness of the design and
operation of our disclosure controls and procedures (as defined in Rule 13a-15 of the
Securities Exchange Act of 1934). Based on that evaluation, our Chief Executive Officer and
our Chief Financial Officer have concluded that our current disclosure controls and procedures
are effective in timely alerting them of material information relating to us that is required
to be disclosed by us in the reports we file or submit under the Securities Exchange Act of
1934.
 (b)
    
    There have been no changes in our internal control over financial reporting that occurred
during the quarter ended March 31, 2006 that have materially affected, or are reasonably
likely to materially affect, our internal control over financial reporting.
 26




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##### 



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
 Regulation S-K):
 ExhibitNumber
    
    Description of Document31.1*
    
    Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.31.2*
    
    Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.32.1*
    
    Certification of Chief Executive Officer Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (18 U. S. C. 1350).32.2*
    
    Certification of Chief Financial Officer Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (18 U. S. C. 1350).
 
 *
    
    Submitted herewith. 27




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##### 



SIGNATURES
  PATRIOT CAPITAL FUNDING, INC.By:
    /s/    Richard P. BuckanavageRichard P. BuckanavageChief Executive Officer and PresidentBy:
    /s/     William E. Alvarez, Jr.William E. Alvarez, Jr.Executive Vice President, Chief Financial Officer and Secretary 28