Table ofContents

 

 

 

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

**FORM 10-Q**

 
| **x**                                   | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|-----------------------------------------|---------------------------------------------------------------------------------------------------------|
|                                    | ** **                                                                                              |
| **FOR THE QUARTER ENDED JUNE 30, 2009** |
| ** **                              | ** **                                                                                              |
| **o**                                   | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

 

**COMMISSION FILE NUMBER: 000-51233**

 

**GLADSTONE INVESTMENT CORPORATION**

(Exact name of registrant as specified in its charter)

 

| **DELAWARE**

(State or other jurisdiction of incorporation or  organization) | ** ** | **83-0423116**

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

 

**1521 WESTBRANCH DRIVE, SUITE 200**

**MCLEAN, VIRGINIA 22102**

(Address of principal executive office)

 

**(703) 287-5800**

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether theregistrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days.  Yes x  No o.

 

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

 

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

 

| Large accelerated filer o |   | Accelerated filer x           |
|---------------------------|--------|-------------------------------|
|                      |   |                          |
| Non-accelerated filer o   |   | Smaller reporting  company o. |

 

Indicate by check mark whether theregistrant is a shell company (as defined in Rule 12b-2 of the ExchangeAct).  Yes o  No x..

 

Indicate the number of shares outstanding of each of the issuer’sclasses of common stock, as of the latest practicable date. The number ofshares of the issuer’s Common Stock, $0.001 par value, outstanding as of August 3,2009 was 22,080,133.

 

 

 

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Table ofContents

 

**GLADSTONE INVESTMENT CORPORATION**

**TABLE OF CONTENTS**

 
| PART I.  | FINANCIAL  INFORMATION:                                                                                            |   |
|---------------|--------------------------------------------------------------------------------------------------------------------|--------|
|          |                                                                                                               |   |
| Item 1.       | Financial  Statements (Unaudited)                                                                                  |   |
|          |                                                                                                               |   |
|          | Condensed Consolidated Statements of Assets and  Liabilities as of June 30, 2009 and March 31, 2009      | 3      |
|          | Condensed Consolidated Schedules of Investments as of  June 30, 2009 and March 31, 2009                  | 4      |
|          | Condensed Consolidated Statements of Operations for  the three months ended June 30, 2009 and 2008            | 10     |
|          | Condensed Consolidated Statements of Changes in Net  Assets for the three months ended June 30, 2009 and 2008 | 11     |
|          | Condensed Consolidated Statements of Cash Flows for  the three months ended June 30, 2009 and 2008            | 12     |
|          | Financial  Highlights for the three months ended June 30, 2009 and 2008                                       | 13     |
|          | Notes to Condensed Consolidated Financial Statements                                                               | 14     |
|          |                                                                                                               |   |
| Item 2.       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                        | 25     |
|          | Overview                                                                                                           | 25     |
|          | Results  of Operations                                                                                             | 28     |
|          | Liquidity and Capital Resources                                                                                    | 31     |
|          |                                                                                                               |   |
| Item 3.       | Quantitative  and Qualitative Disclosures About Market Risk                                                        | 40     |
|          |                                                                                                               |   |
| Item 4.       | Controls and  Procedures                                                                                           | 40     |
|          |                                                                                                               |   |
| PART II. | OTHER INFORMATION:                                                                                                 |   |
|          |                                                                                                               |   |
| Item 1.       | Legal Proceedings                                                                                                  | 41     |
|          |                                                                                                               |   |
| Item 1A.      | Risk Factors                                                                                                       | 41     |
|          |                                                                                                               |   |
| Item 2.       | Unregistered  Sales of Equity Securities and Use of Proceeds                                                       | 41     |
|          |                                                                                                               |   |
| Item 3.       | Defaults  Upon Senior Securities                                                                                   | 41     |
|          |                                                                                                               |   |
| Item 4.       | Submission  of Matters to a Vote of Security Holders                                                               | 41     |
|          |                                                                                                               |   |
| Item 5.       | Other Information                                                                                                  | 41     |
|          |                                                                                                               |   |
| Item 6.       | Exhibits                                                                                                           | 41     |
|          |                                                                                                               |   |
| SIGNATURES    | 42                                                                                                                 |

 

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**GLADSTONE INVESTMENT CORPORATION**

**CONDENSED CONSOLIDATED STATEMENTS OFASSETS AND LIABILITIES**

**(DOLLAR AMOUNTS IN THOUSANDS, EXCEPTPER SHARE AMOUNTS)**

**(UNAUDITED)**

** **
| ** **                                                                                                                                              | ** ** | **June 30,** | ** ** | **March 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|--------------------|------------|
| ** **                                                                                                                                              | ** ** | **2009**          | ** ** | **2009**           | ** ** |
| **ASSETS**                                                                                                                                              | ** ** | ** **        | ** ** | ** **         | ** ** |
| Non-Control/Non-Affiliate investments (Cost 6/30/09:  $30,328; Cost 3/31/09: $134,836)                                                                  |       | $                 | 26,961     |               | $          | 94,740 |   |
| Control investments (Cost 6/30/09: $144,908; Cost  3/31/09: $150,081)                                                                                   |       | 149,509           |       | 166,163            |       |
| Affiliate investments (Cost 6/30/09: $63,807; Cost  3/31/09: $64,028)                                                                                   |       | 50,539            |       | 53,027             |       |
| Total investments at fair value (Cost 6/30/09:  $239,043; Cost 3/31/09: $348,945)                                                                       |       | 227,009           |       | 313,930            |       |
| Cash and cash equivalents                                                                                                                               |       | 84,577            |       | 7,236              |       |
| Interest receivable                                                                                                                                     |       | 952               |       | 1,500              |       |
| Due from Custodian                                                                                                                                      |       | 1,416             |       | 2,706              |       |
| Deferred financing fees                                                                                                                                 |       | 1,387             |       | 1,167              |       |
| Prepaid assets                                                                                                                                          |       | 237               |       | 172                |       |
| Other assets                                                                                                                                            |       | 212               |       | 132                |       |
| **TOTAL ASSETS**                                                                                                                                        |       | $                 | 315,790    |               | $          | 326,843 |   |
|                                                                                                                                                    |       |              |       |               |       |
| **LIABILITIES**                                                                                                                                         | ** ** | ** **        | ** ** | ** **         | ** ** |
| Accounts payable and accrued expenses                                                                                                                   |       | $                 | 350        |               | $          | 1,283 |   |
| Fee due to Administrator (Refer to Note 4)                                                                                                              |       | 173               |       | 179                |       |
| Fee due to Adviser (Refer to Note 4)                                                                                                                    |       | 238               |       | 187                |       |
| Short -term loan                                                                                                                                        |       | 65,000            |       | —             |       |
| Borrowings under line of credit                                                                                                                         |       | 46,940            |       | 110,265            |       |
| Other liabilities                                                                                                                                       |       | 159               |       | 127                |       |
| **TOTAL LIABILITIES**                                                                                                                                   |       | 112,860           |       | 112,041            |       |
| **NET ASSETS**                                                                                                                                          |       | $                 | 202,930    |               | $          | 214,802 |   |
|                                                                                                                                                    |       |              |       |               |       |
| **ANALYSIS OF NET ASSETS:**                                                                                                                             | ** ** | ** **        | ** ** | ** **         | ** ** |
| Common stock, $0.001 par value, 100,000,000 shares  authorized, 22,080,133 shares issued and outstanding at June 30, 2009  and March 31, 2009 |       | $                 | 22         |               | $          | 22 |   |
| Capital in excess of par value                                                                                                                          |       | 264,697           |       | 257,361            |       |
| Net unrealized depreciation of investment portfolio                                                                                                     |       | (12,034           | )          | (35,015            | )          |
| Net unrealized depreciation of derivative                                                                                                               |       | (11               | )          | (53                | )          |
| Accumulated net investment loss                                                                                                                         |       | (49,744           | )          | (7,513             | )          |
| **TOTAL NET ASSETS**                                                                                                                                    |       | $                 | 202,930    |               | $          | 214,802 |   |
| **NET ASSETS PER SHARE**                                                                                                                                |       | $                 | 9.19       |               | $          | 9.73 |   |

 

*THEACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS*

 

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** **

**GLADSTONEINVESTMENT CORPORATION**

**CONDENSED CONSOLIDATED SCHEDULES OFINVESTMENTS**

**AS OF JUNE 30, 2009**

**(DOLLAR AMOUNTS IN THOUSANDS)**

**(UNAUDITED)**

** **
| **Company (1)**                                 | ** **   | **Industry**                                                      | ** **   | **Investment (2)**                                                  | ** **   | **Cost**     | ** **   | **Fair Value** | ** **   |
|-------------------------------------------------|--------------|-------------------------------------------------------------------|--------------|---------------------------------------------------------------------|--------------|--------------|--------------|----------------|--------------|
|                                            |         |                                                              |         |                                                                |         |         |         |           |         |
| **NON-CONTROL/NON-AFFILIATE INVESTMENTS:**      | *** *** | *** ***                                                      | *** *** | *** ***                                                        | *** *** | *** *** | *** *** |
| ***Senior Syndicated Loans:***                  | *** *** | *** ***                                                      | *** *** | *** ***                                                        | *** *** | *** *** | *** *** | *** ***   | *** *** |
| HMTBP Acquisition II Corp.                      |         | Service - aboveground  storage tanks                              |         | Senior Term Debt (3.3%, Due  5/2014) (3)                            |         | $            | 3,828        |           | $            | 3,657 |   |
| Interstate  Fibernet, Inc.                 |         | Service - provider of voice  and data telecommunications services |         | Senior Term Debt (4.6%, Due  7/2013) (3)                            |         | 9,781        |         | 7,605          |         |
| Survey Sampling, LLC                            |         | Service -  telecommunications-based sampling                      |         | Senior Term Debt (9.5%, Due  5/2011) (3)                            |         | 2,422        |         | 2,404          |         |
| *Subtotal  - Syndicated Loans*                  |         |                                                              |         |                                                                |         | $            | 16,031       |           | $            | 13,666 |   |
|                                            |         |                                                              |         |                                                                |         |         |         |           |         |
| ***Non-syndicated Loans***                      | *** *** | *** ***                                                      | *** *** | *** ***                                                        | *** *** | *** *** | *** *** | *** ***   | *** *** |
| American Greetings  Corporation                 |         | Manufacturing and design –  greeting cards                   |         | Senior Notes (7.4%, Due  6/2016) (3)                                |         | $            | 3,043        |           | $            | 2,555 |   |
|                                            |         |                                                              |         |                                                                |         |         |         |           |         |
| B-Dry, LLC                                      |         | Service - basement  waterproofer                                  |         | Revolving Credit Facility,  $380 available (10.5%, Due 10/2008) (5) |         | 370          |         | 367            |         |
| * *                                        |         |                                                              |         | Senior Term Debt (13.0%,  Due 5/2014) (5)                           |         | 6,664        |         | 6,531          |         |
| * *                                        |         |                                                              |         | Senior Term Debt (13.0%,  Due 5/2014) (5)                           |         | 3,920        |         | 3,842          |         |
|                                            |         |                                                              |         | Common Stock Warrants (4)                                           |         | 300          |         | —         |         |
|                                            |         |                                                              |         |                                                                |         | 11,254       |         | 10,740         |         |
|                                            |         |                                                              |         |                                                                |         |         |         |           |         |
| **Total Non-Control/Non-Affiliate Investments** |         |                                                              | ** **   | **$**                                                               | **30,328**   | ** **   | **$**        | **26,961**     | ** **   |
| ** **                                      | ** **   | ** **                                                        | ** **   | ** **                                                          | ** **   | ** **   | ** **   | ** **     | ** **   |
| **CONTROL INVESTMENTS:**                        | ** **   | ** **                                                        | ** **   | ** **                                                          | ** **   | ** **   | ** **   |
| A. Stucki Holding Corp.                         |         | Manufacturing – railroad  freight car products               |         | Senior Term Debt (4.8%, Due  3/2012)                                |         | $            | 9,101        |           | $            | 9,101 |   |
|                                            |         |                                                              |         | Senior Term Debt (7.1%, Due  3/2012) (6)                            |         | 9,900        |         | 9,900          |         |
|                                            |         |                                                              |         | Senior Subordinated Term  Debt (13%, Due 3/2014)                    |         | 8,586        |         | 8,586          |         |
|                                            |         |                                                              |         | Preferred Stock (4)                                                 |         | 4,386        |         | 5,230          |         |
|                                            |         |                                                              |         | Common Stock (4)                                                    |         | 130          |         | 10,374         |         |
|                                            |         |                                                              |         |                                                                |         | 32,103       |         | 43,191         |         |
|                                            |         |                                                              |         |                                                                |         |         |         |           |         |
| Acme Cryogenics, Inc.                      |         | Manufacturing – manifolds and pipes for industrial gasses    |         | Senior Subordinated Term  Debt (11.5%, Due 3/2013)                  |         | 14,500       |         | 14,500         |         |
|                                            |         |                                                              |         | Redeemable Preferred Stock  (4)                                     |         | 6,984        |         | 7,741          |         |
|                                            |         |                                                              |         | Common Stock (4)                                                    |         | 1,045        |         | —         |         |
|                                            |         |                                                              |         | Common Stock Warrants (4)                                           |         | 25           |         | —         |         |
|                                            |         |                                                              |         |                                                                |         | 22,554       |         | 22,241         |         |
|                                            |         |                                                              |         |                                                                |         |         |         |           |         |
| ASH Holdings Corp.                              |         | Retail and Service – school buses and parts                  |         | Revolver, $1,500 available  (non-accrual, Due 3/2010) (5)           |         | 500          |         | 200            |         |
|                                            |         |                                                              |         | Senior Subordinated Term  Debt (non-accrual, Due 1/2012) (5)        |         | 5,937        |         | 1,781          |         |
|                                            |         |                                                              |         | Preferred Stock (4)                                                 |         | 2,500        |         | —         |         |
|                                            |         |                                                              |         | Common Stock Warrants (4)                                           |         | 4            |         | —         |         |
|                                            |         |                                                              |         |                                                                |         | 8,941        |         | 1,981          |         |
|                                            |         |                                                              |         |                                                                |         |         |         |           |         |
| Cavert II Holdings Corp.                        |         | Manufacturing – bailing wire                                 |         | Senior Term Debt (8.3%, Due  10/2012)                               |         | 4,875        |         | 4,875          |         |
|                                            |         |                                                              |         | Senior Term Debt (10.0%,  Due 10/2012) (6)                          |         | 2,700        |         | 2,700          |         |
|                                            |         |                                                              |         | Senior Subordinated Term  Debt (13.0%, Due 10/2014)                 |         | 4,671        |         | 4,671          |         |
|                                            |         |                                                              |         | Preferred Stock (4)                                                 |         | 4,110        |         | 4,679          |         |
|                                            |         |                                                              |         | Common Stock (4)                                                    |         | 69           |         | 974            |         |
|                                            |         |                                                              |         |                                                                |         | 16,425       |         | 17,899         |         |
|                                            |         |                                                              |         |                                                                |         |         |         |           |         |
| Chase II Holdings Corp.                         |         | Manufacturing – traffic doors                                |         | Revolving Credit Facility,  $105 available (4.3%, Due 7/2010) (7)   |         | 3,395        |         | 3,395          |         |
|                                            |         |                                                              |         | Senior Term Debt (8.8%, Due  3/2011)                                |         | 8,525        |         | 8,525          |         |
|                                            |         |                                                              |         | Senior Term Debt (12.0%,  Due 3/2011) (6)                           |         | 7,640        |         | 7,640          |         |
|                                            |         |                                                              |         | Senior Subordinated Term  Debt (13.0%, Due 3/2013)                  |         | 6,168        |         | 6,168          |         |
|                                            |         |                                                              |         | Redeemable Preferred Stock  (4)                                     |         | 6,961        |         | 9,531          |         |
|                                            |         |                                                              |         | Common Stock (4)                                                    |         | 61           |         | 3,087          |         |
|                                            |         |                                                              |         |                                                                |         | 32,750       |         | 38,346         |         |

 

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**GLADSTONE INVESTMENT CORPORATION**

**CONDENSED CONSOLIDATED SCHEDULES OFINVESTMENTS (Continued)**

**AS OF JUNE 30, 2009**

**(DOLLAR AMOUNTS IN THOUSANDS)**

**(UNAUDITED)**

** **
| **Company (1)**                        | ** ** | **Industry**                                                     | ** ** | **Investment (2)**                                                          | ** ** | **Cost** | ** **  | **Fair Value** | ** ** |
|----------------------------------------|------------|------------------------------------------------------------------|------------|-----------------------------------------------------------------------------|------------|----------|-------------|----------------|------------|
|                                   |       |                                                             |       |                                                                        |       |     |        |           |       |
| **CONTROL INVESTMENTS *(Continued)*:** |       |                                                             |       |                                                                        |       |     |        |
| Country Club Enterprises,  LLC         |       | Service – golf cart  distribution                           |       | Subordinated Term Debt  (14.0%, Due 11/2014)                                |       | $        | 7,000       |           | $          | 7,000 |   |
|                                   |       |                                                             |       | Preferred Stock (4)                                                         |       | 3,725    |        | —         |       |
|                                   |       |                                                             |       |                                                                        |       | 10,725   |        | 7,000          |       |
|                                   |       |                                                             |       |                                                                        |       |     |        |           |       |
| Galaxy Tool Holding Corp.              |       | Manufacturing – aerospace  and plastics                     |       | Senior Subordinated Term  Debt (13.5%, Due 8/2013)                          |       | 17,250   |        | 17,250         |       |
|                                   |       |                                                             |       | Preferred Stock (4)                                                         |       | 4,112    |        | 1,601          |       |
|                                   |       |                                                             |       | Common Stock (4)                                                            |       | 48       |        | —         |       |
|                                   |       |                                                             |       |                                                                        |       | 21,410   |        | 18,851         |       |
|                                   |       |                                                             |       |                                                                        |       |     |        |           |       |
| **Total  Control Investments**         | ** ** | ** **                                                       | ** ** | ** **                                                                  | ** ** | **$**    | **144,908** | ** **     | **$**      | **149,509** | ** ** |
|                                   |       |                                                             |       |                                                                        |       |     |        |           |       |
| **AFFILIATE INVESTMENTS:**             |       |                                                             |       |                                                                        |       |     |        |
| Danco Acquisition Corp.                |       | Manufacturing – machining  and sheet metal work             |       | Revolving Credit Facility,  $2,100 available (9.3%, Due 10/2010) (5)        |       | $        | 900         |           | $          | 871 |   |
|                                   |       |                                                             |       | Senior Term Debt (9.3%, Due  10/2012) (5)                                   |       | 4,312    |        | 4,183          |       |
|                                   |       |                                                             |       | Senior Term Debt (11.5%,  Due 4/2013) (5)                                   |       | 9,067    |        | 8,692          |       |
|                                   |       |                                                             |       | Redeemable Preferred Stock  (4)                                             |       | 2,500    |        | 1,404          |       |
|                                   |       |                                                             |       | Common Stock Warrants (4)                                                   |       | 3        |        | —         |       |
|                                   |       |                                                             |       |                                                                        |       | 16,782   |        | 15,150         |       |
|                                   |       |                                                             |       |                                                                        |       |     |        |           |       |
| Mathey  Investments, Inc.         |       | Manufacturing – pipe-cutting  and pipe-fitting equipment    |       | Revolving Credit Facility,  $463 available (10.0%, Due 3/2011) (5) (7) |       | 537      |        | 534            |       |
|                                   |       |                                                             |       | Senior Term Debt (10.0%,  Due 3/2013) (5)                                   |       | 2,375    |        | 2,363          |       |
|                                   |       |                                                             |       | Senior Term Debt (13.5%,  Due 3/2014) (5)(6)                                |       | 7,227    |        | 7,128          |       |
|                                   |       |                                                             |       | Common Stock (4)                                                            |       | 500      |        | —         |       |
|                                   |       |                                                             |       | Common Stock Warrants (4)                                                   |       | 277      |        | —         |       |
|                                   |       |                                                             |       |                                                                        |       | 10,916   |        | 10,025         |       |
|                                   |       |                                                             |       |                                                                        |       |     |        |           |       |
| Noble Logistics, Inc.             |       | Service – aftermarket auto  parts delivery                  |       | Revolving Credit Facility,  $0 available (4.3%, Due 12/2009) (5)            |       | 2,000    |        | 1,510          |       |
|                                   |       |                                                             |       | Senior Term Debt (9.3%, Due  12/2011) (5)                                   |       | 6,227    |        | 4,701          |       |
|                                   |       |                                                             |       | Senior Term Debt (10.5%,  Due 12/2011) (5) (6)                         |       | 7,300    |        | 5,512          |       |
|                                   |       |                                                             |       | Preferred Stock (4)                                                         |       | 1,750    |        | —         |       |
|                                   |       |                                                             |       | Common Stock (4)                                                            |       | 1,682    |        | —         |       |
|                                   |       |                                                             |       |                                                                        |       | 18,959   |        | 11,723         |       |
| Quench Holdings Corp.                  |       | Service – sales, installation  and service of water coolers |       | Senior Subordinated Term  Debt (10.0%, Due 8/2013) (5)                      |       | 8,000    |        | 6,180          |       |
|                                   |       |                                                             |       | Preferred Stock (4)                                                         |       | 2,950    |        | 1,511          |       |
|                                   |       |                                                             |       | Common Stock Warrants (4)                                                   |       | 447      |        | —         |       |
|                                   |       |                                                             |       |                                                                        |       | 11,397   |        | 7,691          |       |
|                                   |       |                                                             |       |                                                                        |       |     |        |           |       |
| Tread Corp.                            |       | Manufacturing – storage and  transport equipment            |       | Senior Term Debt (12.5%,  Due 5/2013) (5)                                   |       | 5,000    |        | 4,987          |       |
|                                   |       |                                                             |       | Preferred Stock (4)                                                         |       | 750      |        | 808            |       |
|                                   |       |                                                             |       | Common Stock Warrants (4)                                                   |       | 3        |        | 155            |       |
|                                   |       |                                                             |       |                                                                        |       | 5,753    |        | 5,950          |       |
|                                   |       |                                                             |       |                                                                        |       |     |        |           |       |
| **Total  Affiliate Investments**       | ** ** | ** **                                                       | ** ** | ** **                                                                  | ** ** | **$**    | **63,807**  | ** **     | **$**      | **50,539** | ** ** |
|                                   |       |                                                             |       |                                                                        |       |     |        |           |       |
| **TOTAL  INVESTMENTS**                 | ** ** | ** **                                                       | ** ** | ** **                                                                  | ** ** | **$**    | **239,043** | ** **     | **$**      | **227,009** | ** ** |

 

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| (1) | Certain of the listed securities are issued by affiliate(s) of  the indicated portfolio company.                                               |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) | Percentage represents the weighted average interest rates in effect at  June 30, 2009, and due date represents the contractual maturity date.  |
| (3) | Security valued using internally-developed, risk-adjusted discounted  cash flow methodologies as of June 30, 2009.                             |
| (4) | Security is non-income producing.                                                                                                                   |
| (5) | Fair value based on opinions of value submitted by Standard &  Poor’s Securities Evaluations, Inc. at June 30, 2009.        |
| (6) | Last Out Tranche of senior debt, meaning if the portfolio company is  liquidated, the holder of the Last Out Tranche is paid after the senior debt. |
| (7) | Terms of agreement were refinanced and revolver limit was reduced.                                                                                  |

 

*THE ACCOMPANYING NOTES ARE ANINTEGRAL PART OF THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS*

 

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**GLADSTONE INVESTMENT CORPORATION**

**CONDENSED CONSOLIDATED SCHEDULES OFINVESTMENTS**

**AS OF MARCH 31, 2009**

**(DOLLAR AMOUNTS IN THOUSANDS)**

** **
| **Company (1)**                                  | ** **   | **Industry**                                                      | ** **   | **Investment (2)**                                                  | ** **   | **Cost**     | ** **   | **Fair   Value** | ** **   |
|--------------------------------------------------|--------------|-------------------------------------------------------------------|--------------|---------------------------------------------------------------------|--------------|--------------|--------------|------------------|--------------|
|                                             |         |                                                              |         |                                                                |         |         |         |             |         |
| **NON-CONTROL/NON-AFFILIATE  INVESTMENTS:**      |         |                                                              |         |                                                                |         |         |         |
| ***Senior Syndicated Loans:***                   | *** *** | *** ***                                                      | *** *** | *** ***                                                        | *** *** | *** *** | *** *** | *** ***     | *** *** |
| Activant  Solutions, Inc.                   |         | Service - enterprise  software and services                       |         | Senior Term Debt (3.4%, Due  5/2013) (7)                            |         | $            | 1,658        |             | $            | 904 |   |
| Advanced Homecare  Holdings, Inc.           |         | Service - home health  nursing services                           |         | Senior Term Debt (4.3%, Due  8/2014) (7)                            |         | 2,947        |         | 2,019            |         |
| Aeroflex, Inc.                              |         | Service - provider of  highly specialized electronic equipment    |         | Senior Term Debt (4.5%, Due  8/2014) (7)                            |         | 1,892        |         | 1,083            |         |
| Compsych Investments Corp.                       |         | Service - employee  assistance programs                           |         | Senior Term Debt (3.8%, Due  2/2012) (7)                            |         | 3,083        |         | 2,405            |         |
| CRC Health Group, Inc.                      |         | Service - substance abuse  treatment                              |         | Senior Term Debt (3.5%, Due  2/2012) (7)                            |         | 7,772        |         | 5,026            |         |
| Critical Homecare  Solutions, Inc.          |         | Service - home therapy and  respiratory treatment                 |         | Senior Term Debt (3.8%, Due  1/2012) (7)                            |         | 4,359        |         | 3,632            |         |
| Generac Acquisition Corp.                        |         | Manufacturing - standby power  products                           |         | Senior Term Debt (3.0%, Due  11/2013) (7)                           |         | 6,799        |         | 3,820            |         |
| Graham Packaging Holdings  Company               |         | Manufacturing - plastic  containers                               |         | Senior Term Debt (3.6%, Due  10/2011) (7)                           |         | 3,348        |         | 2,813            |         |
| HMTBP Acquisition II Corp.                       |         | Service - aboveground  storage tanks                              |         | Senior Term Debt (3.5%, Due  5/2014) (3)                            |         | 3,838        |         | 2,942            |         |
| Huish Detergents, Inc.                      |         | Manufacturing - household  cleaning products                      |         | Senior Term Debt (2.3%, Due  4/2014) (7)                            |         | 1,966        |         | 1,690            |         |
| Hyland Software, Inc.                       |         | Service - provider of  enterprise content management software     |         | Senior Term Debt (3.6%, Due  7/2013) (7)                            |         | 3,912        |         | 2,990            |         |
| Interstate  Fibernet, Inc.                  |         | Service - provider of voice  and data telecommunications services |         | Senior Term Debt (5.2%, Due  7/2013) (3)                            |         | 9,804        |         | 6,698            |         |
| KIK Custom  Products, Inc.                  |         | Manufacturing - consumer  products                                |         | Senior Term Debt (2.8%, Due  5/2014) (7)                            |         | 3,941        |         | 1,862            |         |
| Kronos, Inc.                                |         | Service - workforce  management solutions                         |         | Senior Term Debt (3.5%, Due  6/2014) (7)                            |         | 1,899        |         | 1,291            |         |
| Local TV Finance, LLC                            |         | Service - television  station operator                            |         | Senior Term Debt (2.5%, Due  5/2013) (7)                            |         | 985          |         | 359              |         |
| LVI Services, Inc.                          |         | Service - asbestos and mold  remediation                          |         | Senior Term Debt (4.5%, Due  11/2010) (7)                           |         | 5,916        |         | 2,673            |         |
| MedAssets, Inc.                             |         | Service - pharmaceuticals  and healthcare GPO                     |         | Senior Term Debt (5.1%, Due  10/2013) (7)                           |         | 3,517        |         | 3,129            |         |
| Network Solutions, LLC                           |         | Service - internet domain  solutions                              |         | Senior Term Debt (3.2%, Due  3/2014) (7)                            |         | 8,672        |         | 5,506            |         |
| Open Solutions, Inc.                        |         | Service - software  outsourcing for financial institutions        |         | Senior Term Debt (3.3%, Due  1/2014) (7)                            |         | 2,648        |         | 1,206            |         |
| Ozburn-Hessey Holding Co.  LLC                   |         | Service – third party  logistics                             |         | Senior Term Debt (4.4%, Due  8/2012) (7)                            |         | 7,523        |         | 5,975            |         |
| Pinnacle Foods Finance, LLC                      |         | Manufacturing - branded  food products                            |         | Senior Term Debt (3.2%, Due  4/2014) (7)                            |         | 1,950        |         | 1,570            |         |
| PTS Acquisition Corp.                            |         | Manufacturing - drug  delivery and packaging technologies         |         | Senior Term Debt (2.8%, Due  4/2014) (7)                            |         | 6,877        |         | 4,264            |         |
| QTC Acquisition, Inc.                       |         | Service - outsourced  disability evaluations                      |         | Senior Term Debt (2.8%, Due  11/2012) (7)                           |         | 1,763        |         | 1,356            |         |
| Radio Systems Corporation                        |         | Service - design electronic  pet containment products             |         | Senior Term Debt (3.3%, Due  9/2013) (7)                            |         | 1,644        |         | 1,308            |         |
| Rally Parts, Inc.                           |         | Manufacturing - aftermarket  motorcycle parts and accessories     |         | Senior Term Debt (3.5%, Due  11/2013) (7)                           |         | 2,458        |         | 1,073            |         |
| SafeNet, Inc.                               |         | Service – chip encryption  products                          |         | Senior Term Debt (4.2%, Due  4/2014) (7)                            |         | 2,949        |         | 2,008            |         |
| SGS  International, Inc.                    |         | Service - digital imaging  and graphics                           |         | Senior Term Debt (4.0%, Due  12/2011) (7)                           |         | 1,475        |         | 978              |         |
| Survey Sampling, LLC                             |         | Service -  telecommunications-based sampling                      |         | Senior Term Debt (9.5%, Due  5/2011) (3)                            |         | 2,596        |         | 2,441            |         |
| Triad Laboratory Alliance,  LLC                  |         | Service - regional medical  laboratories                          |         | Senior Term Debt (4.5%, Due  12/2011) (7)                           |         | 4,120        |         | 3,432            |         |
| Wastequip, Inc.                             |         | Service - process and  transport waste materials                  |         | Senior Term Debt (2.8%, Due  2/2013) (7)                            |         | 2,893        |         | 1,530            |         |
| WaveDivision Holdings, LLC                       |         | Service - cable                                                   |         | Senior Term Debt (3.5%, Due  6/2014) (7)                            |         | 1,905        |         | 1,575            |         |
| West Corporation                                 |         | Service - business process  outsourcing                           |         | Senior Term Debt (2.9%, Due  10/2013) (7)                           |         | 3,323        |         | 2,293            |         |
| ***Subtotal - Senior Syndicated Loans***         |         |                                                              |         | $                                                                   | 120,432      |         | $            | 81,851           |         |
| * *                                         | * *     | * *                                                          | * *     | * *                                                            | * *     | * *     | * *     | * *         | * *     |
| ***Non-Syndicated Loans***                       | * *     | * *                                                          | * *     | * *                                                            | * *     | * *     | * *     | * *         | * *     |
| American Greetings  Corporation                  |         | Manufacturing and design -  greeting cards                        |         | Senior Notes (7.4%, Due  6/2016) (3) (10)                      |         | $            | 3,043        |             | $            | 2,180 |   |
|                                             |         |                                                              |         |                                                                |         |         |         |             |         |
| B-Dry, LLC                                       |         | Service - basement  waterproofer                                  |         | Revolving Credit Facility,  $300 available (10.5%, Due 10/2009) (5) |         | 450          |         | 443              |         |
|                                             |         |                                                              |         | Senior Term Debt (10.0%,  Due 5/2014) (5)                           |         | 6,681        |         | 6,464            |         |
|                                             |         |                                                              |         | Senior Term Debt (10.0%,  Due 5/2014) (5)                           |         | 3,930        |         | 3,802            |         |
|                                             |         |                                                              |         | Common Stock Warrants (4)                                           |         | 300          |         | —           |         |
|                                             |         |                                                              |         |                                                                |         | 11,361       |         | 10,709           |         |
|                                             |         |                                                              |         |                                                                |         |         |         |             |         |
| **Total  Non-Control/Non-Affiliate Investments** |         |                                                              | ** **   | **$**                                                               | **134,836**  | ** **   | **$**        | **94,740**       | ** **   |

 

7

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Tableof Contents

 

**GLADSTONE INVESTMENT CORPORATION**

**CONDENSED CONSOLIDATED SCHEDULES OFINVESTMENTS (Continued)**

**AS OF MARCH 31, 2009**

**(DOLLAR AMOUNTS IN THOUSANDS)**

** **
| **Company (1)**                | ** ** | **Industry**                                               | ** ** | **Investment (2)**                                                   | ** ** | **Cost**   | ** **  | **Fair Value** | ** ** |
|--------------------------------|------------|------------------------------------------------------------|------------|----------------------------------------------------------------------|------------|------------|-------------|----------------|------------|
| ** **                     |       |                                                       |       |                                                                 |       |       |        |           |       |
| **CONTROL  INVESTMENTS:**      | ** ** | ** **                                                 | ** ** | ** **                                                           | ** ** | ** ** | ** **  |
| A. Stucki Holding Corp.        |       | Manufacturing - railroad  freight car products             |       | Senior Term Debt (5.0%, Due  3/2012)                                 |       | $          | 11,246      |           | $          | 11,246 |   |
|                           |       |                                                       |       | Senior Term Debt (7.2%, Due  3/2012) (6)                             |       | 10,450     |        | 10,450         |       |
|                           |       |                                                       |       | Senior Subordinated Term  Debt (13%, Due 3/2014)                     |       | 8,586      |        | 8,586          |       |
|                           |       |                                                       |       | Preferred Stock (4)                                                  |       | 4,387      |        | 5,128          |       |
|                           |       |                                                       |       | Common Stock (4)                                                     |       | 130        |        | 14,021         |       |
|                           |       |                                                       |       |                                                                 |       | 34,799     |        | 49,431         |       |
|                           |       |                                                       |       |                                                                 |       |       |        |           |       |
| Acme Cryogenics, Inc.     |       | Manufacturing - manifolds  and pipes for industrial gasses |       | Senior Subordinated Term  Debt (11.5%, Due 3/2013)                   |       | 14,500     |        | 14,500         |       |
|                           |       |                                                       |       | Redeemable Preferred Stock  (4)                                      |       | 6,984      |        | 6,920          |       |
|                           |       |                                                       |       | Common Stock (4)                                                     |       | 1,045      |        | —         |       |
|                           |       |                                                       |       | Common Stock Warrants (4)                                            |       | 25         |        | —         |       |
|                           |       |                                                       |       |                                                                 |       | 22,554     |        | 21,420         |       |
|                           |       |                                                       |       |                                                                 |       |       |        |           |       |
| ASH Holdings Corp.             |       | Retail and Service - school  buses and parts               |       | Revolver, $400 available  (non-accrual, Due 3/2010) (5)              |       | 1,600      |        | 560            |       |
|                           |       |                                                       |       | Senior Subordinated Term  Debt (non-accrual, Due 1/2012) (5)         |       | 5,937      |        | 2,078          |       |
|                           |       |                                                       |       | Preferred Stock (4)                                                  |       | 2,500      |        | —         |       |
|                           |       |                                                       |       | Common Stock Warrants (4)                                            |       | 4          |        | —         |       |
|                           |       |                                                       |       |                                                                 |       | 10,041     |        | 2,638          |       |
|                           |       |                                                       |       |                                                                 |       |       |        |           |       |
| Cavert II Holding Corp.        |       | Manufacturing - bailing  wire                              |       | Revolving Credit Facility,  $3,000 available (8.0%, Due 10/2010) (8) |       | —     |        | —         |       |
|                           |       |                                                       |       | Senior Term Debt (8.3%, Due  10/2012)                                |       | 5,687      |        | 5,687          |       |
|                           |       |                                                       |       | Senior Term Debt (10.0%,  Due 10/2012) (6)                           |       | 2,950      |        | 2,950          |       |
|                           |       |                                                       |       | Senior Subordinated Term  Debt (13.0%, Due 10/2014)                  |       | 4,671      |        | 4,671          |       |
|                           |       |                                                       |       | Preferred Stock (4)                                                  |       | 4,110      |        | 4,591          |       |
|                           |       |                                                       |       | Common Stock (4)                                                     |       | 69         |        | 733            |       |
|                           |       |                                                       |       |                                                                 |       | 17,487     |        | 18,632         |       |
|                           |       |                                                       |       |                                                                 |       |       |        |           |       |
| Chase II Holdings Corp.        |       | Manufacturing - traffic  doors                             |       | Revolving Credit Facility,  $1,105 available (4.5%, Due 7/2010)      |       | 3,395      |        | 3,395          |       |
|                           |       |                                                       |       | Senior Term Debt (8.8%, Due  3/2011)                                 |       | 8,800      |        | 8,800          |       |
|                           |       |                                                       |       | Senior Term Debt (12.0%,  Due 3/2011) (6)                            |       | 7,680      |        | 7,680          |       |
|                           |       |                                                       |       | Senior Subordinated Term  Debt (13.0%, Due 3/2013)                   |       | 6,168      |        | 6,168          |       |
|                           |       |                                                       |       | Redeemable Preferred Stock  (4)                                      |       | 6,961      |        | 9,300          |       |
|                           |       |                                                       |       | Common Stock (4)                                                     |       | 61         |        | 5,537          |       |
|                           |       |                                                       |       |                                                                 |       | 33,065     |        | 40,880         |       |
|                           |       |                                                       |       |                                                                 |       |       |        |           |       |
| Country Club Enterprises,  LLC |       | Service - golf cart  distribution                          |       | Subordinated Term Debt  (14.0% Due 11/2014)                          |       | 7,000      |        | 7,000          |       |
|                           |       |                                                       |       | Preferred Stock (4)                                                  |       | 3,725      |        | 3,725          |       |
|                           |       |                                                       |       |                                                                 |       | 10,725     |        | 10,725         |       |
|                           |       |                                                       |       |                                                                 |       |       |        |           |       |
| Galaxy Tool Holding Corp.      |       | Manufacturing - aerospace  and plastics                    |       | Senior Subordinated Term  Debt (13.5%, Due 8/2013)                   |       | 17,250     |        | 17,250         |       |
|                           |       |                                                       |       | Preferred Stock (4)                                                  |       | 4,112      |        | 4,486          |       |
|                           |       |                                                       |       | Common Stock (4)                                                     |       | 48         |        | 701            |       |
|                           |       |                                                       |       |                                                                 |       | 21,410     |        | 22,437         |       |
|                           |       |                                                       |       |                                                                 |       |       |        |           |       |
| **Total  Control Investments** | ** ** | ** **                                                 | ** ** | ** **                                                           | ** ** | **$**      | **150,081** | ** **     | **$**      | **166,163** | ** ** |

 

8

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Table of Contents

 

**GLADSTONE INVESTMENT CORPORATION**

**CONDENSED CONSOLIDATED SCHEDULES OFINVESTMENTS (Continued)**

**AS OF MARCH 31, 2009**

**(DOLLAR AMOUNTS IN THOUSANDS)**

** **
| **Company (1)**                  | ** ** | **Industry**                                                | ** ** | **Investment (2)**                                                            | ** ** | **Cost** | ** **        | **Fair Value** | ** ** |
|----------------------------------|------------|-------------------------------------------------------------|------------|-------------------------------------------------------------------------------|------------|----------|-------------------|----------------|------------|
| ** **                       |       |                                                        |       |                                                                          |       |     |              |           |       |
| **AFFILIATE  INVESTMENTS:**      |       |                                                        |       |                                                                          |       |     |              |
| Danco Acquisition Corp.          |       | Manufacturing - machining  and sheet metal work             |       | Revolving Credit Facility,  $2,600 available (9.3%, Due 10/2010) (5) (9) |       | $        | 400               |           | $          | 378 |   |
|                             |       |                                                        |       | Senior Term Debt (9.3%, Due  10/2012) (5)                                     |       | 4,837    |              | 4,584          |       |
|                             |       |                                                        |       | Senior Term Debt (11.5%,  Due 4/2013) (5)                                     |       | 9,113    |              | 8,544          |       |
|                             |       |                                                        |       | Redeemable Preferred Stock  (4)                                               |       | 2,500    |              | 2,558          |       |
|                             |       |                                                        |       | Common Stock Warrants (4)                                                     |       | 3        |              | —         |       |
|                             |       |                                                        |       |                                                                          |       | 16,853   |              | 16,064         |       |
|                             |       |                                                        |       |                                                                          |       |     |              |           |       |
| Mathey  Investments, Inc.   |       | Manufacturing -  pipe-cutting and pipe-fitting equipment    |       | Revolving Credit Facility,  $1,463 available (9.0%, Due 3/2011) (5) (9)  |       | 537      |              | 529            |       |
|                             |       |                                                        |       | Senior Term Debt (9.0%, Due  3/2013) (5)                                      |       | 2,375    |              | 2,339          |       |
|                             |       |                                                        |       | Senior Term Debt (12.0%,  Due 3/2014) (5)(6)                                  |       | 7,227    |              | 7,082          |       |
|                             |       |                                                        |       | Common Stock (4)                                                              |       | 500      |              | 446            |       |
|                             |       |                                                        |       | Common Stock Warrants (4)                                                     |       | 277      |              | 260            |       |
|                             |       |                                                        |       |                                                                          |       | 10,916   |              | 10,656         |       |
|                             |       |                                                        |       |                                                                          |       |     |              |           |       |
| Noble Logistics, Inc.       |       | Service - aftermarket auto  parts delivery                  |       | Revolving Credit Facility,  $-0- available (6.5%, Due 12/2009) (5)            |       | 2,000    |              | 1,500          |       |
|                             |       |                                                        |       | Senior Term Debt (10.5%,  Due 12/2011) (5)                                    |       | 5,727    |              | 4,295          |       |
|                             |       |                                                        |       | Senior Term Debt (12.5%,  Due 12/2011) (5)(6)                                 |       | 7,300    |              | 5,475          |       |
|                             |       |                                                        |       | Senior Subordinated Term  Debt (18.0%, Due 12/2011)                           |       | 500      |              | 375            |       |
|                             |       |                                                        |       | Senior Subordinated Term  Debt (14.0%, Due 5/2009)                            |       | 150      |              | 149            |       |
|                             |       |                                                        |       | Preferred Stock (4)                                                           |       | 1,750    |              | —         |       |
|                             |       |                                                        |       | Common Stock (4)                                                              |       | 1,682    |              | —         |       |
|                             |       |                                                        |       |                                                                          |       | 19,109   |              | 11,794         |       |
|                             |       |                                                        |       |                                                                          |       |     |              |           |       |
| Quench Holdings Corp.            |       | Service - sales,  installation and service of water coolers |       | Senior Subordinated Term  Debt (10.0%, Due 8/2013) (5)                        |       | 8,000    |              | 5,800          |       |
|                             |       |                                                        |       | Preferred Stock (4)                                                           |       | 2,950    |              | 2,542          |       |
|                             |       |                                                        |       | Common Stock Warrants (4)                                                     |       | 447      |              | —         |       |
|                             |       |                                                        |       |                                                                          |       | 11,397   |              | 8,342          |       |
|                             |       |                                                        |       |                                                                          |       |     |              |           |       |
| Tread Corp.                      |       | Manufacturing - storage and  transport equipment            |       | Senior Term Debt (12.5%,  Due 5/2013) (5)                                     |       | 5,000    |              | 4,925          |       |
|                             |       |                                                        |       | Preferred Stock (4)                                                           |       | 750      |              | 793            |       |
|                             |       |                                                        |       | Common Stock Warrants (4)                                                     |       | 3        |              | 453            |       |
|                             |       |                                                        |       |                                                                          |       | 5,753    |              | 6,171          |       |
|                             |       |                                                        |       |                                                                          |       |     |              |           |       |
| **Total  Affiliate Investments** | ** ** | ** **                                                  | ** ** | ** **                                                                    | ** ** | **$**    | ** 64,028**  | ** **     | **$**      | **53,027** | ** ** |
|                             |       |                                                        |       |                                                                          |       |     |              |           |       |
| **Total  Investments**           | ** ** | ** **                                                  | ** ** | ** **                                                                    | ** ** | **$**    | ** 348,945** | ** **     | **$**      | ** 313,930** | ** ** |

** **

----

| (1)  | Certain of the listed securities are issued by affiliate(s) of  the indicated portfolio company.                                                                                                                                                                                                                              |
|------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2)  | Percentage represents the weighted average interest rates in effect at  March 31, 2009, and due date represents the contractual maturity date.                                                                                                                                                                                |
| (3)  | Security valued using internally-developed, risk-adjusted discounted  cash flow methodologies as of March 31, 2009.                                                                                                                                                                                                           |
| (4)  | Security is non-income producing.                                                                                                                                                                                                                                                                                                  |
| (5)  | Fair value based on opinions of value submitted by Standard &  Poor’s Securities Evaluations, Inc. at March 31, 2009.                                                                                                                                                                                      |
| (6)  | Last Out Tranche of senior debt, meaning if the portfolio company is liquidated,  the holder of the Last Out Tranche is paid after the senior debt.                                                                                                                                                                                |
| (7)  | Security valued based on the sale price obtained at or subsequent to  March 31, 2009, since the security was sold.                                                                                                                                                                                                            |
| (8)  | Revolver was sold to third party subsequent to March 31, 2009.                                                                                                                                                                                                                                                                |
| (9)  | Terms of agreement were refinanced and revolver limit was reduced.                                                                                                                                                                                                                                                                 |
| (10) | The Company received non-cash assumption of $3,043 worth of senior  notes received from American Greetings Corporation for the Company’s  agreement to the RPG bankruptcy settlement in which the Company received the  aforementioned notes and $909 in cash and recognized a loss on the settlement  of approximately $601. |

 

*THE ACCOMPANYING NOTES ARE ANINTEGRAL PART OF THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.*

 

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** **

**GLADSTONEINVESTMENT CORPORATION**

**CONDENSED CONSOLIDATED STATEMENTS OFOPERATIONS**

**(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)**

**(UNAUDITED)**

** **
| ** **                                                              | ** ** | **Three Months Ended** | ** ** |
|-------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                              | ** ** | **June 30,**      | ** ** |
| ** **                                                              | ** ** | **2009**               | ** ** | **2008** | ** ** |
| INVESTMENT INCOME                                                       |       |                   |       |   |   |
| Interest income                                                         |       |                   |       |   |   |
| Non-Control/Non-Affiliate  investments                                  |       | $                      | 1,029      |   | $ | 2,324 |   |
| Control investments                                                     |       | 2,777                  |       | 2,569 |   |
| Affiliate investments                                                   |       | 1,278                  |       | 1,111 |   |
| Cash and cash equivalents                                               |       | —                 |       | 24 |   |
| Total interest income                                                   |       | 5,084                  |       | 6,028 |   |
| Other income                                                            |       | 85                     |       | 10 |   |
| Total investment income                                                 |       | 5,169                  |       | 6,038 |   |
|                                                                    |       |                   |       |   |   |
| EXPENSES                                                                |       |                   |       |   |   |
| Loan servicing fee (Refer to Note 4)                                    |       | 1,068                  |       | 1,254 |   |
| Base management fee (Refer to Note 4)                                   |       | 313                    |       | 426 |   |
| Administration fee (Refer to Note 4)                                    |       | 173                    |       | 235 |   |
| Interest expense                                                        |       | 702                    |       | 1,102 |   |
| Amortization of deferred finance costs                                  |       | 314                    |       | 139 |   |
| Professional fees                                                       |       | 201                    |       | 131 |   |
| Stockholder related costs                                               |       | 82                     |       | 100 |   |
| Insurance expense                                                       |       | 57                     |       | 53 |   |
| Directors fees                                                          |       | 51                     |       | 47 |   |
| Other                                                                   |       | 64                     |       | 74 |   |
| Expenses before credit from Adviser                                     |       | 3,025                  |       | 3,561 |   |
| Credits to base management fee (Refer to Note 4)                        |       | (301                   | )          | (574 | ) |
| Total expenses net of credit to base management fee                     |       | 2,724                  |       | 2,987 |   |
|                                                                    |       |                   |       |   |   |
| NET INVESTMENT INCOME                                                   |       | 2,445                  |       | 3,051 |   |
|                                                                    |       |                   |       |   |   |
| REALIZED AND UNREALIZED (LOSS) GAIN ON INVESTMENTS                      |       |                   |       |   |   |
| Realized loss on sale of Non-Control/Non-Affiliate  investments         |       | (34,605                | )          | (1,718 | ) |
| Realized loss on termination of derivative                              |       | (53                    | )          | — |   |
| Net unrealized appreciation of  Non-Control/Non-Affiliate investments   |       | 36,728                 |       | 4,465 |   |
| Net unrealized depreciation of Control investments                      |       | (11,481                | )          | (4,867 | ) |
| Net unrealized depreciation of Affiliate investments                    |       | (2,266                 | )          | (5,415 | ) |
| Net unrealized appreciation of derivative                               |       | 42                     |       | — |   |
| Net loss on investments                                                 |       | (11,635                | )          | (7,535 | ) |
|                                                                    |       |                   |       |   |   |
| NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS                    |       | $                      | (9,190     | ) | $ | (4,484 | ) |
|                                                                    |       |                   |       |   |   |
| NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS  PER COMMON SHARE: |       |                   |       |   |   |
| Basic and Diluted                                                       |       | $                      | (0.42      | ) | $ | (0.22 | ) |
|                                                                    |       |                   |       |   |   |
| SHARES OF COMMON STOCK OUTSTANDING:                                     |       |                   |       |   |   |
| Basic and diluted weighted average shares                               |       | 22,080,133             |       | 19,943,346 |   |

 

*THE ACCOMPANYING NOTES ARE ANINTEGRAL PART OF THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.*

 

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**GLADSTONE INVESTMENT CORPORATION**

**CONDENSED CONSOLIDATED STATEMENTS OFCHANGES IN NET ASSETS**

**(DOLLAR AMOUNTS IN THOUSANDS)**

**(UNAUDITED)**

** **
| ** **                                                       | ** ** | **Three Months Ended June 30,** | ** ** |
|------------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                       | ** ** | **2009**                             | ** ** | **2008** | ** ** |
| *Operations:*                                                    | * *   | * *                             | * *   | * * | * * |
| Net investment income                                            |       | $                                    | 2,445      |   | $ | 3,051 |   |
| Realized loss on sale of investments                             |       | (34,605                              | )          | (1,718 | ) |
| Realized loss on termination of derivative                       |       | (53                                  | )          | — |   |
| Net unrealized appreciation (depreciation) of  portfolio         |       | 22,981                               |       | (5,817 | ) |
| Unrealized appreciation of derivative                            |       | 42                                   |       | — |   |
| Net decrease in net assets from operations                       |       | (9,190                               | )          | (4,484 | ) |
|                                                             |       |                                 |       |   |   |
| *Capital transactions:*                                          | * *   | * *                             | * *   | * * | * * |
| Issuance of common stock                                         |       | —                               |       | 41,290 |   |
| Shelf offering registration costs                                |       | (32                                  | )          | (637 | ) |
| Distributions to stockholders                                    |       | (2,650                               | )          | (4,858 | ) |
| Net (decrease) increase in net assets from capital  transactions |       | (2,682                               | )          | 35,795 |   |
|                                                             |       |                                 |       |   |   |
| Total (decrease) increase in net assets                          |       | (11,872                              | )          | 31,311 |   |
| Net assets at beginning of period                                |       | 214,802                              |       | 206,445 |   |
|                                                             |       |                                 |       |   |   |
| Net assets at end of period                                      |       | $                                    | 202,930    |   | $ | 237,756 |   |

 

*THE ACCOMPANYING NOTES ARE ANINTEGRAL PART OF THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.*

 

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**GLADSTONE INVESTMENT CORPORATION**

**CONDENSED CONSOLIDATED STATEMENTS OFCASH FLOWS**

**(DOLLAR AMOUNTS IN THOUSANDS)**

**(UNAUDITED)**

** **
| ** **                                                                                                                               | ** ** | **Three Months Ended June 30,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                                                                               | ** ** | **2009**                             | ** ** | **2008** | ** ** |
| **CASH FLOWS FROM OPERATING  ACTIVITIES**                                                                                                | ** ** | ** **                           | ** ** | ** ** | ** ** |
| Net (decrease) in net assets resulting from  operations                                                                                  |       | $                                    | (9,190     | ) | $ | (4,484 | ) |
| Adjustments to reconcile net (decrease) increase in  net assets resulting from operations to net cash provided by operating  activities: |       |                                 |       |   |   |
| Purchase of investments                                                                                                                  |       | (650                                 | )          | (8,978 | ) |
| Principal repayments of investments                                                                                                      |       | 6,725                                |       | 3,493 |   |
| Proceeds from the sale of investments                                                                                                    |       | 69,222                               |       | 13,246 |   |
| Proceeds from short-term borrowings                                                                                                      |       | 65,000                               |       | — |   |
| Net unrealized (appreciation) depreciation of  investment portfolio                                                                      |       | (22,981                              | )          | 5,817 |   |
| Net unrealized appreciation of derivative                                                                                                |       | (42                                  | )          | — |   |
| Net realized loss on sales of investments                                                                                                |       | 34,605                               |       | 1,718 |   |
| Net realized loss on termination of derivative                                                                                           |       | 53                                   |       | — |   |
| Net amortization of premiums and discounts                                                                                               |       | —                               |       | 9 |   |
| Amortization of deferred finance costs                                                                                                   |       | 314                                  |       | 139 |   |
| Decrease in interest receivable                                                                                                          |       | 548                                  |       | 322 |   |
| Decrease in due from custodian                                                                                                           |       | 1,290                                |       | 1,504 |   |
| (Increase) decrease in prepaid assets                                                                                                    |       | (65                                  | )          | 333 |   |
| Increase in other assets                                                                                                                 |       | (52                                  | )          | (79 | ) |
| Decrease in accounts payable and accrued liabilities                                                                                     |       | (933                                 | )          | (331 | ) |
| (Decrease) increase in administration fee payable to  Administrator (See Note 4)                                                         |       | (6                                   | )          | 27 |   |
| Increase in base management fee payable to Adviser  (See Note 4)                                                                         |       | 126                                  |       | 236 |   |
| Decrease in loan servicing fee payable to Adviser  (See Note 4)                                                                          |       | (75                                  | )          | (7 | ) |
| Increase in other liabilities                                                                                                            |       | 32                                   |       | 11 |   |
| Net cash provided by operating activities                                                                                                |       | 143,921                              |       | 12,976 |   |
|                                                                                                                                     |       |                                 |       |   |   |
| **CASH FLOWS FROM FINANCING  ACTIVITIES**                                                                                                | ** ** | ** **                           | ** ** | ** ** | ** ** |
| Net proceeds from the issuance of common stock                                                                                           |       | (32                                  | )          | 40,652 |   |
| Borrowings from line of credit                                                                                                           |       | 24,200                               |       | 52,750 |   |
| Repayments of line of credit                                                                                                             |       | (87,525                              | )          | (68,300 | ) |
| Purchase of derivative                                                                                                                   |       | (40                                  | )          | — |   |
| Deferred finance costs                                                                                                                   |       | (533                                 | )          | — |   |
| Distributions paid                                                                                                                       |       | (2,650                               | )          | (4,858 | ) |
| Net cash (used in) provided by financing activities                                                                                      |       | (66,580                              | )          | 20,244 |   |
| ** **                                                                                                                               |       |                                 |       |   |   |
| **NET INCREASE IN CASH AND CASH  EQUIVALENTS**                                                                                           |       | 77,341                               |       | 33,220 |   |
| **CASH AND CASH EQUIVALENTS,  BEGINNING OF PERIOD**                                                                                      |       | 7,236                                |       | 9,360 |   |
| ** **                                                                                                                               |       |                                 |       |   |   |
| **CASH AND CASH EQUIVALENTS, END OF  PERIOD**                                                                                            |       | $                                    | 84,577     |   | $ | 42,580 |   |
| ** **                                                                                                                               |       |                                 |       |   |   |
| **CASH PAID DURING PERIOD FOR  INTEREST**                                                                                                |       | $                                    | 840        |   | $ | 1,248 |   |
| **CASH PAID DURING PERIOD FOR TAXES**                                                                                                    |       | —                               |       | — |   |
| ** **                                                                                                                               |       |                                 |       |   |   |
| **NON-CASH ACTIVITIES**(1)                                                                                                               |       | 850                                  |       | — |   |

 

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| (1) | On April 10, 2009, the Company made an investment disbursement to  Cavert II Holding Corp. for approximately $850 on their revolving line of  credit, and the proceeds were used to make the next four quarterly payments  due under normal amortization for both their senior term A and senior term B  loans in a non-cash transaction. |
|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

*THE ACCOMPANYING NOTES ARE ANINTEGRAL PART OF THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.*

 

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**GLADSTONE INVESTMENT CORPORATION**

**FINANCIAL HIGHLIGHTS**

**(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)**

**(UNAUDITED)**

** **
| ** **                                                             | ** ** | **Three Months Ended June 30,** | ** ** |
|------------------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                             | ** ** | **2009**                             | ** ** | **2008** | ** ** |
| Per Share Data (1)                                                     |       |                                 |       |   |   |
| Net asset value at beginning of period                                 |       | $                                    | 9.73       |   | $ | 12.47 |   |
|                                                                   |       |                                 |       |   |   |
| *Income from investment operations:*                                   | * *   | * *                             | * *   | * * | * * |
| Net investment income (2)                                              |       | 0.11                                 |       | 0.15 |   |
| Realized loss on sale of investments (2)                               |       | (1.57                                | )          | (0.08 | ) |
| Net unrealized appreciation (depreciation) of  investments (2)         |       | 1.04                                 |       | (0.29 | ) |
| Total from investment operations                                       |       | (0.42                                | )          | (0.22 | ) |
|                                                                   |       |                                 |       |   |   |
| *Distributions from:*                                                  | * *   | * *                             | * *   | * * | * * |
| Net investment income                                                  |       | (0.12                                | )          | (0.24 | ) |
| Total distributions (3)                                                |       | (0.12                                | )          | (0.24 | ) |
|                                                                   |       |                                 |       |   |   |
| *Effect of shelf offering:*                                            |       |                                 |       |   |   |
| Shelf registration offering costs                                      |       | —                               |       | (0.03 | ) |
| Effect on distribution of stock rights offering  after record date (4) |       | —                               |       | (1.21 | ) |
| Total effect of shelf offering                                         |       | —                               |       | (1.24 | ) |
|                                                                   |       |                                 |       |   |   |
| Net asset value at end of period                                       |       | $                                    | 9.19       |   | $ | 10.77 |   |
|                                                                   |       |                                 |       |   |   |
| Per share market value at beginning of period                          |       | $                                    | 3.82       |   | $ | 9.41 |   |
| Per share market value at end of period                                |       | 4.83                                 |       | 6.43 |   |
| Total Return (5)                                                       |       | 35.24                                | %          | -29.57 | % |
| Shares outstanding at end of period                                    |       | 22,080,133                           |       | 22,080,133 |   |
|                                                                   |       |                                 |       |   |   |
| Statement of Assets and Liabilities Data:                              |       |                                 |       |   |   |
| Net assets at end of period                                            |       | $                                    | 202,930    |   | $ | 237,756 |   |
| Average net assets (6)                                                 |       | 210,188                              |       | 242,655 |   |
|                                                                   |       |                                 |       |   |   |
| Senior Securities Data:                                                |       |                                 |       |   |   |
| Borrowings under line of credit                                        |       | $                                    | 46,940     |   | $ | 129,285 |   |
| Asset coverage ratio (7)                                               |       | 532                                  | %          | 284 | % |
| Asset coverage per unit (8)                                            |       | $                                    | 5,323      |   | $ | 2,840 |   |
|                                                                   |       |                                 |       |   |   |
| Ratios/Supplemental Data:                                              |       |                                 |       |   |   |
| Ratio of expenses to average net assets  (9) (10)                 |       | 5.76                                 | %          | 5.87 | % |
| Ratio of net expenses to average net assets  (9) (11)             |       | 5.18                                 | %          | 4.93 | % |
| Ratio of net investment income to average net assets  (9)              |       | 4.65                                 | %          | 5.03 | % |

 

----

| (1)  |   | Based on actual shares outstanding at the end of the corresponding  period.                                                                                                                                                                                                                                                                                     |
|------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2)  |   | Based on weighted average basic per share data.                                                                                                                                                                                                                                                                                                                 |
| (3)  |   | Distributions are determined based on taxable income calculated in  accordance with income tax regulations which may differ from amounts determined  under accounting principles generally accepted in the United States of  America.                                                                                                                           |
| (4)  |   | The effect of distributions from the stock rights offering after the  record date represents the effect on net asset value of issuing additional  shares after the record date of a distribution.                                                                                                                                                               |
| (5)  |   | Total return equals the change in the market value of the Company’s  common stock from the beginning of the period, taking into account dividends  reinvested in accordance with the terms of our dividend reinvestment plan.                                                                                                                              |
| (6)  |   | Calculated using the average of the balance of net assets at the end  of each month of the reporting period.                                                                                                                                                                                                                                                    |
| (7)  |   | As a business development company, the Company is generally required  to maintain a ratio of at least 200% of total assets, less all liabilities  and indebtedness not represented by senior securities, to total borrowings.                                                                                                                                   |
| (8)  |   | Asset coverage per unit is the ratio of the carrying value of the  Company’s total consolidated assets, less all liabilities and indebtedness  not represented by senior securities, to the aggregate amount of senior  securities representing indebtedness. Asset coverage per unit is expressed in  terms of dollar amounts per $1,000 of indebtedness. |
| (9)  |   | Amounts are annualized.                                                                                                                                                                                                                                                                                                                                         |
| (10) |   | Ratio of expenses to average net assets is computed using expenses  before credits from the Adviser.                                                                                                                                                                                                                                                            |
| (11) |   | Ratio of net expenses to average net assets is computed using total  expenses net of credits to the management fee.                                                                                                                                                                                                                                             |

 

*THE ACCOMPANYING NOTES ARE ANINTEGRAL PART OF THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.*

 

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** **

**GLADSTONEINVESTMENT CORPORATION**

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS**

**(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA AND ASOTHERWISE INDICATED)**

**JUNE 30, 2009**

**(UNAUDITED)**

 

**NOTE1. ORGANIZATION**

 

Gladstone Investment Corporation (the “Company”) was incorporated underthe General Corporation Laws of the State of Delaware on February 18, 2005and completed an initial public offering on June 22, 2005. The Company isa closed-end, non-diversified management investment company that has elected tobe treated as a business development company under the Investment Company Actof 1940, as amended (the “1940 Act”). In addition, the Company has elected tobe treated for tax purposes as a regulated investment company (“RIC”) under theInternal Revenue Code of 1986, as amended (the “Code”). The Company’sinvestment objectives are to achieve a high level of current income and capitalgains by investing in debt and equity securities of established privatebusinesses.

 

Gladstone Business Investment, LLC (“Business Investment”) awholly-owned subsidiary of the Company, was established on August 11, 2006for the sole purpose of owning the Company’s portfolio of investments inconnection with its line of credit. The financial statements of BusinessInvestment are consolidated with those of the Company.

 

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

 

**NOTE2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

 

*UnauditedInterim Financial Statements*

 

Interim financialstatements of the Company are prepared in accordance with accounting principlesgenerally accepted in the United States of America (“GAAP”) for interimfinancial information and pursuant to the requirements for reporting on Form 10-Qand Article 10 of Regulation S-X. Accordingly, certain disclosuresaccompanying annual financial statements prepared in accordance with GAAP areomitted. In the opinion of management, all adjustments, consisting solely ofnormal recurring accruals, necessary for the fair statement of financialstatements for the interim periods have been included. The current period’sresults of operations are not necessarily indicative of results that ultimatelymay be achieved for the year. The interim financial statements and notesthereto should be read in conjunction with the financial statements and notesthereto included in the Company’s Form 10-K for the fiscal year ended March 31,2009, as filed with the Securities and Exchange Commission (the “SEC”) on June 2,2009.

 

The year-endcondensed consolidated balance sheet data was derived from audited financialstatements, but does not include all of the disclosures required by GAAP.

 

*Cashand Cash Equivalents*

 

The Company considers all short-term, highly liquid investments thatare both readily convertible to cash and have a maturity of three months orless at the time of purchase to be cash equivalents. Items classified as cashequivalents include temporary investments in commercial paper, United StatesTreasury securities and money-market funds. Cash and cash equivalents arecarried at cost which approximates fair value.

 

*InvestmentValuation Policy*

 

The Companycarries its investments at market value to the extent that market quotationsare readily available and reliable, and otherwise at fair value, as determinedin good faith by its Board of Directors. In determining the fair value of the Company’s investments, the Adviserhas established an investment valuation policy (the “Policy”).  The Policy is approved by the Company’s Boardof Directors and each quarter the Board of Directors reviews whether theAdviser has applied the Policy consistently and votes whether or not to acceptthe recommended valuation of the Company’s investment portfolio.

 

The Company uses generally accepted valuation techniques to value itsportfolio unless the Company has specific information about the value of aninvestment to determine otherwise. From time to time the Company may accept anappraisal of a business in which the Company holds securities. These appraisalsare expensive and occur infrequently but provide a third-party valuationopinion that may differ in results, techniques and scopes used to value theCompany’s investments.  When thesespecific third-party appraisals are engaged or accepted, the Company uses suchappraisals to value the investment the Company has in that business if it isdetermined that the appraisals are the best estimate of fair value.

 

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

 

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**Publicly-tradedsecurities:** TheCompany determines the value of publicly-traded securities based on the closingprice for the security on the exchange or securities market on which it islisted and primarily traded on the valuation date.  To the extent that the Company ownsrestricted securities that are not freely tradable, but for which a publicmarket otherwise exists, the Company will use the market value of that securityadjusted for any decrease in value resulting from the restrictive feature.

 

**Securitiesfor which a limited market exists:** The Company values securities that are not traded onan established secondary securities market, but for which a limited market forthe security exists, such as certain participations in, or assignments of,syndicated loans, at the quoted price. In valuing these assets, the Company assesses trading activity in anasset class and evaluates variances in prices and other market insights todetermine if any available quote prices are reliable.  If the Company concludes that quotes based onactive markets or trading activity may be relied upon, firm bid prices arerequested; however, if a firm bid price is unavailable, the Company bases thevalue of the security upon the indicative bid price offered by the respectiveoriginating syndication agent’s trading desk, or secondary desk, on or near thevaluation date. To the extent that the Company uses the indicative bid price asa basis for valuing the security, the Adviser may take further steps toconsider additional information to validate that price in accordance with thePolicy.

 

In the event these limited markets become illiquidsuch that market prices are no longer readily available, the Company will valueits syndicated loans using estimated net present values of the future cashflows or discounted cash flows (“DCF”). The use of a DCF methodology followsthat prescribed by the Financial Accounting Standards Board (“FASB”) StaffPosition No. 157-3, *Determining theFair Value of a Financial Asset When the Market for That Asset Is Not Active*(“FSP No. 157-3”), which provides guidance on the use of a reportingentity’s own assumptions about future cash flows and risk-adjusted discountrates when relevant observable inputs, such as quotes in active markets, arenot available. When relevant observable market data does not exist, thealternative outlined in the FSP No. 157-3 is the use of valuinginvestments based on DCF.  For thepurposes of using DCF to provide fair value estimates, the Company consideredmultiple inputs such as a risk-adjusted discount rate that incorporatesadjustments that market participants would make both for nonperformance andliquidity risks.  As such, the Companydeveloped a modified discount rate approach that incorporates risk premiumsincluding, among others, increased probability of default, or higher loss givendefault, or increased liquidity risk.

 

The DCF valuations applied to the syndicated loansprovide an estimate of what the Company believes a market participant would payto purchase a syndicated loan in an active market, thereby establishing a fairvalue.  The Company will continue toapply the DCF methodology in illiquid markets until quoted prices are availableor are deemed reliable based on trading activity.  As of June 30, 2009, the portion of theCompany’s investment portfolio that was valued using DCF was approximately$16.2 million, or 7.2% of the fair value of its total portfolio of investments.

 

**Securitiesfor which no market exists:** The valuation methodology for securities for which nomarket exists falls into three categories: (1) portfolio investmentscomprised solely of debt securities; (2) portfolio investments incontrolled companies comprised of a bundle of securities, which can includedebt or equity securities, or both; and (3) portfolio investments innon-controlled companies comprised of a bundle of investments, which caninclude debt or equity securities, or both.

 

**(1)****        ****Portfolio investments comprisedsolely of debt securities:** Debt securities that are not publicly traded on anestablished securities market, or for which a limited market does not exist (“Non-PublicDebt Securities”), and that are issued by portfolio companies where the Companyhas no equity, or equity-like securities, are fair valued in accordance withthe terms of the Policy, which utilizes opinions of value submitted to theCompany by Standard & Poor’s Securities Evaluations, Inc. (“SPSE”).The Company may also submit paid in kind (“PIK”) interest to SPSE for theirevaluation when it is determined that PIK interest is likely to be received.

 

**(2)****        ****Portfolio investments in controlledcompanies comprised of a bundle of investments, which can include debt orequity securities, or both:** The fair value of these investments is determinedbased on the total enterprise value of the portfolio company, or issuer,utilizing a liquidity waterfall approach under Statement of FinancialAccounting Standards (“SFAS”) No. 157, *FairValue Measurements* (“SFAS No. 157”).  For the Company’s Non-Public Debt Securitiesand equity or equity-like securities (e.g. preferred equity, equity, or otherequity-like securities) that are purchased together as part of a package, wherethe Company has control or could gain control through an option or warrantsecurity, both the debt and equity securities of the portfolio investment wouldexit in the mergers and acquisition market as the principal market, generallythrough a sale or recapitalization of the portfolio company. In accordance withSFAS No. 157, the Company applies the in-use premise of value whichassumes the debt and equity securities are sold together. Under this liquiditywaterfall approach, the Company first calculates the total enterprise value ofthe issuer by incorporating some or all of the following factors to determinethe total enterprise value of the issuer:

 

·**                 **the issuer’s ability to make payments;

·**                 **the earnings of the issuer;

·**                 **recent sales to third parties of similarsecurities;

·**                 **the comparison to publicly tradedsecurities; and

 

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·**                 **DCF or other pertinent factors.

 

In gathering the sales to third parties of similar securities, theCompany may reference industry statistics and use outside experts. Once theCompany has estimated the total enterprise value of the issuer, the Companywill subtract the value of all the debt securities of the issuer; which arevalued at the contractual principal balance. Fair values of these debtsecurities are discounted for any shortfall of total enterprise value over thetotal debt outstanding for the issuer. Once the values for all outstandingsenior securities (which include the debt securities) have been subtracted fromthe total enterprise value of the issuer, the remaining amount, if any, is usedto determine the value of the issuer’s equity or equity like securities.  If, in the Adviser’s judgment, the liquiditywaterfall approach does not accurately reflect the value of the debt component,the Adviser may recommend that the Company use a valuation by SPSE, or if thatis unavailable, a DCF valuation technique.

 

**(3)****        ****Portfolio investments innon-controlled companies comprised of a bundle of investments, which caninclude debt or equity securities, or both:**The Company values Non-Public Debt Securities that arepurchased together with equity or equity-like securities from the sameportfolio company, or issuer, for which the Company does not control or cannotgain control as of the measurement date, using a hypothetical secondary marketas the Company’s principal market. In accordance with SFAS No. 157, theCompany determines its fair value of these debt securities of non-controlinvestments assuming the sale of an individual debt security using thein-exchange premise of value (as defined in SFAS No. 157). As such, theCompany estimates the fair value of the debt component using estimates of valueprovided by SPSE and its own assumptions in the absence of observable marketdata, including synthetic credit ratings, estimated remaining life, currentmarket yield and interest rate spreads of similar securities as of themeasurement date. For equity or equity-like securities of investments for whichthe Company does not control or cannot gain control as of the measurement date,the Company values the equity portion based principally on the total enterprisevalue of the issuer, which is calculated using a liquidity waterfall approach.

 

Due to the uncertainty inherent in the valuation process, suchestimates of fair value may differ significantly from the values that wouldhave been obtained had a ready market for the securities existed, and thedifferences could be material. Additionally, changes in the market environmentand other events that may occur over the life of the investments may cause thegains or losses ultimately realized on these investments to be different thanthe valuations currently assigned. There is no single standard for determiningfair value in good faith, as fair value depends upon circumstances of eachindividual case. In general, fair value is the amount that the Company mightreasonably expect to receive upon the current sale of the security in anarms-length transaction in the security’s principal market.

 

Refer to Note 3for additional information regarding fair value measurements and the Company’sadoption of SFAS No. 157.

 

*Interestand Dividend Income Recognition*

 

Interest income,adjusted for amortization of premiums and acquisition costs and for theaccretion of discounts, is recorded on the accrual basis to the extent thatsuch amounts are expected to be collected. Generally, when a loan becomes 90days or more past due or if the Company’s qualitative assessment indicates thatthe debtor is unable to service its debt or other obligations, the Company willplace the loan on non-accrual status and cease recognizing interest income onthat loan until the borrower has demonstrated the ability and intent to paycontractual amounts due.  However, theCompany remains contractually entitled to this interest.  At June 30, 2009, one Control investmentwas on non-accrual with a fair value of approximately $2.0 million, or 0.9% ofthe fair value of all loans held in the Company’s portfolio at June 30,2009.  At March 31, 2009, oneControl investment was on non-accrual with a fair value of approximately $2.6million, or 0.8% of the fair value of all loans held in the Company’s portfolioat March 31, 2009.  Conditionalinterest, or a success fee, is recorded upon full repayment of a loaninvestment. To date, the Company has not recorded any conditional interest.Dividend income on preferred equity securities is accrued to the extent thatsuch amounts are expected to be collected and that the Company has the optionto collect such amounts in cash. To date, the Company has not accrued anydividend income.

 

*RecentAccounting Pronouncements*

 

In June 2009,the FASB approved the *FASB AccountingStandards Codification* (*Codification*)as the single source of authoritative nongovernmental U.S. Generally AcceptedAccounting Principles (*U.S. GAAP*)which was launched on July 1, 2009.  The Codification does notchange current U.S. GAAP but is intended to simplify user access to all authoritativeU.S. GAAP by providing all the authoritative literature related to a particulartopic in one place.  All existing accounting standard documents willbe superseded and all other accounting literature not included in theCodification will be considered non-authoritative.  The Codificationis effective for interim and annual periods ending after September 15,2009.  The Codification is effective for the Company during itsinterim period ending September 30, 2009 and is not expected to have animpact on its financial condition or results of operations.  TheCompany is currently evaluating the impact to its financial reportingprocess of providing Codification references in its public filings.

 

InJune 2009, the FASB issued SFAS No. 166, *Accounting for Transfers of Financial Assets*(“SFAS No. 166”).SFAS No. 166 removes the concept of a qualifying special-purpose entity(QSPE) from SFAS No. 140, *Accountingfor Transfers and Servicing of Financial Assets and Extinguishment ofLiabilities*(“SFAS No. 140”) and removes the exception fromapplying FASB Interpretation 

 

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No. 46R.This statement also clarifies the requirements for isolation and limitations onportions of financial assets that are eligible for sale accounting. Thisstatement is effective for fiscal years beginning after November 15, 2009.SFAS No. 166 is effective for the Company’s fiscal year beginning April 1,2010. The Company is currently evaluating the impact of adopting this standardon the condensed consolidated financial statements.

 

InMay 2009, the FASB issued SFAS No. 165, *Subsequent Events* (“SFAS No. 165”).  The subsequent events project was initiatedin an effort to incorporate accounting guidance that originated as auditingstandards into the body of authoritative literature issued by the FASB.  Moving the accounting requirements out of theauditing literature and into the accounting literature is consistent with theFASB’s objective to codify all authoritative U.S. accounting guidance relatedto a particular topic in one place.  Italso provided an opportunity to consider international convergence issues.  The FASB has established general standards ofaccounting for and disclosure of events that occur after the balance sheet datebut before financial statements are issued or are available to be issued.  Although there is new terminology, thestandard is based on the same principles as those that previously existed inthe auditing standards.  The newstandard, which includes a required disclosure of the date through which anentity has evaluated subsequent events, is effective for interim or annualperiods ending after June 15, 2009. The Company’s adoption of this pronouncement did not have a materialimpact on the reporting of its subsequent events.

 

InApril 2009, the FASB issued FSP No. 115-2, *Recognition and Presentation of Other-Than-Temporary Impairments*(“FSP No. 115-2”), which was issued to make the guidance onother-than-temporary impairment more operational and to improve thepresentation and disclosure of other-than-temporary impairments on debt andequity securities in the financial statements. FSP No. 115-2 requires significant additional disclosures for bothannual and interim periods, including the amortized cost basis ofavailable-for-sale and held-to-maturity debt, the methodology and key importsused to measure the credit portion of other-than-temporary impairment, and aroll forward of amounts recognized in earnings for securities by major securitytype.  FSP No. 115-2 amends SFAS No. 115,*Accounting for Certain Investments in Debtand Equity Securities* (“SFAS No. 115”) and FSP No. 115-1, *The Meaning of Other-Than-Temporary Impairment andIts Application to Certain Investments*, to require that entitiesidentify major security classes consistent with how the securities are managedbased on the nature and risks of the security, and also expands, for disclosurepurposes, the list of major security types identified in SFAS No. 115. FSPNo. 115-2 is effective for interim and annual reporting periods endingafter June 15, 2009.  The Company’sadoption of this pronouncement did not have a material impact on the reportingof its subsequent events.

 

InApril 2009, the FASB issued FSP No. 157-4, *Determining Fair Value When the Volume and Level of Activity for theAsset or Liability Have Significantly Decreased and Identifying TransactionsThat Are Not Orderly* (“FSP No. 157-4”), which providesadditional guidance for estimating fair value in accordance with SFAS No. 157when the volume and level of activity for an asset or liability hassignificantly decreased and also provides guidance on identifying circumstancesthat indicate a transaction is not orderly. FSP No. 157-4 amends SFAS No. 157 to require entities todisclose in interim and annual periods the inputs and valuation techniques usedto measure fair value together with any changes in valuation techniques andrelated inputs during the period.  FSP No. 157-4also requires reporting entities to define major categories**for both debt and equity securities to bemajor security types as described in paragraph 19 of SFAS No. 115, *Accounting for Certain Investments in Debt and EquitySecurities*.  This requiresentities to provide disclosures on a more disaggregated basis than previouslyhad been required under SFAS No. 157. FSP No. 157-4 is effective for interim and annual reporting periodsending after June 15, 2009, and shall be applied prospectively.  The Company’s adoption of this pronouncementdid not have a material impact on the reporting of its subsequent events.

 

**NOTE3. INVESTMENTS**

 

In September 2006,the FASB issued SFAS No. 157 and the Company adopted SFAS No. 157 on April 1,2008. In part, SFAS No. 157 defines fair value, establishes a frameworkfor measuring fair value and expands disclosures about assets and liabilitiesmeasured at fair value. The new standard provides a consistent definition offair value that focuses on exit price in the principal, or most advantageous,market and prioritizes, within a measurement of fair value, the use ofmarket-based inputs over entity-specific inputs. The standard also establishesthe following three-level hierarchy for fair value measurements based upon thetransparency of inputs to the valuation of an asset or liability as of themeasurement date.

 

·                  *Level 1* — inputs to the valuation methodologyare quoted prices (unadjusted) for identical assets or liabilities in activemarkets;

 

·                  *Level 2***— inputs to the valuation methodologyinclude quoted prices for similar assets and liabilities in active markets, andinputs that are observable for the asset or liability, either directly orindirectly, for substantially the full term of the financial instrument. Level2 inputs are in those markets for which there are few transactions, the pricesare not current, little public information exists or instances where pricesvary substantially over time or among brokered market makers; and

 

·                  *Level 3*— inputs to the valuation methodology areunobservable and significant to the fair value measurement. Unobservable inputsare those inputs that reflect the Company’s own assumptions that marketparticipants would use to price the asset or liability based upon the bestavailable information.

 

As of June 30,2009, all of the Company’s assets were valued using Level 3 inputs.

 

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The followingtable presents the financial instruments carried at fair value as of June 30,2009, by caption on the accompanying condensed consolidated statements ofassets and liabilities for each of the three levels of hierarchy established bySFAS No. 157:

 
| ** **                            | ** ** | **As of June 30, 2009** | ** ** |
|---------------------------------------|------------|------------------------------|------------|
| ** **                            | ** ** | ** **                   | ** ** | ** ** | ** ** | ** ** | ** ** | **Total Fair Value** | ** ** |
| ** **                            | ** ** | ** **                   | ** ** | ** ** | ** ** | ** ** | ** ** | **Reported in Condensed** | ** ** |
| ** **                            | ** ** | ** **                   | ** ** | ** ** | ** ** | ** ** | ** ** | **Consolidated Statement of** | ** ** |
| ** **                            | ** ** | **Level 1**                  | ** ** | **Level 2** | ** ** | **Level 3** | ** ** | **Assets and Liabilities** | ** ** |
| Non-Control/Non-Affiliate investments |       | $                            | —     |   | $ | — |   | $ | 26,961 |   | $ | 26,961 |   |
| Control investments                   |       | —                       |       | — |   | 149,509 |   | 149,509 |   |
| Affiliate investments                 |       | —                       |       | — |   | 50,539 |   | 50,539 |   |
| Total investments at fair value       |       | $                            | —     |   | $ | — |   | $ | 227,009 |   | $ | 227,009 |   |

 

*Changesin Level 3 Fair Value Measurements*

 

The followingtable provides a roll-forward in the changes in fair value during the quarterended June 30, 2009 for all investments for which the Company determinesfair value using unobservable (Level 3) factors. When a determination is madeto classify a financial instrument within Level 3 of the valuation hierarchy,the determination is based upon the significance of the unobservable factors tothe overall fair value measurement. However, Level 3 financial instrumentstypically include, in addition to the unobservable or Level 3 components, observablecomponents (that is, components that are actively quoted and can be validatedto external sources). Accordingly, the gains and losses in the table belowinclude changes in fair value due in part to observable factors that are partof the valuation methodology.

 

**Fair value measurements usingunobservable data inputs (Level 3)**

** **
| ** **                                        | ** ** | **Non-Control/**  | ** ** | ** **      | ** ** | ** **      | ** ** | ** ** | ** ** |
|---------------------------------------------------|------------|-------------------|------------|-----------------|------------|-----------------|------------|------------|------------|
| ** **                                        | ** ** | **Non-Affiliate** | ** ** | **Control**     | ** ** | **Affiliate**   | ** ** | ** ** | ** ** |
| ** **                                        | ** ** | **Investments**   | ** ** | **Investments** | ** ** | **Investments** | ** ** | **Total**  | ** ** |
| Fair value as of March 31, 2009              |       | $                 | 94,740     |            | $          | 166,163         |       | $          | 53,027     |   | $ | 313,930 |   |
| Total realized/unrealized (losses) gains (a)      |       | 2,123             |       | (11,481         | )          | (2,266          | )          | (11,624    | )          |
| New investments, repayments, and settlements, net |       | (69,902           | )          | (5,173          | )          | (222            | )          | (75,297    | )          |
| Transfers in (out) of Level 3                     |       | —            |       | —          |       | —          |       | —     |       |
| Fair value as of June 30, 2009               |       | $                 | 26,961     |            | $          | 149,509         |       | $          | 50,539     |   | $ | 227,009 |   |

 

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(a) Realized/unrealizedgains and losses are reported on the accompanying condensed consolidatedstatements of operations for the three months ended June 30, 2009.

 

*Non-Control/Non-AffiliateInvestments*

 

At June 30, 2009 andMarch 31, 2009, the Company held investments in Non-Control/Non-Affiliatesof approximately $27.0 million and $94.7 million, respectively, at fair value.These investments were comprised primarily of syndicated loan participations ofsenior notes of private companies and also non-syndicated loan investmentswhere the Company does not have a significant ownership interest in theportfolio company. Included in Non-Control/Non-Affiliate investments, at both June 30,2009 and March 31, 2009, were common stock warrants of oneNon-Control/Non-Affiliate company, which carried a nominal fair value.  At June 30, 2009 and March 31,2009, the Company’s investments, at fair value, in Non-Control/Non-Affiliatesrepresented approximately 13% and 44%, respectively, of the Company’s netassets.

 

During April andMay 2009, the Company sold 29 of its 32 senior syndicated loans held at March 31,2009 (collectively, the “Syndicated Loan Sales”) for an aggregate ofapproximately $69.2 million in cash proceeds and recorded a realized loss ofapproximately $34.6 million in connection with these sales. These loans weresold to pay down all unpaid principal and interest owed to Deutsche Bank, A.G.(“Deutsche Bank”) under the Company’s prior credit agreement.

 

*Controland Affiliate Investments*

 

At June 30, 2009 and March 31, 2009, the Company hadinvestments of approximately $153.0 million and $157.0 million, respectively,at fair value, in revolving credit facilities, senior debt and subordinateddebt of 12 portfolio companies. In addition, at June 30 and March 31,2009, the Company had invested approximately $47.1 million and $62.2 million,respectively, in preferred and common equity of those companies.  At June 30, 2009 and March 31,2009, the Company’s investments in Control investments, at fair value,represented approximately 74% and 77%, respectively, of the Company’s netassets. Also, at both June 30, 2009 and March 31, 2009, the Company’sinvestments, at fair value, in Affiliate investments represented approximately25% of the Company’s net assets.

 

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*Controland Affiliate Investment Activity*

 

On April 9, 2009, A. Stucki Holding Corp. refinanced a portion ofits senior term debt by making principal repayments of approximately $2.0million, which represented the next three quarterly payments due under normalamortization on both their senior term A ($1.6 million) and senior term B($412) loans.  Normal amortization isexpected to resume on April 1, 2010.

 

On April 9, 2009, ASH Holdings Corp. made a repayment ofapproximately $1.1 million on its revolving line of credit, which reduced theoutstanding balance to $500.

 

On April 10, 2009, the Company entered into an agreement to reducethe available credit limit on Mathey Investment, Inc.’s revolving line ofcredit from $2.0 million to $1.0 million. This was a non-cash transaction.

 

On April 10, 2009, the Company made an investment disbursement toCavert II Holding Corp. (“Cavert”) for approximately $850 on its revolving lineof credit, and the proceeds were used to make the next four quarterly paymentsdue under normal amortization for both its senior term A and senior term B loansin a non-cash transaction.  Normalamortization on both of these loans is expected to resume on July 1,2010.  Subsequently, on April 17,2009, Cavert repaid the outstanding $850 in principal plus accrued interest onits revolving line of credit.  The revolvingline of credit was then sold to a third party, the Royal Bank of Canada, for anominal fee.

 

On April 13, 2009, the Company entered into an agreement to reducethe available credit limit on Chase II Holdings Corp.’s revolving line ofcredit from $4.5 million to $3.5 million. This was a non-cash transaction.

 

*InvestmentConcentrations*

 

Approximately50.1% of the aggregate fair value of the Company’s investment portfolio at June 30,2009 was comprised of senior debt, approximately 29.1% was senior subordinateddebt, and approximately 20.8% was preferred and common equity securities. At June 30,2009, the Company had investments in 17 portfolio companies with an aggregatefair value of $227.0 million, of which A. Stucki Holding Corp., Chase II HoldingsCorp. and Acme Cryogenics, Inc. collectively comprised $103.8 million, or45.7% of the Company’s total investment portfolio, at fair value.  The following table outlines the Company’sinvestments by type at June 30, 2009 and March 31, 2009:

 
| ** **                                    | ** ** | **June 30, 2009** | ** **  | **March 31, 2009** | ** ** |
|-----------------------------------------------|------------|------------------------|-------------|-------------------------|------------|
| ** **                                    | ** ** | **Cost**               | ** **  | **Fair Value**          | ** ** | **Cost** | ** ** | **Fair Value** | ** ** |
| Senior Term Debt                              |       | $                      | 121,609     |                    | $          | 113,779 |   | $ | 230,861 |   | $ | 185,161 |   |
| Senior Subordinated Term Debt                 |       | 72,112                 |        | 66,135                  |       | 72,762 |   | 66,576 |   |
| Preferred & Common Equity Securities |       | 45,322                 |        | 47,095                  |       | 45,322 |   | 62,193 |   |
| **Total Investments**                         | ** ** | **$**                  | **239,043** | ** **              | **$**      | **227,009** | ** ** | **$** | **348,945** | ** ** | **$** | **313,930** | ** ** |

 

Investments atfair value consisted of the following industry classifications at June 30,2009 and March 31, 2009:

 
| ** **                                  | ** ** | **June 30,  2009** | ** **  | **March 31,  2009** | ** ** |
|---------------------------------------------|------------|-------------------------|-------------|--------------------------|------------|
| ** **                                  | ** ** | ** **              | ** **  | **Percentage  of**       | ** ** | ** ** | ** ** | **Percentage  of** | ** ** |
| ** **                                  | ** ** | **Fair Value**          | ** **  | **Total  Investments**   | ** ** | **Net Assets** | ** ** | **Fair Value** | ** ** | **Total  Investments** | ** ** | **Net Assets** | ** ** |
| Aerospace and Defense                       |       | $                       | 18,851      |                     | 8.3        | % | 9.3 | % | $ | 22,436 |   | 7.2 | % | 10.4 | % |
| Automobile                                  |       | 8,981                   |        | 4.0                      | %          | 4.4 | % | 14,436 |   | 4.6 | % | 6.7 | % |
| Beverage, Food and Tobacco                  |       | —                  |        | —                   |       | — |   | 1,570 |   | 0.5 | % | 0.7 | % |
| Broadcasting and  Entertainment             |       | —                  |        | —                   |       | — |   | 1,934 |   | 0.6 | % | 0.9 | % |
| Buildings and Real Estate                   |       | 10,740                  |        | 4.7                      | %          | 5.3 | % | 10,709 |   | 3.4 | % | 5.0 | % |
| Cargo Transport                             |       | 11,723                  |        | 5.2                      | %          | 5.8 | % | 13,324 |   | 4.3 | % | 6.2 | % |
| Chemicals, Plastics and  Rubber             |       | 22,241                  |        | 9.8                      | %          | 11.0 | % | 21,420 |   | 6.8 | % | 10.0 | % |
| Containers, Packaging and  Glass            |       | 17,899                  |        | 7.9                      | %          | 8.8 | % | 21,446 |   | 6.8 | % | 10.0 | % |
| Diversified/Conglomerate  Manufacturing     |       | 53,496                  |        | 23.6                     | %          | 26.4 | % | 56,944 |   | 18.1 | % | 26.5 | % |
| Diversified/Conglomerate  Service           |       | 3,657                   |        | 1.6                      | %          | 1.8 | % | 23,585 |   | 7.5 | % | 11.0 | % |
| Electronics                                 |       | —                  |        | —                   |       | — |   | 6,594 |   | 2.1 | % | 3.1 | % |
| Healthcare, Education and  Childcare        |       | 7,691                   |        | 3.4                      | %          | 3.8 | % | 33,605 |   | 10.7 | % | 15.6 | % |
| Machinery                                   |       | 53,216                  |        | 23.4                     | %          | 26.2 | % | 63,907 |   | 20.4 | % | 29.8 | % |
| Oil and Gas                                 |       | 5,950                   |        | 2.6                      | %          | 2.9 | % | 6,171 |   | 2.0 | % | 2.9 | % |
| Personal, Food, and  Miscellaneous Services |       | —                  |        | —                   |       | — |   | 3,552 |   | 1.1 | % | 1.7 | % |
| Printing and Publishing                     |       | 2,555                   |        | 1.1                      | %          | 1.3 | % | 3,158 |   | 1.0 | % | 1.5 | % |
| Telecommunications                          |       | 10,009                  |        | 4.4                      | %          | 4.9 | % | 9,139 |   | 2.9 | % | 4.3 | % |
| **Total  Investments**                      | ** ** | **$**                   | **227,009** | ** **               | **100.0**  | **%** | ** ** | ** ** | **$** | **313,930** | ** ** | **100.0** | **%** | ** ** | ** ** |

 

The investments atfair value were included in the following geographic regions of the UnitedStates at June 30, 2009 and March 31, 2009:

 
| ** **            | ** ** | **June 30, 2009** | ** **  | **March 31, 2009** | ** ** |
|-----------------------|------------|------------------------|-------------|-------------------------|------------|
| ** **            | ** ** | ** **             | ** **  | **Percentage of**       | ** ** | ** ** | ** ** | **Percentage of** | ** ** |
| ** **            | ** ** | **Fair Value**         | ** **  | **Total Investments**   | ** ** | **Net Assets** | ** ** | **Fair Value** | ** ** | **Total Investments** | ** ** | **Net Assets** | ** ** |
| Mid-Atlantic          |       | $                      | 89,813      |                    | 39.6       | % | 44.3 | % | $ | 119,622 |   | 38.1 | % | 55.7 | % |
| Midwest               |       | 85,157                 |        | 37.5                    | %          | 42.0 | % | 105,945 |   | 33.7 | % | 49.3 | % |
| Northeast             |       | 9,404                  |        | 4.1                     | %          | 4.6 | % | 17,525 |   | 5.6 | % | 8.2 | % |
| Southeast             |       | 25,504                 |        | 11.2                    | %          | 12.6 | % | 40,512 |   | 12.9 | % | 18.9 | % |
| West                  |       | 17,131                 |        | 7.6                     | %          | 8.4 | % | 30,326 |   | 9.7 | % | 14.1 | % |
| **Total Investments** | ** ** | **$**                  | **227,009** | ** **              | **100.0**  | **%** | ** ** | ** ** | **$** | **313,930** | ** ** | **100.0** | **%** | ** ** | ** ** |

 

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The geographicregion indicates the location of the headquarters for the Company’s portfoliocompanies. A portfolio company may have a number of other business locations inother geographic regions.

 

*InvestmentPrincipal Repayments*

 

The followingtable summarizes the contractual principal repayment and maturity of theCompany’s investment portfolio by fiscal year, assuming no voluntaryprepayments:

 
| ** **                                           | ** ** | ** **                                         | ** ** | **Amount** | ** **  |
|------------------------------------------------------|------------|----------------------------------------------------|------------|------------|-------------|
| For the  remaining nine months ending March 31: |       | 2010                                               |       | $          | 4,915       |   |
| For the fiscal  year ending March 31:           |       | 2011                                               |       | 27,041     |        |
|                                                 |       | 2012                                               |       | 54,260     |        |
|                                                 |       | 2013                                               |       | 14,941     |        |
|                                                 |       | 2014                                               |       | 74,229     |        |
|                                                 |       | 2015                                               |       | 15,308     |        |
|                                                 |       | Thereafter                                         |       | 3,043      |        |
|                                                 | ** ** | **Total contractual repayments**                   | ** ** | **$**      | **193,737** | ** ** |
|                                                 |       | Investments in equity securities                   |       | 45,322     |        |
|                                                 |       | Unamortized premiums on debt securities            |       | (16        | )           |
|                                                 | ** ** | **Total investments held at  June 30, 2009:** | ** ** | **$**      | **239,043** | ** ** |

 

**NOTE4. RELATED PARTY TRANSACTIONS**

 

**InvestmentAdvisory and Management Agreement**

 

The Company has entered into an investment advisory and managementagreement with the Adviser (the “Advisory Agreement”), which is controlled bythe Company’s chairman and chief executive officer. In accordance with theAdvisory Agreement, the Company pays the Adviser fees as compensation for itsservices, consisting of a base management fee and an incentive fee. On July 8,2009, the Company’s Board of Directors approved the renewal of its AdvisoryAgreement with the Adviser through August 31, 2010.

 

The Company pays the Adviser an annual base management fee of 2% of itsaverage gross assets, which is defined as total assets less uninvested cash andcash equivalents resulting from borrowings calculated as of the end of the twomost recently completed quarters. The following tables summarize the managementfees and associated credits reflected in the accompanying condensedconsolidated statements of operations:

 
| ** **                                                                     | ** ** | **Three months ended June 30,** | ** ** |
|--------------------------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                     | ** ** | **2009**                             | ** ** | **2008** | ** ** |
| **Base management fee**                                                        |       | $                                    | 313        |   | $ | 426 |   |
|                                                                           |       |                                 |       |   |   |
| *Credits to base management fee  from Adviser:*                                |       |                                 |       |   |   |
| Fee reduction for the waiver of 2% fee on senior  syndicated loans to 0.5% (1) |       | (183                                 | )          | (424 | ) |
| Credit for fees received by Adviser from the  portfolio companies              |       | (118                                 | )          | (150 | ) |
| **Credit to base management fee from  Adviser**                                |       | (301                                 | )          | (574 | ) |
|                                                                           |       |                                 |       |   |   |
| **Net base management fee**                                                    | ** ** | **$**                                | **12**     | ** ** | **$** | **(148** | **)** |

 

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(1)          TheAdviser voluntarily waived the annual 2.0% base management fee to 0.5% forsenior syndicated loan participations to the extent that proceeds resultingfrom borrowings were used to purchase such syndicated loan participation.

 

Overall, the base management fee due tothe Adviser cannot exceed 2% of total assets (as reduced by cash and cashequivalents pledged to creditors) during any given fiscal year.

 

Amounts included in Fee due to Adviser inthe accompanying condensed consolidated statements of assets and liabilitieswere as follows:

 
| ** **                                 | ** ** | **June 30,  2009** | ** ** | **March 31,  2009** | ** ** |
|--------------------------------------------|------------|-------------------------|------------|--------------------------|------------|
| Unpaid base management fee  due to Adviser |       | $                       | 12         |                     | $          | (114 | ) |
| Unpaid loan servicing fee  due to Adviser  |       | 226                     |       | 301                      |       |
| Total Fee due to Adviser                   |       | $                       | 238        |                     | $          | 187 |   |

 

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Frominception through June 30, 2009, the Company has not recorded anyincome-based incentive fee.

 

**LoanServicing and Portfolio Company Fees**

 

The Adviser alsoservices the loans held by Business Investment, in return for which it receivesa 2.0% annual fee based on the monthly aggregate outstanding balance of loanspledged under the Company’s line of credit. Since the Company owns these loans,all loan servicing fees paid to the Adviser are treated as reductions againstthe 2.0% base management fee under the Advisory Agreement.  Effective April, 2006, the Adviser’s board ofdirectors voluntarily reduced the annual servicing fee rate on the seniorsyndicated loans to 0.5%.  For the threemonths ended June 30, 2009 and 2008, the Company recorded loan servicingfees due to the Adviser of $1,068 and $1,254, respectively, all of which werededucted against the 2.0% base management fee in order to derive the Basemanagement fee line item in the accompanying condensed consolidated statementsof operations.  Under the AdvisoryAgreement, the Adviser has also provided and continues to provide managerialassistance and other services to the Company’s portfolio companies and mayreceive fees for services other than managerial assistance.

 

**AdministrationAgreement**

 

The Company hasentered into an administration agreement (the “Administration Agreement”) withGladstone Administration, LLC (the “Administrator”), a wholly-owned subsidiaryof the Adviser.  Under the AdministrationAgreement, the Company pays separately for administrative services. TheAdministration Agreement provides for payments equal to the Company’s allocableportion of its Administrator’s overhead expenses in performing its obligationsunder the Administration Agreement including, but not limited to, rent foremployees of the Administrator, and its allocable portion of the salaries andbenefits expenses of the Company’s chief financial officer, chief complianceofficer, treasurer and their respective staffs. The Company’s allocable portionof expenses is derived by multiplying the Administrator’s total allocableexpenses by the percentage of the Company’s average total assets (the totalassets at the beginning of each quarter) in comparison to the average totalassets of all companies managed by the Adviser under similar agreements. On July 8,2009, the Company’s Board of Directors approved the renewal of itsAdministration Agreement with the Administrator through August 31, 2010.

 

The Company recorded fees to the Administrator on the condensedconsolidated statements of operations of $173 and $235 for three months ended June 30,2009 and 2008, respectively.  As of June 30,2009 and March 31, 2009, $173 and $179, respectively, was unpaid andincluded in Fee due to Administrator in the accompanying condensed consolidatedstatements of assets and liabilities.

 

**NOTE5. LINE OF CREDIT**

 

On April 14,2009, the Company, through its wholly-owned subsidiary, Business Investment,entered into a second amended and restated credit agreement providing for a$50.0 million revolving line of credit (the “Credit Facility”) arranged byBranch Banking and Trust Company (“BB&T”) as administrative agent. KeyEquipment Finance Inc. also joined the Credit Facility as a committed lender.  In connection with entering into the CreditFacility, the Company borrowed $43.8 million under the Credit Facility to makea final payment in satisfaction of all unpaid principal and interest owed toDeutsche Bank under the prior credit agreement. The Credit Facility may be expanded up to $125.0 million through theaddition of other committed lenders to the facility.  The Credit Facility matures on April 14,2010, and if the facility is not renewed or extended by this date, all unpaidprincipal and interest will be due and payable within one year of the maturitydate.  Advances under the Credit Facilitygenerally bear interest at the 30-day LIBOR rate (subject to a minimum rate of2%), plus 5% per annum, with a commitment fee of 0.75% per annum on undrawnamounts.

 

Interest ispayable monthly during the term of the Credit Facility. After April 14,2010, if the Credit Facility is not renewed, all principal collections from theCompany’s loans are required to be used to pay outstanding principal under theCredit Facility. Available borrowings are subject to various constraintsimposed under the Credit Facility, based on the aggregate loan balance pledgedby Business Investment.

 

The CreditFacility contains covenants that require Business Investment to maintain itsstatus as a separate entity; prohibit certain significant corporatetransactions (such as mergers, consolidations, liquidations or dissolutions);and restrict material changes to the Company’s credit and collection policies.The facility also limits payments on distributions to the aggregate netinvestment income for the prior twelve months preceding April 2010. As of June 30,2009, Business Investment was in compliance with all of the facilitycovenants.  Additionally, during thethree months ended June 30, 2009, the Company adopted SFAS No. 159, *The Fair Value Option for Financial Assets andLiabilities* (“SFAS No. 159”), specifically for the CreditFacility.  SFAS No. 159 requiresthat the Company apply a fair value methodology to the Credit Facility as of June 30,2009, which is the period that this liability became eligible under SFAS No. 159.   Due to the nature of this Credit Facilitybeing a short term agreement and the fact that interest is based on a variableinterest rate, the Credit Facility has been fair valued at its approximate costbasis as of June 30, 2009.

 

In conjunctionwith entering into the Credit Facility, the Company amended a performanceguaranty which remains substantially similar to the form under the previouscredit facility. The performance guaranty requires the Company to maintain aminimum net worth of $169 million plus 50% of all equity and subordinated debtraised after April 14, 2009, to maintain “asset coverage” with respect to “seniorsecurities representing indebtedness” of at least 200%, in accordance with Section 18of the 1940 Act, and to 

 

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maintain itsstatus as a BDC under the 1940 Act and as a RIC under the Code. As of June 30,2009, the Company was in compliance with the covenants under the performanceguaranty.

 

**NOTE6. INTEREST RATE CAP AGREEMENT**

 

In May 2009, the Company cancelled its interest rate cap agreementwith Deutsche Bank and entered into an interest rate cap agreement withBB&T that will effectively limit the interest rate on a portion of theborrowings under the line of credit pursuant to the terms of the CreditFacility. The interest rate cap has a notional amount of $45 million at a costof approximately $40. At June 30, 2009, the interest rate cap agreementhad a fair market value of approximately $29. The Company records changes inthe fair market value of the interest rate cap agreement monthly based on thecurrent market valuation at month end as unrealized depreciation orappreciation on derivative on the Company’s consolidated statement ofoperations. The interest rate cap agreement expires in April 2010. Theagreement provides that the Company’s floating interest rate or cost of fundson a portion of the portfolio’s borrowings will be capped at 9% when the LIBORrate is in excess of 9%.

 

The use of a cap involves risks that are different from thoseassociated with ordinary portfolio securities transactions. Cap agreements maybe considered to be illiquid. Although the Company will not enter into any suchagreements unless it believes that the other party to the transaction iscreditworthy, the Company does bear the risk of loss of the amount expected tobe received under such agreements in the event of default or bankruptcy of theagreement counterparty.

 

**NOTE7.  SHORT -TERM LOAN**

 

On June 30,2009, the Company purchased $83.0 million of short -term United States Treasurysecurities through Jefferies & Company, Inc. (“Jefferies”).  The securities were purchased with $18.0million in funds drawn on the Credit Facility and the proceeds from a $65.0million short -term loan from Jefferies, with an effective annual interest rateof approximately 2.5%.  On July 2,2009, when the securities matured, the Company repaid the $65.0 million loanfrom Jefferies in full, and repaid all but $1.0 million of the amount drawn onthe Credit Facility for the transaction, which was retained for working capitalpurposes.

 

**NOTE8. COMMON STOCK**

 

As of both June 30,2009 and March 31, 2009, 100,000,000 shares of common stock, $0.001 parvalue per share, were authorized and 22,080,133 shares of common stock wereoutstanding.

 

**NOTE9. NET DECREASE IN NET ASSETS PER SHARE RESULTING FROM OPERATIONS**

 

The followingtable sets forth the computation of basic and diluted net decrease in netassets per share resulting from operations:

 
| ** **                                                                                      | ** ** | **Three  months ended** | ** ** | **Three  months ended** | ** ** |
|-------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-------------------------|------------|
| ** **                                                                                      | ** ** | **June 30,  2009** | ** ** | **June 30,  2008** | ** ** |
| Numerator for basic and diluted net decrease in net  assets resulting from operations per share |       | $                       | (9,190     | )                       | $          | (4,484 | ) |
| Denominator for basic and diluted shares                                                        |       | 22,080,133              |       | 19,943,346              |       |
| Basic and diluted net decrease in net assets per  share resulting from operations               |       | $                       | (0.42      | )                       | $          | (0.22 | ) |

 

**NOTE10. DISTRIBUTIONS**

 

Thefollowing table lists the per common share distributions paid for the threemonths ended June 30, 2009 and 2008:

 
| ** **            | ** ** | ** **           | ** ** | ** **           | ** ** | **Distribution** | ** ** |
|-----------------------|------------|----------------------|------------|----------------------|------------|------------------|------------|
| **Declaration Date**  | ** ** | **Record  Date**     | ** ** | **Payment  Date**    | ** ** | **Per Share**    | ** ** |
| April 16,  2009  |       | April 27,  2009 |       | May 8, 2009     |       | $                |  0.04 |   |
| April 16,  2009  |       | May 20,  2008   |       | May 29,  2009   |       | 0.04             |       |
| April 16,  2009  |       | June 22,  2009  |       | June 30,  2009  |       | 0.04             |       |
|                  |       |                 | ** ** | **Total**            | ** ** | **$**            | **0.12**   | ** ** |
| ** **            |       |                 |       |                 |       |             |       |
|                  | ** ** | ** **           | ** ** | ** **           | ** ** | **Distribution** | ** ** |
| **Declaration  Date** | ** ** | **Record Date**      | ** ** | **Payment Date**     | ** ** | **Per Share**    | ** ** |
| April 8,  2008   |       | April 22,  2008 |       | April 30,  2008 |       | $                |  0.08 |   |
| April 8,  2008   |       | May 21,  2008   |       | May 30,  2008   |       | 0.08             |       |
| April 8,  2008   |       | June 20,  2008  |       | June 30,  2008  |       | 0.08             |       |
|                  |       |                 | ** ** | **Total**            | ** ** | **$**            | **0.24**   | ** ** |

 

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Aggregate distributions declared and paid for three months ended June 30,2009 and 2008 were approximately $2.7 and $4.9 million, respectively, whichwere declared based on estimates of net investment income, and some of thedistributions included a return of capital.

 

The timing and characterization of certain income and capital gainsdistributions are determined annually in accordance with federal taxregulations which may differ from GAAP. These differences primarily relate toitems recognized as income for financial statement purposes and realized gainsfor tax purposes. As a result, net investment income and net realized gain(loss) on investment transactions for a reporting period may differsignificantly from distributions during such period. Accordingly, the Companymay periodically make reclassifications among certain of its capital accountswithout impacting the net asset value of the Company.

 

***Section 19(a) Disclosure***

 

The Company’s Board of Directors estimates the source of thedistributions at the time of their declaration as required by Section 19(a) ofthe 1940 Act. On a monthly basis, if required under Section 19(a), theCompany posts a Section 19(a) notice through the Depository TrustCompany’s Legal Notice System (“LENS”) and also sends to its registeredstockholders a written Section 19(a) notice along with the payment ofdistributions for any payment which includes a distribution estimated to bepaid from any other source other than net investment income. The estimates ofthe source of the distribution are interim estimates based on GAAP that aresubject to revision, and the exact character of the distributions for taxpurposes cannot be determined until the final books and records of the Company arefinalized for the calendar year. Following the calendar year end, afterdefinitive information has been determined by the Company, if the Company hasmade distributions of taxable income (or return of capital), the Company willdeliver a Form 1099-DIV to its stockholders specifying such amount and thetax characterization of such amount. Therefore, these estimates are made solelyin order to comply with the requirements of Section 19(a) of the 1940Act and should not be relied upon for tax reporting or any other purposes andcould differ significantly from the actual character of distributions for taxpurposes.

 

The following GAAP estimates were made by the Board of Directors duringthe quarter ended June 30, 2009:

 
| **Payment Date**   | ** ** | **Ordinary Income** | ** ** | **Return of Capital** | ** ** | **Total Distribution** | ** ** |
|--------------------|------------|---------------------|------------|-----------------------|------------|------------------------|------------|
| May 8, 2009   |       | $                   | 0.043      |                  | $          | (0.003                 | )          | $ | 0.040 |   |
| May 29, 2009  |       | 0.037               |       | 0.003                 |       | 0.040                  |       |
| June 30, 2009 |       | 0.045               |       | (0.005                | )          | 0.040                  |       |
|                    |            |                     |            |                       |            |                        |            |  |  |  |

 

Because the Board of Directors declares distributions at the beginningof a quarter, it is difficult to estimate how much of the Company’s monthlydividends and distributions, based on GAAP, will come from ordinary income,capital gains and returns of capital. Subsequent to the quarter ended June 30,2009, the following corrections were made to the above listed estimates forthat quarter:

 
| **Payment Date**   | ** ** | **Ordinary Income** | ** ** | **Return of Capital** | ** ** | **Total Distribution** | ** ** |
|--------------------|------------|---------------------|------------|-----------------------|------------|------------------------|------------|
| May 8, 2009   |       | $                   | 0.051      |                  | $          | (0.011                 | )          | $ | 0.040 |   |
| May 29, 2009  |       | 0.034               |       | 0.006                 |       | 0.040                  |       |
| June 30, 2009 |       | 0.026               |       | 0.014                 |       | 0.040                  |       |
|                    |            |                     |            |                       |            |                        |            |  |  |  |

 

For distributions declared subsequent to quarter end, the followingestimates, based on GAAP, have been made pursuant to Section 19(a) ofthe 1940 Act:

 
| **Payment Date**        | ** ** | **Ordinary Income** | ** ** | **Return of Capital** | ** ** | **Total Distribution** | ** ** |
|-------------------------|------------|---------------------|------------|-----------------------|------------|------------------------|------------|
| July 31, 2009      |       | $                   | 0.042      |                  | $          | (0.002                 | )          | $ | 0.040 |   |
| August 31, 2009    |       | 0.039               |       | 0.001                 |       | 0.040                  |       |
| September 30, 2009 |       | 0.039               |       | 0.001                 |       | 0.040                  |       |
|                         |            |                     |            |                       |            |                        |            |  |  |  |

 

**NOTE11.  COMMITMENTS AND CONTINGENCIES**

 

AtJune 30, 2009, the Company was not party to any signed term sheets forpotential investments.

 

In October 2008,the Company executed a guaranty of a vehicle finance facility agreement betweenFord Motor Credit Company (“FMC”) and Auto Safety House, LLC (“ASH”), one ofits Control investments (the “Finance Facility”).  The Finance Facility provides ASH with a lineof credit of up to $500 for component Ford parts used by ASH to build truckbodies under a separate contract.  Titleand ownership of the parts is retained by Ford. The guaranty of the FinanceFacility will expire upon termination of the separate parts supply contractwith Ford or upon our replacement as guarantor. The Finance Facility is secured by all of the assets of BusinessInvestment.  As of June 30, 2009,the Company has not been required to make any payments on the guaranty of theFinance Facility.

 

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**NOTE12. SUBSEQUENT EVENTS**

 

The Companyevaluated all events that have occurred subsequent to June 30, 2009through the date of the filing of this Form 10Q on August 4, 2009.

 

*Short-Term Loan Repayment*

 

On July 2,2009, when the securities purchased through Jefferies matured, the Companyrepaid the $65.0 million loan from Jefferies in full, and repaid all but $1.0million of the amount drawn on the Credit Facility for the transaction, whichwas retained for working capital purposes.  Please refer to Note 7, “Short-Term Loan” for more information.

 

*Distributions*

 

On July 8,2009, the Company’s Board of Directors declared the following monthly cashdistributions:

 
| ** **           | ** ** | ** **               | ** ** | ** **               | ** ** | **Distribution** | ** ** |
|----------------------|------------|--------------------------|------------|--------------------------|------------|------------------|------------|
| **Declaration Date** | ** ** | **Record Date**          | ** ** | **Payment Date**         | ** ** | **Per Share**    | ** ** |
| July 8, 2009    |       | July 23,  2009      |       | July 31,  2009      |       | $                | 0.040      |   |
| July 8, 2009    |       | August 21,  2009    |       | August 31,  2009    |       | 0.040            |       |
| July 8, 2009    |       | September 22,  2009 |       | September 30,  2009 |       | 0.040            |       |
|                      |            |                          |            |                          |            |                  |            |  |

 

*Renewalof Advisory Agreement*

 

On July 8,2009, the Company’s Board of Directors approved the renewal of the AdvisoryAgreement and the Administration Agreement through August 31, 2010.

 

*RegistrationStatement*

 

On July 21,2009, the Company filed a registration statement (the “Registration Statement”)with the SEC that, if declared effective by the SEC, will permit the Company toissue, through one or more transactions, up to an aggregate of $300.0 millionin securities, consisting of common stock, preferred stock, subscriptionrights, debt securities and warrants to purchase common stock, or a combinationof these securities.

 

*InvestmentActivity*

 

On July 1,2009, the Company extended approximately $0.1 million of revolver draws andadditional investments to existing portfolio companies.  Subsequent to June 30, 2009, the Companyreceived approximately $0.4 million from scheduled and unscheduled loanrepayments.

 

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**ITEM 2. MANAGEMENT’S DISCUSSION ANDANALYSIS OF FINANCIALCONDITION AND RESULTS OF OPERATIONS (dollar amounts in thousands, except pershare data or as otherwise indicated).**

 

**All statements contained herein, other than historical facts,may constitute “forward-looking statements.” These statements may relate to,among other things, future events or our future performance or financialcondition. In some cases, you can identify forward-looking statements byterminology such as “may,” “might,” “believe,” “will,” “provided,” “anticipate,”“future,” “could,” “growth,” “plan,” “intend,” “expect,” “should,” “would,” “if,”“seek,” “possible,” “potential,” “likely” or the negative of such terms orcomparable terminology. These forward-looking statements involve known andunknown risks, uncertainties and other factors that may cause our actualresults, levels of activity, performance or achievements to be materiallydifferent from any future results, levels of activity, performance orachievements expressed or implied by such forward-looking statements. Wecaution readers not to place undue reliance on any such forward-lookingstatements. We undertake no obligation to publicly update or revise anyforward-looking statements, whether as a result of new information, futureevents or otherwise, after the date of this Form 10-Q**.

 

**Thefollowing analysis of our financial condition and results of operations shouldbe read in conjunction with our condensed consolidated financial statements andthe notes thereto contained elsewhere in this report and our annual report on Form 10-Kfor the fiscal year ended March 31, 2009.**

 

**OVERVIEW**

 

We were incorporated under the General Corporation Laws of the State ofDelaware on February 18, 2005. We were primarily established for thepurpose of investing in subordinated loans, mezzanine debt, preferred stock andwarrants to purchase common stock of small and medium-sized companies inconnection with buyouts and other recapitalizations. We also invest in seniorsecured loans, common stock and, to a much lesser extent, senior andsubordinated syndicated loans. Our investment objective is to generate bothcurrent income and capital gains through these debt and equity instruments. Weoperate as a closed-end, non-diversified management investment company and haveelected to be treated as a business development company under the InvestmentCompany Act of 1940 (the “1940 Act”).  Inaddition, for tax purposes, we have elected to be treated as a regulatedinvestment company (“RIC”) under the Internal Revenue Code of 1986, as amended(the “Code”).

 

**BusinessEnvironment**

 

The currenteconomic conditions generally and the disruptions in the capital markets inparticular have decreased liquidity and increased our cost of debt and equitycapital, where available. The longer these conditions persist, the greater theprobability that these factors could continue to increase our cost andsignificantly limit our access to debt and equity capital, and thus have anadverse effect on our operations and financial results. Many of the companiesin which we have made or will make investments are also susceptible to theeconomic downturn, which may affect the ability of one or more of our portfoliocompanies to repay our loans or engage in a liquidity event, such as a sale,recapitalization or initial public offering. The recession could alsodisproportionately impact some of the industries in which we invest, causing usto be more vulnerable to losses in our portfolio. Therefore, the fair marketvalue of our aggregate portfolio is likely to continue to decrease during theseperiods.

 

The recession hasaffected the availability of credit generally and, as a result, subsequent toour fiscal year end, we sold 29 of the 32 senior syndicated loans that wereheld in our portfolio of investments at March 31, 2009 to variousinvestors in the syndicated loan market (collectively, the “Syndicated LoanSales”) in order to repay amounts outstanding under our prior credit facility,which matured in April 2009. These loans, in aggregate, had a cost valueof approximately $104.2 million, or 29.9% of the cost value of our totalinvestments, and an aggregate fair market value of approximately $69.8 million,or 22.2% of the fair market value of our total investments, at March 31,2009. These sales changed our asset composition in a manner that has affectedour ability to satisfy certain elements of the Code’s rules formaintenance of our RIC status. In order to maintain our status as a RIC, inaddition to other requirements, as of the close of each quarter of our taxableyear, we must meet the asset diversification test, which requires that at least50% of the value of our assets consist of cash, cash items, U.S. governmentsecurities or certain other qualified securities. During the quarter ended June 30,2009, we fell below the required 50% asset diversification threshold.

 

Failure to meetthe asset diversification test alone will not result in our loss of RIC status.In  circumstances where the failure tomeet the quarterly 50% asset diversification threshold is the result offluctuations in the value of assets, including as a result of the sale ofassets, we will still be deemed under the Code’s rules to satisfy theasset diversification test and, therefore, maintain our RIC status, as long aswe have not made any new investments, including additional investments in ourportfolio companies (such as advances under outstanding lines of credit), sincethe time that we fell below the 50% threshold. At June 30, 2009, the firstquarterly measurement date following the sales, we satisfied the 50% assetdiversification threshold through the purchase of short-term qualifiedsecurities, which purchase was funded primarily through a short-term loanagreement. Subsequent to the June 30th measurement date, these securitiesmatured and we repaid the short-term loan, at which time we again fell belowthe 50% threshold. See “—Recent Developments—Short-Term Loan” for more informationregarding this transaction. As of the date of this filing, we remain below the50% threshold. Thus, although we currently qualify as a RIC despite ourcurrent, and potential future, inability to meet the 50% asset diversificationrequirement, if we make any additional investments before regaining compliancewith the asset diversification test, our 

 

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RIC status will bethreatened. If we make a new or additional investment and fail to regaincompliance with the 50% threshold on the next quarterly measurement datefollowing such investment, we will be in non-compliance with the RIC rules andwill have thirty days to “cure” our failure of the asset diversification testto avoid our loss of RIC status. Potential cures for failure of the assetdiversification test include raising additional equity or debt capital, orchanging the composition of our assets, which could include full or partialdivestitures of investments, such that we would once again exceed the 50%threshold.

 

Until thecomposition of our assets is above the required 50% asset diversificationthreshold, we will continue to seek to deploy similar purchases of qualifiedsecurities using short-term loans that would allow us to satisfy the assetdiversification test, thereby allowing us to make additional investments. Therecan be no assurance, however, that we will be able to enter into such a transactionon reasonable terms, if at all. We also continue to explore a number of otherstrategies, including changing the composition of our assets, which couldinclude full or partial divestitures of investments, and raising additionalequity or debt capital, such that we would once again exceed the 50% threshold.Our ability to implement any of these strategies will be subject to marketconditions and a number of risks and uncertainties that are, in part, beyondour control.

 

On April 14, 2009, through our wholly-owned subsidiary, GladstoneBusiness Investment, LLC (“Business Investment”), we entered into a secondamended and restated credit agreement providing for a $50.0 million revolvingline of credit (the “Credit Facility”) arranged by Branch Banking and TrustCompany (“BB&T”) as administrative agent. Key Equipment Finance CompanyInc. also joined the Credit Facility as a committed lender.  Under the terms of the Credit Facility,committed funding was reduced from $125.0 million under our prior facility to$50.0 million. See “—Recent Developments” section below for furtherinformation. As of July 20, 2009, $28.2 million was outstanding under theCredit Facility and $18.7 million was available for borrowing due to certainlimitations on our borrowing base. As a result of this limited availabilityunder our credit facility, and the restraints upon our investing activitiesrequired in order to maintain RIC status under the Code as described above, weare unsure when we will once again be in a position to make any newinvestments. The Credit Facility also limits our distributions to stockholdersand, as a result, we recently decreased our monthly cash distribution rate by50% as compared to the prior three month period. We do not know when marketconditions will stabilize, if adverse conditions will intensify or the fullextent to which the disruptions will continue to affect us. If marketinstability persists or intensifies, we may experience increasing difficulty inraising capital.

 

Challenges in thecurrent market are intensified for us by certain regulatory limitations underthe Code and the 1940 Act, as well as contractual restrictions under theagreement governing the Credit Facility that further constrain our ability toaccess the capital markets. To maintain our qualification as a RIC, we mustsatisfy, among other requirements, an annual distribution requirement to payout at least 90% of our ordinary income and short-term capital gains to ourstockholders on an annual basis. Because we are required to distribute ourincome in this manner, and because the illiquidity of many of our investmentsmakes it difficult for us to finance new investments through the sale ofcurrent investments, our ability to make new investments is highly dependentupon external financing. Our external financing sources include the issuance ofequity securities, debt securities or other leverage such as borrowings underour line of credit. Our ability to seek external debt financing, to the extentthat it is available under current market conditions, is further subject to theasset coverage limitations of the 1940 Act, which require us to have at least a200% asset coverage ratio, meaning generally that for every dollar of debt, wemust have two dollars of assets.

 

The recession mayalso continue to decrease the value of collateral securing some of our loans,as well as the value of our equity investments, which has impacted and maycontinue to impact our ability to borrow under the Credit Facility.Additionally, the Credit Facility contains covenants regarding the maintenanceof certain minimum loan concentrations which are affected by the decrease invalue of our portfolio. Failure to meet these requirements would result in adefault which, if we are unable to obtain a waiver from our lenders, wouldresult in the acceleration of our repayment obligations under the CreditFacility.

 

We expect that,given these regulatory and contractual constraints in combination with currentmarket conditions, debt and equity capital may be costly or difficult for us toaccess for some time. For so long as this is the case, our near-term strategydepends on retaining capital and building the value of our existing portfoliocompanies to increase the likelihood of maintaining potential future returns.We will also, where prudent and possible, consider the sale of lower-yieldinginvestments. This has resulted, and may continue to result, in significantlyreduced investment activity, as our ability to make new investments under theseconditions is largely dependent on availability of proceeds from the sale orexit of existing portfolio investments, which events may be beyond our control.As capital constraints improve, we intend to continue our strategy of makingconservative investments in businesses that we believe will weather the currenteconomy and that are likely to produce attractive long-term returns for ourstockholders.

 

**Useof Internally-Developed Discount Cash Flow Methodologies**

 

Given therecession, the market for syndicated loans has become increasingly illiquidwith limited or no transactions for many of those securities which we hold. TheFinancial Accounting Standards Board (“FASB”) Staff Position No. 157-3, *Determining the Fair Value of a Financial Asset Whenthe Market for That Asset is Not Active* (“FSP No. 157- 3”),provides guidance on the use of a discounted cash flow (“DCF”) methodology tovalue investments in an illiquid market. Under FSP No. 157-3, indications of an illiquid market includecases where the volume and level of trading activity in the asset have declinedsignificantly, the available prices vary significantly over time or amongstmarket participants, or the prices are not current. The marketplace for whichwe obtain indicative bids for purposes of determining fair value for oursyndicated loan investments have shown these attributes of illiquidity.  In 

 

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accordance withStatement of Financial Accounting Standards (“SFAS”) No. 157, ourvaluation procedures specify the use of third-party indicative bid quotes forvaluing syndicated loans where there is a liquid public market for those loansand market pricing quotes are readily available. However, due to continuedmarket illiquidity and the lack of transactions during the quarter ended June 30,2009, we determined that the current agent bank non-binding indicative bids forour syndicated loans were unreliable and alternative procedures would need tobe implemented until liquidity returns to the marketplace.  As of June 30, 2009, the portion of ourinvestment portfolio that was valued using DCF was approximately $16.2 million,or 7.1% of the fair value of our total portfolio of investments.

 

**RecentDevelopments**

 

*NewCredit Facility with Branch Bank and Trust Company and Termination of DeutscheBank, A.G. Credit Facility*

 

On April 14,2009, we entered into the Credit Facility arranged by BB&T asadministrative agent. Key Equipment Finance Company Inc. also joined the CreditFacility as a committed lender. In connection with our entry into the CreditFacility, we borrowed $43.8 million under the Credit Facility to repay in fullall amounts outstanding under our prior credit agreement with Deutsche Bank,A.G. (“Deutsche Bank”).  The CreditFacility may be expanded up to $125.0 million through the addition of othercommitted lenders to the facility. The Credit Facility matures on April 14,2010, and if the facility is not renewed or extended by this date, all unpaidprincipal and interest will be due and payable within one year of maturity.

 

During the threemonths ended June 30, 2009, we adopted SFAS No. 159—*The Fair Value Option for Financial Assets andFinancial Liabilities* (“SFAS No.  159”), specifically for theCredit Facility, which requires us to apply a fair value methodology to theCredit Facility as of June 30, 2009, which is the period that thisliability became eligible under SFAS No. 159. Due to the nature of thisCredit Facility being a short term agreement and the fact that interest isbased on a variable interest rate, the Credit Facility has been fair valued atits approximate cost basis as of June 30, 2009.

 

*InterestRate Cap Agreement*

 

During May 2009,we cancelled our interest rate cap agreement with Deutsche Bank and enteredinto a new interest rate cap agreement for a notional amount of $45.0 millionthat will effectively limit the interest rate on a portion of the borrowingsunder the Credit Facility. We incurred a premium fee of approximately $40 inconjunction with this agreement.

 

### ***SeniorSyndicated Loan Sales***

### ** **

### **As previously noted, during April andMay 2009, we finalized our sale of 29 of the 32 senior syndicated loansthat were held in our portfolio of investments at March 31, 2009 tovarious investors in the syndicated loan market.  The loans, in aggregate, had a cost value ofapproximately $104.2 million, or 29.9% of the cost value of our totalinvestments, and an aggregate fair market value of approximately $69.8 million,or 22.2% of the fair market value of our total investments, at March 31,2009.  As a result of these sales, wereceived approximately $69.2 million in net cash proceeds and recorded arealized loss of approximately $34.6 million.**

### ** **

*ProprietaryInvestments Term Debt Repayments and Revolver Reductions/Extinguishments*

 

During April 2009,we executed the following transactions with certain of our portfolio companies:

 

·                  On April 9, 2009, A. Stucki Holding Corp.refinanced a portion of its senior term debt by repaying approximately $2.0million of principal repayments which represented the next three quarterlypayments due under normal amortization on both their senior term A ($1.6million) and senior term B ($0.4 million) loans.  Normal amortization is expected to resume on April 1,2010.

 

·                  On April 9, 2009, ASH Holdings Corp. made arepayment of approximately $1.1 million on its revolving line of credit whichreduced the outstanding balance to $0.5 million.

 

·                  On April 10, 2009, we entered into an agreementto reduce the available credit limit on Mathey Investment, Inc.’srevolving line of credit from $2.0 million to $1.0 million.  This was a non-cash transaction.

 

·                  On April 10, 2009, we made an investmentdisbursement to Cavert II Holding Corp. (“Cavert”) for approximately $0.85million on its revolving line of credit, and the proceeds were used to make thenext four quarterly payments due under normal amortization for both theirsenior term A and senior term B loans in a non-cash transaction.  Normal amortization on both of these loans isexpected to resume on July 1, 2010. Subsequently, on April 17, 2009, Cavert repaid the outstanding $.85million in principal plus accrued interest on its revolving line ofcredit.  The revolving line of credit wasthen sold to a third party, the Royal Bank of Canada, for a nominal fee.

 

·                  On April 13, 2009, we entered into an agreementto reduce the available credit limit on Chase II Holdings Corp.’s revolvingline of credit from $4.5 million to $3.5 million.  This was a non-cash transaction.

 

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### ***Short -TermLoan***

### ** **

On June 30,2009, we purchased $83.0 million of short -term United States Treasurysecurities through Jefferies & Company, Inc. (“Jefferies”).  The securities were purchased with $18.0million in funds drawn on the Credit Facility and the proceeds from a $65.0million short -term loan from Jefferies with an effective annual interest rateof approximately 2.5%.  On July 2,2009, when the securities matured, we repaid the $65.0 million loan fromJefferies in full, and repaid all but $1.0 million of the amount drawn on theCredit Facility for the transaction, which was retained for working capitalpurposes.

 

**RESULTS OF OPERATIONS**

 

***Comparison of the Three Months Ended June 30,2009 to the Three Months Ended June 30, 2008***

 

**Investment Income**

 

Investment incomefor the three months ended June 30, 2009 was $5,169, as compared to $6,038for the three months ended June 30, 2008.

 

Interest incomefrom our investments in debt securities of private companies was $5,084 for thethree months ended June 30, 2009, as compared to $6,004 for the comparableprior year period. The level of interest income from investments is directlyrelated to the balance, at cost, of the interest-bearing investment portfoliooutstanding during the period multiplied by the weighted average yield. Theweighted average yield varies from period to period based on the current statedinterest rate on interest-bearing investments and the amounts of loans forwhich interest is not accruing. Interest income from our investments decreased$920, or 15.3%, during the three months ended June 30, 2009, as comparedto the prior year period. This change was due to the decrease in the weightedaverage yield of our portfolio, attributable mainly to a reduction in theaverage LIBOR during the comparable time periods, which was approximately 0.37%for the three months ended June 30, 2009, as compared to 2.7% in the prioryear period.  Also contributing to thechange was a decrease in the average cost basis of our interest-bearinginvestment portfolio during the period, which was approximately $241.7 millionfor the three months ended June 30, 2009, compared to approximately $299.8million for the prior year period, due primarily to the Syndicated Loan Sales.

 

Interest incomefrom Non-Control/Non-Affiliate investments was $1,029 for the three monthsended June 30, 2009, as compared to $2,324 for the prior year period. Thisdecrease was the result of an overall decrease in the number ofNon-Control/Non-Affiliate investments held at June 30, 2009 compared tothe prior year period, primarily due to the Syndicated Loan Sales. At June 30,2009, we held investments in five different Non-Control/Non-Affiliateinvestments, compared to 37 at June 30, 2008. This decrease was furtheraccentuated by drops in LIBOR between periods, due to the instability andtightening of the credit markets.

 

Interest incomefrom Control investments was $2,777 for the three months ended June 30,2009, as compared to $2,569 for the prior year period. The increase of $208 isattributable to two additional Control investments, Galaxy Tool and CountryClub Enterprises, being held at June 30, 2009 compared to the prior yearperiod; however, this increase was partially offset by the reclassification ofQuench, a Control investment at June 30, 2008, as an Affiliate investmentfor the current reporting year.  Thisreclassification took place in the second quarter of fiscal year 2009.  Continuing decreases in LIBOR played aminimal role in interest income from our proprietary deals during the currentquarter, as the majority of them include interest rate floors to protectagainst such circumstances.

 

Interest incomefrom Affiliate investments was $1,278 for the three months ended June 30,2009, as compared to $1,111 for the prior year period. The increase of $167 wasdue mainly to the reclassification of Quench as an Affiliate investment, asnoted above.

 

The followingtable lists the interest income from investments for the five largest portfoliocompany investments during the respective periods:

 

**Three months ended June 30, 2009**

 
| **Company**                | ** ** | **Interest  Income** | ** ** | **% of  Total** | ** ** |
|----------------------------|------------|----------------------|------------|-----------------|------------|
| Chase II Holdings Corp.    |       | $                    | 661        |            | 13.0       | % |
| Galaxy Tools Holding Corp. |       | 589                  |       | 11.6            | %          |
| A. Stucki Holding Corp.    |       | 577                  |       | 11.3            | %          |
| Acme Cryogenics, Inc. |       | 421                  |       | 8.3             | %          |
| Danco Acquisition Corp.    |       | 394                  |       | 7.8             | %          |
| **Subtotal**               | ** ** | **$**                | **2,642**  | ** **      | **52.0**   | **%** |
| Other companies            |       | 2,442                |       | 48.0            | %          |
| **Total interest income**  | ** ** | **$**                | **5,084**  | ** **      | **100.0**  | **%** |

 

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**Three months ended June 30, 2008**

** **
| **Company**                | ** ** | **Interest  Income** | ** ** | **% of  Total** | ** ** |
|----------------------------|------------|----------------------|------------|-----------------|------------|
| Chase II Holdings Corp.    |       | $                    | 710        |            | 11.8       | % |
| A. Stucki Holding Corp.    |       | 669                  |       | 11.2            | %          |
| Acme Cryogenics, Inc. |       | 422                  |       | 7.0             | %          |
| Cavert II Holding Corp.    |       | 412                  |       | 6.9             | %          |
| Danco Acquisition Corp.    |       | 404                  |       | 6.7             | %          |
| **Subtotal**               | ** ** | **$**                | **2,617**  | ** **      | **43.6**   | **%** |
| Other companies            |       | 3,387                |       | 56.4            | %          |
| ** **                 | ** ** | ** **           | ** ** | ** **      | ** ** |
| **Total interest income**  | ** ** | **$**                | **6,004**  | ** **      | **100.0**  | **%** |

 

The weightedaverage yield on our portfolio, excluding cash and cash equivalents, for thethree months ended June 30, 2009 was 9.84%, compared to 7.79% for theprior year period.  The weighted averageyield varies from period to period based on the current stated interest rate oninterest-bearing investments and the amounts of loans for which interest is notaccruing.  The increase in the weightedaverage yield for the current quarter results primarily from the Company’s saleof lower interest-bearing senior syndicated loans.

 

Interest incomefrom invested cash and cash equivalents was nominal for the three months ended June 30,2009, compared to $24 for the prior year period.  This decrease is a result of lower interestrates offered by banks, as this income is derived mainly from interest earnedon overnight sweeps of cash held at financial institutions, in addition to ususing the proceeds from repayments on outstanding loans during the year to paydown our line of credit.

 

Other income was$85 for the three months ended June 30, 2009, as compared to $10 for theprior year period.  The majority of thisincrease was due to the full recognition of amendment fees related to theSyndicated Loan Sales that were previously being amortized over the respectivelives of the loans.

 

**Operating Expenses**

 

Total operatingexpenses, excluding any voluntary and irrevocable credits to the basemanagement fee, were $3,025 for the three months ended June 30, 2009, ascompared to $3,561 for the prior year period, an overall decrease of $536, or15.1%.  The majority of this reductionwas due to a decrease in interest expense associated with the Credit Facilityas well as a decrease in the amount of fees to our Adviser.

 

Loan servicingfees of $1,068 were incurred for the three months ended June 30, 2009, ascompared to $1,254 for the prior year period. These fees were incurred inconnection with a loan servicing agreement between Business Investment and ourAdviser, which is based on the value of the aggregate outstanding portfolio.These fees were directly credited against the amount of the base management feedue to our Adviser. Our lower overall portfolio value, caused by the SyndicatedLoan Sales, attributed to the decrease in this fee.

 

The basemanagement fee for the three months ended June 30, 2009 was $313, ascompared to $426 for the prior year period. The decrease is reflective of fewertotal assets held during the quarter ended June 30, 2009 when compared tothe prior year quarter. The base management fee is computed quarterly asdescribed under *“Investment Advisory andManagement Agreement”* in Note 4 of the notes to the consolidatedfinancial statements in the Company’s Annual Report on Form 10-K as filedon June 2, 2009, and is summarized in the table below:

 
| ** **                                                                     | ** ** | **Three months ended June 30,** | ** ** |
|--------------------------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                     | ** ** | **2009**                             | ** ** | **2008** | ** ** |
| **Base management fee**                                                        |       | $                                    | 313        |   | $ | 426 |   |
|                                                                           |       |                                 |       |   |   |
| *Credits to base management fee  from Adviser:*                                |       |                                 |       |   |   |
| Fee reduction for the waiver of 2% fee on senior  syndicated loans to 0.5% (1) |       | (183                                 | )          | (424 | ) |
| Credit for fees received by Adviser from the  portfolio companies              |       | (118                                 | )          | (150 | ) |
| **Credit to base management fee from  Adviser**                                |       | (301                                 | )          | (574 | ) |
|                                                                           |       |                                 |       |   |   |
| **Net base management fee**                                                    | ** ** | **$**                                | **12**     | ** ** | **$** | **(148** | **)** |

 

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(1)                   Our Adviser voluntarily and irrevocablywaived the annual 2.0% base management fee to 0.5% for senior syndicated loanparticipations to the extent that proceeds resulting from borrowings were usedto purchase such syndicated loan participations.

 

The administrationfee was $173 for the three months ended June 30, 2009, as compared to $235for the prior year period. The decrease in the current year period is due to adecrease of administration staff and related expenses, as well as a decrease inour total assets in comparison to the total assets of all companies managed byour Adviser under similar agreements. The calculation of the 

 

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administrative feeis described in detail above under *“InvestmentAdvisory and Management Agreement”* in Note 4 of the notes to theconsolidated financial statements in the Company’s Annual Report on Form 10-Kas filed on June 2, 2009.

 

Interest expensewas $702 for the three months ended June 30, 2009, as compared to $1,102for the prior year period, a decrease of $400, or 36.3%. The decline was adirect result of decreased borrowings under the Credit Facility during thequarter ended June 30, 2009, as compared to the prior year period.  The weighted average balance outstanding onour line of credit during the quarter ended June 30, 2009 wasapproximately $41.9 million, compared to $99.7 million in the comparable prioryear period.

 

Other operatingexpenses (including deferred financing fees, professional fees, stockholderrelated costs, insurance, director’s fees and other direct expenses) increasedover the comparable prior year period, driven primarily by increases indeferred financing fees related to the Credit Facility and professional fees,such as audit and legal costs associated with the filings of a shelf registration statement with the SEC and theSyndicated Loan Sales, partially offset by slightly lower stockholder relatedcosts from proxy solicitation and annual report fees.

 

**Realized and Unrealized (Loss) Gainon Investments**

 

*RealizedLosses*

 

During the threemonths ended June 30, 2009, we exited 29 of the 32 senior syndicated loansfor aggregate proceeds of approximately $69.2 million in cash and recorded arealized loss of approximately $34.6 million. For the three months ended June 30,2008, we received approximately $13.2 million in cash proceeds and recognized anet loss on the sale of nine syndicated loans in the aggregate amount of $1.7million. The increase in realized losses is attributable to liquidity needsfrom the senior syndicated loan sales associated with the repayment of amountsoutstanding under our prior credit facility with Deutsche Bank, which maturedin April 2009.

 

*UnrealizedGains and Losses*

 

Net unrealizedappreciation (depreciation) of investments is the net change in the fair valueof our investment portfolio during the reporting period, including the reversalof previously recorded unrealized appreciation or depreciation when gains andlosses are actually realized. During the three months ended June 30, 2009,we recorded net unrealized appreciation of investments in the aggregate amountof $23.0 million, compared to $5.8 million for the prior year period.  The unrealized appreciation (depreciation)across our investments for the three months ended June 30, 2009 was asfollows:

 
| **Investment  Category**  | ** ** | **Net  Unrealized Gain (Loss)** | ** ** |
|---------------------------|------------|---------------------------------|------------|
| Non-Control/Non-Affiliate |       | $                               | 36,728     | * |
| Control                   |       | (11,481                         | )          |
| Affiliate                 |       | (2,266                          | )          |
| Total                     |       | $                               | 22,981     |   |

 

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*     Includes the reversal of approximately$34.4 million of previously recorded unrealized depreciation related to theSyndicated Loan Sales, which resulted in a $34.6 million of realized loss forthe current quarter.

 

We recordedapproximately $36.7 million of unrealized appreciation of ourNon-Control/Non-Affiliate investments for the quarter ended June 30, 3009,due primarily to the reversal of $34.4 million of previously recordedunrealized depreciation upon the completion of the Senior Syndicated LoanSales, as noted above, and appreciation in value in the aggregate amount ofapproximately $2.3 million on our remaining Non-Control/Non-Affiliateinvestments.

 

Our Controlinvestments experienced the most significant devaluation in our totalportfolio, particularly in our equity holdings, which depreciated in value byan aggregate of approximately $11.9 million during the quarter ended June 30,2009, mainly in A. Stucki and Galaxy Tools, as well as Country Club Enterprises,whose fair value had previously approximated its cost basis.  The debt portion of our Control investmentsappreciated modestly, led by Auto Safety House.

 

Our Affiliateinvestments also experienced unrealized depreciation during the current quarter,most notably in the equity components of our investments, which experienceddepreciation in the aggregate of approximately $3.2 million, led by Danco andQuench.  This was partially offset byunrealized appreciation in our debt positions of approximately $0.9 million,primarily in Danco and Quench.

 

Over our entireinvestment portfolio, we recorded an aggregate of approximately $38.1 millionof unrealized appreciation on our debt positions for the quarter ended June 30,2009, while our equity holdings experienced an aggregate devaluation ofapproximately $15.1 million.  At June 30,2009, the fair value of our investment portfolio was less than the cost basisof our portfolio by approximately $12.0 million, as compared to $35.0 millionat March 31, 2009, representing net unrealized appreciation of $23.0million for the quarter.  We believe thatour investment portfolio was valued at a depreciated value due primarily to thegeneral instability of the loan markets. Although our investment portfolio has depreciated, our entire portfoliowas fair valued at 95% of cost as of June 30, 2009.  

 

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The unrealizeddepreciation of our investments does not have an impact on our current abilityto pay distributions to stockholders; however, it may be an indication offuture realized losses, which could ultimately reduce our income available fordistribution.

 

**Derivatives**

 

During May 2009,we cancelled our prior interest rate cap agreements and recorded a realizedloss of $53.  During the quarter ended June 30,2009, we entered into a new interest rate cap agreement with BB&T for anotional amount of $45.0 million that will effectively limit the interest rateon a portion of the borrowings under the Credit Facility.  We incurred a premium fee of approximately$40 in conjunction with this agreement. At June 30, 2009, its value had decreased by approximately $11.

 

We recorded netunrealized appreciation of our interest rate cap agreement of $42 for the threemonths ended June 30, 2009.  For theprior year period, the fair market value of our prior interest rate capagreements remained flat.

 

**Net Decrease in Net Assets Resultingfrom Operations**

 

For the threemonths ended June 30, 2009, we recorded a net decrease in net assetsresulting from operations of $9.1 million as a result of the factors discussedabove. For the three months ended June 30, 2008, we recorded a netdecrease in net assets resulting from operations of $4.5 million.  Our net decrease in net assets resulting fromoperations per basic and diluted weighted average common share for the quartersended June 30, 2009 and 2008 were $0.42 and $0.22, respectively.

 

**LIQUIDITY AND CAPITAL RESOURCES**

 

**OperatingActivities**

 

Net cash providedby operating activities for the three months ended June 30, 2009 wasapproximately $143.9 million and consisted primarily of the proceeds receivedfrom the syndicated loan sales and the net loss realized on those sales,borrowings under the short -term loan, as discussed in Note 7, “Short -TermLoan Agreement,” in the accompanying notes to the condensed consolidatedfinancial statements, and principal payments received from existinginvestments.  For the three months ended June 30,2008, net cash provided by operating activities was approximately $13.0 millionand consisted primarily of the proceeds from the sale of existing portfolioinvestments, and principal repayments, offset by the purchase of one newControl investment.

 

At June 30,2009, we had investments in equity of, loans to, or syndicated participationsin 17 private companies with a cost basis totaling approximately $239.0million.  At June 30, 2008, we hadinvestments in equity of, loans to, or syndicated participations in 47 privatecompanies with an aggregate cost basis of approximately $341.3 million.  A summary of our investment activity for thethree months ended June 30, 2009 and 2008 is as follows:

 
| **Quarter  Ended** | ** ** | **Loan   Disbursements (1)** | ** ** | **Principal  Repayments (2)** | ** ** | **Proceeds  from   Sales (3)** | ** ** | **Net Loss  on   Disposal (3)** | ** ** |
|--------------------|------------|------------------------------|------------|-------------------------------|------------|--------------------------------|------------|---------------------------------|------------|
| June 30, 2009 |       | $                            | 1,500      | (a)                           | $          | 7,575                          | (a)        | $                               | 69,222     |   | $ | (34,605 | ) |
|               |       |                         |       |                          |       |                           |       |                            |       |
| **Quarter Ended**  | ** ** | **Loan   Disbursements (1)** | ** ** | **Principal  Repayments (2)** | ** ** | **Proceeds from  Sales (3)**   | ** ** | **Net Loss on   Disposal (3)**  |       |
| June 30, 2008 |       | $                            | 8,978      |                          | $          | 3,493                          |       | $                               | 13,246     |   | $ | (1,718 | ) |

 

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(a)  Includes an $850 non-cash transaction whereby a portfolio company,Cavert Wire, drew $850 on its revolving line of credit and immediately used theproceeds to pay down its senior term A and senior term B loans.  No cash was disbursed in this transaction, asit was simply a transfer of balance.  The$850 drawn on the credit line was subsequently paid off in full and sold to athird party for a nominal fee.

 

**(1)   Loan Disbursements:**

 
| ** **         | ** ** | **New Investments** | ** ** | **Disbursements to Existing** | ** ** | **Total**               | ** ** |
|--------------------|------------|---------------------|------------|-------------------------------|------------|-------------------------|------------|
| **Quarter Ended**  | ** ** | **Companies**       | ** ** | **Investments**               | ** ** | **Portfolio Companies** | ** ** | **Disbursements** | ** ** |
| June 30, 2009 |       | 0                   |       | $                             | 0          |                    | $          | 1,500 | (a) | $ | 1,500 | (a) |
|               |       |                |       |                          |       |                    |       |   |   |
|               |       | **New Investments** |       | **Disbursements to Existing** |       | **Total**               |       |
| **Quarter Ended**  | ** ** | **Companies**       | ** ** | **Investments**               | ** ** | **Portfolio Companies** | ** ** | **Disbursements** | ** ** |
| June 30, 2008 |       | 1                   | (b)        | $                             | 5,753      |                    | $          | 3,225 |   | $ | 8,978 |   |

 

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(a)   See note (a) above

(b)   Tread Corporation

 

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**(2)   PrincipalRepayments:**

 
| **Quarter  Ended** | ** ** | **Scheduled  Principal  Repayments** | ** ** | **Unscheduled  Principal  Repayments (*)** | ** ** | **Total  Principal  Repayments** | ** ** |
|--------------------|------------|--------------------------------------|------------|--------------------------------------------|------------|----------------------------------|------------|
| June 30, 2009 |       | $                                    | 2,004      |                                       | $          | 5,571                            | (a)        | $ | 7,575 |   |
|               |       |                                 |       |                                       |       |                             |       |
| **Quarter Ended**  | ** ** | **Scheduled Principal  Repayments**  | ** ** | **Unscheduled Principal  Repayments (*)**  | ** ** | **Total Principal  Repayments**  | ** ** |
| June 30, 2008 |       | $                                    | 2,516      |                                       | $          | 977                              |       | $ | 3,493 |   |

 

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(*)   Includes principalrepayments due to excess cash flows, covenant trips, exits, refinancings, etc.

(a)   Includes principalpayments received in connection with the refinancings of A. Stucki and Cavert.

 

Our lastinvestment in a new portfolio company was in November 2008.  In light of current economic conditions,limited borrowings available under the Credit Facility, constraints on ourability to access the capital markets and the restraints upon our investingactivities required in order to maintain the RIC status, our near-term strategywill be focused on retaining capital and building the value of our existingportfolio companies.  We will also, whereprudent and possible, consider the sale of lower-yielding investments.  This strategy has resulted, and may continueto result, in significantly reduced investment activity, as our ability to makenew investments under these conditions is largely dependent on availability ofproceeds from the sale or exit of existing portfolio investments, which eventsmay be beyond our control and our ability to satisfy the asset diversificationtest under the Code.  As our capitalconstraints and asset diversification improve, we intend to continue ourstrategy of making conservative investments in businesses that we believe willweather the current economy and that are likely to produce attractive long-termreturns for our stockholders.

 

*Short-Term Loan Agreement*

 

On June 30,2009, we purchased $83.0 million of short -term United States Treasurysecurities through Jefferies.  Thesecurities were purchased with $18.0 million in funds drawn on the CreditFacility and the proceeds from a $65.0 million short -term loan from Jefferieswith an effective annual interest rate of approximately 2.5%.  On July 2, 2009, when the securitiesmatured, we repaid the $65.0 million loan from Jefferies in full, and repaidall but $1.0 million of the amount drawn on the Credit Facility for thetransaction, which was retained for working capital purposes. If necessary,we  plan to use a similar form of loanagreement in future quarters as a financing option in order to satisfy certainquarterly asset diversification requirements and maintain our status as a RICunder Subchapter M of the Code.

 

**(3) LoanSales / Exits:**

** **
| **Quarter  Ended** | ** ** | **Number of  Loans Sold** | ** ** | **Proceeds  Received** | ** ** | **Position  (Principal) Sold** | ** ** | **Unamortized    Loan Costs (#)** | ** ** | **Net Loss  on  Disposal** | ** ** |
|--------------------|------------|---------------------------|------------|------------------------|------------|--------------------------------|------------|-----------------------------------|------------|----------------------------|------------|
| June 30, 2009 |       | 29                        | (a)        | $                      | 69,223     |                           | $          | 103,772                           |       | $                          | 56         |   | $ | (34,605 | ) |
|               |       |                      |       |                   |       |                           |       |                              |       |                       |       |
| **Quarter Ended**  | ** ** | **Number of  Loans Sold** | ** ** | **Proceeds  Received** | ** ** | **Position  (Principal) Sold** | ** ** | **Unamortized   Loan Costs (#)**  | ** ** | **Net Loss on  Disposal**  | ** ** |
| June 30, 2008 |       | 9                         | (b)        | $                      | 13,246     |                           | $          | 14,926                            |       | $                          | 38         |   | $ | (1,718 | ) |

 

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(#)   Includes balance ofpremiums, discounts, acquisition costs, and deferred compensation unamortizedat time of exit.

(a)   One syndicated loan(Critical Homecare Solutions) was sold in two separate installments.

(b)   Includesthe partial sale of three syndicated loans still held subsequent to June 30,2008 (CRC Health Group, Graham Packaging and Pinnacle Foods).  One syndicated loan (NPC International) wassold in two separate installments.

 

### **As discussed elsewhere in thisreport, during April 2009, we sold 29 of our 32 senior syndicated loansheld at March 31, 2009 for an aggregate of approximately $69.2 million incash proceeds and recorded a realized loss of approximately $34.6 million inconnection with these sales. These loans were sold to pay down all unpaidprincipal and interest owing to Deutsche Bank under our prior credit facility.**

### ** **

**FinancingActivities**

 

Net cash used infinancing activities during the three months ended June 30, 2009 wasapproximately $66.6 million, which primarily consisted of net repayments madeon the line of credit, in connection with the termination of our prior creditfacility.  During the three months ended June 30,2008, net cash provided by financing activities was approximately $20.2million, due mainly to the Rights Offering (as defined below), which accountedfor cash proceeds of $40.7 million.  Themajority of the cash outflow consisted of net repayments made on the creditfacility.

 

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**Distributions**

 

In order to qualify as a RIC and to avoid corporate level tax on theincome we distribute to our stockholders, we are required, under Subchapter M ofthe Code, to distribute at least 90% of our ordinary income and short-termcapital gains to our stockholders on an annual basis. In accordance with theserequirements, we declared and paid monthly cash distributions of $0.04 percommon share during each month of the quarter ended June 30, 2009.  For the quarter ended June 30, 2009, ourdistribution payments of approximately $2.7 million exceeded our net investmentincome by approximately $0.2 million. We declared these distributions based onour estimates of net investment income for the fiscal year. Our investment pacecontinued to be slower than expected in our third full year of operations and,consequently, our net investment income was lower than our original estimates.  During the quarter ended June 30, 2009,we reduced our monthly distribution from $0.08 to $0.04.

 

**Issuance of Equity**

 

On July 21, 2009, we filed a registration statement (the “RegistrationStatement”) with the Securities and Exchange Commission (the “SEC”) that, ifdeclared effective by the SEC, will permit us to issue, through one or moretransactions, up to an aggregate of $300.0 million in securities, consisting ofcommon stock, preferred stock, subscription rights, debt securities andwarrants to purchase common stock, or a combination of these securities. Todate, we have incurred approximately $20 of costs in connection with theRegistration Statement.

 

We anticipate issuing equity securities to obtain additional capital inthe future. However, we cannot determine the terms of any future equityissuances or whether we will be able to issue equity on terms favorable to us,or at all. Additionally, when our common stock is trading below net assetvalue, we will have regulatory constraints under the 1940 Act on our ability toobtain additional capital in this manner. At June 30, 2009, our stockclosed trading at $4.83, representing a 47.4% discount to our net asset valueof $9.19 per share. Generally, the 1940 Act provides that we may not issuestock for a price below net asset value per share, without first obtaining theapproval of our stockholders and our independent directors or through a rightsoffering.

 

We raised additional capital within these regulatory constraints in April 2008through an offering of transferable subscription rights to purchase additionalshares of common stock (the “Rights Offering”). Pursuant to the RightsOffering, we sold 5,520,033 shares of our common stock at a subscription priceof $7.48 per share, which represented a purchase price equal to 93% of the weightedaverage closing price of our stock in the last five trading days of thesubscription period. Net proceeds of the offering, after offering expensesborne by us, were approximately $40.5 million and were used to repayoutstanding borrowings under our line of credit. Should our common stockcontinue to trade below its net asset value per share, we may seek to conductsimilar offerings in the future in order to raise additional capital, althoughthere can be no assurance that we will be successful in our efforts to raisecapital.

 

**Future Capital Resources**

 

During our 2008 annual stockholders meeting, our stockholders approveda proposal that allows us to issue long-term rights, including warrants topurchase shares of our common stock at an exercise price per share that willnot be less than the greater of the market value or net asset value of ourcommon stock at a time such rights may be issued.  This proposal is in effect until our nextannual stockholders meeting, which is currently scheduled for August 13,2009, when our stockholders will again be asked to vote in favor of renewingthis proposal for another year.

 

**New Revolving Credit Facility**

 

On April 14, 2009, we entered into the Credit Facility, whichprovides for a $50.0 million revolving line of credit arranged by BB&T asadministrative agent, replacing Deutsche Bank who served as administrativeagent under our prior credit facility. Key Equipment Finance, Inc. alsojoined the Credit Facility as a committed lender.  In connection with our entry into the CreditFacility, we borrowed $43.8 million under the Credit Facility to repay DeutscheBank in full all amounts outstanding under the prior credit agreement.  The Credit Facility may be expanded up to$125.0 million through the addition of other committed lenders to thefacility.  The Credit Facility matures onApril 14, 2010 and, if the facility is not renewed or extended by thisdate, all unpaid principal and interest will be due and payable within one yearof maturity.  Advances under the Credit Facilitywill generally bear interest at the 30 day LIBOR rate (subject to a minimumrate of 2%), plus 5% per annum, with a commitment fee of 0.75% per annum onundrawn amounts.

 

Interest is payable monthly during the term of the CreditFacility.  After April 14, 2010, ifthe Credit Facility is not renewed, all collections of principal from our loansare required to be used to pay outstanding principal under the Credit Facility.Available borrowings are subject to various constraints imposed under the CreditFacility, based on the aggregate loan balance pledged by Business Investment.

 

The Credit Facility contains covenants that require Business Investmentto maintain its status as a separate entity, prohibit certain significantcorporate transactions (such as mergers, consolidations, liquidations ordissolutions) and restrict material changes to our credit and collectionpolicies. The Credit Facility also limits the borrower and industryconcentrations of loans that are eligible to secure advances as well as limitson payments of distributions limited to the aggregate net investment income forthe prior twelve 

 

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months preceding April 2010. As of June 30, 2009, BusinessInvestment was in compliance with all of the facility covenants. Additionally,during the three months ended June 30, 2009, we adopted SFAS No. 159specifically for the Credit Facility with BB&T. SFAS No. 159 requiresus to apply a fair value methodology to the Credit Facility as of June 30,2009, which is the period that this liability became eligible under SFAS No. 159.Due to the nature of this Credit Facility being a short term agreement and thefact that interest is based on a variable interest rate, the Credit Facilityhas been fair valued at its approximate cost basis as of June 30, 2009. Asof July 20, 2009, there was $28.2 million of borrowings outstanding on theCredit Facility at an interest rate of approximately 7.0%, and the remainingborrowing capacity under the Credit Facility was approximately $18.7 million.

 

During May 2009, we cancelled our interest rate cap agreement withDeutsche Bank and entered into a new interest rate cap agreement with BB&Tfor a notional amount of $45 million that will effectively limit the interestrate on a portion of the borrowings under the Credit Facility.  We incurred a premium fee of approximately$40 in conjunction with this agreement. As of June 30, 2009, the interest rate cap agreement haddepreciated by approximately $11 and had a fair value of $29.

 

In conjunction with entering into the amended and restated CreditFacility, we amended a performance guaranty which remains substantially similarto the form under the previous credit facility. The performance guarantyrequires us to maintain a minimum net worth of $169 million plus 50% of allequity and subordinated debt raised after April 14, 2009, to maintain “assetcoverage” with respect to “senior securities representing indebtedness” of atleast 200%, in accordance with Section 18 of the 1940 Act, and to maintainour status as a BDC under the 1940 Act and as a RIC under the Code. As of June 30,2009, we were in compliance with the covenants under the performance guaranty.

 

Our continued compliance with these covenants, however, depends on manyfactors, some of which are beyond our control. In particular, depreciation inthe valuation of our assets, which valuation is subject to changing marketconditions that are presently very volatile, affects our ability to comply withthese covenants. During the quarter ended June 30, 2009, net unrealizedappreciation on our investments was approximately $23.0 million, brought aboutprimarily by the reversal of $34.4 million of previously unrealizeddepreciation on syndicated loans that were sold during the quarter, compared toan unrealized depreciation of approximately $5.8 million during the prior yearperiod. Given the continued deterioration in the capital markets, netunrealized depreciation in our portfolio may continue to threaten our abilityto comply with the covenants under the Credit Facility. Accordingly, there areno assurances that we will continue to comply with these covenants. Failure tocomply with these covenants would result in a default which, if we were unableto obtain a waiver from the lenders, could accelerate our repayment obligationsunder the Credit Facility and thereby have a material adverse impact on ourliquidity, financial condition, results of operations and ability to paydistributions as more fully described below.

 

The Credit Facility matures on April 14, 2010, and, if thefacility is not renewed or extended by this date, all unpaid principal andinterest will be due and payable within one year of maturity and allcollections of principal from our loans will be required to be used to payoutstanding principal under the Credit Facility. There can be no guarantee thatwe will be able to renew, extend or replace the Credit Facility on terms thatare favorable to us, or at all.  Ourability to obtain replacement financing will be constrained by current economicconditions affecting the credit markets, which have significantly deterioratedover the last several months and may decline further.  Consequently, any renewal, extension orrefinancing of the Credit Facility will likely result in significantly higherinterest rates and related charges and may impose significant restrictions onthe use of borrowed funds with regard to our ability to fund investments ormaintain distributions.  For instance, inconnection with the recent establishment of the Credit Facility, the size ofthe line was reduced from $125.0 million under our prior facility to $50.0 millionunder the Credit Facility and Deutsche Bank, who was a committed lender ourprior credit facility elected not to participate in the new facility andwithdrew its commitment.  If we are notable to renew, extend or refinance the Credit Facility, this would likely havea material adverse effect on our liquidity and ability to fund new investmentsor pay distributions to our stockholders. Our inability to pay distributions could result in us failing to qualifyas a RIC.  Consequently, any income orgains could become taxable at corporate rates. If we are unable to securereplacement financing, we may be forced to sell certain assets ondisadvantageous terms, which may result in realized losses such as thoserecently recorded in connection with the Syndicated Loan Sales, which resultedin a realized loss of approximately $34.6 million during the quarter ended June 30,2009.  Such realized losses couldmaterially exceed the amount of any unrealized depreciation on these assets asof our most recent balance sheet date, which would have a material adverseeffect on our results of operations.  Inaddition to selling assets, or as an alternative, we may issue equity in orderto repay amounts outstanding under the Credit Facility.  Based on the recent trading prices of ourstock, such an equity offering may have a substantial dilutive impact on ourexisting stockholders’ interest in our earnings and assets and voting interestin us.

 

**Contractual Obligations andOff-Balance Sheet Arrangements**

 

We were not a party to any signed term sheets for potential investmentsas of June 30, 2009.  In October 2008,the Company executed a guaranty of a vehicle finance facility agreement betweenFord Motor Credit Company (“FMC”) and Auto Safety House, LLC (“ASH”), one ofour Control investments (the “Finance Facility”).  The Finance Facility provides ASH with a lineof credit of up to $500 for component Ford parts used by ASH to build truckbodies under a separate contract.  Titleand ownership of the parts is retained by Ford. The guaranty of the FinanceFacility will expire upon termination of the separate parts supply contractwith Ford or 

 

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upon our replacement as guarantor. The Finance Facility is secured by all of the assets of BusinessInvestment.  As of June 30, 2009, wehave not been required to make any payments on the guaranty of the FinanceFacility.

 

**Critical Accounting Policies**

 

The preparation of financial statements and related disclosures inconformity with accounting principles generally accepted in the United States (“GAAP”)requires management to make estimates and assumptions that affect the reportedamounts of assets and liabilities, and disclosure of contingent assets andliabilities at the date of the financial statements, and revenues and expensesduring the period reported. Actual results could differ materially from thoseestimates. We have identified our investment valuation process as our mostcritical accounting policy.

 

***InvestmentValuation***

 

The most significant estimate inherent in the preparation of ourcondensed consolidated financial statements is the valuation of investments andthe related amounts of unrealized appreciation and depreciation of investmentsrecorded.

 

*General Valuation Policy:* We value our investments in accordance with the requirements of the 1940Act.  As discussed more fully below, wevalue securities for which market quotations are readily available and reliableat their market value.  We value allother securities and assets at fair value as determined in good faith by ourBoard of Directors.

 

In September 2006, the FASB issued SFAS No.  157, which, forfinancial assets, is effective for fiscal years beginning after November 15,2007, with early adoption permitted. We adopted SFAS No. 157 on April 1,2008. In part, SFAS No. 157 defines fair value and establishes a frameworkfor measuring fair value, and expands disclosures about assets and liabilitiesmeasured at fair value. The new standard provides a consistent definition offair value that focuses on exit price in the principal, or most advantageous,market and prioritizes, within a measurement of fair value, the use ofmarket-based inputs over entity-specific inputs. The standard also establishesthe following three-level hierarchy for fair value measurements based upon thetransparency of inputs to the valuation of an asset or liability as of themeasurement date.

 

·                  *Level 1*—inputs to the valuation methodology arequoted prices (unadjusted) for identical assets or liabilities in activemarkets;

 

·                  *Level 2*—inputs to the valuation methodologyinclude quoted prices for similar assets and liabilities in active markets, andinputs that are observable for the asset or liability, either directly orindirectly, for substantially the full term of the financial instrument. Level2 inputs are in those markets for which there are few transactions, the pricesare not current, little public information exists or instances where pricesvary substantially over time or among brokered market makers; and

 

·                  *Level 3*—inputs to the valuation methodology areunobservable and significant to the fair value measurement. Unobservable inputsare those inputs that reflect our own assumptions that market participantswould use to price the asset or liability based upon the best availableinformation.

 

See Note 3, “Investments” in our notes to the condensed consolidatedfinancial statements for additional information regarding fair valuemeasurements and our adoption of SFAS No. 157.

 

We use generally accepted valuation techniques to value our portfoliounless we have specific information about the value of an investment todetermine otherwise. From time to time we may accept an appraisal of a businessin which we hold securities. These appraisals are expensive and occurinfrequently but provide a third-party valuation opinion that may differ inresults, techniques and scopes used to value our investments.  When these specific third-party appraisalsare engaged or accepted, we would use such appraisals to value the investmentwe have in that business if we determine that the appraisals are the bestestimate of fair value.

 

In determining the value of our investments, our Adviser hasestablished an investment valuation policy (the “Policy”).  The Policy has been approved by our Board ofDirectors, and each quarter the Board of Directors reviews whether our Adviserhas applied the Policy consistently, and votes whether or not to accept therecommended valuation of our investment portfolio.

 

The Policy, which is summarized below, applies to the followingcategories of securities:

 

·                  Publicly-traded securities;

·                  Securities for which a limited marketexists; and

·                  Securities for which no market exists.

 

*Valuation Methods:*

 

**Publicly-traded securities:** We determine the value ofpublicly-traded securities based on the closing price for the security on theexchange or securities market on which it is listed and primarily traded on thevaluation date. To the extent that we own restricted securities that are notfreely tradable, but for which a public market otherwise exists, we will use themarket value of that security adjusted for any decrease in value resulting fromthe restrictive feature.

 

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**Securities for which a limited marketexists:**We valuesecurities that are not traded on an established secondary securities market,but for which a limited market for the security exists, such as certainparticipations in, or assignments of, syndicated loans, at the quoted bidprice.  In valuing these assets, weassess trading activity in an asset class, evaluate variances in prices andother market insights to determine if any available quote prices are reliable.  If we conclude that quotes based on active marketsor trading activity may be relied upon, firm bid prices are requested; however,if a firm bid price is unavailable, we base the value of the security upon theindicative bid price offered by the respective originating syndication agent’strading desk, or secondary desk, on or near the valuation date.  To the extent that we use the indicative bidprice as a basis for valuing the security, our Adviser may take further stepsto consider additional information to validate that price in accordance with thePolicy.

 

In the event these limited markets become illiquid such that marketprices are no longer readily available, we will value our syndicated loansusing estimated net present values of the future cash flows or discounted cashflows. The use of a DCF methodology follows that prescribed by FSP No. 157-3,which provides guidance on the use of a reporting entity’s own assumptionsabout future cash flows and risk-adjusted discount rates when relevantobservable inputs, such as quotes in active markets, are not available. Whenrelevant observable market data does not exist, the alternative outlined in theFSP No. 157-3 is the use of valuing investments based on DCF.  For the purposes of using DCF to provide fairvalue estimates, we considered multiple inputs such as a risk-adjusted discountrate that incorporates adjustments that market participants would make both fornonperformance and liquidity risks.  Assuch, we developed a modified discount rate approach that incorporates riskpremiums including, among others, increased probability of default, or higherloss given default, or increased liquidity risk.

 

The DCF valuationsapplied to the syndicated loans provide an estimate of what we believe a marketparticipant would pay to purchase a syndicated loan in an active market,thereby establishing a fair value.  Wewill continue to apply the DCF methodology in illiquid markets until quotedprices are available or are deemed reliable based on trading activity.

 

**Securities for which no marketexists:** Thevaluation methodology for securities for which no market exists falls intothree categories: (1) portfolio investments comprised solely of debtsecurities; (2) portfolio investments in controlled companies comprised ofa bundle of securities, which can include debt or equity securities, or both;and (3) portfolio investments in non-controlled companies comprised of abundle of investments, which can include debt or equity securities, or both.

 

(1)          **Portfolio investmentscomprised solely of debt securities:** Debt securities that are not publicly traded on anestablished securities market, or for which a limited market does not exist (“Non-PublicDebt Securities”), and that are issued by portfolio companies where we have noequity, or equity-like securities, and are fair valued in accordance with theterms of the policy, which utilizes opinions of value submitted to us byStandard & Poor’s Securities Evaluations, Inc. (“SPSE”). We mayalso submit paid in kind (“PIK”) interest to SPSE for their evaluation when itis determined that PIK interest is likely to be received.

 

In the case of Non-Public Debt Securities, we haveengaged SPSE to submit opinions of value for our debt securities that areissued by portfolio companies in which we own no equity, or equity-like securities.  SPSE’s opinions of value are based on thevaluations prepared by our portfolio management team as described below.  We request that SPSE also evaluate and assignvalues to success fees (conditional interest included in some loan securities)when we determine that the probability of receiving a success fee on a givenloan is above 6-8%, a threshold of significance. SPSE will only evaluate thedebt portion of our investments for which we specifically request evaluation,and may decline to make requested evaluations for any reason at its solediscretion. Upon completing our collection of data with respect to theinvestments (which may include the information described below under “—CreditInformation,” the risk ratings of the loans described below under “—LoanGrading and Risk Rating” and the factors described hereunder), this valuationdata is forwarded to SPSE for review and analysis. SPSE makes its independentassessment of the data that we have assembled and assesses its independent datato form an opinion as to what they consider to be the market values for thesecurities. With regard to its work, SPSE has issued the following paragraph:

 

SPSE provides evaluated price opinions which arereflective of what SPSE believes the bid side of the market would be for eachloan after careful review and analysis of descriptive, market and creditinformation. Each price reflects SPSE’s best judgment based upon carefulexamination of a variety of market factors. Because of fluctuation in themarket and in other factors beyond its control, SPSE cannot guarantee theseevaluations. The evaluations reflect the market prices, or estimates thereof,on the date specified. The prices are based on comparable market prices forsimilar securities. Market information has been obtained from reputablesecondary market sources. Although these sources are considered reliable, SPSEcannot guarantee their accuracy.

 

SPSE opinions of value of our debt securities that areissued by portfolio companies where we have no equity, or equity-likesecurities are submitted to our Board of Directors along with our Adviser’ssupplemental assessment and recommendation regarding valuation of each of theseinvestments. Our Adviser generally accepts the opinion of value given by SPSE,however, in certain limited circumstances, such as when our Adviser may learnnew information regarding an investment between the time of submission to SPSEand the date of the assessment by our Board of Directors, our Adviser’sconclusions as to value may differ from the opinion of value delivered by SPSE.Our Board of Directors then reviews whether our Adviser has followed itsestablished procedures for determinations of fair value, and votes to accept orreject the recommended valuation of our investment 

 

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portfolio. Our Adviser and our management recommended,and our Board of Directors voted to accept, the opinions of value delivered bySPSE on the loans in our portfolio as denoted on the Schedule of Investmentsincluded in our accompanying condensed consolidated financial statements.

 

Because there is a delay between when we close aninvestment and when the investment can be evaluated by SPSE, new loans are notvalued immediately by SPSE; rather, management makes its own determinationabout the value of these investments in accordance with our valuation policyusing the methods described herein.

 

(2)          **Portfolio investments incontrolled companies comprised of a bundle of investments, which can includedebt or equity securities, or both:** The fair value of these investments is determinedbased on the total enterprise value of the portfolio company, or issuer,utilizing a liquidity waterfall approach under Statement of AccountingStandards (“SFAS No. 157, Fair Value Measurements (“SFAS No. 157”).  For Non-Public Debt Securities and equity orequity-like securities (e.g. preferred equity, equity, or other equity-likesecurities) that are purchased together as part of a package, where we havecontrol or could gain control through an option or warrant security, both thedebt and equity securities of the portfolio investment would exit in themergers and acquisitions market as the principal market, generally through asale or recapitalization of the portfolio company. In accordance with SFAS No. 157,we apply the in-use premise of value which assumes the debt and equitysecurities are sold together. Under this liquidity waterfall approach, wecontinue to use the enterprise value methodology utilizing a liquiditywaterfall approach to determine the fair value of these investments under SFAS No. 157if we have the ability to initiate a sale of a portfolio company as of themeasurement date. Under this approach, we first calculate the total enterprisevalue 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 similarsecurities;

·                  the comparison to publicly tradedsecurities; and

·                  DCF or other pertinent factors.

 

In gathering the sales to third parties of similarsecurities, we may reference industry statistics and use outside experts. Oncewe have estimated the total enterprise value of the issuer, we subtract thevalue of all the debt securities of the issuer; which are valued at thecontractual principal balance. Fair values of these debt securities arediscounted for any shortfall of total enterprise value over the total debtoutstanding for the issuer. Once the values for all outstanding seniorsecurities (which include the debt securities) have been subtracted from thetotal enterprise value of the issuer, the remaining amount, if any, is used todetermine the value of the issuer’s equity or equity like securities.  If, in our Adviser’s judgment, the liquiditywaterfall 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 isunavailable, a DCF valuation technique.

 

(3)          **Portfolio investments innon-controlled companies comprised of a bundle of investments, which caninclude debt or equity securities, or both:**We value Non-Public Debt Securities that are purchasedtogether 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 themeasurement date, using a hypothetical secondary market as our principalmarket. In accordance with SFAS No. 157, we determine the fair value ofthese debt securities of non-control investments assuming the sale of anindividual debt security using the in-exchange premise of value (as defined inSFAS No. 157). As such, we estimate the fair value of the debt componentusing estimates of value provided by SPSE and our own assumptions in theabsence of observable market data, including synthetic credit ratings,estimated remaining life, current market yield and interest rate spreads ofsimilar securities as of the measurement date. For equity or equity-likesecurities of investments for which we do not control or cannot gain control asof the measurement date, we value the equity portion based on the totalenterprise value of the issuer, which is calculated using a liquidity waterfallapproach as described above.

 

Due to the uncertainty inherent in the valuationprocess, such estimates of fair value may differ significantly from the valuesthat would have been obtained had a ready market for the securities existed,and the differences could be material. Additionally, changes in the marketenvironment and other events that may occur over the life of the investmentsmay cause the gains or losses ultimately realized on these investments to bedifferent than the valuations currently assigned. There is no single standardfor determining fair value in good faith, as fair value depends uponcircumstances of each individual case. In general, fair value is the amountthat we might reasonably expect to receive upon the current sale of thesecurity in an arms-length transaction in the security’s principal market.

 

*Valuation Considerations: *From time to time, depending on certain circumstances,the Adviser may use the following valuation considerations, including but notlimited to:

 

·                  the nature andrealizable value of the collateral;

·                  the portfolio company’searnings and cash flows and its ability to make payments on its obligations;

 

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·                  the markets in whichthe portfolio company does business;

·                  the comparison topublicly traded companies; and

·                  DCF and other relevantfactors.

 

Because such valuations, particularly valuations of private securities andprivate companies, are not susceptible to precise determination, may fluctuateover short periods of time, and may be based on estimates, our determinationsof fair value may differ from the values that might have actually resulted hada readily available market for these securities been available.

 

*Credit Information:* Our Adviser monitors a wide variety of key credit statistics thatprovide information regarding our portfolio companies to help us assess creditquality and portfolio performance. We and our Adviser participate in theperiodic board meetings of our portfolio companies in which we hold Control andAffiliate investments and also require them to provide annual audited andmonthly unaudited financial statements. Using these statements or comparableinformation and board discussions, our Adviser calculates and evaluates thecredit statistics.

 

*Loan Grading and Risk Rating:* As part of our valuation procedures above, we risk rate all of ourinvestments in debt securities. For syndicated loans that have been rated by anNRSRO (as defined in Rule 2a-7 under the 1940 Act), we use the NRSRO’srisk rating for such security. For all other debt securities, we use aproprietary risk rating system. Our risk rating system uses a scale of 0 to 10,with 10 being the lowest probability of default. This system is used toestimate the probability of default on debt securities and the probability ofloss if there is a default. These types of systems are referred to as riskrating systems and are used by banks and rating agencies. The risk ratingsystem covers both qualitative and quantitative aspects of the business and thesecurities we hold.

 

For the debt securities for which we do not use a third-party NRSROrisk rating, we seek to have our risk rating system mirror the risk ratingsystems of major risk rating organizations, such as those provided by an NRSRO.While we seek to mirror the NRSRO systems, we cannot provide any assurance thatour risk rating system will provide the same risk rating as an NRSRO for thesesecurities. The following chart is an estimate of the relationship of our riskrating system to the designations used by two NRSROs as they risk rate debtsecurities of major companies. Because our system rates debt securities ofcompanies that are unrated by any NRSRO, there can be no assurance that thecorrelation to the NRSRO set out below is accurate. We believe our risk ratingwould be significantly higher than a typical NRSRO risk rating because the riskrating of the typical NRSRO is designed for larger businesses. However, ourrisk rating has been designed to risk rate the securities of smaller businessesthat are not rated by a typical NRSRO. Therefore, when we use our risk ratingon larger business securities, the risk rating is higher than a typical NRSROrating. The primary difference between our risk rating and the rating of atypical NRSRO is that our risk rating uses more quantitative determinants andincludes qualitative determinants that we believe are not used in the NRSROrating. It is our understanding that most debt securities of medium-sizedcompanies do not exceed the grade of BBB on an NRSRO scale, so there would beno debt securities in the middle market that would meet the definition of AAA,AA or A. Therefore, our scale begins with the designation 10 as the best riskrating which may be equivalent to a BBB from an NRSRO, however, no assurancecan be given that a 10 on our scale is equal to a BBB on an NRSRO scale.

 
| **Company’s  System** | ** ** | **First  NRSRO** | ** ** | **Second  NRSRO** | ** ** | **Gladstone  Investment’s Description(a)**                                                       |
|----------------------------|------------|------------------|------------|-------------------|------------|-------------------------------------------------------------------------------------------------------|
| **>10**                 |       | Baa2             |       | BBB               |       | Probability of Default (PD) during the next ten  years is 4% and the Expected Loss (EL) is 1% or less |
| **10**                     |       | Baa3             |       | BBB-              |       | PD is 5% and the EL is 1% to 2%                                                                       |
| **9**                      |       | Ba1              |       | BB+               |       | PD is 10% and the EL is 2% to 3%                                                                      |
| **8**                      |       | Ba2              |       | BB                |       | PD is 16% and the EL is 3% to 4%                                                                      |
| **7**                      |       | Ba3              |       | BB-               |       | PD is 17.8% and the EL is 4% to 5%                                                                    |
| **6**                      |       | B1               |       | B+                |       | PD is 22% and the EL is 5% to 6.5%                                                                    |
| **5**                      |       | B2               |       | B                 |       | PD is 25% and the EL is 6.5% to 8%                                                                    |
| **4**                      |       | B3               |       | B-                |       | PD is 27% and the EL is 8% to 10%                                                                     |
| **3**                      |       | Caa1             |       | CCC+              |       | PD is 30% and the EL is 10% to 13.3%                                                                  |
| **2**                      |       | Caa2             |       | CCC               |       | PD is 35% and the EL is 13.3% to 16.7%                                                                |
| **1**                      |       | Caa3             |       | CC                |       | PD is 65% and the EL is 16.7% to 20%                                                                  |
| **0**                      |       | N/A              |       | D                 |       | PD is 85% or there is a payment of default and the  EL is greater than 20%                            |

 

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(a)                           *The default rates setforth are for a ten year term debt security. If a debt security is less thanten years, then the PD is adjusted to a lower percentage for the shorterperiod, which may move the security higher on our risk rating scale*

 

The above scale gives an indication of the probability of default andthe magnitude of the loss if there is a default. Our policy is to stop accruinginterest on an investment if we determine that interest is no longercollectible.  At June 30, 2009, oneinvestment was on non-accrual for approximately $2.0 million at fair value, or0.9% of the aggregate fair value of our investment portfolio.  Additionally, we do not risk rate our equitysecurities.

 

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The following table lists the risk ratings for all non-syndicated loansin our portfolio at June 30, 2009 and March 31, 2009, representingapproximately 90% and 59%, respectively, of all loans in our portfolio at theend of each period:

 
| **Rating**       | ** ** | **June 30,  2009** | ** ** | **March 31,  2009** | ** ** |
|------------------|------------|-------------------------|------------|--------------------------|------------|
| Highest          |       | 8.0                     |       | 7.0                      |       |
| Average          |       | 5.6                     |       | 5.5                      |       |
| Weighted Average |       | 5.3                     |       | 5.1                      |       |
| Lowest           |       | 2.0                     |       | 2.0                      |       |

 

The following table lists the risk ratings for syndicated loans in ourportfolio that were not rated by an NRSRO at June 30, 2009 and March 31,2009, representing approximately 3% and 12%, respectively, of all loans in ourportfolio at the end of each period:

 
| **Rating**       | ** ** | **June 30,  2009** | ** ** | **March 31,  2009** | ** ** |
|------------------|------------|-------------------------|------------|--------------------------|------------|
| Highest          |       | 8.0                     |       | 9.0                      |       |
| Average          |       | 7.0                     |       | 8.0                      |       |
| Weighted Average |       | 7.2                     |       | 8.0                      |       |
| Lowest           |       | 6.0                     |       | 7.0                      |       |

 

For syndicated loans that are currently rated by an NRSRO, we risk ratesuch loans in accordance with the risk rating systems of major risk ratingorganizations, such as those provided by an NRSRO. The following table liststhe risk ratings for all syndicated loans in our portfolio that were rated byan NRSRO at June 30, 2009 and March 31, 2009, representingapproximately 7% and 29%, respectively, of all loans in our portfolio at theend of each period:

 
| **Rating**       | ** ** | **June 30,  2009** | ** ** | **March 31,  2009** | ** ** |
|------------------|------------|-------------------------|------------|--------------------------|------------|
| Highest          |       | B+/B1                   |       | BB/Ba2                   |       |
| Average          |       | B/B2                    |       | B/B2                     |       |
| Weighted Average |       | B-/B3                   |       | B/B2                     |       |
| Lowest           |       | CCC+/B2                 |       | CCC+/B3                  |       |

 

**Tax Status**

 

*Federal Income Taxes*

 

We intend to continue to qualify for treatment as a RIC under SubtitleA, Chapter 1 of Subchapter M of the Code. As a RIC, we are not subject tofederal income tax on the portion of our taxable income and gains distributedto stockholders. To qualify as a RIC, we are required to distribute tostockholders at least 90% of investment company taxable income, as defined bythe Code. It is our policy to pay out as a distribution up to 100% of thoseamounts.

 

In an effort to avoid certain excise taxes imposed on RICs, wecurrently intend to distribute during each calendar year, an amount at leastequal to the sum of (1) 98% of our ordinary income for the calendar year, (2) 98%of our capital gains in excess of capital losses for the one-year period endingon October 31 of the calendar year, and (3) any ordinary income andnet capital gains for preceding years that were not distributed during suchyears.

 

**RevenueRecognition**

 

*Interestand Dividend Income Recognition*

 

Interest income, adjusted for amortization of premiums and acquisitioncosts and for the accretion of discounts, is recorded on the accrual basis tothe extent that such amounts are expected to be collected.  Generally, when a loan becomes 90 days ormore past due or if our qualitative assessment indicates that the debtor isunable to service its debt or other obligations, we will place the loan onnon-accrual status and cease recognizing interest income on that loan until theborrower has demonstrated the ability and intent to pay contractual amountsdue.  However, we remain contractuallyentitled to this interest.  At June 30,2009, one Control investment was on non-accrual with a fair value ofapproximately $2.0 million, or 0.9% of the fair value of all loans held in ourportfolio at June 30, 2009.  At March 31,2009, one Control investment was on non-accrual with a fair value ofapproximately $2.6 million, or 0.8% of the fair value of all loans held in ourportfolio at March 31, 2009. Conditional interest, or a success fee, isrecorded when earned upon full repayment of a loan investment. To date we havenot recorded any conditional interest. Dividend income on preferred equitysecurities is accrued to the extent that such amounts are expected to becollected and that we have the option to collect such amounts in cash. To date,we have not accrued any dividend income.

 

*ServicesProvided to Portfolio Companies*

 

As a business development company under the 1940 Act, we are requiredto make available significant managerial assistance to our portfolio companies.We provide these services through our Adviser, who provides these services onour behalf through its officers who are also our officers. Currently, neitherwe nor our Adviser charges a fee for managerial assistance, however, if ourAdviser does 

 

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receive fees for such managerial assistance, our Adviser will creditthe managerial assistance fees to the base management fee due from us to ourAdviser.

 

Our Adviser receives fees for the other services it provides to our portfoliocompanies. These other fees are typically non-recurring, are recognized asrevenue when earned and are generally paid directly to our Adviser by theborrower or potential borrower upon the closing of the investment. The servicesour Adviser provides to our portfolio companies vary by investment, butgenerally include a broad array of services such as investment bankingservices, arranging bank and equity financing, structuring financing frommultiple lenders and investors, reviewing existing credit facilities,restructuring existing investments, raising equity and debt capital, turnaroundmanagement, merger and acquisition services and recruiting new managementpersonnel. When our Adviser receives fees for these services, 50% of certain ofthose fees are voluntarily credited against the base management fee that we payto our Adviser. Any services of this nature subsequent to the closing wouldtypically generate a separate fee at the time of completion.

 

Our Adviser also receives fees for monitoring and reviewing portfoliocompany investments. These fees are recurring and are generally paid annuallyor quarterly in advance to our Adviser throughout the life of the investment.Fees of this nature are recorded as revenue by our Adviser when earned and arenot credited against the base management fee.

 

We may receive fees for the origination and closing services we provideto portfolio companies through our Adviser. These fees are paid directly to usand are recognized as revenue upon closing of the originated investment and arereported as Fee income in the accompanying condensed consolidated statements ofoperations.

 

**Recent Accounting Pronouncements**

 

Refer to Note 2, “Summary of Significant Accounting Policies” in thenotes to our condensed consolidated financial statements included elsewhere inthis report.

 

**ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.**

 

We are subject to financial market risks, including changes in interestrates.  We estimate that ultimatelyapproximately 20% of the loans in our portfolio will be made at fixed rates andapproximately 80% will be made at variable rates.   As of June 30, 2009, our portfolioconsisted of the following breakdown in relation to all outstanding debt:

 
| 23  | % | variable rates              |   |
|-----|---|-----------------------------|--------|
| 46  | % | variable rates with a floor |   |
| 31  | % | fixed rates                 |   |
| 100 | % | Total                       |   |

 

There have been no material changes in thequantitative and qualitative market risk disclosures for the three months endedJune 30, 2009 from those disclosed in our Annual Report on Form 10-Kfor the fiscal year ended March 31, 2009, as filed with the SEC on June 2,2009.

 

In May 2009, we cancelled our interest rate capagreement with Deutsche Bank and entered into an interest rate cap agreementwith BB&T that will effectively limit the interest rate on a portion of theborrowings under the line of credit pursuant to the terms of the CreditFacility. The interest rate cap has a notional amount of $45.0 million at acost of approximately $40. The Company records changes in the fair market valueof the interest rate cap agreement monthly based on the current marketvaluation at month end as unrealized depreciation or appreciation on derivativeon the Company’s consolidated statement of operations. The interest rate capagreement expires in April 2010. The agreement provides that the Company’sfloating interest rate or cost of funds on a portion of the portfolio’sborrowings will be capped at 9% when the LIBOR rate is in excess of 9%.

 

**ITEM 4.CONTROLS AND PROCEDURES.**

 

As of June 30, 2009, we, including our Chief Executive Officer andChief Financial Officer, evaluated the effectiveness of the design andoperation of our disclosure controls and procedures (as defined in Exchange ActRules 13a-15(e) and 15d-15(e)). Based on that evaluation, ourmanagement, including the Chief Executive Officer and Chief Financial Officer,concluded that our disclosure controls and procedures were effective in timelyalerting management, including the Chief Executive Officer and Chief FinancialOfficer, of material information about us required to be included in periodicSecurities and Exchange Commission filings. However, in evaluating thedisclosure controls and procedures, management recognized that any controls andprocedures, no matter how well designed and operated, can provide onlyreasonable assurance of achieving the desired control objectives, andmanagement necessarily was required to apply its judgment in evaluating thecost-benefit relationship of possible controls and procedures.

 

There have been no changes in our internal control over financialreporting that occurred during the quarter ended June 30, 2009 that havematerially affected, or are reasonably likely to materially affect, ourinternal control over financial reporting.

 

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**PART II—OTHER INFORMATION**

 

**ITEM1.  LEGAL PROCEEDINGS.**

 

Neither we, nor any ofour subsidiaries, are currently subject to any material legal proceeding, nor,to our knowledge, is any material legal proceeding threatened against us or anyof our subsidiaries.

 

**ITEM 1A.RISK FACTORS.**

 

Our business is subject to certain risks and events that, if theyoccur, could adversely affect our financial condition and results of operationsand the trading price of our common stock. For a discussion of these risks,please refer to the “Risk Factors” section of our Annual Report on Form 10-Kfor the year ended March 31, 2009, filed by us with the SEC on June 2,2009.

 

**ITEM2.  UNREGISTERED SALES OF EQUITYSECURITIES AND USE OF PROCEEDS.**

 

Not applicable.

 

**ITEM3.  DEFAULTS UPON SENIOR SECURITIES.**

 

Not applicable.

 

**ITEM4.  SUBMISSION OF MATTERS TO A VOTE OFSECURITY HOLDERS.**

 

Not applicable.

 

**ITEM5.  OTHER INFORMATION.**

 

Not applicable.

 

**ITEM6.  EXHIBITS**

 

See the exhibit index.

 

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**SIGNATURE**

 

Pursuant to the requirements of the Securities Exchange Act of 1934,the registrant has duly caused this report to be signed on its behalf by theundersigned thereunto duly authorized.

 
| ** ** | **GLADSTONE INVESTMENT CORPORATION** |
|------------|--------------------------------------|
|       |                                 |   |
|       | By:                                  | /s/ Mark Perrigo |
|       |                                 | Mark Perrigo |
| * *   | * *                             | *Chief Financial Officer* |

 

Date: August 4, 2009

 

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**EXHIBIT INDEX**

 
| **Exhibit** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|-------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1         |       | Amended and Restated Certificate of Incorporation, incorporated  by reference to Exhibit a.2 to Pre-Effective Amendment No. 1 to the  Registration Statement on Form N-2 (File No. 333-123699), filed  May 13, 2005.                                                                                                                                                                                                                                                                               |
| 3.2         |       | Amended and Restated Bylaws, incorporated by  reference to Exhibit b.2 to Pre-Effective Amendment No. 3 to the  Registration Statement on Form N-2 (File No. 333-123699), filed  June 21, 2005.                                                                                                                                                                                                                                                                                                    |
| 3.3         |       | First Amendment to Amended and Restated Bylaws,  incorporated by reference to Exhibit 99.1 to the Company’s Current  Report on Form 8-K (File No. 814-00704), filed on July 10,  2007.                                                                                                                                                                                                                                                                                                             |
| 4.1         |       | Specimen Stock Certificate, incorporated by  reference to Exhibit 99.1 to Pre-Effective Amendment No. 3 to the  Registration Statement on Form N-2 (File No. 333-123699), filed  June 21, 2005.                                                                                                                                                                                                                                                                                                    |
| 10.1        |       | Investment Advisory and Management Agreement between  the Company and Gladstone Management Corporation, dated June 22, 2005  and incorporated by reference to Exhibit 10.1 to the Company’s Annual  Report on Form 10-K, filed on June 14, 2006 (renewed on  July 8, 2009).                                                                                                                                                                                                                   |
| 10.2        |       | Administration Agreement between the Company and  Gladstone Administration, LLC, dated June 22, 2005 and incorporated by  reference to Exhibit 10.2 to the Company’s Annual Report on  Form 10-K, filed June 14, 2006 (renewed on July 8, 2009).                                                                                                                                                                                                                                              |
| 10.3        |       | Second Amended and Restated Credit Agreement dated  as of April 14, 2009 by and among Gladstone Business Investment LLC as  Borrower, Gladstone Management Corporation as Servicer, the Committed Lenders  named therein, the CP Lenders named therein, the Managing Agents named  therein, and Branch Banking and Trust Company as Administrative Agent,  incorporated by reference to Exhibit 10.9 to the Company’s Current  Report on Form 8-K (File No. 814-00704), filed April 14, 2009. |
| 11          |       | Computation of Per Share Earnings (included in the  notes to the unaudited condensed consolidated financial statements contained  in this report).                                                                                                                                                                                                                                                                                                                                                                          |
| 31.1        |       | Certification of Chief Executive Officer pursuant to  section 302 of The Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 31.2        |       | Certification of Chief Financial Officer pursuant to  section 302 of The Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 32.1        |       | Certification of Chief Executive Officer pursuant to  section 906 of The Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 32.2        |       | Certification of Chief Financial Officer pursuant to  section 906 of The Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                                                                                        |

 

All other exhibits for which provision is made in the applicableregulations of the Securities and Exchange Commission are not required underthe related instruction or are inapplicable and therefore have been omitted.

 

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