Form 10Q

Large accelerated filer

Accelerated filer

Non-accelerated filer

¨ (Do not check if smaller reporting company)

Smaller reporting company

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 QUARTERLY PERIOD ENDED MARCH 31, 2013

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

FOR THE TRANSITION PERIOD FROM TO

COMMISSION FILE NUMBER: 814-00237

GLADSTONE CAPITAL CORPORATION

(Exact name of registrant as specified in its charter)


MARYLAND		54-2040781
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

1521 WESTBRANCH DRIVE, SUITE 200		22102
MCLEAN, VIRGINIA		(Zip Code)
(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 (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨.

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12 b-2 of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ 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 per share, outstanding as of April 29, 2013 was 21,000,160.

GLADSTONE CAPITAL CORPORATION

TABLE OF CONTENTS


PART I.	FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited)

	Condensed Consolidated Statements of Assets and Liabilities as of March 31, 2013 and September 30, 2012	3
	Condensed Consolidated Statements of Operations for the three and six months ended March 31, 2013 and 2012	4
	Condensed Consolidated Statements of Changes in Net Assets for the six months ended March 31, 2013 and 2012	5
	Condensed Consolidated Statements of Cash Flows for the six months ended March 31, 2013 and 2012	6
	Condensed Consolidated Schedules of Investments as of March 31, 2013 and September 30, 2012	7
	Notes to Condensed Consolidated Financial Statements	13

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	33

	Overview	33

	Results of Operations	37

	Liquidity and Capital Resources	47

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	57

Item 4.	Controls and Procedures	57

PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings	58

Item 1A.	Risk Factors	58

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	58

Item 3.	Defaults Upon Senior Securities	58

Item 4.	Mine Safety Disclosures	58

Item 5.	Other Information	58

Item 6.	Exhibits	58

SIGNATURES		59

GLADSTONE CAPITAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES

(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

(UNAUDITED)


	March 31, 2013			September 30, 2012
ASSETS
Investments at fair value
Non-Control/Non-Affiliate investments (Cost of $241,930 and $268,500, respectively)	$	211,316		$	237,135
Control investments (Cost of $119,360 and $96,521, respectively)		56,164			36,825

Total investments at fair value (Cost of $361,290 and $365,021, respectively)		267,480			273,960
Cash and cash equivalents		8,823			10,155
Restricted cash and cash equivalents		1,237			507
Interest receivable		3,177			2,696
Due from custodian		952			2,177
Deferred financing fees		3,033			2,957
Other assets		727			950

TOTAL ASSETS	$	285,429		$	293,402

LIABILITIES
Borrowings at fair value (Cost of $55,400 and $58,800, respectively)	$	56,951		$	62,451
Mandatorily redeemable preferred stock, $0.001 par value per share, $25 liquidation preference per share; 4,000,000 shares authorized and 1,539,882 shares issued and outstanding at March31, 2013 and September 30, 2012, respectively		38,497			38,497
Accounts payable and accrued expenses		444			475
Interest payable		140			185
Fees due to Adviser^(A)		1,036			1,830
Fee due to Administrator^(A)		187			174
Other liabilities		1,027			1,226

TOTAL LIABILITIES	$	98,282		$	104,838

Commitments and contingencies^(B)
NET ASSETS	$	187,147		$	188,564

ANALYSIS OF NET ASSETS
Common stock, $0.001 par value per share, 46,000,000 shares authorized and 21,000,160 shares issued and outstanding at March 31, 2013 and September 30, 2012, respectively	$	21		$	21
Capital in excess of par value		324,714			324,714
Notes receivable from employees^(A)		(1,224	)		(3,024	)
Cumulative net unrealized depreciation of investments		(93,810	)		(91,061	)
Cumulative net unrealized appreciation of borrowings		(1,551	)		(3,651	)
Overdistributed net investment income		(474	)		(474	)
Accumulated net realized losses		(40,529	)		(37,961	)

TOTAL NET ASSETS	$	187,147		$	188,564

NET ASSET VALUE PER COMMON SHARE AT END OF PERIOD	$	8.91		$	8.98

^(A)	Refer to Note 4—Related Party Transactions for additional information.

^(B)	Refer to Note 10—Commitments and Contingencies for additional information.

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

GLADSTONE CAPITAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

(UNAUDITED)


	Three Months Ended March 31,						Six Months Ended March 31,
	2013			2012			2013			2012
INVESTMENT INCOME
Interest income:
Non-Control/Non-Affiliate investments	$	6,835		$	7,840		$	14,149		$	15,729
Control investments		1,545			1,051			2,357			2,410
Cash and cash equivalents		1			—			2			6
Notes receivable from employees^(A)		43			63			96			130

Total interest income		8,424			8,954			16,604			18,275
Other income:
Non-Control/Non-Affiliate investments		—			2,042			1,648			2,042

Total investment income		8,424			10,996			18,252			20,317

EXPENSES
Base management fee^(A)		1,419			1,538			2,851			3,094
Incentive fee^(A)		953			1,304			2,168			2,339
Administration fee^(A)		187			209			337			404
Interest expense on borrowings		803			999			1,659			2,138
Dividend expense on mandatorily redeemable preferred stock		686			686			1,372			1,120
Amortization of deferred financing fees		329			277			585			734
Professional fees		35			362			293			655
Other general and administrative expenses		241			528			558			773

Expenses before credits from Adviser		4,653			5,903			9,823			11,257
Credits to fees from Adviser^(A)		(639	)		(123	)		(840	)		(574	)

Total expenses net of credits		4,014			5,780			8,983			10,683

NET INVESTMENT INCOME		4,410			5,216			9,269			9,634

NET REALIZED AND UNREALIZED GAIN (LOSS)
Net realized gain (loss):
Non-Control/Non-Affiliate investments		30			37			(611	)		(8,212	)
Control investments		—			—			(2,407	)		—

Total net realized gain (loss)		30			37			(3,018	)		(8,212	)
Net unrealized (depreciation) appreciation:
Non-Control/Non-Affiliate investments		(1,772	)		(3,351	)		(1,858	)		3,267
Control investments		(5,861	)		(3,818	)		(890	)		(8,193	)
Borrowings		430			313			2,100			612

Net unrealized depreciation		(7,203	)		(6,856	)		(648	)		(4,314	)

Net realized and unrealized loss		(7,173	)		(6,819	)		(3,666	)		(12,526	)

NET (DECREASE) INCREASE IN NET ASSETS RESULTING FROM OPERATIONS	$	(2,763	)	$	(1,603	)	$	5,603		$	(2,892	)

NET (DECREASE) INCREASE IN NET ASSETS RESULTING FROM OPERATIONS PER COMMON SHARE:
Basic and Diluted	$	(0.13	)	$	(0.08	)	$	0.27		$	(0.14	)

WEIGHTED AVERAGE SHARES OF COMMON STOCK OUTSTANDING:
Basic and Diluted		21,000,160			21,005,402			21,000,160			21,022,087

^(A)	Refer to Note 4—Related Party Transactions for additional information.

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

GLADSTONE CAPITAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS

(DOLLAR AMOUNTS IN THOUSANDS)

(UNAUDITED)


	Six Months Ended March 31,
	2013			2012
OPERATIONS
Net investment income	$	9,269		$	9,634
Net realized loss on investments		(3,018	)		(8,212	)
Net unrealized depreciation of investments		(2,748	)		(4,926	)
Net unrealized depreciation of borrowings		2,100			612

Net increase (decrease) in net assets resulting from operations		5,603			(2,892	)

DISTRIBUTIONS
Distributions to common stockholders		(8,820	)		(8,830	)

CAPITAL TRANSACTIONS
Stock redemption for repayment of principal on employee notes^(A)		—			(332	)
Repayment of principal on employee notes^(A)		1,800			335

Net increase in net assets from capital transactions		1,800			3

NET DECREASE IN NET ASSETS		(1,417	)		(11,719	)
NET ASSETS, BEGINNING OF PERIOD		188,564			213,721

NET ASSETS, END OF PERIOD	$	187,147		$	202,002

^(A)	Refer to Note 4—Related Party Transactions for additional information.

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

GLADSTONE CAPITAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(DOLLAR AMOUNTS IN THOUSANDS)

(UNAUDITED)


	Six Months Ended March 31,
	2013			2012
CASH FLOWS FROM OPERATING ACTIVITIES
Net increase (decrease) in net assets resulting from operations	$	5,603		$	(2,892	)
Adjustments to reconcile net increase (decrease) in net assets resulting from operations to net cash provided by operating activities:
Purchase of investments		(60,826	)		(29,609	)
Principal repayments on investments		55,007			24,760
Proceeds from sale of investments		5,918			6,459
Increase in investment balance due to paid-in-kind interest		(39	)		—
Net change in premiums, discounts and amortization		526			(119	)
Net realized loss on investments		3,146			8,363
Net unrealized depreciation of investments		2,748			4,926
Net unrealized depreciation of borrowings		(2,100	)		(612	)
Increase in restricted cash and cash equivalents		(730	)		(1,225	)
Amortization of deferred financing fees		585			734
Increase in interest receivable		(481	)		(51	)
Decrease (increase) in due from custodian		1,225			(3,983	)
Decrease in other assets		223			579
Decrease in accounts payable and accrued expenses		(31	)		(18	)
Decrease in interest payable		(45	)		(63	)
(Decrease) increase in fees due to Adviser^(A)		(794	)		303
Increase in fee due to Administrator^(A)		13			17
(Decrease) increase in other liabilities		(199	)		882

Net cash provided by operating activities		9,749			8,451

CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings		51,500			32,900
Repayments on borrowings		(54,900	)		(66,500	)
Proceeds from issuance of mandatorily redeemable preferred stock		—			38,497
Deferred financing fees		(661	)		(3,560	)
Distributions paid to common stockholders		(8,820	)		(8,830	)
Receipt of principal on employee notes		1,800			3

Net cash used in financing activities		(11,081	)		(7,490	)

NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS		(1,332	)		961
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD		10,155			6,732

CASH AND CASH EQUIVALENTS, END OF PERIOD	$	8,823		$	7,693

NON-CASH ACTIVITIES^(B)	$	—		$	332

^(A)	Refer to Note 4—Related Party Transactions for additional information.

^(B)	Redemption of 39,082 shares of common stock to reduce the principal balance of an employee loan by $332. Refer to Note 4—Related Party Transactions for additional information.

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

GLADSTONE CAPITAL CORPORATION

CONDENSED CONSOLIDATED SCHEDULE OF INVESTMENTS

AS OF MARCH 31, 2013

(DOLLAR AMOUNTS IN THOUSANDS)

(UNAUDITED)


Company^(A)	Industry	Investment^(B)	Principal		Cost		Fair Value
NON-CONTROL/NON-AFFILIATE INVESTMENTS:

Non-syndicated Loans:

AG Transportation Holdings, LLC	Cargo Transport	Senior Subordinated Term Debt (13.3%, Due 3/2018) ⁽ ^D⁾	$	13,000	$	12,774	$	13,016
		Member Profit Participation (18% ownership) ⁽ ^F⁾^(G)				1,000		273
		Profit Participation Warrants (7% ownership) ⁽ ^F⁾^(G)				244		—

						14,018		13,289

Allen Edmonds Shoe Corporation	Personal and non-durable consumer products	Senior Subordinated Term Debt (11.3%, Due 12/2015) ⁽ ^D⁾		19,483		19,483		19,580

Allison Publications, LLC	Printing and publishing	Senior Term Debt (10.5% and 2.0% PIK, Due 9/2013) ^(D)		7,353		7,353		7,096

BAS Broadcasting	Broadcasting and entertainment	Senior Term Debt (11.5%, Due 7/2013) ^(D)		7,465		7,465		1,306

Chinese Yellow Pages Company	Printing and publishing	Line of Credit, $102 available (7.3%, Due 11/2013) ^(D)		348		348		216

CMI Acquisition, LLC	Mining, steel, iron and non-precious metals	Senior Subordinated Term Debt (14.0%, Due 12/2016) ^(D)		14,265		14,265		13,480
FedCap Partners, LLC	Private equity fund – aerospace and defense	Class A Membership Units (80 units) ⁽^{G) (J)}				2,000		2,963

Francis Drilling Fluids, Ltd.	Oil and gas	Senior Subordinated Term Debt (12.0%, Due 11/2017) ^(D)		15,000		15,000		14,550
		Preferred Units (999 units)^{(F) (G)}				999		—
		Common Units (999 units) ^{(F) G)}				1		—

						16,000		14,550

GFRC Holdings, LLC	Buildings and real estate	Senior Term Debt (10.5%, Due 12/2013) ^(D)		5,024		5,024		2,010
		Senior Subordinated Term Debt (13.0%, Due 12/2013) ^(D)		6,598		6,598		2,639

						11,622		4,649

Heartland Communications Group	Broadcasting and entertainment	Line of Credit, $0 available (5.0%, Due 3/2014) ^(D)		100		100		45
		Line of Credit, $0 available (10.0%, Due 3/2014) ^(D)		100		100		45
		Senior Term Debt (5.0%, Due 3/2014) ^(D)		4,343		4,342		1,954
		Common Stock Warrants (8.8% ownership) ^(F) (G)				66		—

						4,608		2,044

International Junior Golf Training Acquisition Company	Leisure, amusement, motion pictures and entertainment	Line of Credit, $0 available (11.0%, Due 5/2014) ^(D)		2,250		2,250		1,688
		Senior Term Debt (10.5%, Due 5/2014) ^(D)		461		461		346
		Senior Term Debt (12.5%, Due 5/2014) ^(C) ^(D)		2,500		2,500		1,875

						5,211		3,909

Legend Communications of Wyoming, LLC	Broadcasting and entertainment	Senior Term Debt (12.0%, Due 6/2013) ^(D)		8,390		8,390		2,936

North American Aircraft Services, LLC	Aerospace and defense	Senior Term Debt (7.5%, Due 8/2016) ^(D)		3,763		3,763		3,773
		Senior Subordinated Term Debt (11.8%, Due 8/2016) ^(D)		4,750		4,750		4,762
		Senior Subordinated Term Debt (12.5%, Due 8/2016) ^(D)		2,820		2,820		2,827
		Common Stock Warrants (35,000 shares) ^{(F) (G)}				350		268

						11,683		11,630

Ohana Media Group	Broadcasting and entertainment	Senior Term Debt (10.0%, Due 10/2016)^(D)		1,570		1,570		1,531

POP Radio, LLC	Broadcasting and entertainment	Senior Term Debt (11.8%, Due 5/2017) ^(D)		10,569		10,569		10,648
		Junior Subordinated Term Debt (11.0% PIK, Due 11/2017) ^(D)		500		433		501
		Participation Unit (2.4% ownership) ^(F) ^(G)				75		—

						11,077		11,149

Precision Acquisition Group Holdings, Inc.	Machinery	Equipment Note (13.0%, Due 3/2013) ^(D)		1,000		1,000		835
		Senior Term Debt (13.0%, Due 3/2013) ^(D)		4,125		4,125		3,444
		Senior Term Debt (13.0%, Due 3/2013) ^{(C) (D)}		4,053		4,053		3,384

						9,178		7,663

PROFIT Systems Acquisition Co.	Electronics	Senior Term Debt (10.5%, Due 7/2014) ^{(C) (D)}		2,250		2,250		2,244

GLADSTONE CAPITAL CORPORATION

CONDENSED CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

AS OF MARCH 31, 2013

(DOLLAR AMOUNTS IN THOUSANDS)

(UNAUDITED)


Company^(A)	Industry	Investment^(B)	Principal		Cost		Fair Value
NON-CONTROL/NON-AFFILIATE INVESTMENTS (Continued):
Saunders & Associates	Electronics	Line of Credit, $0 available (11.3%, Due 5/2013) ^(D)	$	917	$	917	$	820
		Senior Term Debt (11.3%, Due 5/2013) ^(D)		8,947		8,947		8,007

						9,864		8,827

Sunburst Media - Louisiana, LLC	Broadcasting and entertainment	Senior Term Debt (10.5%, Due 11/2013) ^(D)		6,000		6,000		2,100

Thibaut Acquisition Co.	Home and office furnishings, housewares	Line of Credit, $550 available (9.0%, Due 1/2014) ^(D)		450		450		452
	and durable consumer products	Senior Term Debt (12.0%, Due 1/2014) ^(C) (D)		2,763		2,763		2,773

						3,213		3,225

Westland Technologies, Inc.	Diversified/conglomerate manufacturing	Senior Term Debt (7.5%, Due 4/2016)^(D)		1,250		1,250		1,236
		Senior Term Debt (12.5%, Due 4/2016) ^(D)		4,000		4,000		3,955
		Common Stock Warrants (77,287 shares) ^{(F) (G)}				350		308

						5,600		5,499

*Subtotal – Non-syndicated loans*					$	171,198	$	139,886

Syndicated Loans:
Allied Security Holdings, LLC	Personal, food and miscellaneous services	Senior Subordinated Term Debt (9.0%, Due 2/2018) ^(E)	$	1,000		$992	$	1,000
Ameriqual Group, LLC	Beverage, food and tobacco	Senior Term Debt (9.0%, Due 3/2016) ^(E)		7,369		7,272		7,221
Applied Systems, Inc.	Insurance	Senior Subordinated Term Debt (9.5%, Due 6/2017) ⁽ ^I⁾		1,000		992		1,000
Ardent Medical Services, Inc.	Healthcare, education and childcare	Senior Subordinated Term Debt (11.0%, Due 1/2019) ^(E ⁾		4,000		3,922		4,080
Ascend Learning, LLC	Healthcare, education and childcare	Senior Subordinated Term Debt (11.5%, Due 12/2017) ^(E)		1,000		977		993
Autoparts Holdings Limited	Automobile	Senior Term Debt (10.5%, Due 1/2018) ^(E)		1,000		996		1,015
First American Payment Systems, L.P.	Finance	Senior Subordinated Term Debt (10.8%, Due 4/2019) ^(E)		4,500		4,467		4,523
John Henry Holdings, Inc.	Containers, packaging and glass	Senior Subordinated Term Debt (10.3%, Due 5/2019) ^(E)		5,000		4,879		5,025
National Surgical Hospitals, Inc.	Healthcare, education and childcare	Senior Term Debt (8.3%, Due 2/2017) ^(E)		1,622		1,599		1,610
PLATO Learning, Inc.	Healthcare, education and childcare	Senior Subordinated Term Debt (11.3%, Due 5/2019) ^(E)		5,000		4,908		4,850
RP Crown Parent, LLC	Diversified/conglomerate service	Senior Subordinated Term Debt (11.3%, Due 12/2019) ^(E ⁾		2,000		1,961		2,080
Sensus USA, Inc.	Electronics	Senior Term Debt (8.5%, Due 5/2018) ^(E)		500		496		500
Springs Window Fashions, LLC	Personal and non-durable consumer products	Senior Term Debt (11.3%, Due 11/2017) ^(E)		7,000		6,864		7,035
SRAM, LLC	Leisure, amusement, motion pictures and entertainment	Senior Term Debt (8.5%, Due 12/2018) ⁽^I⁾		2,500		2,479		2,500
SumTotal Systems, Inc.	Electronics	Senior Subordinated Term Debt (10.3%, Due 5/2019) ^(E)		4,000		3,923		3,970
Targus Group International, Inc.	Textiles and leather	Senior Term Debt (11.0%, Due 5/2016) ^(E)		9,825		9,687		9,727
Vision Solutions, Inc.	Electronics	Senior Term Debt (9.5%, Due 7/2017)^(E)		11,000		10,932		11,000
Wall Street Systems Holdings, Inc.	Electronics	Senior Term Debt (9.3%, Due 10/2020) ^(E)		3,000		2,942		3,045
WP Evenflo Group Holdings, Inc.	Diversified/conglomerate manufacturing	Senior Preferred Equity (333 shares) ^{(F) (G)}				333		256
		Junior Preferred Equity (111 shares) ^{(F) (G)}				111		—
		Common Stock (1,874 shares) ^{(F) (G)}				—		—

						444		256

*Subtotal - Syndicated loans*					$	70,732	$	71,430

Total Non-Control/Non-Affiliate Investments (represented 79.0% of total investments at fair value)					$	241,930	$	211,316

GLADSTONE CAPITAL CORPORATION

CONDENSED CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

AS OF MARCH 31, 2013

(DOLLAR AMOUNTS IN THOUSANDS)

(UNAUDITED)


Company^(A)	Industry	Investment^(B)	Principal		Cost		Fair Value
CONTROL INVESTMENTS:

Defiance Integrated Technologies,	Automobile	Senior Term Debt (11.0%, Due 4/2016) ^{(C) (F)}	$	7,025	$	7,025	$	7,025
Inc.		Common Stock (15,500 shares) ^{(F) (G)}				1		2,521

						7,026		9,546

Kansas Cable Holdings, Inc.	Broadcasting and entertainment	Line of Credit, $9 available (10.0%, Due 3/2013)⁽^H^{) (}^I⁾		1,007		997		147
		Senior Term Debt (10.0%, Due 3/2013) ⁽^H^{) (}^I⁾		1,500		1,444		219
		Senior Term Debt (10.0%, Due 3/2013) ⁽^H^{) (}^I⁾		1,039		1,000		152
		Common Stock (100 shares) ⁽^G^{) (}^I⁾				—		—

						3,441		518

Lindmark Acquisition, LLC	Broadcasting and entertainment	Senior Subordinated Term Debt (11.0%, Due 10/2017) ^(D) ^(H)		10,000		10,000		400
		Senior Subordinated Term Debt (13.0%, Due 10/2017) ^(D) (H)		2,000		2,000		80
		Senior Subordinated Term Debt (13.0%, Due Upon Demand) ^{(D) (H)}		2,290		2,290		92
		Common Stock (100 shares) ^{(F) (G)}				317		—

						14,607		572

LocalTel, LLC	Printing and publishing	Line of credit, $106 available (10.0%, Due 6/2013) ^(F) (H)		2,894		2,894		562
		Line of Credit, $1,830 available (4.7%, Due 6/2013) ^{(F) (H)}		1,170		1,170		—
		Senior Term Debt (12.5%, Due 6/2013) ^(F) (H)		325		325		—
		Senior Term Debt (8.5%, Due 6/2013) ^(F) (H)		2,688		2,688		—
		Senior Term Debt (10.5%, Due 6/2013) ^{(C) (F) (H)}		2,750		2,750		—
		Common Stock Warrants (4,000 shares) ^{(F) (G)}				—		—

						9,827		562

Midwest Metal Distribution, Inc.	Mining, steel, iron and non-precious metals	Senior Subordinated Term Debt (12.0%, Due 7/2013) ^(D)		18,281		18,277		18,007
		Common Stock (501 shares) ^{(F) (G)}				138		—

						18,415		18,007

Reliable Biopharmaceutical Holdings, Inc.	Healthcare, education and childcare	Line of Credit, $0 available (9.0%, Due 6/2014) ⁽ ^F⁾		4,000		4,000		4,000
		Mortgage Note (9.5%, Due 12/2014) ⁽^F⁾		7,020		7,020		7,020
		Senior Term Debt (12.0%, Due 12/2014) ^{(C) (}^F⁾		11,392		11,392		10,090
		Senior Subordinated Term Debt (12.5%, Due 12/2014) ⁽ ^F⁾		6,000		6,000		—
		Preferred Stock (1,999,000 shares) ^(F) (G)				1,999		—
		Common Stock (1,000 shares)^{(F) (G)}				370		—

						30,781		21,110

Sunshine Media Holdings	Printing and publishing	Line of credit, $400 available (4.8%, Due 8/2014) ^(D) (H)		1,600		1,600		319
		Senior Term Debt (4.8%, Due 5/2016) ^(D) (H)		16,948		16,948		3,390
		Senior Term Debt (5.5%, Due 5/2016) ^{(C) (D) (H)}		10,700		10,700		2,140
		Preferred Equity (15,270 shares) ^{(F) (G)}				5,275		—
		Common Stock (1,867 shares) ^{(F) (G)}				740		—
		Common Stock Warrants (72 shares)				—		—

						35,263		5,849


Total Control Investments (represented 21.0% of total investments at fair value)					$	119,360	$	56,164

Total Investments					$	361,290	$	267,480

^(A)	Certain of the securities listed in the above schedule are issued by affiliate(s) of the indicated portfolio company.

^(B)

Percentages represent cash interest rates in effect at March 31, 2013, and due dates represent the contractual maturity date. If applicable, paid-in-kind (“PIK”) interest rates are noted separately from the cash interest rates. Senior debt securities generally take the form of first priority liens on the assets of the underlying businesses.

^(C)	Last Out Tranche (“LOT”) of senior debt, meaning if the portfolio company is liquidated, the holder of the LOT is paid after the senior debt.

^(D)	Fair value was primarily based on opinions of value submitted by Standard & Poor’s Securities Evaluations, Inc.

^(E)	Security valued based on the indicative bid price on or near March 31, 2013, offered by the respective syndication agent’s trading desk or secondary desk.

^(F)	Fair value was primarily based on the total enterprise value of the portfolio company using a liquidity waterfall approach. We also considered discounted cash flow methodologies.

^(G)	Security is non-income producing.

^(H)	Debt security is on non-accrual status.

^(I)	Security was exited, subsequent to March 31, 2013, and was valued based on the payoff.

^(J⁾	There are certain limitations on our ability to transfer our units owned prior to dissolution of the entity, which must occur no later than May 3, 2020.

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

GLADSTONE CAPITAL CORPORATION

CONDENSED CONSOLIDATED SCHEDULE OF INVESTMENTS

SEPTEMBER 30, 2012

(DOLLAR AMOUNTS IN THOUSANDS)


Company^(A)	Industry	Investment^(B)	Principal		Cost		Fair Value
NON-CONTROL/NON-AFFILIATE INVESTMENTS:

Non-syndicated Loans:

Access Television Network, Inc.	Broadcasting and entertainment	Senior Term Debt (14.0%, Due 2/2011) ^(D) (H)	$	903	$	903	$	—
Allison Publications, LLC	Printing and publishing	Senior Term Debt (10.5%, Due 9/2013) ^(D)		7,864		7,864		7,510
BAS Broadcasting	Broadcasting and entertainment	Senior Term Debt (11.5%, Due 7/2013) ^(D)		7,465		7,465		1,866
Chinese Yellow Pages Company	Printing and publishing	Line of Credit, $12 available (7.3%, Due 11/2012) ^(D)		438		438		285
CMI Acquisition, LLC	Mining, steel, iron and non-precious metals	Senior Subordinated Term Debt (14.0%, Due 12/2016) ^(D)		14,265		14,265		13,766
FedCap Partners, LLC	Private equity fund – aerospace and defense	Class A Membership Units (80 units) ^(G) ^(J)				2,000		2,964
Francis Drilling Fluids, Ltd.	Oil and gas	Senior Subordinated Term Debt (12.0%, Due 11/2017) ^(D)		15,000		15,000		14,906
		Preferred Units (999 units)^{(F) (G)}				999		479
		Common Units (999 units) ^{(F) G)}				1		—

						16,000		15,385
GFRC Holdings, LLC	Buildings and real estate	Senior Term Debt (10.5%, Due 12/2013) ^(D)		5,124		5,124		2,587
		Senior Subordinated Term Debt (13.0%, Due 12/2013) ^(D)		6,598		6,598		3,332

						11,722		5,919
Heartland Communications Group	Broadcasting and entertainment	Line of Credit, $0 available (5.0%, Due 3/2013) ^(D)		100		100		40
		Line of Credit, $55 available (10.0%, Due 3/2013) ^(D)		45		45		18
		Senior Term Debt (5.0%, Due 3/2013) ^(D)		4,342		4,333		1,737
		Common Stock Warrants (8.8% ownership) ^(F) (G)				66		—

						4,544		1,795
International Junior Golf Training Acquisition Company	Leisure, amusement, motion pictures and entertainment	Line of Credit, $225 available (11.0%, Due 5/2014) ^(D)		2,025		2,025		1,154
		Senior Term Debt (10.5%, Due 5/2014) ^(D)		461		461		263
		Senior Term Debt (12.5%, Due 5/2014) ^(C) ^(D)		2,500		2,500		1,425

						4,986		2,842
Legend Communications of Wyoming, LLC	Broadcasting and entertainment	Senior Term Debt (12.0%, Due 6/2013) ^(D)		8,661		8,661		4,547
North American Aircraft Services, LLC	Aerospace and defense	Line of Credit, $500 available (6.5%, Due 10/2012) ^(D)		1,500		1,500		1,489
		Senior Term Debt (7.5%, Due 8/2016) ^(D)		4,265		4,265		4,233
		Senior Subordinated Term Debt (11.8%, Due 8/2016) ^(D)		4,750		4,750		4,714
		Senior Subordinated Term Debt (12.5%, Due 8/2016) ^(D)		2,820		2,820		2,799
		Common Stock Warrants (35,000 shares) ^(F) (G)				350		399

						13,685		13,634
Northstar Broadband, LLC	Broadcasting and entertainment	Senior Term Debt (0.7%, Due 12/2012) ^(D)		20		18		20
Ohana Media Group	Broadcasting and entertainment	Senior Term Debt (10.0%, Due 10/2016)^(D)		1,590		1,590		1,463
POP Radio, LLC	Broadcasting and entertainment	Senior Term Debt (11.8%, Due 5/2017) ^(D)		11,500		11,500		11,486
		Junior Subordinated Term Debt (11.0% PIK, Due
		11/2017) ^(D)		500		428		498
		Participation Unit (2.4% ownership) ^(F) ^(G)				75		—

						12,003		11,984
Precision Acquisition Group Holdings, Inc.	Machinery	Equipment Note (13.0%, Due 3/2013) ^(D)		1,000		1,000		830
		Senior Term Debt (13.0%, Due 3/2013) ^(D)		4,125		4,125		3,424
		Senior Term Debt (13.0%, Due 3/2013) ^{(C) (D)}		4,053		4,053		3,364

						9,178		7,618
PROFIT Systems Acquisition Co.	Electronics	Senior Term Debt (10.5%, Due 7/2014) ^{(C) (D)}		2,550		2,550		2,486
Reliable Biopharmaceutical Holdings, Inc.	Healthcare, education and childcare	Line of Credit, $1,100 available (9.0%, Due 1/2013) ^(D)		2,900		2,900		2,690
		Mortgage Note (9.5%, Due 12/2014) ^(D)		7,074		7,074		6,562
		Senior Term Debt (12.0%, Due 12/2014) ^(C) (D)		11,452		11,452		10,622
		Senior Subordinated Term Debt (12.5%, Due 12/2014) ^(D)		6,000		6,000		5,565
		Common Stock Warrants (764 shares)^(F) (G)				209		—

						27,635		25,439

GLADSTONE CAPITAL CORPORATION

CONDENSED CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

AS OF SEPTEMBER 30, 2012

(DOLLAR AMOUNTS IN THOUSANDS)


Company^(A)	Industry	Investment^(B)	Principal		Cost		Fair Value
NON-CONTROL/NON-AFFILIATE INVESTMENTS (Continued):
Saunders & Associates	Electronics	Line of Credit, $0 available (11.3%, Due 5/2013) ^(D)	$	917	$	917	$	807
		Senior Term Debt (11.3%, Due 5/2013) ^(D)		8,947		8,947		7,873

						9,864		8,680

Sunburst Media - Louisiana, LLC	Broadcasting and entertainment	Senior Term Debt (10.5%, Due 11/2013) ^(D)		6,000		6,000		2,250
Thibaut Acquisition Co.	Home and office furnishings, housewares	Line of Credit, $650 available (9.0%, Due 1/2014) ^(D)		350		350		347
	and durable consumer products	Senior Term Debt (8.5%, Due 1/2014) ^(I)		25		25		25
		Senior Term Debt (12.0%, Due 1/2014) ^(C) (D)		3,000		3,000		2,985

						3,375		3,357

Westlake Hardware, Inc.	Retail store	Senior Subordinated Term Debt (12.3%, Due 1/2014) ^(D)		12,000		12,000		11,640
		Senior Subordinated Term Debt (13.5%, Due 1/2014) ^(D)		8,000		8,000		7,720

						20,000		19,360

Westland Technologies, Inc.	Diversified/conglomerate manufacturing	Senior Term Debt (7.5%, Due 4/2016)^(D)		1,650		1,650		1,617
		Senior Term Debt (12.5%, Due 4/2016) ^(D)		4,000		4,000		3,920
		Common Stock Warrants (77,287 shares) ^{(F) (G)}				350		228

						6,000		5,765

*Subtotal – Non-syndicated loans*					$	190,746	$	158,935

Syndicated Loans:
Airvana Network Solutions, Inc.	Telecommunications	Senior Term Debt (10.0%, Due 3/2015) ^(E)	$	1,071	$	1,036	$	1,070
Allied Security Holdings, LLC	Personal, food and miscellaneous services	Senior Subordinated Term Debt (9.0%, Due 2/2018) ^(E)		1,000		992		990
Ameriqual Group, LLC	Beverage, food and tobacco	Senior Term Debt (9.0%, Due 3/2016) ^(E)		7,406		7,295		7,258
Applied Systems, Inc.	Insurance	Senior Subordinated Term Debt (9.5%, Due 6/2017) ^(E)		1,000		992		995
Ascend Learning, LLC	Healthcare, education and childcare	Senior Subordinated Term Debt (11.5%, Due 12/2017) ^(E)		1,000		975		998
Autoparts Holdings Limited	Automobile	Senior Term Debt (10.5%, Due 1/2018) ^(E)		1,000		996		870
Blue Coat Systems, Inc.	Electronics	Senior Subordinated Term Debt (11.5%, Due 8/2018)^(E) (I)		8,500		8,497		8,500
HGI Holding, Inc.	Personal and non-durable consumer	Senior Term Debt (6.8%, Due 10/2016)^(E)		1,566		1,539		1,574
	products
Hubbard Radio, LLC	Broadcasting and entertainment	Senior Subordinated Term Debt (8.8%, Due 4/2018) ^(E)		500		496		508
Keypoint Government Solutions, Inc.	Personal, food and miscellaneous services	Senior Term Debt (10.0%, Due 12/2015) ^(E)		6,364		6,340		6,364
Mood Media Corporation	Electronics	Senior Term Debt (10.3%, Due 11/2018) ^{(E) (I)}		8,000		7,930		8,000

National Surgical Hospitals, Inc.	Healthcare, education and childcare	Senior Term Debt (8.3%, Due 2/2017) ^(E)		1,662		1,596		1,581
PLATO Learning, Inc.	Healthcare, education and childcare	Senior Subordinated Term Debt (11.3%, Due 5/2019) ^(E)		5,000		4,903		4,850
Sensus USA, Inc.	Electronics	Senior Term Debt (8.5%, Due 5/2018) ^(E)		500		496		500
Springs Window Fashions, LLC	Personal and non-durable consumer	Senior Term Debt (11.3%, Due 11/2017) ^(E)		7,000		6,853		6,825
	products
SRAM, LLC	Leisure, amusement, motion pictures and	Senior Term Debt (8.5%, Due 12/2018) ^(E)		2,500		2,478		2,538
	entertainment
Targus Group International, Inc.	Textiles and leather	Senior Term Debt (11.0%, Due 5/2016) ^(E)		9,875		9,719		9,776
Vision Solutions, Inc.	Electronics	Senior Term Debt (9.5%, Due 7/2017)^(E)		11,000		10,926		10,945
Wall Street Systems Holdings, Inc.	Electronics	Senior Term Debt (9.0%, Due 6/2018) ^(E) (I)		3,000		2,974		3,000
WP Evenflo Group Holdings, Inc.	Diversified/conglomerate manufacturing	Senior Term Debt (8.0%, Due 2/2013) ^(E)		277		277		274
		Senior Preferred Equity (333 shares) ^{(F) (G)}				333		460
		Junior Preferred Equity (111 shares) ^{(F) (G)}				111		164
		Common Stock (1,874 shares) ^{(F) (G)}				—		160

						721		1,058

*Subtotal - Syndicated loans*					$	77,754	$	78,200

Total Non-Control/Non-Affiliate Investments (represented 86.6% of total investments at fair value)					$	268,500	$	237,135

GLADSTONE CAPITAL CORPORATION

CONDENSED CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

AS OF SEPTEMBER 30, 2012

(DOLLAR AMOUNTS IN THOUSANDS)


Company^(A)	Industry	Investment^(B)	Principal		Cost		Fair Value
CONTROL INVESTMENTS:

Defiance Integrated Technologies,	Automobile	Senior Term Debt (11.0%, Due 4/2016) ^(C) (F)	$	7,185	$	7,185	$	7,185
Inc.		Common Stock (15,500 shares) ^{(F) (G)}				1		4,113

						7,186		11,298

Kansas Cable Holdings, Inc.	Broadcasting and entertainment	Line of Credit, $56 available (10.0%, Due 10/2012)^{(D) (H)}		919		910		8
		Senior Term Debt (10.0%, Due 10/2012) ^(D) (H)		1,500		1,444		13
		Senior Term Debt (10.0%, Due 10/2012) ^(D) (H)		1,039		1,000		9
		Common Stock (100 shares) ^{(F) (G)}				—		—

						3,354		30

Lindmark Acquisition, LLC	Broadcasting and entertainment	Senior Subordinated Term Debt (11.0%, Due 10/2017) ^(D) ^(H)		10,000		10,000		750
		Senior Subordinated Term Debt (13.0%, Due 10/2017) ^{(D) (H)}		2,000		2,000		150
		Senior Subordinated Term Debt (13.0%, Due Upon Demand) ^{(D) (H)}		1,909		1,909		143
		Common Stock (100 shares) ^{(F) (G)}				317		—

						14,226		1,043
LocalTel, LLC	Printing and publishing	Line of credit, $226 available (10.0%, Due 6/2013) ^{(F) (H)}		2,624		2,624		548
		Line of Credit, $1,830 available (4.7%, Due 6/2013) ^{(F) (H)}		1,170		1,170		—
		Senior Term Debt (12.5%, Due 6/2013) ^(F) (H)		325		325		—
		Senior Term Debt (8.5%, Due 6/2013) ^(F) (H)		2,688		2,688		—
		Senior Term Debt (10.5%, Due 6/2013) ^{(C) (F) (H)}		2,750		2,750		—
		Common Stock Warrants (4,000 shares) ^{(F) (G)}				—		—

						9,557		548

Midwest Metal Distribution, Inc.	Mining, steel, iron and non-precious metals	Senior Subordinated Term Debt (12.0%, Due 7/2013) ^(D)		18,281		18,272		17,824
		Common Stock (501 shares) ^{(F) (G)}				138		—

						18,410		17,824

Sunshine Media Holdings	Printing and publishing	Line of credit, $200 available (4.8%, Due 8/2014) ^{(D) (H)}		1,800		1,800		270
		Senior Term Debt (4.8%, Due 5/2016) ^(D) (H)		16,948		16,948		2,542
		Senior Term Debt (5.5%, Due 5/2016) ^{(C) (D) (H)}		10,700		10,700		1,605
		Preferred Equity (15,270 shares) ^{(F) (G)}				5,275		—
		Common Stock (1,867 shares) ^{(F) (G)}				740		—

						35,463		4,417

Viapack, Inc.	Chemicals, plastics and rubber	Line of Credit, $0 available (6.5%, Due 3/2013) ^(D)		3,800		3,800		760
		Senior Real Estate Term Debt (5.0%, Due 3/2014) ^(D)		600		600		120
		Senior Term Debt (6.2%, Due 3/2014) ^{(C) (D) (H)}		3,925		3,925		785
		Preferred Equity (100 shares) ^{(F) (G)}				—		—
		Guarantee ($300)

						8,325		1,665

Total Control Investments (represented 13.4% of total investments at fair value)					$	96,521	$	36,825

Total Investments ^(K)					$	365,021	$	273,960

^(A)	Certain of the securities listed in the above schedule are issued by affiliate(s) of the indicated portfolio company.

^(B)

Percentages represent cash interest rates in effect at September 30, 2012, and due dates represent the contractual maturity date. If applicable, PIK interest rates are noted separately from the cash interest rates. Senior debt securities generally take the form of first priority liens on the assets of the underlying businesses.

^(C)	LOT of senior debt, meaning if the portfolio company is liquidated, the holder of the LOT is paid after the senior debt.

^(D)	Fair value was primarily based on opinions of value submitted by Standard & Poor’s Securities Evaluations, Inc.

^(E)	Security valued based on the indicative bid price on or near September 30, 2012, offered by the respective syndication agent’s trading desk or secondary desk.

^(F)	Fair value was primarily based on the total enterprise value of the portfolio company using a liquidity waterfall approach. We also considered discounted cash flow methodologies.

^(G)	Security is non-income producing.

^(H)	Debt security is on non-accrual status.

^(I)	Security was paid off, at par, subsequent to September 30, 2012, and was valued based on the payoff.

^(J)	There are certain limitations on our ability to transfer our units owned prior to dissolution of the entity, which must occur no later than May 3, 2020.

⁽^K⁾	Cumulative gross unrealized depreciation for federal income tax purposes is $98.7 million; cumulative gross unrealized appreciation for federal income tax purposes is $6.1 million. Cumulative net unrealized depreciation is $92.6 million, based on a tax cost of $366.6 million.

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

GLADSTONE CAPITAL CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

MARCH 31, 2013

(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA AND AS OTHERWISE INDICATED)

NOTE 1. ORGANIZATION

Gladstone Capital Corporation was incorporated under the General Corporation Law of the State of Maryland on May 30, 2001, and completed an initial public offering on August 23, 2001. The terms “the Company,” “we,” “our,” and “us” all refer to Gladstone Capital Corporation and its consolidated subsidiaries. We are a closed-end, non-diversified management investment company that has elected to be treated as a business development company (“BDC”) under the Investment Company Act of 1940, as amended (the “1940 Act”). In addition, we have elected to be treated for federal income tax purposes as a regulated investment company (“RIC”) under the Internal Revenue Code of 1986, as amended (the “Code”). Our investment objectives are to (1) achieve and grow current income by investing in debt securities of established small and medium-sized businesses in the United States (U.S.) that we believe will provide stable earnings and cash flow to pay expenses, make principal and interest payments on our outstanding indebtedness and make distributions to stockholders that grow over time; and (2) provide our stockholders with long-term capital appreciation in the value of our assets by investing in equity securities of established businesses that we believe can grow over time to permit us to sell our equity investments for capital gains.

Gladstone Business Loan, LLC (“Business Loan”), a wholly-owned subsidiary of ours, was established on February 3, 2003, for the sole purpose of owning our portfolio of investments in connection with our line of credit.

Gladstone Financial Corporation (“Gladstone Financial”), a wholly-owned subsidiary of ours, was established on November 21, 2006, for the purpose of holding a license to operate as a Specialized Small Business Investment Company. Gladstone Financial (previously known as Gladstone SSBIC Corporation) acquired this license in February 2007. The license enables us, through this subsidiary, to make investments in accordance with the United States Small Business Administration guidelines for specialized small business investment companies.

The financial statements of the foregoing two subsidiaries are consolidated with those of ours.

We are externally managed by our investment adviser, Gladstone Management Corporation (the “Adviser”), an affiliate of ours, pursuant to an investment advisory and management agreement.

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Unaudited Interim Financial Statements and Basis of Presentation

We prepare our interim financial statements in accordance with accounting principles generally accepted in the U.S. (“GAAP”) for interim financial information and pursuant to the requirements for reporting on Form 10-Q and Article 10 of Regulation S-X under the Securities Act of 1933, as amended (the “Securities Act”). Accordingly, we have omitted certain disclosures accompanying annual financial statements prepared in accordance with GAAP. The accompanying Condensed Consolidated Financial Statements include our accounts and those of our wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated. Under Article 6 of Regulation S-X under the Securities Act, and the authoritative accounting guidance provided by the American Institute of Certified Public Accountants Audit and Accounting Guide for Investment Companies, we are not permitted to consolidate any portfolio company investments, including those in which we have a controlling interest. In our opinion, all adjustments, consisting solely of normal recurring accruals, necessary for the fair presentation of financial statements for the interim periods have been included. The results of operations for the three and six months ended March 31, 2013, are not necessarily indicative of results that ultimately may be achieved for the fiscal year. The interim financial statements and notes thereto should be read in conjunction with the financial statements and notes thereto included in our annual report on Form 10-K for the fiscal year ended September 30, 2012, as filed with the Securities and Exchange Commission (the “SEC”) on November 13, 2012.

Our accompanying fiscal year-end Condensed Consolidated Statement of Assets and Liabilities was derived from audited financial statements, but does not include all disclosures required by GAAP.

Investment Valuation Policy

We carry our investments at fair value to the extent that market quotations are readily available and reliable and otherwise at fair value as determined in good faith by our board of directors (our “Board of Directors”). In determining the fair value of our investments, the Adviser has established an investment valuation policy (the “Policy”). The Policy has been approved by our Board of Directors, and each quarter our Board of Directors reviews whether the Adviser has applied the Policy consistently and votes whether to accept the recommended valuation of our investment portfolio. Such determination of fair values may involve subjective judgments and estimates.

The Adviser uses generally accepted valuation techniques to value our portfolio unless it has specific information about the value of an investment to determine otherwise. From time to time, the Adviser may accept an appraisal of a business in which we hold securities. These appraisals are expensive and occur infrequently, but provide a third-party valuation opinion that may differ in results, techniques and scope used to value our investments. When the Adviser obtains these specific third-party appraisals, the Adviser uses estimates of value provided by such appraisals and its own assumptions, including estimated remaining life, current market yield and interest rate spreads of similar securities as of the measurement date, to value our investments.

The Policy, summarized below, applies to publicly traded securities, securities for which a limited market exists and securities for which no market exists.

Publicly traded securities: The Adviser determines the value of a publicly traded security based on the closing price for the security on the exchange or securities market on which it is listed and primarily traded on the valuation date. To the extent that we own a restricted security that is not freely tradable, but for which a public market otherwise exists, the Adviser will use the market value of that security adjusted for any decrease in value resulting from the restrictive feature. As of March 31, 2013 and September 30, 2012, we did not have any investments in publicly traded securities.

Securities for which a limited market exists: The Adviser values securities that are not traded on an established secondary securities market, but for which a limited market for the security exists, such as certain participations in, or assignments of, syndicated loans, at the quoted bid price, which are non-binding. In valuing these assets, the Adviser assesses trading activity in an asset class and evaluates variances in prices and other market insights to determine if any available quoted prices are reliable. In general, if the Adviser concludes that quotes based on active markets or trading activity may be relied upon, firm bid prices are requested; however, if firm bid prices are unavailable, the Adviser bases the value of the security upon the indicative bid price (“IBP”) offered by the respective originating syndication agent’s trading desk, or secondary desk, on or near the valuation date. To the extent that the Adviser uses the IBP as a basis for valuing the security, the Adviser may take further steps to consider additional information to validate that price in accordance with the Policy, including but not limited to reviewing a range of indicative bids to the extent it has ready access to such qualified information.

In the event these limited markets become illiquid such that market prices are no longer readily available, the Adviser will value our syndicated loans using alternative methods, such as estimated net present values of the future cash flows or discounted cash flows (“DCF”). The use of a DCF methodology follows that prescribed by the Financial Accounting Standards Board (the “FASB”) Accounting Standards Codification (“ASC”) 820, “Fair Value Measurements and Disclosures,” which provides guidance on the use of a reporting entity’s own assumptions about future cash flows and risk-adjusted discount rates when relevant observable inputs, such as quotes in active markets, are not available. When relevant observable market data does not exist, an alternative outlined in ASC 820 is the valuation of investments based on DCF. For the purposes of using DCF to provide fair value estimates, the Adviser considers multiple inputs, such as a risk-adjusted discount rate that incorporates adjustments that market participants would make, both for nonperformance and liquidity risks. As such, the Adviser develops a modified discount rate approach that incorporates risk premiums including, among other things, increased probability of default, higher loss given default or increased liquidity risk. The DCF valuations applied to the syndicated loans provide an estimate of what the Adviser believes a market participant would pay to purchase a syndicated loan in an active market, thereby establishing a fair value. The Adviser applies the DCF methodology in illiquid markets until quoted prices are available or are deemed reliable based on trading activity.

As of March 31, 2013 and September 30, 2012, the Adviser determined that the IBPs were reliable indicators of fair value for our syndicate investments. However, because of the private nature of this marketplace (meaning actual transactions are not publicly reported); the Adviser determined that these valuation inputs were classified as Level 3 within the fair value hierarchy as defined in ASC 820.

Securities for which no market exists: The valuation methodology for securities for which no market exists falls into four categories: (A) portfolio investments comprised solely of debt securities; (B) portfolio investments in controlled companies comprised of a bundle of securities, which can include debt and equity securities; (C) portfolio investments in non-controlled companies comprised of a bundle of investments, which can include debt and equity securities; and (D) portfolio investments comprised of non-publicly traded, non-control equity securities of other funds.

(A)

Portfolio investments comprised solely of debt securities: Debt securities that are not publicly traded on an established securities market, or for which a market does not exist (“Non-Public Debt Securities”), and that are issued by portfolio companies in which we have no equity or equity-like securities, are fair valued utilizing opinions of value submitted to us by Standard & Poor’s Securities Evaluations, Inc. (“SPSE”). The Adviser may also submit paid-in-kind (“PIK”) interest to SPSE for its evaluation when it is determined that PIK interest is likely to be received.

(B)

Portfolio investments in controlled companies comprised of a bundle of investments, which can include debt and equity securities: The fair value of these investments is determined based on the total enterprise value (“TEV”) of the portfolio company, or issuer, utilizing a liquidity waterfall approach under ASC 820 for our Non-Public Debt Securities and equity or equity-like securities (e.g., preferred equity, common equity or other equity-like securities) that are purchased together as part of a package, where we have control or could gain control through an option or warrant security; both the debt and equity securities of the portfolio investment would exit in the mergers and acquisitions market as the principal market, generally through a sale or recapitalization of the portfolio company. We generally exit the debt and equity securities of an issuer together. Applying the liquidity waterfall approach to all of the investments of an issuer, the Adviser first calculates the TEV of the issuer by incorporating some or all of the following factors:

•

the issuer’s ability to make payments;

•

the earnings of the issuer;

•

recent sales to third parties of similar securities;

•

the comparison to publicly traded securities; and

•

DCF or other pertinent factors.

In gathering the sales to third parties of similar securities, the Adviser generally references industry statistics and may use outside experts. TEV is only an estimate of value and may not be the value received in an actual sale. Once the Adviser has estimated the TEV of the issuer, it will subtract the value of all the debt securities of the issuer, which are valued at the contractual principal balance. Fair values of these debt securities are discounted for any shortfall of TEV over the total debt outstanding for the issuer. Once the values for all outstanding senior securities, which include all the debt securities, have been subtracted from the TEV of the issuer, the remaining amount, if any, is used to determine the value of the issuer’s equity or equity-like securities. If, in the Adviser’s judgment, the liquidity waterfall approach does not accurately reflect the value of the debt component, the Adviser may recommend that we use a valuation by SPSE, or, if that is unavailable, a DCF valuation technique.

(C)

Portfolio investments in non-controlled companies comprised of a bundle of investments, which can include debt and equity securities: The Adviser values Non-Public Debt Securities that are purchased together with equity or equity-like securities from the same portfolio company, or issuer, for which we do not control or cannot gain control as of the measurement date, using a hypothetical secondary market as our principal market. In accordance with ASC 820 (as amended by the FASB’s Accounting Standards Update No. 2011-04, “Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards (“IFRS”),” (“ASU 2011-04”)), the Adviser has defined our “unit of account” at the investment level (either debt or equity) and as such determines our fair value of these non-control investments assuming the sale of an individual security using the standalone premise of value. As such, the Adviser estimates the fair value of the debt component using estimates of value provided by SPSE and its own assumptions in the absence of observable market data, including synthetic credit ratings, estimated remaining life, current market yield and interest rate spreads of similar securities as of the measurement date. For equity or equity-like securities of investments for which we do not control or cannot gain control as of the measurement date, the Adviser estimates the fair value of the equity based on factors such as the overall value of the issuer, the relative fair value of other units of account, including debt, or other relative value approaches. Consideration is also given to capital structure and other contractual obligations that may impact the fair value of the equity. Furthermore, the Adviser may utilize comparable values of similar companies, recent investments and indices with similar structures and risk characteristics or DCF valuation techniques and, in the absence of other observable market data, our own assumptions.

(D)

Portfolio investments comprised of non-publicly traded, non-control equity securities of other funds: The Adviser generally values any uninvested capital of the non-control fund at par value and values any invested capital at the net asset value (“NAV”) provided by the non-control fund.

Due to the uncertainty inherent in the valuation process, such estimates of fair value may differ significantly and materially from the values that would have been obtained had a ready market for the securities existed. 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 valuations currently assigned. There is no single standard for determining fair value in good faith, as fair value depends upon circumstances of each individual case. In general, fair value is the amount that the Adviser might reasonably expect us to receive upon the current sale of the security in an orderly transaction between market participants at the measurement date.

Refer to Note 3—Investments for additional information regarding fair value measurements and our application of ASC 820.

Interest Income Recognition

Interest income, adjusted for amortization of premiums and acquisition costs, the accretion of discounts and the amortization of amendment fees, is recorded on the accrual basis to the extent that such amounts are expected to be collected. Generally, when a loan becomes 90 days or more past due, or if our qualitative assessment indicates that the debtor is unable to service its debt or other obligations, we will place the loan on non-accrual status and cease recognizing interest income on that loan until the borrower has demonstrated the ability and intent to pay contractual amounts due. However, we remain contractually entitled to this interest. Interest payments received on non-accrual loans may be recognized as income or applied to the cost basis, depending upon management’s judgment. Generally, non-accrual loans are restored to accrual status when past due principal and interest are paid and, in management’s judgment, are likely to remain current, or due to a restructuring such that the interest income is deemed to be collectable. At March 31, 2013, four portfolio companies were on non-accrual with an aggregate debt cost basis of approximately $56.8 million, or 16.4% of the cost basis of all debt investments in our portfolio, and an aggregate fair value of approximately $7.5 million, or 2.9% of the fair value of all debt investments in our portfolio. At September 30, 2012, six portfolio companies were either fully or partially on non-accrual with an aggregate debt cost basis of approximately $61.1 million, or 17.3% of the cost basis of all debt investments in our portfolio, and an aggregate fair value of approximately $6.8 million, or 2.6% of the fair value of all debt investments in our portfolio.

As of March 31, 2013 and September 30, 2012, we had 22 and 24 original issue discount (“OID”) loans, respectively, primarily from the syndicated loans in our portfolio. We recorded OID income of $70 and $0.1 million for the three and six months ended March 31, 2013, respectively, as compared to $74 and $0.2 million for the three and six months ended March 31, 2012. The unamortized balance of OID investments as of March 31, 2013 and September 30, 2012 totaled $1.4 million and $1.1 million, respectively.

As of March 31, 2013, we had two investments which had a PIK interest component and as of September 30, 2012, we had one investment which had a PIK interest component. PIK interest, computed at the contractual rate specified in a loan agreement, is added to the principal balance of a loan and recorded as income. To maintain our status as a RIC, this non-cash source of income must be paid out to common stockholders in the form of distributions, even though we have not yet collected the cash. We recorded PIK income of $51 and $0.1 million for the three and six months ended March 31, 2013, respectively as compared to no PIK income during the three and six months ended March 31, 2012, respectively. We collected $0 PIK interest in cash during the six months ended March 31, 2013 and 2012, respectively.

Other Income Recognition

We generally record success fees upon receipt of cash. Success fees are contractually due upon a change of control in a portfolio company. We recorded $1.1 million of success fees during the six months ended March 31, 2013, which resulted from our exit of Westlake Hardware, Inc. in December 2012. We recorded a combined $2.0 million of success fees during the six months ended March 31, 2012, which resulted from our exits of Global Materials Technologies, Inc. and RCS Management Holding Co. in January and March 2012, respectively. As of March 31, 2013, we have an aggregate off-balance sheet success fee receivable of approximately $12.9 million on our accruing debt securities.

During the six months ended March 31, 2013, we recognized an aggregate of $0.5 million in prepayment fees which resulted from the early payoffs of four of our syndicated loans during the period. We did not recognize any prepayment fees for the six months ended March 31, 2012.

Both success and prepayment fees are recorded in other income in our accompanying Condensed Consolidated Statements of Operations.

NOTE 3. INVESTMENTS

ASC 820 defines fair value, establishes a framework for measuring fair value and expands disclosures about assets and liabilities measured at fair value. ASC 820 provides a consistent definition of fair value that focuses on exit price in the principal, or most advantageous, market and prioritizes, within a measurement of fair value, the use of market-based inputs over entity-specific inputs. ASC 820 also establishes the following three-level hierarchy for fair value measurements based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date.

Level 1 — inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets;

Level 2 — inputs to the valuation methodology include quoted prices for similar assets and liabilities in active or inactive markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument. Level 2 inputs are in those markets for which there are few transactions, the prices are not current, little public information exists or instances where prices vary substantially over time or among brokered market makers; and

Level 3— inputs to the valuation methodology are unobservable and reflect assumptions that market participants would use when pricing the asset or liability. Level 3 inputs can include the Adviser’s own assumptions based upon the best available information.

As of March 31, 2013 and September 30, 2012, all of our investments were valued using Level 3 inputs. We transfer investments in and out of Level 1, 2 and 3 as of the beginning balance sheet date, based on changes in the use of observable and unobservable inputs utilized to perform the valuation for the period. During the six months ended March 31, 2013 and 2012, there were no transfers in or out of Level 1, 2 and 3.

The following table presents the investments carried at fair value as of March 31, 2013 and September 30, 2012, by caption on our accompanying Condensed Consolidated Statements of Assets and Liabilities and by security type, all of which are valued using Level 3 inputs:


	Total Recurring Fair Value Measurements Reported in
	*Condensed Consolidated Statements of* *Assets and Liabilities* Using Significant Unobservable Inputs (Level 3)
	March 31, 2013		September 30, 2012
Non-Control/Non-Affiliate Investments
Senior debt	$	108,372	$	150,500
Senior subordinated debt		98,375		81,282
Junior subordinated debt		501		498
Preferred equity		256		1,103
Common equity/equivalents		3,812		3,752

Total Non-Control/Non-Affiliate Investments	$	211,316	$	237,135

Control Investments
Senior debt	$	35,065	$	13,845
Senior subordinated debt		18,578		18,867
Common equity/equivalents		2,521		4,113

Total Control Investments	$	56,164	$	36,825

Total Investments at Fair Value	$	267,480	$	273,960

In accordance with ASU 2011-04, which was effective for us beginning January 1, 2012, the following table provides quantitative information about our Level 3 fair value measurements of our investments as of March 31, 2013 and September 30, 2012. In addition to the techniques and inputs noted in the table below, according to our Policy, the Adviser may also use other valuation techniques and methodologies when determining our fair value measurements. The below table is not intended to be all-inclusive, but rather provides information on the significant Level 3 inputs as they relate to our fair value measurements. The weighted average calculations in the table below are based on the principal balances for all debt related calculations and on the cost basis for all equity-related calculations for the particular input.

Quantitative Information about Level 3 Fair Value Measurements

Fair Value
as of
March 31,
2013

Fair Value
as of
September 30,
2012

Valuation
Technique/
Methodology

Unobservable
Input

Range / Weighted
Average as of
March 31, 2013

Range / Weighted Average as of
September 30, 2012

Non-syndicated debt only investments

78,763

99,768

SPSE

^(A)

EBITDA

^(B)

($156) - $14,853 / $4,012

($310) - $14,055 / $4,074

Risk

Ratings

^(C)

2.0 – 10.0 / 6.1

2.0 – 10.0 / 5.9

Syndicated debt only investments

67,673

57,642

Market
Quotes

IBP

^(D)

97.0% - 104.0% / 99.8%

87.0% - 101.5% / 98.7%

Bundled debt and equity investments

114,062

94,062

SPSE

^(A)

EBITDA

^(B)

$282 - $7,582 / $3,165

($1,164) - $9,753 / $2,206

Risk

Ratings

^(C)

2.0 – 8.0 / 3.5

3.0 – 8.0 / 4.4

TEV

EBITDA
multiples

^(B)

3.9 – 10.0 / 8.6

4.2 – 9.2 / 5.5

EBITDA

^(B)

$199 - $7,582 / $4,276

($1,164) - $10,967 / $4,555

TEV

Revenue

multiples

^(B)

0.2 – 1.9 / 0.6

0.2 – 2.2 / 0.2

Revenue

^(B)

$2,493 - $11,109 / $9,024

$1,057 - $2,474 / $2,474

Fund of fund investments

2,964

2,963

NAV

^(E)

Other

4,018

19,525

Payoff

^(F)

Total Fair Value for Level 3 Investments

267,480

273,960

⁽^A⁾

SPSE makes an independent assessment of the data the Adviser submits to them (which includes the financial and operational performance, as well as the Adviser’s internally assessed risk ratings of the portfolio companies – see footnote (D) below) and its own independent data to form an opinion as to what they consider to be the market values for our securities. With regard to its work, SPSE has stated that the data submitted to us is proprietary in nature.

⁽^B⁾

Adjusted earnings before interest expense, taxes, depreciation and amortization (“EBITDA”) is an unobservable input, which is generally based on the most recently available trailing twelve month financial statements submitted to the Adviser from the portfolio companies. EBITDA multiples, generally indexed, represent the Adviser’s estimate of where market participants might price these investments. For our bundled debt and equity investments, the EBITDA and EBITDA multiple inputs are used in the TEV fair value determination and the issuer’s debt, equity, and/or equity-like securities are valued in accordance with the Adviser’s liquidity waterfall approach. In limited cases, the revenue from the most recently available trailing twelve month financial statements submitted to the Adviser from the portfolio companies and the related revenue multiples, generally indexed, are used to provide a TEV fair value determination of our bundled debt and equity investments.

⁽^C⁾

As part of the Adviser’s valuation procedures, it risk rates all of our investments in debt securities. The Adviser uses the Nationally Recognized Statistical Rating Organization’s risk rating system for generally all syndicated loans and a proprietary risk rating system for all other debt securities. The Adviser’s risk rating system uses a scale of 0 to 10, with 10 being the lowest probability of default. The risk rating system covers both qualitative and quantitative aspects of the portfolio company business and the securities we hold.

⁽^D⁾

The Adviser generally bases the value of our syndicated debt securities on the IBP offered by the respective originating syndication agent’s trading desk, or secondary desk, on or near the valuation date. These bid prices are non-binding and are generally based on the underlying company performance and security characteristics, as well as other market conditions and credit risk factors.

⁽^E⁾	The Adviser generally values any uninvested capital of the non-control fund at par value and values any invested capital at the NAV provided by the non-control fund.

^(F)	Includes two syndicated debt only investments and one bundled debt and equity investment as of March 31, 2013 and three syndicated debt only investments as of September 30, 2012, which subsequently paid off at par after those period ends and, as such, were valued based on the payoff.

A portfolio company’s EBITDA and EBITDA multiples are the significant unobservable inputs generally included in the Adviser’s internally assessed TEV models used to value our proprietary debt and equity investments. Holding all other factors constant, increases (decreases) in the EBITDA and/or the EBITDA multiples inputs would result in a higher (lower) fair value measurement. Per our Policy, the Adviser generally uses an indexed EBITDA multiple in these TEVs. EBITDA and EBITDA multiple inputs do not have to directionally correlate since EBITDA is a company performance metric and EBITDA multiples can be influenced by market, industry, company size and other factors.

Changes in Level 3 Fair Value Measurements of Investments

The following tables provide the changes in fair value, broken out by security type, during the three and six month periods ended March 31, 2013 and 2012 for all investments for which we determine fair value using unobservable (Level 3) factors. When a determination is made to classify a financial instrument within Level 3 of the valuation hierarchy, such determination is based upon the significance of the unobservable factors to the overall fair value measurement. However, Level 3 financial instruments typically include, in addition to the unobservable, or Level 3, inputs, observable inputs (that is, components that are actively quoted and can be validated to external sources). In these cases, we categorize the fair value measurement in its entirety in the same level of the fair value hierarchy as the lowest level input that is significant to the entire measurement. Accordingly, the gains and losses in the tables below include changes in fair value, due in part to observable factors that are part of the valuation methodology.

Fair Value Measurements Using Significant Unobservable Inputs (Level 3)

FISCAL YEAR 2013:


				Senior						Common
	Senior			Subordinated			Preferred			Equity/
Three months ended March 31, 2013	Debt			Debt^(A)			Equity			Equivalents			Total
Fair value as of December 31, 2012	$	143,825		$	117,549		$	1,186		$	7,953		$	270,513
Total gains (losses):
Net realized gain^(B)		13			3			—			—			16
Net unrealized appreciation (depreciation)^(C)		2,782			(5,683	)		(2,929	)		(1,781	)		(7,611	)
Reversal of prior period net appreciation on realization^(C)		(10	)		(12	)		—			—			(22	)
New investments, repayments and settlements:^(D)
Issuances/originations		706			6,181			1,999			161			9,047
Settlements/repayments		(3,879	)		(584	)		—			—			(4,463	)

Fair value as of March 31, 2013	$	143,437		$	117,454		$	256		$	6,333		$	267,480


				Senior						Common
	Senior			Subordinated			Preferred			Equity/
Six months ended March 31, 2013	Debt			Debt^(A)			Equity			Equivalents			Total
Fair value as of September 30, 2012	$	164,345		$	100,647		$	1,103		$	7,865		$	273,960
Total (losses) gains:
Net realized (loss) gain^(B)		(3,152	)		6			—			—			(3,146	)
Net unrealized appreciation (depreciation)^(C)		1,641			(6,633	)		(2,846	)		(2,936	)		(10,774	)
Reversal of prior period net depreciation on realization^(C)		7,401			625			—			—			8,026
New investments, repayments and settlements:^(D)
Issuances/originations		5,098			52,364			1,999			1,404			60,865
Settlements/repayments		(25,978	)		(29,555	)		—			—			(55,533	)
Sales		(5,918	)		—			—			—			(5,918	)

Fair value as of March 31, 2013	$	143,437		$	117,454		$	256		$	6,333		$	267,480


FISCAL YEAR 2012:

	Senior			Senior						Common
	Term			Subordinated			Preferred			Equity/
Three months ended March 31, 2012	Debt			Term Debt			Equity			Equivalents			Total
Fair value as of December 31, 2011	$	192,821		$	88,004		$	581		$	11,440		$	292,846
Total gains (losses):
Net realized gain⁽^B⁾		37			—			—			—			37
Net unrealized (depreciation) appreciation⁽^C⁾		(6,292	)		(784	)		(986	)		435			(7,627	)
Reversal of prior period net depreciation on realization⁽^C⁾		458			—			—			—			458
New investments, repayments and settlements:⁽^D⁾
Issuances/originations		8,858			8,500			1,000			—			18,358
Settlements/repayments		(13,912	)		(23	)		—			—			(13,935	)
Sales		(1,970	)		—			—			—			(1,970	)

Fair value as of March 31, 2012	$	180,000		$	95,697		$	595		$	11,875		$	288,167


	Senior			Senior						Common
	Term			Subordinated			Preferred			Equity/
Six months ended March 31, 2012	Debt			Term Debt			Equity			Equivalents		Total
Fair value as of September 30, 2011	$	200,145		$	92,148		$	566		$	10,088	$	302,947
Total (losses) gains:
Net realized loss⁽^B⁾		(8,363	)		—			—			—		(8,363	)
Net unrealized (depreciation) appreciation⁽^C⁾		(15,128	)		(2,028	)		(1,572	)		1,787		(16,941	)
Reversal of prior period net depreciation on realization⁽^C⁾		11,571			444			—			—		12,015
New investments, repayments and settlements:⁽^D⁾
Issuances/originations		16,688			11,320			1,601			—		29,609
Settlements/repayments		(18,454	)		(6,187	)		—			—		(24,641	)
Sales		(6,459	)		—			—			—		(6,459	)

Fair value as of March 31, 2012	$	180,000		$	95,697		$	595		$	11,875	$	288,167

⁽^A⁾	Includes a junior subordinated debt investment totaling $0.5 million in fair value as of March 31, 2013 and September 30, 2012, respectively. There were no junior subordinated debt investments as of March 31, 2012 or September 30, 2011, respectively.

^(B)	Included in net realized gain (loss) on Non-Control/Non-Affiliate and Control investments on our accompanying Condensed Consolidated Statements of Operations for the three and six months ended March 31, 2013 and 2012.

⁽^C⁾	Included in net unrealized (depreciation) appreciation of Non-Control/Non-Affiliate and Control investments on our accompanying Condensed Consolidated Statements of Operations for the three and six months ended March 31, 2013 and 2012.

⁽^D⁾

Includes increases in the cost basis of investments resulting from new portfolio investments, the amortization of discounts, and PIK, as well as decreases in the costs basis of investments resulting from principal repayments or sales, the amortization of premiums and acquisition costs and other cost-basis adjustments.

Non-Syndicated Investments

As of March 31, 2013 and September 30, 2012, we held 28 and 30 non-syndicated investments with an aggregate fair value of $196.1 million and $195.8 million, respectively. During the six months ended March 31, 2013, we invested in two new non-syndicated investments for an aggregate of $33.7 million; we sold one non-syndicated investment; wrote off one non-syndicated investment for a realized loss of $0.9 million and had one non-syndicated investment pay off early, for which we received a principal payment of $20.0 million and a success fee of $1.1 million. Additionally, during the six months ended March 31, 2013, we funded $4.6 million to existing non-syndicated portfolio companies through revolver draws and add-on investments, while scheduled and unscheduled principal payments totaled $25.6 million from existing non-syndicated portfolio companies. The following significant non-syndicated investment transactions occurred during the six months ended March 31, 2013:

•

Viapack, Inc. – In November 2012, we sold our investment in Viapack, Inc. (“Viapack”) for net proceeds of $5.9 million, which resulted in a realized loss of $2.4 million recorded in the three months ended December 31, 2012. Viapack had partially been on non-accrual status at the time of the sale.

•

AG Transportation Holdings, LLC. – In December 2012, we invested $14.0 million in AG Transportation Holdings, LLC (“AG Trucking”) through a combination of senior subordinated term debt and equity. AG Trucking, headquartered in Goshen, Indiana, is a regional food-grade liquid and dry bulk carrier providing a variety of bulk transportation services, including liquid transportation, dry bulk dumps, freight brokering, private fleet conversion and project runs to large international agricultural and food manufacturing firms.

•

Allen Edmonds Shoe Corporation – In December 2012, we invested $19.5 million in Allen Edmonds Shoe Corporation (“Allen Edmonds”) through senior subordinated term debt that we purchased from one of Allen Edmonds’ existing lenders. Allen Edmonds, headquartered in Port Washington, Wisconsin, manufactures premium men’s footwear and accessories, which it sells through its retail stores, catalogs and internet site and also through its wholesale and e-commerce channels.

•

Reliable Biopharmaceutical Holdings, Inc. – In March 2013, we acquired a controlling equity position in Reliable Biopharmaceutical Holdings, Inc. (“Reliable”) and infused $2.0 million in additional equity capital in the form of preferred equity. In addition, we invested $1.1 million in line of credit draws to Reliable during the six months ended March 31, 2013. As of March 31, 2013, we have classified Reliable as a Control portfolio company on our accompanying Condensed Consolidated Schedule of Investments.

Syndicated Investments

We held a total of 19 syndicate loans with an aggregate fair value of $71.4 million, or 26.7% of our total investment portfolio, as of March 31, 2013, as compared to 20 syndicate loans with an aggregate fair value of $78.2 million, or 28.5% of our total investment portfolio, as of September 30, 2012. During the six months ended March 31, 2013, we had eight early payoffs of syndicated investments for a combined total of $28.4 million and six new syndicated investments for a combined total of $22.5 million. We received an aggregate of $0.5 million in prepayment fees related to four of these early payoffs of syndicated investments during the six months ended March 31, 2013.

Investment Concentrations

As of March 31, 2013, our investment portfolio consisted of loans to 47 companies located in 28 states across 22 different industries, with an aggregate fair value of $267.5 million. The five largest investments at fair value as of March 31, 2013, totaled $86.7 million, or 32.4% of our total investment portfolio, as compared to the five largest investments at fair value as of September 30, 2012, which totaled $91.8 million, or 33.5% of our total investment portfolio. As of March 31, 2013, our average investment by obligor was $7.7 million at cost, compared to $7.3 million at cost as of September 30, 2012. The following table outlines our investments by security type as of March 31, 2013 and September 30, 2012:


	March 31, 2013								September 30, 2012
	Cost				Fair Value				Cost				Fair Value
Senior debt	$	205,209	56.8	%	$	143,437	53.6	%	$	235,158	64.4	%	$	164,345	60.0	%
Senior subordinated debt		141,279	39.1			116,953	43.7			118,469	32.5			100,149	36.5
Junior subordinated debt		433	0.1			501	0.2			428	0.1			498	0.2

Total Debt Investments		346,921	96.0			260,891	97.5			354,055	97.0			264,992	96.7
Preferred equity		8,717	2.4			256	0.1			6,719	1.8			1,103	0.4
Common equity/equivalents		5,652	1.6			6,333	2.4			4,247	1.2			7,865	2.9

Total Equity Investments		14,369	4.0			6,589	2.5			10,966	3.0			8,968	3.3

Total Investments	$	361,290	100.0	%	$	267,480	100.0	%	$	365,021	100.0	%	$	273,960	100.0	%

Investments at fair value consisted of the following industry classifications at March 31, 2013 and September 30, 2012:


	March 31, 2013					September 30, 2012
Industry Classification	Fair Value		Percentage of Total Investments			Fair Value		Percentage of Total Investments
Healthcare, education and childcare	$	32,643		12.2	%	$	32,867		12.0	%
Mining, steel, iron and non-precious metals		31,487		11.8			31,590		11.5
Electronics		29,587		11.1			42,111		15.4
Personal and non-durable consumer products		26,615		10.0			8,399		3.1
Broadcast and entertainment		22,157		8.3			25,505		9.3
Aerospace and defense		14,593		5.5			16,597		6.0
Oil and gas		14,550		5.4			15,386		5.6
Printing and publishing		13,723		5.1			12,760		4.6
Cargo Transportation		13,289		5.0			—		—
Automobile		10,560		3.9			12,168		4.4
Textiles and leather		9,727		3.6			9,776		3.6
Machinery		7,664		2.9			7,618		2.8
Beverage, food and tobacco		7,221		2.7			7,258		2.6
Leisure, amusement, motion pictures and entertainment		6,408		2.4			5,380		2.0
Diversified/conglomerate manufacturing		5,754		2.1			6,824		2.5
Containers, packaging and glass		5,025		1.9			—		—
Buildings and real estate		4,649		1.7			5,920		2.2
Finance		4,523		1.7			—		—
Home and office furnishing, housewares and durable consumer goods		3,225		1.2			3,357		1.2
Personal, food and miscellaneous services		1,000		0.4			7,354		2.7
Retail store		—		—			19,360		7.1
Other, < 1%^(A)		3,080		1.1			3,730		1.4

Total Investments	$	267,480		100.0	%	$	273,960		100.0	%

^(A)	No individual industry within this category exceeds 1% of the total fair value as of the respective periods.

Investments at fair value were included in the following geographic regions of the U.S. at March 31, 2013 and September 30, 2012:


	March 31, 2013					September 30, 2012
Geographic Region	Fair Value		Percent of Total Investments			Fair Value		Percentage of Total Investments
Midwest	$	132,009		49.3	%	$	127,179		46.4	%
South		71,406		26.7			62,677		22.9
West		50,194		18.8			66,268		24.2
Northeast		13,871		5.2			9,836		3.6
Outside continental U.S.		—		—			8,000		2.9

Total Investments	$	267,480		100.0	%	$	273,960		100.0	%

The geographic region reflects the location of the headquarters of our portfolio companies. A portfolio company may have a number of other business locations in other geographic regions.

Investment Principal Repayments

The following table summarizes the contractual principal repayments and maturity of our investment portfolio by fiscal year, assuming no voluntary prepayments, at March 31, 2013:


		Amount
For the remaining six months ending September 30:	2013	$	67,518
For the fiscal year ending September 30:	2014		50,596
	2015		26,984
	2016		84,131
	2017		35,829
	Thereafter		83,290

	Total contractual repayments	$	348,348
	Equity investments		14,369
	Adjustments to cost basis on debt investments		(1,427	)

	Total cost basis of investments held at March 31, 2013:	$	361,290

Receivables from Portfolio Companies

Receivables from portfolio companies represent non-recurring costs that we incurred on behalf of portfolio companies and are included in other assets on our accompanying Condensed Consolidated Statements of Assets and Liabilities. We maintain an allowance for uncollectible receivables from portfolio companies, which is determined based on historical experience and management’s expectations of future losses. We charge the accounts receivable to the established provision when collection efforts have been exhausted and the receivables are deemed uncollectible. As of March 31, 2013 and September 30, 2012, we had gross receivables from portfolio companies of $0.6 million and $0.8 million, respectively. The allowance for uncollectible receivables was $0.3 million and $0.4 million as of March 31, 2013 and September 30, 2012, respectively. In addition, we recorded an allowance for uncollectible interest receivable of $0 and $21 as of March 31, 2013 and September 30, 2012, respectively.

NOTE 4. RELATED PARTY TRANSACTIONS

Investment Advisory and Management Agreement

We entered into an investment advisory and management agreement with the Adviser (the “Advisory Agreement”). The Adviser is controlled by our chairman and chief executive officer. In accordance with the Advisory Agreement, we pay the Adviser certain fees as compensation for its services, such fees consisting of a base management fee and an incentive fee. On July 10, 2012, our Board of Directors approved the renewal of the Advisory Agreement through August 31, 2013. In order for the term of the Advisory Agreement to be extended, it must be reviewed and renewed annually by our Board of Directors.

The following table summarizes the management fees, incentive fees and associated credits reflected in our accompanying Condensed Consolidated Statements of Operations:


	Three Months Ended March 31,						Six Months Ended March 31,
	2013			2012			2013			2012
Average total assets subject to base management fee^(A)	$	283,800		$	307,600		$	285,100		$	309,400
Multiplied by prorated annual base management fee of 2.0%		0.5	%		0.5	%		1.0	%		1.0	%

Base management fee^(B)	$	1,419		$	1,538		$	2,851		$	3,094
Reduction for loan servicing fees		(908	)		(864	)		(1,766	)		(1,823	)

Adjusted base management fee		511			674			1,085			1,271
Credit for fees received by Adviser from the portfolio companies		—			(5	)		(140	)		(53	)
Fee reduction for the voluntary, irrevocable waiver of 2.0% fee on senior syndicated loans to 0.5% per annum		(43	)		(118	)		(104	)		(243	)

Net base management fee	$	468		$	551		$	841		$	975

Incentive fee⁽^B)		953			1,304			2,168			2,339
Credit from voluntary, irrevocable waiver issued by Adviser’s board of directors		(596	)		—			(596	)		(278	)

Net incentive fee	$	357		$	1,304		$	1,572		$	2,061

Credit for fees received by Adviser from the portfolio companies		—			(5	)		(140	)		(53	)
Fee reduction for the voluntary, irrevocable waiver of 2.0% fee on senior syndicated loans to 0.5% per annum		(43	)		(118	)		(104	)		(243	)
Incentive fee credit		(596	)		—			(596	)		(278	)

Credit to fees from Adviser^(B)	$	(639	)	$	(123	)	$	(840	)	$	(574	)

⁽^A)

Average total assets subject to the base management fee is defined as total assets, including investments made with proceeds of borrowings, less any uninvested cash or cash equivalents resulting from borrowings, valued at the end of the applicable quarters within the respective periods and adjusted appropriately for any share issuances or repurchases during the periods.

^(B)	Reflected as a line item on our accompanying Condensed Consolidated Statements of Operations.

Base Management Fee

The base management fee is payable quarterly and assessed at an annual rate of 2.0%, computed on the basis of the value of our average total 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. In addition, the following three items are adjustments to the base management fee calculation:

•

Loan Servicing Fees

The Adviser also services the loans held by Business Loan, in return for which it receives a 1.5% annual fee, based on the monthly aggregate outstanding balance of loans pledged under our line of credit. Since we own these loans, all loan servicing fees paid to the Adviser are treated as reductions directly against the 2.0% base management fee under the Advisory Agreement.

•

Senior Syndicated Loan Fee Waiver

Our Board of Directors accepted an unconditional and irrevocable 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 senior syndicated loan participations, for the six months ended March 31, 2013 and 2012.

•

Portfolio Company Fees

Under the Advisory Agreement, the Adviser has also provided, and continues to provide, managerial assistance and other services to our portfolio companies and may receive fees for services other than managerial assistance with 50% of certain of these fees, and 100% of others, credited against the base management fee that we would otherwise be required to pay to the Adviser.

Incentive Fee

The incentive fee consists of two parts: an income-based incentive fee and a capital gains-based incentive fee. The income-based incentive fee rewards the Adviser if our quarterly net investment income (before giving effect to any incentive fee) exceeds 1.75% of our net assets (the “hurdle rate”). We will pay the Adviser an income-based incentive fee with respect to our pre-incentive fee net investment income in each calendar quarter as follows:

•

no incentive fee in any calendar quarter in which our pre-incentive fee net investment income does not exceed the hurdle rate (7.0% annualized);

•

100% of our pre-incentive fee net investment income with respect to that portion of such pre-incentive fee net investment income, if any, that exceeds the hurdle rate but is less than 2.1875% in any calendar quarter (8.75% annualized); and

•

20% of the amount of our pre-incentive fee net investment income, if any, that exceeds 2.1875% in any calendar quarter (8.75% annualized).

Our Board of Directors accepted an unconditional and irrevocable voluntary waiver from the Adviser to reduce the income-based incentive fee to the extent net investment income did not 100% cover distributions to common stockholders for the six months ended March 31, 2013 and 2012.

The second part of the incentive fee is a capital gains-based incentive fee that will be determined and payable 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% of our realized capital gains as of the end of the fiscal year. In determining the capital gains-based incentive fee payable to the Adviser, we will calculate the cumulative aggregate realized capital gains and cumulative aggregate realized capital losses since our inception, and the aggregate net unrealized capital depreciation as of the date of the calculation, as applicable, with respect to each of the investments in our portfolio. For this purpose, cumulative aggregate realized capital gains, if any, equals the sum of the differences between the net sales price of each investment, when sold, and the original cost of such investment since our inception. Cumulative aggregate realized capital losses equals the sum of the amounts by which the net sales price of each investment, when sold, is less than the original cost of such investment since our inception. Aggregate net unrealized capital depreciation equals the sum of the difference, if negative, between the valuation of each investment as of the applicable calculation date and the original cost of such investment. At the end of the applicable year, the amount of capital gains that serves as the basis for our calculation of the capital gains-based incentive fee equals the cumulative aggregate realized capital gains less cumulative aggregate realized capital losses, less aggregate net unrealized capital depreciation, with respect to our portfolio of investments. If this number is positive at the end of such year, then the capital gains-based incentive fee for such year equals 20% of such amount, less the aggregate amount of any capital gains-based incentive fees paid in respect of our portfolio in all prior years. No capital gains-based incentive fee has been recorded since our inception through March 31, 2013, as cumulative net unrealized capital depreciation has exceeded cumulative realized capital gains net of cumulative realized capital losses.

Additionally, in accordance with GAAP, a capital gains-based incentive fee accrual is calculated using the aggregate cumulative realized capital gains and losses and aggregate cumulative unrealized capital depreciation included in the calculation of the capital gains-based incentive fee plus the aggregate cumulative unrealized capital appreciation. If such amount is positive at the end of a period, then GAAP requires us to record a capital gains-based incentive fee equal to 20% of such amount, less the aggregate amount of actual capital gains-based incentive fees paid in all prior years. If such amount is negative, then there is no accrual for such year. GAAP requires that the capital gains-based incentive fee accrual consider the cumulative aggregate unrealized capital appreciation in the calculation, as a capital gains-based incentive fee would be payable if such unrealized capital appreciation were realized. There can be no assurance that such unrealized capital appreciation will be realized in the future. No GAAP accrual for a capital gains-based incentive fee has been recorded since our inception through March 31, 2013.

As a BDC, we make available significant managerial assistance to our portfolio companies and provide other services to such portfolio companies. Although neither we nor the Adviser receive fees in connection with managerial assistance, the Adviser provides other services to our portfolio companies and receives fees for these other services.

Administration Agreement

We have entered into an administration agreement (the “Administration Agreement”) with Gladstone Administration, LLC (the “Administrator”), an affiliate of the Adviser, whereby we pay separately for administrative services. The Administration Agreement provides for payments equal to our allocable portion of the Administrator’s overhead expenses in performing its obligations under the Administration Agreement, including, but not limited to, rent and the salaries and benefits expenses of our chief financial officer and treasurer, chief accounting officer, chief compliance officer, internal counsel and their respective staffs. Our allocable portion of administrative expenses is generally derived by multiplying the Administrator’s total allocable expenses by the percentage of our total assets at the beginning of the quarter in comparison to the total assets at the beginning of the quarter of all companies managed by the Adviser under similar agreements. On July 10, 2012, our Board of Directors approved the renewal of the Administration Agreement through August 31, 2013. In order for the term of the Administration Agreement to be extended, it must be reviewed and renewed annually by our Board of Directors.

Related Party Fees Due

Amounts due to related parties on our accompanying Condensed Consolidated Statements of Assets and Liabilities were as follows:


	March 31, 2013		September 30, 2012
Base management fee due to Adviser	$	679	$	695
Incentive fee due to Adviser		357		1,135

Total fees due to Adviser		1,036		1,830

Fee due to Administrator		187		174

Total related party fees due	$	1,223	$	2,004

Notes to Former Employees

We have outstanding loans to certain of our former employees, who are now employees of the Adviser. The notes were for the exercise of options granted under the Amended and Restated 2001 Equity Incentive Plan, which has since been terminated. The notes require the quarterly payment of interest at the market rate in effect at the date of issuance, have varying terms not exceeding ten years and have been recorded as a reduction of net assets. The notes are evidenced by full recourse notes that are due upon maturity or 60 days following termination of employment with the Adviser, and the shares of common stock purchased with the proceeds of the notes are posted as collateral. We received $1.8 million and $3 of principal repayments during the six months ended March 31, 2013 and 2012, respectively. As part of the principal payments made during the fiscal year ended September 30, 2012, one employee redeemed 39,082 common shares (20,000 in December 2011 and 19,082 in January 2012) and liquidated additional collateral to pay off an aggregate of $0.3 million of principal on his outstanding loans during the six months ended March 31, 2012. There were no redemptions of common shares held by employees during the six months ended March 31, 2013. We recognized interest income from all employee loans of $43 and $0.1 million for the three and six months ended March 31, 2013, respectively, and $0.1 million for the three and six months ended March 31, 2012, respectively.

The following table is a summary of all outstanding notes issued to employees of the Adviser for the exercise of stock options as of March 31, 2013 and September 30, 2012:

Original

Outstanding

Original

Current

Amount of

Balance of

Interest

Issue

Employee

Employee Notes

Maturity

Rate

Date

Notes

At March 31, 2013

At September 30, 2012

Date

on Note

On Note

Aug-01

5,900

^(A)

949

2,749

Aug-10

4.90