10-Q

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

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 DECEMBER 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 100 MCLEAN, VIRGINIA		22102
(Address of principal executive office)		(Zip Code)

(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 January 31, 2014 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 December 31 and September 30, 2013			3
Condensed Consolidated Statements of Operations for the three months ended December 31, 2013 and 2012			4
Condensed Consolidated Statements of Changes in Net Assets for the three months ended December 31, 2013 and 2012			5
Condensed Consolidated Statements of Cash Flows for the three months ended December 31, 2013 and 2012			6
Condensed Consolidated Schedules of Investments as of December 31 and September 30, 2013			7
Notes to Condensed Consolidated Financial Statements			15

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			34
Overview			34
Results of Operations			38
Liquidity and Capital Resources			42

Item 3. Quantitative and Qualitative Disclosures About Market Risk			52

Item 4. Controls and Procedures			53

PART II. OTHER INFORMATION

Item 1. Legal Proceedings			53

Item 1A. Risk Factors			53

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			53

Item 3. Defaults Upon Senior Securities			53

Item 4. Mine Safety Disclosures			53

Item 5. Other Information			53

Item 6. Exhibits			54

SIGNATURES			55

GLADSTONE CAPITAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES

(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

(UNAUDITED)


	December 31,			September 30,
	2013			2013
ASSETS
Investments at fair value
Non-Control/Non-Affiliate investments (Cost of $238,315 and $218,713, respectively)	$	203,566		$	181,870
Control investments (Cost of $93,962 and $104,113, respectively)		69,008			64,221
Affiliate investments (Cost of $9,440)		10,632			10,787

Total investments at fair value (Cost of $341,717 and $332,266, respectively)		283,206			256,878

Cash and cash equivalents		9,090			13,900
Restricted cash and cash equivalents		869			1,176
Interest receivable		2,485			2,488
Due from custodian		2,129			16,473
Deferred financing fees		2,770			3,086
Other assets		913			1,090

TOTAL ASSETS	$	301,462		$	295,091

LIABILITIES
Borrowings at fair value (Cost of $47,700 and $46,900, respectively)	$	47,908		$	47,102
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		38,497			38,497
Accounts payable and accrued expenses		492			494
Interest payable		148			170
Fees due to Adviser^(A)		855			1,706
Fee due to Administrator^(A)		203			126
Other liabilities		1,271			1,004

TOTAL LIABILITIES	$	89,374		$	89,099

Commitments and contingencies^(B)
NET ASSETS	$	212,088		$	205,992

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	$	21		$	21
Capital in excess of par value		322,936			322,936
Note receivable from employee^(A)		(175	)		(175	)
Cumulative net unrealized depreciation of investments		(58,511	)		(75,388	)
Cumulative net unrealized appreciation of other		(267	)		(260	)
Overdistributed net investment income		(100	)		(100	)
Accumulated net realized losses		(51,816	)		(41,042	)

TOTAL NET ASSETS	$	212,088		$	205,992

NET ASSET VALUE PER COMMON SHARE AT END OF PERIOD	$	10.10		$	9.81

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

^(B)	Refer to Note 11—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 December 31,
	2013			2012
INVESTMENT INCOME
Interest income:
Non-Control/Non-Affiliate investments	$	6,399		$	7,314
Control investments		1,569			812
Affiliate investments		219			—
Cash and cash equivalents		—			1
Notes receivable from employees^(A)		4			53

Total interest income		8,191			8,180
Other income:
Non-Control/Non-Affiliate investments		1			1,648
Control investments		200			—

Total investment income		8,392			9,828

EXPENSES
Base management fee^(A)		1,456			1,432
Incentive fee^(A)		974			1,215
Administration fee^(A)		203			150
Interest expense on borrowings		615			856
Dividend expense on mandatorily redeemable preferred stock		686			686
Amortization of deferred financing fees		315			256
Professional fees		290			258
Other general and administrative expenses		321			317

Expenses before credits from Adviser		4,860			5,170
Credits to fees from Adviser^(A)		(878	)		(201	)

Total expenses net of credits		3,982			4,969

NET INVESTMENT INCOME		4,410			4,859

NET REALIZED AND UNREALIZED GAIN
Net realized loss:
Non-Control/Non-Affiliate investments		—			(641	)
Control investments		(10,774	)		(2,407	)

Total net realized loss		(10,774	)		(3,048	)
Net unrealized appreciation (depreciation):
Non-Control/Non-Affiliate investments		2,094			(86	)
Control investments		14,938			4,971
Affiliate investments		(155	)		—
Other		(7	)		1,670

Total net unrealized appreciation		16,870			6,555

Net realized and unrealized gain		6,096			3,507

NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS	$	10,506		$	8,366

BASIC AND DILUTED PER COMMON SHARE:
Net investment income	$	0.21		$	0.23

Net increase in net assets resulting from operations	$	0.50		$	0.40

WEIGHTED AVERAGE SHARES OF COMMON STOCK OUTSTANDING:
Basic and Diluted		21,000,160			21,000,160

^(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)


	Three Months Ended December 31,
	2013			2012
OPERATIONS
Net investment income	$	4,410		$	4,859
Net realized loss on investments		(10,774	)		(3,048	)
Net unrealized appreciation of investments		16,877			4,885
Net unrealized (appreciation) depreciation of other		(7	)		1,670

Net increase in net assets resulting from operations		10,506			8,366

DISTRIBUTIONS
Distributions to common stockholders		(4,410	)		(4,410	)
NET INCREASE IN NET ASSETS		6,096			3,956
NET ASSETS, BEGINNING OF PERIOD		205,992			188,564

NET ASSETS, END OF PERIOD	$	212,088		$	192,520

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)


	Three Months Ended December 31,
	2013			2012
CASH FLOWS FROM OPERATING ACTIVITIES
Net increase in net assets resulting from operations	$	10,506		$	8,366
Adjustments to reconcile net increase in net assets resulting from operations to net cash (used in) provided by operating activities:
Purchase of investments		(44,881	)		(51,818	)
Principal repayments on investments		24,667			50,596
Proceeds from sale of investments		—			5,918
Increase in investment balance due to paid-in-kind interest		(53	)		—
Net change in premiums, discounts and amortization		84			474
Net realized loss on investments		10,732			3,162
Net unrealized appreciation of investments		(16,877	)		(4,885	)
Net unrealized appreciation (depreciation) of other		7			(1,670	)
Decrease (increase) in restricted cash and cash equivalents		307			(849	)
Amortization of deferred financing fees		315			257
Decrease in interest receivable		3			32
Decrease (increase) in due from custodian		14,344			(688	)
Decrease in other assets		177			254
Decrease in accounts payable and accrued expenses		(2	)		(80	)
Decrease in interest payable		(22	)		(12	)
Decrease in fees due to Adviser^(A)		(851	)		(46	)
Increase (decrease) in fee due to Administrator^(A)		77			(24	)
Increase (decrease) in other liabilities		267			(45	)

Net cash (used in) provided by operating activities		(1,200	)		8,942

CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings		42,400			44,000
Repayments on borrowings		(41,600	)		(47,000	)
Distributions paid to common stockholders		(4,410	)		(4,410	)

Net cash used in financing activities		(3,610	)		(7,410	)

NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS		(4,810	)		1,532
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD		13,900			9,857

CASH AND CASH EQUIVALENTS, END OF PERIOD	$	9,090		$	11,389

^(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 SCHEDULE OF INVESTMENTS

DECEMBER 31, 2013

(DOLLAR AMOUNTS IN THOUSANDS)

(UNAUDITED)


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

AG Transportation Holdings, LLC	Cargo transport	Senior Subordinated Term Debt (13.3%, Due 3/2018)^(D)	$	13,000	$	12,839	$	13,065
		Member Profit Participation (18.0% ownership)^(F) (G)				1,000		—
		Profit Participation Warrants (7.0% ownership)^(F) (G)				244		—

						14,083		13,065

Allison Publications, LLC	Printing and publishing	Line of Credit, $0 available (8.3%, Due 9/2016)^(D)		600		600		599
		Senior Term Debt (8.3% , Due 9/2018)^(D)		2,875		2,875		2,871
		Senior Term Debt (13.0% , Due 9/2018)^(C) (D)		5,400		5,400		5,393

						8,875		8,863

Alloy Die Casting Co.	Diversified/conglomerate manufacturing	Senior Term Debt (13.5%, Due 10/2018)^(I)		5,235		5,235		5,235
		Preferred Stock (1,742 shares)^{(G) (I)}				1,742		1,742
		Common Stock (270 shares)^{(G) (I)}				18		18

						6,995		6,995

BAS Broadcasting	Broadcasting and entertainment	Senior Term Debt (11.5%, Due 7/2013)^(D)		7,465		7,465		560

Behrens Manufacturing, LLC	Diversified/conglomerate manufacturing	Senior Term Debt (13.0%, Due 12/2018)^(I)		4,275		4,275		4,275
		Preferred Stock (1,253 shares)^{(G) (I) (L)}				1,253		1,253

						5,528		5,528

Chinese Yellow Pages Company	Printing and publishing	Line of Credit, $0 available (7.3%, Due 2/2015)^(D)		198		198		114

Francis Drilling Fluids, Ltd.	Oil and gas	Senior Subordinated Term Debt (12.0%, Due 11/2017)^(D)		15,000		15,000		14,700
		Preferred Equity Units (999 units)^{(F) (G)}				999		73
		Common Equity Units (999 units)^{(F) G)}				1		—

						16,000		14,773

Funko, LLC	Personal and non-durable consumer products	Senior Subordinated Term Debt (12.0% and 1.5% PIK, Due 5/2019)^(D)		7,558		7,558		7,672
		Preferred Equity Units (1,305 units)^(F) (G)				1,305		2,235

						8,863		9,907

GFRC Holdings, LLC	Buildings and real estate	Senior Term Debt (10.5%, Due 6/2016)^(D)		4,924		4,924		3,447
		Senior Subordinated Term Debt (13.0%, Due 6/2016)^(D)		6,598		6,598		4,619

						11,522		8,066

Heartland Communications Group	Broadcasting and entertainment	Line of Credit, $0 available (5.0%, Due 3/2014)^(D)		100		100		12
		Line of Credit, $0 available (10.0%, Due 3/2014)^(D)		100		100		12
		Senior Term Debt (5.0%, Due 3/2014)^(D)		4,342		4,342		521
		Common Stock Warrants (8.8% ownership)^(F) (G)				66		—

						4,608		545

International Junior Golf Training Acquisition Company	Leisure, amusement, motion	Line of Credit, $0 available (11.0%, Due 5/2014)^(D)		2,250		2,250		1,125
	pictures and entertainment	Senior Term Debt (10.5%, Due 5/2014)^(D)		61		61		31
		Senior Term Debt (12.5%, Due 5/2014)^{(C) (D)}		2,700		2,700		1,350

						5,011		2,506

J.America, Inc.	Personal and non-durable consumer products	Senior Subordinated Term Debt (10.4%, Due 12/2019)^(I)		7,500		7,500		7,500
		Senior Subordinated Term Debt (11.5%, Due 12/2019)^(I)		9,500		9,500		9,500

						17,000		17,000

Leeds Novamark Capital I, L.P.	Private equity fund – healthcare, education and childcare	Limited Partnership Interest (8.4% ownership, $2,800 uncalled capital commitment)^{(G) (M)}				173		173

Legend Communications of Wyoming, LLC	Broadcasting and entertainment	Senior Term Debt (12.0%, Due 12/2013)^(D)		6,874		6,874		1,203

GLADSTONE CAPITAL CORPORATION

CONDENSED CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

DECEMBER 31, 2013

(DOLLAR AMOUNTS IN THOUSANDS)

(UNAUDITED)


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

Meridian Rack & Pinion, Inc.	Automobile	Senior Term Debt (13.5%, Due 12/2018)^(I)	$	4,140	$	4,140	$	4,140
		Preferred Stock (1,449 shares)^{(G) (I)}				1,449		1,449

						5,589		5,589

North American Aircraft Services, LLC	Aerospace and defense	Senior Subordinated Term Debt (11.8%, Due 8/2016)^(D)		4,750		4,750		4,797
		Senior Subordinated Term Debt (12.5%, Due 8/2016)^(D)		2,820		2,820		2,848
		Common Stock Warrants (35,000 shares)^{(F) (G)}				350		955

						7,920		8,600

Ohana Media Group	Broadcasting and entertainment	Senior Term Debt (10.0%, Due 10/2016)^(D)		1,453		1,453		1,422

POP Radio, LLC	Broadcasting and entertainment	Senior Term Debt (11.8%, Due 5/2017)^(J)		7,134		7,134		7,134
		Junior Subordinated Term Debt (11.0% PIK, Due 11/2017)^(J)		556		496		556
		Participation Unit (2.4% ownership)^{(G) (J)}				75		145

						7,705		7,835

Precision Acquisition Group Holdings, Inc.	Machinery	Equipment Note (13.0%, Due 3/2014)^(D)		1,000		1,000		705
		Senior Term Debt (13.0%, Due 3/2014)^(D)		4,125		4,125		2,908
		Senior Term Debt (13.0%, Due 3/2014)^{(C) (D)}		4,053		4,053		2,857

						9,178		6,470

Saunders & Associates	Electronics	Line of Credit, $0 available (11.3%, Due 5/2013)^(D)		917		917		825
		Senior Term Debt (11.3%, Due 5/2013)^(D)		8,947		8,947		8,052

						9,864		8,877

Sunburst Media—Louisiana, LLC	Broadcasting and entertainment	Senior Term Debt (10.5%, Due 2/2014)^(D)		6,026		6,026		422

Thibaut Acquisition Co.	Home and office furnishings, housewares and durable consumer products	Line of Credit, $1,000 available (9.0%, Due 8/2014)^(D)		—		—		—
		Senior Term Debt (12.0%, Due 8/2014)^{(C) (D)}		2,369		2,369		2,416

						2,369		2,416

Westland Technologies, Inc.	Diversified/conglomerate manufacturing	Senior Term Debt (7.5%, Due 4/2016)^(D)		650		650		566
		Senior Term Debt (12.5%, Due 4/2016)^(D)		4,000		4,000		3,480
		Common Stock Warrants (77,287 shares)^{(F) (G)}				350		—

						5,000		4,046

*Subtotal – Non-syndicated investments*					$	168,299	$	134,975

Syndicated Investments:

Allied Security Holdings, LLC	Personal, food and miscellaneous services	Senior Subordinated Term Debt (9.8%, Due 2/2018)^(E)	$	1,000	$	993	$	1,007

Ameriqual Group, LLC	Beverage, food and tobacco	Senior Term Debt (9.0% and 1.3% PIK, Due 3/2016)^(E)		7,313		7,236		7,020

Ardent Medical Services, Inc.	Healthcare, education and childcare	Senior Subordinated Term Debt (11.0%, Due 1/2019)^(E)		4,000		3,930		4,030

ARSloane Acquisition, LLC	Printing and publishing	Senior Subordinated Term Debt (11.8%, Due 9/2020)^(E)		5,000		4,920		4,900

Ascend Learning, LLC	Healthcare, education and childcare	Senior Subordinated Term Debt (11.5%, Due 12/2017)^(E)		1,000		981		1,000

Autoparts Holdings Limited	Automobile	Senior Term Debt (10.5%, Due 1/2018)^(E)		1,000		997		930

Blue Coat Systems, Inc.	Electronics	Senior Subordinated Term Debt (9.5%, Due 6/2020)^(E)		3,000		2,971		3,060

Envision Acquisition Company, LLC	Healthcare, education and childcare	Senior Subordinated Term Debt (9.8%, Due 11/2021)^(E)		2,500		2,451		2,506

First American Payment Systems, L.P.	Finance	Senior Subordinated Term Debt (10.8%, Due 4/2019)^(E)		4,500		4,470		4,264

GLADSTONE CAPITAL CORPORATION

CONDENSED CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

DECEMBER 31, 2013

(DOLLAR AMOUNTS IN THOUSANDS)

(UNAUDITED)


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

New Trident Holdcorp, Inc.	Healthcare, education and childcare	Senior Subordinated Term Debt (10.3%, Due 7/2020)^(E)	$	4,000	$	3,986	$	4,000

PLATO Learning, Inc.	Healthcare, education and childcare	Senior Subordinated Term Debt (11.3%, Due 5/2019)^(E)		5,000		4,916		5,000

RP Crown Parent, LLC	Electronics	Senior Subordinated Term Debt (11.3%, Due 12/2019)^(E)		2,000		1,964		2,020

Sensus USA, Inc.	Electronics	Senior Term Debt (8.5%, Due 5/2018)^(E)		500		497		498

Steinway Musical Instruments, Inc.	Personal and non-durable consumer products	Senior Subordinated Term Debt (9.3%, Due 9/2020)^(E)		250		247		257

SumTotal Systems, Inc.	Electronics	Senior Subordinated Term Debt (10.3%, Due 5/2019)^(E)		4,000		3,930		3,930

Targus Group International, Inc.	Textiles and leather	Senior Term Debt (11.0% and 1.0% PIK, Due 5/2016)^(E)		9,322		9,213		7,598

The Active Network, Inc.	Electronics	Senior Subordinated Term Debt (9.5%, Due 11/2021)^(E)		1,000		995		1,015

Vision Solutions, Inc.	Electronics	Senior Term Debt (9.5%, Due 7/2017)^(E)		11,000		10,942		11,055

Vitera Healthcare Solutions, LLC	Healthcare, education and childcare	Senior Subordinated Term Debt (9.3%, Due 11/2021)^(E)		500		493		503

W3, Co.	Oil and gas	Senior Subordinated Term Debt (9.3%, Due 9/2020)^(E)		499		494		501

Wall Street Systems Holdings, Inc.	Electronics	Senior Term Debt (9.3%, Due 10/2020)^(E)		3,000		2,946		3,030

WP Evenflo Group Holdings, Inc.	Diversified/conglomerate manufacturing	Senior Preferred Equity (333 shares)^{(F) (G)}				333		467
		Junior Preferred Equity (111 shares)^{(F) (G)}				111		—
		Common Stock (1,874 shares)^{(F) (G)}				—		—

						444		467

*Subtotal—Syndicated investments*					$	70,016	$	68,591

Total Non-Control/Non-Affiliate Investments (represented 71.9% of total investments at fair value)					$	238,315	$	203,566

CONTROL INVESTMENTS^(O):

Defiance Integrated Technologies, Inc.	Automobile	Senior Subordinated Term Debt (11.0%, Due 4/2016)^(C) (F)	$	6,785	$	6,785	$	6,785
		Common Stock (15,500 shares)^{(F) (G)}				1		1,663

						6,786		8,448

Lindmark Acquisition, LLC	Broadcasting and entertainment	Senior Subordinated Term Debt (25.0%, Due Upon Demand^(F)		—		—		—
		Success Fee on Senior Subordinated Term Debt^(F)				—		932
		Common Stock (100 shares)^{(F) (G)}				317		—

						317		932

Midwest Metal Distribution, Inc.	Mining, steel, iron and non-precious metals	Senior Subordinated Term Debt (12.0%, Due 7/2015)^(D)		18,281		18,281		18,098
		Preferred Stock (2,175 shares)^{(F) (G) (L)}				2,175		—
		Common Stock (501 shares)^{(F) (G)}				138		—

						20,594		18,098

RBC Acquisition Corp.	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)		6,941		6,941		6,941
		Senior Term Debt (12.0%, Due 12/2014)^(C) (F)		11,392		11,392		11,392
		Senior Subordinated Term Debt (12.5%, Due 12/2014)^(F)		6,000		6,000		6,000
		Preferred Stock (2,299,000 shares)^{(F) (G) (L)}				2,299		2,519
		Common Stock (2,000,000 shares)^{(F) (G)}				370		3,367

						31,002		34,219

GLADSTONE CAPITAL CORPORATION

CONDENSED CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

DECEMBER 31, 2013

(DOLLAR AMOUNTS IN THOUSANDS)

(UNAUDITED)


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

Sunshine Media Holdings	Printing and publishing	Line of credit, $400 available (4.8%, Due 8/2014)^(D) (H)	$	1,600	$	1,600	$	400
		Senior Term Debt (4.8%, Due 5/2016)^(D) (H)		16,948		16,948		4,236
		Senior Term Debt (5.5%, Due 5/2016)^{(C) (D) (H)}		10,700		10,700		2,675
		Preferred Equity (15,270 shares)^{(F) (G) (L)}				5,275		—
		Common Stock (1,867 shares)^{(F) (G)}				740		—
		Common Stock Warrants (72 shares)^(F) (G)				—		—

						35,263		7,311

Total Control Investments (represented 24.4% of total investments at fair value)					$	93,962	$	69,008

AFFILATE INVESTMENTS^(P):

Ashland Acquisition, LLC	Printing and publishing	Line of Credit, $1,500 available (12.0%, Due 7/2016)^(D)	$	—	$	—	$	—
		Senior Term Debt (12.0%, Due 7/2018)^(D)		7,000		7,000		7,062
		Common Equity Units (4,400 units)^(F) (G)				440		223
		Preferred Equity Units (4,400 units)^(F) (G)				—		—

						7,440		7,285

FedCap Partners, LLC	Private equity fund – aerospace and defense	Class A Membership Units (80 units)^(G) (K)				2,000		3,347

Total Affiliate Investments (represented 3.7% of total investments at fair value)					$	9,440	$	10,632

TOTAL INVESTMENTS					$	341,717	$	283,206

^(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 as of December 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 December 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)	New proprietary portfolio investment valued at cost, as it was determined that the price paid during the three months ended December 31, 2013, best represents fair value as of December 31, 2013.

^(J)	Subsequent to December 31, 2013, our investment in Pop Radio, LLC paid off and therefore was valued at the pay off amount as of December 31, 2013.

^(K)	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. No Class A member may withdraw or resign from the entity prior to the dissolution and winding up of the entity.

^(L)	Aggregates all shares of such class of stock owned without regard to specific series owned within such class, some series of which may or may not be voting shares.

^(M)	There are certain limitations on our ability to withdraw our partnership interest prior to dissolution of the entity, which must occur no later than ten years after the not yet determined final closing date or two years after all outstanding leverage has matured.

^(N)	Non-Control/Non-Affiliate investments, as defined by the Investment Company Act of 1940, as amended, (the “1940 Act”), are those that are neither Control nor Affiliate investments and in which we own less than 5.0% of the issued and outstanding voting securities.

^(O)	Control investments, as defined by the 1940 Act, are those where we have the power to exercise a controlling influence over the management or policies of the portfolio company, which may include owning, with the power to vote, more than 25.0% of the issued and outstanding voting securities.

^(P)	Affiliate investments, as defined by the 1940 Act, are those in which we own, with the power to vote, between and inclusive of 5.0% and 25.0% of the issued and outstanding voting securities.

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

GLADSTONE CAPITAL CORPORATION

CONDENSED CONSOLIDATED SCHEDULE OF INVESTMENTS

SEPTEMBER 30, 2013

(DOLLAR AMOUNTS IN THOUSANDS)


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

AG Transportation Holdings, LLC	Cargo transport	Senior Subordinated Term Debt (13.3%, Due 3/2018)^(D)	$	13,000	$	12,818	$	12,984
		Member Profit Participation (18.0% ownership)^(F) (G)				1,000		—
		Profit Participation Warrants (7.0% ownership)^(F) (G)				244		—

						14,062		12,984

Allen Edmonds Shoe Corporation	Personal and non-durable consumer products	Senior Subordinated Term Debt (11.3%, Due 12/2015)^(D)		19,483		19,483		19,604

Allison Publications, LLC	Printing and publishing	Line of Credit, $0 available (8.3%, Due 9/2016)^(D)		600		600		594
		Senior Term Debt (8.3% , Due 9/2018)^(D)		2,875		2,875		2,846
		Senior Term Debt (13.0% , Due 9/2018)^(C) (D)		5,400		5,400		5,346

						8,875		8,786

BAS Broadcasting	Broadcasting and entertainment	Senior Term Debt (11.5%, Due 7/2013)^(D)		7,465		7,465		373

Chinese Yellow Pages Company	Printing and publishing	Line of Credit, $0 available (7.3%, Due 2/2015)^(D)		243		243		148

Francis Drilling Fluids, Ltd.	Oil and gas	Senior Subordinated Term Debt (12.0%, Due 11/2017)^(D)		15,000		15,000		14,475
		Preferred Equity Units (999 units)^{(F) (G)}				999		192
		Common Equity Units (999 units)^{(F) G)}				1		—

						16,000		14,667

Funko, LLC	Personal and non-durable consumer products	Senior Subordinated Term Debt (12.0% and 1.5% PIK, Due 5/2019)^(D)		7,530		7,530		7,530
		Preferred Equity Units (1,250 units)^(F) (G)				1,250		1,646

						8,780		9,176

GFRC Holdings, LLC	Buildings and real estate	Line of Credit, $100 available (8.7%, Due 12/2013)^(D) (I)		100		100		55
		Senior Term Debt (10.5%, Due 12/2013)^(D) (I)		4,924		4,924		2,708
		Senior Subordinated Term Debt (13.0%, Due 12/2013)^(D) (I)		6,598		6,598		3,629

						11,622		6,392

Heartland Communications Group	Broadcasting and entertainment	Line of Credit, $0 available (5.0%, Due 3/2014)^(D)		100		100		20
		Line of Credit, $0 available (10.0%, Due 3/2014)^(D)		100		100		20
		Senior Term Debt (5.0%, Due 3/2014)^(D)		4,342		4,342		868
		Common Stock Warrants (8.8% ownership)^(F) (G)				66		—

						4,608		908

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		1,238

		Senior Term Debt (10.5%, Due 12/2013)^(D)		261		261		144
		Senior Term Debt (12.5%, Due 5/2014)^{(C) (D)}		2,500		2,500		1,375

						5,011		2,757

Leeds Novamark Capital I, L.P.	Private equity fund – healthcare, education and childcare	Limited Partnership Interest (8.4% ownership, $2,700 uncalled capital commitment)^{(G) (O)}				253		253

Legend Communications of Wyoming, LLC	Broadcasting and entertainment	Senior Term Debt (11.0%, Due 12/2013)^(D)		6,874		6,874		1,203

GLADSTONE CAPITAL CORPORATION

CONDENSED CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

SEPTEMBER 30, 2013

(DOLLAR AMOUNTS IN THOUSANDS)


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

North American Aircraft Services, LLC	Aerospace and defense	Senior Subordinated Term Debt (11.8%, Due 8/2016)^(D)	$	4,750	$	4,750	$	4,774
		Senior Subordinated Term Debt (12.5%, Due 8/2016)^(D)		2,820		2,820		2,834
		Common Stock Warrants (35,000 shares)^(F) (G)				350		774

						7,920		8,382

Ohana Media Group	Broadcasting and entertainment	Senior Term Debt (10.0%, Due 10/2016)^(D)		1,472		1,472		1,432

POP Radio, LLC	Broadcasting and entertainment	Senior Term Debt (11.8%, Due 5/2017)^(D)		9,422		9,422		9,540
		Junior Subordinated Term Debt (11.0% PIK, Due 11/2017)^(D)		556		494		561
		Participation Unit (2.4% ownership)^(F) (G)				75		—

						9,991		10,101

Precision Acquisition Group Holdings, Inc.	Machinery	Equipment Note (11.0%, Due 3/2014)^(D) (L)		1,000		1,000		700
		Senior Term Debt (11.0%, Due 3/2014)^(D) (L)		4,125		4,125		2,888
		Senior Term Debt (11.0%, Due 3/2014)^{(C) (D) (L)}		4,053		4,053		2,837

						9,178		6,425

PROFIT Systems Acquisition Co.	Electronics	Senior Term Debt (10.5%, Due 7/2014)^{(C) (D) (K)}		1,950		1,950		1,950

Saunders & Associates	Electronics	Line of Credit, $0 available (11.3%, Due 5/2013)^(D)		917		917		779
		Senior Term Debt (11.3%, Due 5/2013)^(D)		8,947		8,947		7,605

						9,864		8,384

Sunburst Media—Louisiana, LLC	Broadcasting and entertainment	Senior Term Debt (10.5%, Due 11/2013)^(D)		6,000		6,000		600

Thibaut Acquisition Co.	Home and office furnishings, housewares and durable consumer products	Line of Credit, $875 available (9.0%, Due 1/2014)^(D) (J)		125		125		126
		Senior Term Debt (12.0%, Due 1/2014)^{(C) (D) (J)}		2,500		2,500		2,525

						2,625		2,651

Westland Technologies, Inc.	Diversified/conglomerate manufacturing	Senior Term Debt (7.5%, Due 4/2016)^(D)		850		850		723
		Senior Term Debt (12.5%, Due 4/2016)^(D)		4,000		4,000		3,400
		Common Stock Warrants (77,287 shares)^{(F) (G)}				350		18

						5,200		4,141

*Subtotal – Non-syndicated investments*					$	157,476	$	121,317

Syndicated Investments:

Allied Security Holdings, LLC	Personal, food and miscellaneous services	Senior Subordinated Term Debt (9.8%, Due 2/2018)^(E)	$	1,000	$	992	$	1,008

Ameriqual Group, LLC	Beverage, food and tobacco	Senior Term Debt (9.0%, Due 3/2016)^(E)		7,331		7,248		7,038

Ardent Medical Services, Inc.	Healthcare, education and childcare	Senior Subordinated Term Debt (11.0%, Due 1/2019)^(E)		4,000		3,927		4,070

Ascend Learning, LLC	Healthcare, education and childcare	Senior Subordinated Term Debt (11.5%, Due 12/2017)^(E)		1,000		980		1,000

Autoparts Holdings Limited	Automobile	Senior Term Debt (10.5%, Due 1/2018)^(E)		1,000		996		969

Blue Coat Systems, Inc.	Electronics	Senior Subordinated Term Debt (9.5%, Due 6/2020)^(E)		3,000		2,971		3,015

First American Payment Systems, L.P.	Finance	Senior Subordinated Term Debt (10.8%, Due 4/2019)^(E)		4,500		4,469		4,489

New Trident Holdcorp, Inc.	Healthcare, education and childcare	Senior Subordinated Term Debt (10.3%, Due 7/2020)^(E)		4,000		3,985		4,025

PLATO Learning, Inc.	Healthcare, education and childcare	Senior Subordinated Term Debt (11.3%, Due 5/2019)^(E)		5,000		4,914		5,000

GLADSTONE CAPITAL CORPORATION

CONDENSED CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

SEPTEMBER 30, 2013

(DOLLAR AMOUNTS IN THOUSANDS)


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

RP Crown Parent, LLC	Electronics	Senior Subordinated Term Debt (11.3%, Due 12/2019)^(E)	$	2,000	$	1,963	$	2,025

Sensus USA, Inc.	Electronics	Senior Term Debt (8.5%, Due 5/2018)^(E)		500		496		485

Steinway Musical Instruments, Inc.	Personal and non-durable consumer products	Senior Subordinated Term Debt (9.3%, Due 9/2020)^(E)		250		247		252

SumTotal Systems, Inc.	Electronics	Senior Subordinated Term Debt (10.3%, Due 5/2019)^(E)		4,000		3,928		3,940

Targus Group International, Inc.	Textiles and leather	Senior Term Debt (11.0% and 1.0% PIK, Due 5/2016)^(E)		9,418		9,299		8,476

Vision Solutions, Inc.	Electronics	Senior Term Debt (9.5%, Due 7/2017)^(E)		11,000		10,939		10,890

W3, Co.	Oil and gas	Senior Subordinated Term Debt (9.3%, Due 9/2020)^(E)		499		494		507

Wall Street Systems Holdings, Inc.	Electronics	Senior Term Debt (9.3%, Due 10/2020)^(E)		3,000		2,945		3,023

WP Evenflo Group Holdings, Inc.	Diversified/conglomerate manufacturing	Senior Preferred Equity (333 shares)^{(F) (G)}				333		341
		Junior Preferred Equity (111 shares)^{(F) (G)}				111		—
		Common Stock (1,874 shares)^{(F) (G)}				—		—

						444		341

*Subtotal—Syndicated investments*					$	61,237	$	60,553

Total Non-Control/Non-Affiliate Investments (represented 70.8% of total investments at fair value)					$	218,713	$	181,870

CONTROL INVESTMENTS^(Q):

Defiance Integrated Technologies, Inc.	Automobile	Senior Subordinated Term Debt (11.0%, Due 4/2016)^(C) (F)	$	6,865	$	6,865	$	6,865
		Common Stock (15,500 shares)^{(F) (G)}				1		1,867

						6,866		8,732

Lindmark Acquisition, LLC	Broadcasting and entertainment	Senior Subordinated Term Debt (25.0%, Due Upon Demand^(F)		—		—		—
		Success Fee on Senior Subordinated Term Debt^(F)				—		916
		Common Stock (100 shares)^{(F) (G)}				317		—

						317		916

LocalTel, LLC	Printing and publishing	Line of credit, $199 available (10.0%, Due 6/2014)^(F) (H)		3,285		3,285		—
		Line of Credit, $1,830 available (4.7%, Due 6/2014)^(F) (H)		1,170		1,170		—
		Senior Term Debt (12.5%, Due 6/2014)^(F) (H)		325		325		—
		Senior Term Debt (8.5%, Due 6/2014)^(F) (H)		2,688		2,688		—
		Senior Term Debt (10.5%, Due 6/2014)^{(C) (F) (H)}		2,750		2,750		—
		Common Stock Warrants (4,000 shares)^{(F) (G)}				—		—

						10,218		—

Midwest Metal Distribution, Inc.	Mining, steel, iron and non-precious metals	Senior Subordinated Term Debt (12.0%, Due 7/2015)^(D)		18,281		18,281		17,733
		Preferred Stock (2,000 shares)^{(F) (G) (N)}				2,000		—
		Common Stock (501 shares)^{(F) (G)}				138		—

						20,419		17,733

RBC Acquisition Corp.	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)		6,969		6,969		6,969
		Senior Term Debt (12.0%, Due 12/2014)^(C) (F)		11,392		11,392		11,392
		Senior Subordinated Term Debt (12.5%, Due 12/2014)^(F)		6,000		6,000		6,000
		Preferred Stock (2,299,000 shares)^{(F) (G) (N)}				2,299		2,447
		Common Stock (2,000,000 shares)^{(F) (G)}				370		183

						31,030		30,991

GLADSTONE CAPITAL CORPORATION

CONDENSED CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

SEPTEMBER 30, 2013

(DOLLAR AMOUNTS IN THOUSANDS)


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

Sunshine Media Holdings	Printing and publishing	Line of credit, $400 available (4.8%, Due 8/2014)^(D) (H)	$	1,600	$	1,600	$	320
		Senior Term Debt (4.8%, Due 5/2016)^(D) (H)		16,948		16,948		3,389
		Senior Term Debt (5.5%, Due 5/2016)^{(C) (D) (H)}		10,700		10,700		2,140
		Preferred Equity (15,270 shares)^{(F) (G) (N)}				5,275		—
		Common Stock (1,867 shares)^{(F) (G)}				740		—
		Common Stock Warrants (72 shares)				—		—

						35,263		5,849

Total Control Investments (represented 25.0% of total investments at fair value)					$	104,113	$	64,221

AFFILATE INVESTMENTS^(R):

Ashland Acquisition, LLC	Printing and publishing	Line of Credit, $1,500 available (12.0%, Due 7/2016)^(D)	$	—	$	—	$	—
		Senior Term Debt (12.0%, Due 7/2018)^(D)		7,000		7,000		7,000
		Common Equity Units (8,800 units)^{(F) (G) (N)}				440		440

						7,440		7,440

FedCap Partners, LLC	Private equity fund – aerospace and defense	Class A Membership Units (80 units)^(G) (M)				2,000		3,347

Total Affiliate Investments (represented 4.2% of total investments at fair value)					$	9,440	$	10,787

TOTAL INVESTMENTS^(S)					$	332,266	$	256,878

^(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 as of September 30, 2013, 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, 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)	Subsequent to September 30, 2013, the maturity on GFRC Holdings, LLC’s debt was extended until June 30, 2016 and the GFRC Holdings, LLC’s line of credit was repaid in full and terminated.

^(J)	Subsequent to September 30, 2013, the maturity on Thibaut Acquisition Co.’s debt was extended until December 11, 2014.

^(K)	Subsequent to September 30, 2013, the investment was paid off at par and therefore was valued at the pay off amount as of September 30, 2013.

^(L)	Effective October 1, 2013, Precision Acquisition Group Holdings, Inc.’s debt interest rates increased to 13.0%.

^(M)	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. No Class A member may withdraw or resign from the entity prior to the dissolution and winding up of the entity.

^(N)	Aggregates all shares of such class of stock owned without regard to specific series owned within such class, some series of which may or may not be voting shares.

^(O)	There are certain limitations on our ability to withdraw our partnership interest prior to dissolution of the entity, which must occur no later than ten years after the not yet determined final closing date or two years after all outstanding leverage has matured.

^(P)	Non-Control/Non-Affiliate investments, as defined by the Investment Company Act of 1940, as amended, (the “1940 Act”), are those that are neither Control nor Affiliate investments and in which we own less than 5.0% of the issued and outstanding voting securities.

^(Q)	Control investments, as defined by the 1940 Act, are those where we have the power to exercise a controlling influence over the management or policies of the portfolio company, which may include owning, with the power to vote, more than 25.0% of the issued and outstanding voting securities.

^(R)	Affiliate investments, as defined by the 1940 Act, are those in which we own, with the power to vote, between and inclusive of 5.0% and 25.0% of the issued and outstanding voting securities.

^(S)	Cumulative gross unrealized depreciation for federal income tax purposes is $83.7 million; cumulative gross unrealized appreciation for federal income tax purposes is $5.5 million. Cumulative net unrealized depreciation is $78.2 million, based on a tax cost of $335.1 million.

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

GLADSTONE CAPITAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

DECEMBER 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 an externally-managed, 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”). We were established for the purpose of investing in debt and equity securities of established private businesses in the United States (“U.S.”). 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 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 revolving line of credit.

Gladstone Financial Corporation (previously known as Gladstone SSBIC Corporation and herein referred to as “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 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. As of December 31 and September 30, 2013, we held no investments through Gladstone Financial.

The financial statements of the foregoing two subsidiaries are consolidated with those of ours. We also have significant subsidiaries whose financial statements are not consolidated with ours. Refer to Note 13—Unconsolidated Significant Subsidiaries for additional information regarding our unconsolidated significant subsidiaries.

We are externally managed by our investment adviser, Gladstone Management Corporation (the “Adviser”), a Securities and Exchange Commission (the “SEC”) registered investment adviser and an affiliate of ours, pursuant to an investment advisory and management agreement (the “Advisory Agreement”). Administrative services are provided by our affiliate Gladstone Administration, LLC (the “Administrator”), a Delaware limited liability company, pursuant to an administration agreement (the “Administration 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 Articles 6 and 10 of Regulation S-X. 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, 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 months ended December 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, 2013, as filed with the SEC on November 20, 2013.

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.

Reclassifications

Certain amounts in the prior year’s financial statements have been reclassified to conform to the presentation for the three months ended December 31, 2013, with no effect on our financial condition, results of operations or cash flows.

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 the Policy to determine if changes thereto are advisable and also 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 valuation techniques in accordance with GAAP to value our portfolio. 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 December 31 and September 30, 2013, 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, it 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 the Adviser 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 December 31 and September 30, 2013, 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), we 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 the Adviser by Standard & Poor’s Securities Evaluations, Inc. (“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. 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 securities, 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 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 at the same time. Applying the liquidity waterfall approach to all of our investments in 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 securities, 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, its 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, acquisition costs, and amendment fees and the accretion of original issue discounts (“OID”), 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 for financial reporting purposes 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, the interest income is deemed to be collectable. As of December 31, 2013, one portfolio company was on non-accrual with a debt cost basis of approximately $29.2 million, or 9.2% of the cost basis of all debt investments in our portfolio, and a debt fair value of approximately $7.3 million, or 2.8% of the fair value of all debt investments in our portfolio. As of September 30, 2013, two portfolio companies were on non-accrual with an aggregate debt cost basis of approximately $39.5 million, or 12.6% of the cost basis of all debt investments in our portfolio, and an aggregate debt fair value of approximately $5.8 million, or 2.4% of the fair value of all debt investments in our portfolio.

We currently hold, and we expect to hold in the future, some loans in our portfolio that contain OID or PIK provisions. We recognize OID for loans originally issued at discounts and recognize the income over the life of the obligation based on an effective yield calculation. 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 over the life of the obligation. Thus, the actual collection of PIK income may be deferred until the time of debt principal repayment. To maintain our ability to be taxed as a RIC, we may need to pay out both of our OID and PIK non-cash income amounts in the form of distributions, even though we have not yet collected the cash.

As of December 31 and September 30, 2013, we had 22 and 19 original OID loans, respectively, primarily from the syndicated loans in our portfolio. We recorded OID income of $61 and $72 for the three months ended December 31, 2013 and 2012, respectively. The unamortized balance of OID investments as of December 31 and September 30, 2013 totaled $1.1 million and $1.0 million, respectively. As of December 31, 2013, we had four investments which had a PIK interest component, and as of September 30, 2013, we had three investments which had a PIK interest component. We recorded PIK income of $92 and $53 for the three months ended December 31, 2013 and 2012, respectively. We collected $0 PIK interest in cash during the three months ended December 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 received $0.2 million of success fees during the three months ended December 31, 2013, which resulted from our sale of substantially all of the assets in Lindmark Acquisition, LLC and the ensuing pay down of our debt investments at par in September 2013. We received $1.1 million of success fees during the three months ended December 31, 2012, which resulted from our exit of Westlake Hardware, Inc. at par during the period. As of December 31 and September 30, 2013, we had an aggregate off-balance sheet success fee receivable of approximately $15.3 million and $14.8 million, respectively, on our accruing debt investments.

We generally record prepayment fees upon receipt of cash. Prepayment fees are contractually due at the time of an investment’s exit, based on the prepayment fee schedule. During the three months ended December 31, 2013, we did not receive any prepayment fees. During the three months ended December 31, 2012, we received an aggregate of $0.5 million in prepayment fees, which resulted from the early payoffs of four of our syndicated loans during the period.

Dividend income on preferred equity investments is accrued to the extent that such amounts are expected to be collected and if we have the option to collect such amounts in cash. During the three months ended December 31, 2013 and 2012, we did not record or collect any dividend income on our preferred equity investments.

Success fees, prepayment fees and dividend income are all recorded in other income in our accompanying Condensed Consolidated Statements of Operations.

Recent Accounting Pronouncements

In June 2013, the FASB issued ASU 2013-08, “Financial Services – Investment Companies (Topic 946): Amendments to the Scope, Measurement, and Disclosure Requirements,” which amends the criteria that define an investment company, clarifies the measurement guidance and requires new disclosures for investment companies. Under ASU 2013-08, an entity already regulated under the 1940 Act is automatically an investment company under the new GAAP definition, so we anticipate no impact on our financial position or results of operations from adopting this standard. We are currently assessing the additional disclosure requirements. ASU 2013-08 is effective for interim and annual reporting periods in fiscal years that begin after December 15, 2013.

NOTE 3. INVESTMENTS

ASC 820 defines fair value by focusing 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 significant to the fair value measurement. Unobservable inputs are those inputs that reflect assumptions that market participants would use when pricing the asset or liability and can include the Adviser’s assumptions based upon the best available information.

As of December 31 and September 30, 2013, 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 three months ended December 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 December 31 and September 30, 2013, 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)
	December 31, 2013		September 30, 2013
Non-Control/Non-Affiliate Investments
Senior debt	$	91,805	$	82,923
Senior subordinated debt		102,696		95,162
Junior subordinated debt		556		561
Preferred equity		7,218		2,179
Common equity/equivalents		1,291		1,045

Total Non-Control/Non-Affiliate Investments	$	203,566	$	181,870

Control Investments
Senior debt	$	29,645	$	28,211
Senior subordinated debt		31,814		31,513
Preferred equity		2,519		2,447
Common equity/equivalents		5,030		2,050

Total Control Investments	$	69,008	$	64,221

Affiliate Investments
Senior debt	$	7,062	$	7,000
Common equity/equivalents		3,570		3,787

Total Affiliate Investments	$	10,632	$	10,787

Total Investments at Fair Value	$	283,206	$	256,878

In accordance with ASU 2011-04, the following table provides quantitative information about our Level 3 fair value measurements of our investments as of December 31 and September 30, 2013. 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 table below 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

Range / Weighted Average as of

December 31,
2013

September 30,
2013

Valuation
Techniques/
Methodologies

Unobservable

Input

December 31,
2013

September 30,
2013

Senior debt^(F)

93,049

64,892

SPSE^(A)

EBITDA^(B)

$66 - $4,700 /
$617

$(80) - $4,754 /
$1,463

Risk

ratings^(C)

3.0 - 10.0 / 5.3

3.0 - 10.0 / 6.0

30,130

30,881

Market
Quotes

IBP^(D)

81.5% - 101.0% /
93.8%

90.0% - 100.8% /
95.8%

22,333

22,361

TEV

Revenue multiples^(B)

2.4x

0.3x - 2.3 x /
1.7x

Revenue^(B)

$15,283

$2,451 - $13,905 /
$10,312

Senior subordinated debt^(G)

66,356

84,124

SPSE^(A)

EBITDA^(B)

$1,201 - $9,703 /
$4,590

$1,220 - $15,891 /

$7,797

Risk

ratings^(C)

2.0 - 6.0 / 4.0

2.0 - 7.0 / 5.0

37,994

29,331

Market
Quotes

IBP^(D)

94.8% - 103.3% /
99.3%

98.5% - 101.8% /
100.3%

13,716

13,781

TEV

EBITDA multiples^(B)

4.2x

4.5x

EBITDA^(B)

$2,646

$2,653

Revenue multiples^(B)

2.4x

2.3x

Revenue^(B)

$15,283

$13,905

Preferred and common equity /
equivalents^(H)

16,107

7,908

TEV

EBITDA multiples^(B)

3.5x - 7.4x /
4.7x

3.8x - 7.9x /

5.0x

EBITDA^(B)

$66 - $9,703 /
$3,085

$84 - $8,724 /
$3,107

Revenue multiples^(B)

2.4x

0.3x - 2.3x /

2.3x

Revenue^(B)

$15,283

$2,451 - $13,905 /
$13,903

3,521

3,600

Other^(E)

Total Investments

283,206

256,878

^(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 (C) 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 the Adviser 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 of our 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)	Includes private equity fund investments, where 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)

December 31, 2013 includes four new proprietary debt investments for a combined $30.7 million, which were valued at cost and includes $7.1 million in one proprietary investment, which subsequently paid off and, as such, was valued based on the payoff. September 30, 2013 includes one new proprietary investment for $7.0 million, which was valued at cost.

^(G)	December 31, 2013 includes $0.6 million in one junior subordinated proprietary investment, which subsequently paid off and, as such, was valued based on the payoff.

^(H)

December 31, 2013 includes three new proprietary investments for a combined $4.5 million, which were valued at cost and includes $0.2 million in one proprietary investment, which subsequently paid off and, as such, was valued based on the payoff. September 30, 2013 includes one new proprietary investment for $0.4 million, which was valued at cost.

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 TEV models. 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 month periods ended December 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)


Three months ended December 31, 2013	Senior Debt			Senior Subordinated Debt^(A)			Preferred Equity		Common Equity/ Equivalents			Total
Fair value as of September 30, 2013	$	118,134		$	127,236		$	4,626	$	6,882		$	256,878
Total (losses) gains:
Net realized loss^(B)		(10,732	)		—			—		—			(10,732	)
Net unrealized appreciation^(C)		1,637			1,591			438		3,070			6,736
Reversal of prior period net depreciation (appreciation) on realization^(C)		10,263			(122	)		—		—			10,141
New investments, repayments and settlements:^(D)
Issuances/originations		14,214			26,029			4,673		18			44,934
Settlements/repayments		(5,004	)		(19,668	)		—		(79	)		(24,751	)

Fair value as of December 31, 2013	$	128,512		$	135,066		$	9,737	$	9,891		$	283,206


Three months ended December 31, 2012	Senior Debt			Senior Subordinated Debt^(A)			Preferred Equity		Common Equity/ Equivalents			Total
Fair value as of September 30, 2012	$	157,160		$	107,832		$	1,103	$	7,865		$	273,960
Total (losses) gains:
Net realized (loss) gain^(B)		(3,165	)		3			—		—			(3,162	)
Net unrealized (depreciation) appreciation^(C)		(1,141	)		(950	)		83		(1,155	)		(3,163	)
Reversal of prior period net depreciation on realization^(C)		7,411			637			—		—			8,048
New investments, repayments and settlements:^(D)
Issuances/originations		4,392			46,183			—		1,243			51,818
Settlements/repayments		(22,018	)		(29,052	)		—		—			(51,070	)
Proceeds from sales		(5,918	)		—			—		—			(5,918	)

Fair value as of December 31, 2012	$	136,721		$	124,653		$	1,186	$	7,953		$	270,513

^(A)	Includes a junior subordinated debt investment totaling $0.6 million in fair value as of December 31 and September 30, 2013 and $0.5 million in fair value as of December 31 and September 30, 2012.

^(B)	Included in net realized loss on our accompanying Condensed Consolidated Statements of Operations for the three months ended December 31, 2013 and 2012.

^(C)	Included in net unrealized (depreciation) appreciation of investments on our accompanying Condensed Consolidated Statements of Operations for the three months ended December 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 December 31 and September 30, 2013, we held 30 and 29 non-syndicated investments with an aggregate fair value of $214.6 million and $196.3 million, or 75.8% and 76.4% of the total aggregate portfolio at fair value, respectively. During the three months ended December 31, 2013, we invested in four new non-syndicated investments for an aggregate of $35.1 million; sold one non-syndicated investment for a realized loss of $10.8 million; and had two non-syndicated investments pay off early at par, for which we received total principal payments of $21.5 million. Additionally, during the three months ended December 31, 2013, we funded $0.8 million in the aggregate to existing non-syndicated portfolio companies through revolver draws and add-on investments, while scheduled and unscheduled principal repayments totaled $3.1 million in the aggregate from existing non-syndicated portfolio companies (exclusive of the aforementioned $21.5 million in early payoffs at par). The following significant non-syndicated investment transactions occurred during the three months ended December 31, 2013:

•

Alloy Die Casting Co. – In October 2013, we invested $7.0 million in Alloy Die Casting Co. (“ADC”), through a combination of senior term debt and equity. ADC, headquartered in Buena Park, California, is a manufacturer of aluminum and zinc metal components for a diverse range of end markets. This was a co-investment with one of our affiliated funds, Gladstone Investment Corporation (“Gladstone Investment”). Gladstone Investment invested an additional $16.3 million under the same terms as us.

•

Behrens Manufacturing, LLC – In December 2013, we invested $5.5 million in Behrens Manufacturing, LLC (“Behrens”) through a combination of senior term debt and equity. Behrens, headquartered in Winona, Minnesota, is a manufacturer and marketer of high quality, classic looking, utility products and containers. Gladstone Investment participated as a co-investor by investing an additional $12.9 million under the same terms as us.

•

J.America, Inc. – In December 2013, we invested $17.0 million in J.America, Inc. (“J.America”) through senior subordinated term debt. J.America, headquartered in Webberville, Michigan, is a supplier of licensed decorated and undecorated apparel and headwear to collegiate, resort and military markets, wholesale distributors and apparel decorators.

•

Meridian Rack & Pinion, Inc. – In December 2013, we invested $5.6 million in Meridian Rack & Pinion, Inc. (“Meridian”) through a combination of senior term debt and equity. Meridian, headquartered in San Diego, CA, is a provider of aftermarket and OEM replacement automotive parts, which it sells through both wholesale channels and online at www.BuyAutoParts.com. Gladstone Investment participated as a co-investor by investing $13.0 million under the same terms as us.

•

LocalTel, LLC - In December 2013, we sold our investment in LocalTel, LLC (“LocalTel”) for net proceeds that are contingent on an earn-out agreement, which resulted in a realized loss of $10.8 million recorded in the three months ended December 31, 2013. LocalTel had been on non-accrual status at the time of the sale.

Syndicated Investments

We held a total of 22 syndicate investments with an aggregate fair value of $68.6 million, or 24.2% of our total investment portfolio at fair value, as of December 31, 2013, as compared to 18 syndicate investments with an aggregate fair value of $60.6 million, or 23.6% of our total investment portfolio at fair value, as of September 30, 2013. During the three months ended December 31, 2013, we invested in four new syndicated investments for an aggregate of $9.0 million.

Investment Concentrations

As of December 31, 2013, our investment portfolio consisted of investments in 52 companies located in 26 states across 20 different industries, with an aggregate fair value of $283.2 million. The five largest investments at fair value as of December 31, 2013, totaled $97.2 million, or 34.3% of our total investment portfolio, as compared to the five largest investments at fair value as of September 30, 2013, which totaled $96.0 million, or 37.4% of our total investment portfolio. As of December 31, 2013, our average investment by obligor was $6.6 million at cost, compared to $7.1 million at cost as of September 30, 2013. The following table outlines our investments by security type as of December 31 and September 30, 2013:


	December 31, 2013								September 30, 2013
	Cost				Fair Value				Cost				Fair Value
Senior debt	$	182,625	53.4	%	$	128,512	45.4	%	$	184,146	55.4	%	$	118,134	46.0	%
Senior subordinated debt		135,372	39.6			134,510	47.5			129,013	38.8			126,675	49.3
Junior subordinated debt		496	0.2			556	0.2			494	0.2			561	0.2

Total Debt Investments		318,493	93.2			263,578	93.1			313,653	94.4			245,370	95.5
Preferred equity		16,941	5.0			9,737	3.4			12,268	3.7			4,626	1.8
Common equity/equivalents		6,283	1.8			9,891	3.5			6,345	1.9			6,882	2.7

Total Equity Investments		23,224	6.8			19,628	6.9			18,613	5.6			11,508	4.5

Total Investments	$	341,717	100.0	%	$	283,206	100.0	%	$	332,266	100.0	%	$	256,878	100.0	%

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


	December 31, 2013					September 30, 2013
Industry Classification	Fair Value		Percentage of Total Investments			Fair Value		Percentage of Total Investments
Healthcare, education and childcare	$	51,431		18.2	%	$	45,339		17.7	%
Electronics		33,485		11.8			33,711		13.1
Personal and non-durable consumer products		27,165		9.6			29,032		11.3
Printing and publishing		23,574		8.3			22,224		8.7
Mining, steel, iron and non-precious metals		18,098		6.4			17,733		6.9
Diversified/conglomerate manufacturing		17,034		6.0			4,482		1.7
Oil and gas		15,275		5.4			15,174		5.9
Automobile		14,966		5.3			9,701		3.8
Cargo Transportation		13,065		4.6			12,984		5.1
Broadcast and entertainment		12,918		4.6			15,534		6.0
Aerospace and defense		11,948		4.2			11,730		4.6
Buildings and real estate		8,065		2.8			6,392		2.5
Textiles and leather		7,598		2.7			8,476		3.3
Beverage, food and tobacco		7,020		2.5			7,038		2.7
Machinery		6,471		2.3			6,425		2.5
Diversified/conglomerate services		4,900		1.7			—		—
Finance		4,264		1.5			4,489		1.7
Leisure, amusement, motion pictures and entertainment		2,506		0.9			2,756		1.1
Home and office furnishing, housewares and durable consumer goods		2,416		0.9			2,651		1.0
Other, < 1.0%^(A)		1,007		0.3			1,007		0.4

Total Investments	$	283,206		100.0	%	$	256,878		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. as of December 31 and September 30, 2013:


	December 31, 2013					September 30, 2013
Geographic Region	Fair Value		Percentage of Total Investments			Fair Value		Percentage of Total Investments
Midwest	$	127,210		44.9	%	$	118,570		46.2	%
South		71,943		25.4			68,669		26.7
West		71,511		25.3			61,737		24.0
Northeast		12,542		4.4			7,902		3.1

Total Investments	$	283,206		100.0	%	$	256,878		100.0	%

The geographic region indicates 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, as of December 31, 2013:


For the fiscal years ending September 30:		Amount
For the remaining nine months ending September 30:	2014	$	58,916
	2015		44,603
	2016		75,747
	2017		16,657
	2018		46,145
	Thereafter		77,458

	Total contractual repayments	$	319,526
	Equity investments		23,224
	Adjustments to cost basis on debt investments		(1,033	)

	Total Cost Basis of Investments Held at December 31, 2013:	$	341,717

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 generally 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 December 31 and September 30, 2013, we had gross receivables from portfolio companies of $0.3 million and $0.7 million, respectively. The allowance for uncollectible receivables was $0 and $0.1 million as of December 31 and September 30, 2013, respectively.

NOTE 4. RELATED PARTY TRANSACTIONS

Investment Advisory and Management Agreement

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. The Adviser is controlled by our Chairman and Chief Executive Officer.

On July 9, 2013, our Board of Directors approved the annual renewal of the Advisory Agreement through August 31, 2014.

The following table summarizes the management fees, incentive fees and associated credits for the three months ended December 31, 2013 and 2012, reflected in our accompanying Condensed Consolidated Statements of Operations:


	Three Months Ended December 31,
	2013			2012
Average total assets subject to base management fee^(A)	$	291,200		$	286,400
Multiplied by prorated annual base management fee of 2.0%		0.5	%		0.5	%

Base management fee^(B)	$	1,456		$	1,432
Credit for fees received by Adviser from the portfolio companies		(333	)		(140	)
Fee reduction for the voluntary, irrevocable waiver of 2.0% fee on senior syndicated loans to 0.5% per annum		(30	)		(61	)

Net Base Management Fee	$	1,093		$	1,231

Incentive fee^(B)		974			1,215
Credit from voluntary, irrevocable waiver issued by Adviser’s board of directors		(515	)		—

Net Incentive Fee	$	459		$	1,215

Credit for fees received by Adviser from the portfolio companies		(333	)		(140	)
Fee reduction for the voluntary, irrevocable waiver of 2.0% fee on senior syndicated loans to 0.5% per annum		(30	)		(61	)
Credit from voluntary, irrevocable waiver issued by Adviser’s board of directors		(515	)		—

Credit to Fees from Adviser^(B)	$	(878	)	$	(201	)

^(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 computed and payable quarterly and is 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 adjustments to the base management fee calculation:

•

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 three months ended December 31, 2013 and 2012.

•

Portfolio Company Fees

Pursuant to the requirements of the 1940 Act, the Adviser makes available significant managerial assistance to our portfolio companies. The Adviser may also provide other services to our portfolio companies under other agreements and may receive fees for services other than managerial assistance. We credit 100.0% of these fees against the base management fee that we would otherwise be required to pay to the Adviser; however, pursuant to the terms of the Advisory Agreement, a percentage of certain of such fees is retained by 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);

•

100.0% 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

•

20.0% 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 100.0% cover distributions to common stockholders for the three months ended December 31, 2013. There was no waiver for the three months ended December 31, 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 20.0% 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 calculate the cumulative aggregate realized capital gains and cumulative aggregate realized capital losses since our inception, and the entire portfolio’s aggregate net unrealized capital depreciation, if any, as of the date of the calculation. 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. The entire portfolio’s aggregate net unrealized capital depreciation, if any, equals the sum of the difference, 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 fiscal 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 the entire portfolio’s aggregate net unrealized capital depreciation, if any. If this number is positive at the end of such fiscal year, then the capital gains-based incentive fee for such year equals 20.0% 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 December 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 20.0% 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 period. 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 December 31, 2013.

Administration Agreement

The Administration Agreement provides that we pay separately for administrative services 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, treasurer, chief compliance officer, internal counsel and secretary 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 funds managed by the Adviser and administered by the Administrator under similar agreements. On July 9, 2013, our Board of Directors approved the annual renewal of the Administration Agreement through August 31, 2014.

Related Party Fees Due

Fees due to related parties as of December 31 and September 30, 2013 on our accompanying Condensed Consolidated Statements of Assets and Liabilities were as follows:


	December 31, 2013		September 30, 2013
Base management fee due to Adviser	$	396	$	529
Incentive fee due to Adviser		459		1,177

Total fees due to Adviser		855		1,706

Fee due to Administrator		203		126

Total related party fees due	$	1,058	$	1,832

Other operating expenses due to the Adviser as of December 31 and September 30, 2013, totaled $15 and $18, respectively. In addition, as of September 30, 2013, other co-investment expenses payable to Gladstone Investment (for reimbursement purposes) totaled $0.2 million. These expenses were paid in full during the three months ended December 31, 2013 and have been included in other liabilities on the accompanying Condensed Consolidated Statements of Assets and Liabilities as of September 30, 2013. There were no amounts due to Gladstone Investment as of December 31, 2013.

Notes to Former Employees

During the three months ended December 31, 2013 and 2012, we had outstanding notes receivables to certain 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 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 $0 of principal repayments during the three months ended December 31, 2013 and 2012. We recognized interest income from all employee notes of $4 and $53 for the three months ended December 31, 2013 and 2012, respectively.

The following table is a summary of the remaining note issued to a current employee of the Adviser for the exercise of stock options as of December 31 and September 30, 2013:

Issue Date

Original
Amount of
Employee
Note

Outstanding
Balance of
Employee Note
As of December 31
and September, 2013

Maturity
Date

Interest
Rate on
Note

Jul-06

275

^(A)

175

Jul-15

8.26

^(A)

On September 7, 2010, we entered into a redemption agreements (the “Redemption Agreement”) Laura Gladstone, a Managing Director of the Adviser and the daughter of Mr. Gladstone, in connection with the maturity of secured promissory notes executed by Ms. Gladstone on July 13, 2006, in the principal amount of $0.3 million (the “Note”). Ms. Gladstone originally executed the Notes to facilitate her payment of the exercise price of certain stock options (the “Options”) to acquire shares of our common stock. Concurrently with the execution of the Note, we, together with Ms. Gladstone entered into a stock pledge agreements (the “Pledge Agreement”), pursuant to which Ms. Gladstone granted to us a first priority security interest in the Pledged Collateral (as defined in the respective Pledge

Agreements), which included 18,334 shares of our common stock that Ms. Gladstone acquired pursuant to the exercise of the Options (collectively, the “Pledged Shares”). The Redemption Agreements provide that, pursuant to the terms and conditions thereof, we will automatically accept and retire the Pledged Shares in partial or full satisfaction, as applicable, of Ms. Gladstone’s obligations to us under the Notes at such time, if ever, that the trading price of our common stock reaches $15 per share. In entering into the Redemption Agreement, we reserved all of our existing rights under the Note and the Pledge Agreement, including, but not limited to, the ability to foreclose on the Pledged Collateral at any time. During the year ended September 30, 2013, Ms. Gladstone paid down $0.1 million of the principal of her Note, leaving a principal balance of $0.2 million outstanding as of December 31 and September 30, 2013. In connection with Ms. Gladstone’s pay downs of principal, we have not released any of our first priority security interests on her Pledged Shares.

In accordance with ASC 505, “Equity,” receivables from employees for the issuance of capital stock to employees prior to the receipt of cash payment should be reflected in the balance sheet as a reduction to stockholders’ equity. Therefore, our recourse note totaling, in aggregate, $0.2 million as of December 31, 2013 was recorded as a note receivable from employee and is included in the net assets section of our accompanying Condensed Consolidated Statements of Assets and Liabilities. As of December 31, 2013, we determined that this note was still recourse.

NOTE 5. BORROWINGS

Revolving Credit Facility

On April 26, 2013, we, through our wholly-owned subsidiary, Business Loan, entered into Amendment No. 6 to the fourth amended and restated credit agreement (our “Credit Facility”) to extend the revolver period end date for one year to January 19, 2016. Our $137.0 million revolving Credit Facility was arranged by Key Equipment Finance Inc. (“Key Equipment”) as administrative agent. Keybank National Association (“Keybank”), Branch Banking and Trust Company and ING Capital LLC also joined our Credit Facility as committed lenders. Subject to certain terms and conditions, our Credit Facility may be expanded from $137.0 million to a maximum of $237.0 million through the addition of other committed lenders to the facility. The interest rates on advances under our Credit Facility generally bear interest at a 30-day London Interbank Offered Rate (“LIBOR”) plus 3.75% per annum, with a commitment fee of 0.5% per annum on undrawn amounts when our facility is drawn more than 50% and 1.0% per annum on undrawn amounts when our facility is drawn less than 50%. If our Credit Facility is not renewed or extended by January 19, 2016, all principal and interest will be due and payable on or before November 30, 2016. Prior to the April 26, 2013 amendment, on January 29, 2013, we, through Business Loan, amended our Credit Facility to remove the LIBOR minimum of 1.5% on advances. We incurred fees of $0.7 million in April 2013 and $0.6 million in January 2013 in connection with these amendments, which are being amortized through our Credit Facility’s revolver period end date of January 19, 2016. All other terms of our Credit Facility remained generally unchanged at the time of these amendments.

The following tables summarize noteworthy information related to our Credit Facility (at cost) as of December 31 and September 30, 2013 and during the three months ended December 31, 2013 and 2012:


	December 31, 2013		September 30, 2013
Commitment amount	$	137,000	$	137,000
Borrowings outstanding		47,700		46,900
Availability		58,670		60,880


	Three Months Ended December 31,
	2013			2012
Weighted average borrowings outstanding	$	33,145		$	46,000
Effective interest rate^(A)		4.9	%		6.3	%
Commitment (unused) fees incurred	$	259		$	231

^(A)	Excludes the impact of deferred financing fees.

Interest is payable monthly during the term of our Credit Facility. Available borrowings are subject to various constraints imposed under our Credit Facility, based on the aggregate loan balance pledged by Business Loan, which varies as loans are added and repaid, regardless of whether such repayments are prepayments or made as contractually required.

Our Credit Facility also requires that any interest or principal payments on pledged loans be remitted directly by the borrower into a lockbox account with Key Equipment as custodian. Key Equipment, who also serves as the trustee of the account, generally remits the collected funds to us once a month.

Our Credit Facility contains covenants that require Business Loan to maintain its status as a separate legal entity, prohibit certain significant corporate transactions (such as mergers, consolidations, liquidations or dissolutions), and restrict material changes to our credit and collection policies without the lenders’ consent. Our Credit Facility also generally limits payments on distributions to our stockholders to our aggregate net investment income for each of the twelve month periods ending September 30, 2014, 2015 and 2016. Business Loan is also subject to certain limitations on the type of loan investments it can apply as collateral towards the borrowing base in order to receive additional borrowing availability under our Credit Facility, including restrictions on geographic

concentrations, sector concentrations, loan size, payment frequency and status, average life and lien property. Our Credit Facility further requires Business Loan to comply with other financial and operational covenants, which obligate Business Loan to, among other things, maintain certain financial ratios, including asset and interest coverage and a minimum number of 20 obligors required in the borrowing base. Additionally, we are subject to a performance guaranty that requires us to maintain (i) a minimum net worth (defined in our Credit Facility to include our mandatorily redeemable preferred stock) of $190.0 million plus 50.0% of all equity and subordinated debt raised after January 19, 2012, which equates to $190.0 million as of December 31, 2013, (ii) asset coverage with respect to senior securities representing indebtedness of at least 200.0%, in accordance with Section 18 of the 1940 Act and (iii) our status as a BDC under the 1940 Act and as a RIC under the Code. As of December 31, 2013, and as defined in the performance guaranty of our Credit Facility, we had a net worth of $250.6 million, asset coverage of 345.9% and an active status as a BDC and RIC. In addition, we had 33 obligors in the borrowing base of our Credit Facility as of December 31, 2013. As of December 31, 2013, we were in compliance with all of our Credit Facility covenants.

Fair Value

We elected to apply the fair value option of ASC 825, “Financial Instruments,” specifically for our Credit Facility, which was consistent with our application of ASC 820 to our investments. Generally, we estimate the fair value of our Credit Facility using estimates of value provided by an independent third party and our own assumptions in the absence of observable market data, including estimated remaining life, counterparty credit risk, current market yield and interest rate spreads of similar securities as of the measurement date. As of December 31 and September 30, 2013, our Credit Facility was valued using Level 3 inputs and any changes in its fair value is recorded in net unrealized appreciation (depreciation) of other on our accompanying Condensed Consolidated Statements of Operations.

The following tables present our Credit Facility carried at fair value as of December 31 and September 30, 2013, on our accompanying Condensed Consolidated Statements of Assets and Liabilities for Level 3 of the hierarchy established by ASC 820 and the changes in fair value of our Credit Facility during the three months ended December 31, 2013 and 2012:


	Total Recurring Fair Value Measurement Reported in *Condensed Consolidated Statements of* *Assets and Liabilities* Using Significant Unobservable Inputs (Level 3)
	December 31, 2013		September 30, 2013
Credit Facility	$	47,908	$	47,102

Fair Value Measurements Using Significant Unobservable Data Inputs (Level 3)


	Three Months Ended December 31,
	2013			2012
Fair value as of September 30, 2013 and 2012, respectively	$	47,102		$	62,451
Borrowings		42,400			44,000
Repayments		(41,600	)		(47,000	)
Net unrealized appreciation (depreciation)^(A)		6			(1,670	)

Fair value as of December 31, 2013 and 2012, respectively	$	47,908		$	57,781

^(A)	Included in net unrealized appreciation (depreciation) of other on our accompanying Condensed Consolidated Statements of Operations for the three months ended December 31, 2013 and 2012.

The fair value of the collateral under our Credit Facility was approximately $239.5 million and $229.3 million in aggregate as of December 31 and September 30, 2013, respectively.

NOTE 6. INTEREST RATE CAP AGREEMENTS

On July 15, 2013, we, through our wholly-owned subsidiary, Business Loan, entered into an interest rate cap agreement with Keybank, effective July 9, 2013 and expiring January 19, 2016, for a notional amount of $35.0 million that effectively limits the interest rate on a portion of our borrowings under our revolving line of credit pursuant to the terms of our Credit Facility. The one month LIBOR cap is set at 5.0%. We incurred a premium fee of $62 in conjunction with this agreement, which was recorded in other assets on our accompanying Condensed Consolidated Statements of Assets and Liabilities. As of December 31 and September 30, 2013, the fair value of our interest rate cap agreement was $2 and $4, respectively. We record changes in the fair value of our interest rate cap agreement at quarter end based on the current market valuation at quarter end in net unrealized appreciation (depreciation) of other on our accompanying Condensed Consolidated Statements of Operations.

Generally, we will estimate the fair value of our interest rate cap agreement using estimates of value provided by the counterparty and our own assumptions in the absence of observable market data, including estimated remaining life, counterparty credit risk, current market yield and interest rate spreads of similar securities as of the measurement date. As of December 31 and September 30, 2013, our interest rate cap agreement was valued using Level 3 inputs.

NOTE 7. MANDATORILY REDEEMABLE PREFERRED STOCK

In November 2011, we completed a public offering of 1.5 million shares of 7.125% Series 2016 Term Preferred Stock, par value $0.001 per share (“Term Preferred Stock”), at a public offering price of $25.00 per share. Gross proceeds totaled $38.5 million and net proceeds, after deducting underwriting discounts and offering expenses borne by us, were $36.4 million, a portion of which was used to repay a portion of outstanding borrowings under our Credit Facility. We incurred $2.1 million in total offering costs related to these transactions, which have been recorded as deferred financing fees on our accompanying Condensed Consolidated Statements of Assets and Liabilities and are being amortized over the redemption period ending December 31, 2016.

The shares of our Term Preferred Stock have a redemption date of December 31, 2016, and are currently traded under the ticker symbol of “GLADP” on the NASDAQ Global Select Market. Our Term Preferred Stock is not convertible into our common stock or any other security and provides for a fixed dividend equal to 7.125% per year, payable monthly (which equates in total to approximately $2.7 million per year). We are required to redeem all of the outstanding Term Preferred Stock on December 31, 2016 for cash at a redemption price equal to $25.00 per share plus an amount equal to accumulated but unpaid dividends, if any, as of the date of redemption. In addition, the two other potential redemption triggers are as follows: (1) if we fail to maintain an asset coverage ratio of at least 200.0%, we are required to redeem a portion of the outstanding Term Preferred Stock or otherwise cure the ratio redemption trigger and (2) at our sole option, at any time on or after December 31, 2012, we may redeem part or all of the Term Preferred Stock. No redemptions of our outstanding Term Preferred Stock have been made as of December 31, 2013.

Our Board of Directors declared and paid the following monthly distributions to preferred stockholders for the three months ended December 31, 2013 and 2012:


Fiscal Year	Declaration Date	Record Date	Payment Date	Distribution per Term Preferred Share
2013	October 8, 2013	October 22, 2013	October 31, 2013	$	0.14843750
	October 8, 2013	November 14, 2013	November 29, 2013		0.14843750
	October 8, 2013	December 16, 2013	December 31, 2013		0.14843750

		Three Months Ended December 31, 2013:		$	0.44531250

2012	October 10, 2012	October 22, 2012	October 31, 2012	$	0.14843750
	October 10, 2012	November 19, 2012	November 30, 2012		0.14843750
	October 10, 2012	December 19, 2012	December 31, 2012		0.14843750

		Three Months Ended December 31, 2012:		$	0.44531250

In accordance with ASC 480, “Distinguishing Liabilities from Equity,” mandatorily redeemable financial instruments should be classified as liabilities in the balance sheet and we have recorded this liability at cost as of December 31 and September 30, 2013. Therefore, the related distribution payments to preferred stockholders are treated as dividend expense on our statement of operations as of the ex-dividend date. For disclosure purposes, the fair value of our Term Preferred Stock based on the last quoted closing price as of December 31 and September 30, 2013, was approximately $39.4 million and $40.0 million, respectively, and we consider our Term Preferred Stock to be a Level 1 liability within the ASC 820 hierarchy.

Aggregate preferred stockholder distributions declared and paid for the three months ended December 31, 2013 and 2012 were each approximately $0.7 million. For federal income tax purposes, distributions paid by us to preferred stockholders generally constitute ordinary income to the extent of our current and accumulated earnings and profits.

NOTE 8. COMMON STOCK

We filed a universal shelf registration statement (our “Registration Statement”) on Form N-2 (File No. 333-185191) with the SEC on November 29, 2012, and subsequently filed a Pre-effective Amendment No. 1 on January 17, 2013 that the SEC declared effective on January 18, 2013. On December 23, 2013, we filed Post-Effective Amendment No. 1, which the SEC has not declared effective as of the date of this filing. Once declared effective, the Registration Statement will permit us to issue, through one or more transactions, up to an aggregate of $300.0 million in securities, consisting of common stock, preferred stock, subscription rights, debt securities and warrants to purchase common stock or preferred stock, including through a combined offering of such securities. We have not issued any securities to date under the Registration Statement.

NOTE 9. NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS PER COMMON SHARE

The following table sets forth the computation of basic and diluted net increase in net assets resulting from operations per weighted average common share for the three months ended December 31, 2013 and 2012:


	Three Months Ended December 31,
	2013		2012
Numerator for basic and diluted net increase in net assets resulting from operations per common share	$	10,506	$	8,366
Denominator for basic and diluted weighted average common shares		21,000,160		21,000,160

Basic and diluted net increase in net assets resulting from operations per common share	$	0.50	$	0.40

NOTE 10. DISTRIBUTIONS TO COMMON STOCKHOLDERS

To qualify to be taxed as a RIC, we are required to distribute to our stockholders 90.0% of our investment company taxable income. The amount to be paid out as distributions to our stockholders is determined by our Board of Directors quarterly and is based on the fiscal year earnings estimated by management. Based on that estimate, three monthly distributions are declared each quarter.

The federal income tax characterization of all distributions will be reported to our stockholders on the Internal Revenue Service Form 1099 at the end of each calendar year. For each of the nine months ended September 30, 2013, approximately 92.0% of our common distributions were deemed to be paid from ordinary income, with the remainder of approximately 8.0% deemed to be from a return of capital. For each of October, November and December 2013, approximately 100.0% of our common distributions were deemed to be paid from ordinary income. For the calendar year ended December 31, 2012, approximately 92.0% of our common distributions were deemed to be paid from ordinary income with the remainder of approximately 8.0% deemed to be from a return of capital. The return of capital in both years resulted primarily resulted from GAAP realized losses being recognized as ordinary losses for federal income tax purposes.

Our Board of Directors declared and paid the following monthly distributions to common stockholders for the three months ended December 31, 2013 and 2012:


Fiscal Year	Declaration Date	Record Date	Payment Date	Distribution per Common Share
2013	October 8, 2013	October 22, 2013	October 31, 2013	$	0.07
	October 8, 2013	November 14, 2013	November 29, 2013		0.07
	October 8, 2013	December 16, 2013	December 31, 2013		0.07

		Three Months Ended December 31, 2013:		$	0.21

2012	October 10, 2012	October 22, 2012	October 31, 2012	$	0.07
	October 10, 2012	November 19, 2012	November 30, 2012		0.07
	October 10, 2012	December 19, 2012	December 31, 2012		0.07

		Three Months Ended December 31, 2012:		$	0.21

Aggregate distributions to our common stockholders declared and paid for the three months ended December 31, 2013 and 2012 were each approximately $4.4 million, which were declared based on estimates of net investment income for the respective fiscal years. The characterization of the common stockholder distributions declared and paid for the fiscal year ending September 30, 2014 will be determined at fiscal year end and cannot be determined at this time. For the fiscal year ended September 30, 2013, common stockholder distributions declared and paid exceeded our accumulated earnings and profits (after taking into account Term Preferred Stock dividends), which resulted in a partial return of capital equal to approximately $1.3 million. The return of capital primarily resulted from GAAP realized losses being recognized as ordinary losses for federal income tax purposes.

NOTE 11. COMMITMENTS AND CONTINGENCIES

Legal Proceedings

We are party to certain legal proceedings incidental to the normal course of our business, including the enforcement of our rights under contracts with our portfolio companies. We are required to establish reserves for litigation matters where those matters present loss contingencies that are both probable and estimable. When loss contingencies are not both probable and estimable, we do not

establish reserves. Based on current knowledge, we do not believe that loss contingencies, if any, arising from pending investigations, litigation or regulatory matters will have a material adverse effect on our financial condition, results of operation or cash flows. Additionally, based on current knowledge, we do not believe such loss contingencies are probable and estimable and therefore, as of December 31, 2013, we have not established reserves for such loss contingencies.

Escrow Holdbacks

From time to time, we will enter into arrangements as it relates to exits of certain investments whereby specific amounts of the proceeds are held in escrow to be used to satisfy potential obligations as stipulated in the sales agreements. We record escrow amounts in restricted cash and cash equivalents on our accompanying Condensed Consolidated Statements of Assets and Liabilities. We establish a contingent liability against the escrow amounts if we determine that it is probable and estimable that a portion of the escrow amounts will not be ultimately received at the end of the escrow period. The aggregate contingent liabilities recorded against the escrow amounts was $0.4 million and $0 as of December 31 and September 30, 2013, respectively, and are recorded in other liabilities on our accompanying Condensed Consolidated Statements of Assets and Liabilities.

Financial Commitments and Obligations

We have lines of credit with certain of our portfolio companies that have not been fully drawn. Since these commitments have expiration dates and we expect many will never be fully drawn, the total commitment amounts do not necessarily represent future cash requirements.

For our investments in certain private equity funds, we may have uncalled capital commitments, depending on the agreed upon terms of our committed ownership interest. These capital commitments usually have a specific date in the future set as a closing date, at which time the commitment is either funded or terminates. As of December 31 and September 30, 2013, we had uncalled capital commitments related to our partnership interest in Leeds Novamark Capital I, L.P.

The following table summarizes the dollar balances of our unused line of credit and uncalled capital commitments as of December 31 and September 30, 2013:


	December 31,		September 30,
	2013		2013
Unused line of credit commitments	$	6,020	$	6,524
Uncalled capital commitment		2,800		2,700

Total	$	8,820	$	9,224

NOTE 12. FINANCIAL HIGHLIGHTS


	As of and for the Three Months Ended December 31,
	2013			2012
Per Common Share Data
Net asset value at beginning of period^(A)	$	9.81		$	8.98

Net investment income^(B)		0.21			0.23
Net realized loss on investments^(B)		(0.51	)		(0.14	)
Net unrealized appreciation of investments^(B)		0.80			0.23
Net unrealized depreciation of other^(B)

Large accelerated filer

Accelerated filer

Non-accelerated filer

¨ (Do not check if a smaller reporting company)

Smaller reporting company