##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 FOR THE QUARTER ENDED JUNE 30, 2010
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 COMMISSION FILE NUMBER: 814-00237
 GLADSTONE CAPITAL CORPORATION
  MARYLAND
    
    54-2040781(State or other jurisdiction of incorporation or organization)
    
    (I.R.S. Employer Identification No.)
 1521 WESTBRANCH DRIVE, SUITE 200
MCLEAN, VIRGINIA 22102
 (703) 287-5800
 þ o
 o o
  Large accelerated filer o
 
 Accelerated filer þ
 
 Non-accelerated filer o(Do not check if a smaller reporting company)
 
 Smaller reporting company o
 o þ




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##### 



GLADSTONE CAPITAL CORPORATION
TABLE OF CONTENTS
 PART I. FINANCIAL INFORMATIONItem 1. Financial Statements (Unaudited)Condensed Consolidated Statements of Assets and Liabilities as of June 30, 2010 and September 30, 2009
    
    
    2Condensed Consolidated Statements of Operations for the three and nine months ended June 30, 2010 and
2009
    
    
    3Condensed Consolidated Statements of Changes in Net Assets for the nine months ended June 30, 2010
and 2009
    
    
    4Condensed Consolidated Statements of Cash Flows for the nine months ended June 30, 2010 and 2009
    
    
    5Condensed Consolidated Schedules of Investments as of June 30, 2010 and September 30, 2009
    
    
    7Notes to Condensed Consolidated Financial Statements
    
    
    15Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    32Overview
    
    
    32Results of Operations
    
    
    35Liquidity and Capital Resources
    
    
    43Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    54Item 4. Controls and Procedures
    
    
    54PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    55Item 1A. Risk Factors
    
    
    55Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    55Item 3. Defaults Upon Senior Securities
    
    
    55Item 4. Removed and Reserved
    
    
    55Item 5. Other Information
    
    
    55Item 6. Exhibits
    
    
    55SIGNATURES
    
    
    56EX-31.1EX-31.2EX-32.1EX-32.2
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##### Table of Contents



GLADSTONE CAPITAL CORPORATION
 
 CONDENSED CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES  (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)  (UNAUDITED)
 June 30,
    
    
    September 30,2010
    
    
    2009ASSETSNon-Control/Non-Affiliate investments (Cost of $257,333 and $312,043, respectively)
    
    $
    238,882
    
    
    $
    286,997Control investments (Cost of $52,533 and $52,350, respectively)
    
    
    31,084
    
    
    
    33,972Total investments at fair value (Cost of $309,866 and $364,393, respectively)
    
    
    269,966
    
    
    
    320,969Cash
    
    
    6,468
    
    
    
    5,276Interest receivable  investments in debt securities
    
    
    2,566
    
    
    
    3,048Interest receivable  employees (Refer to Note 4)
    
    
    95
    
    
    
    85Due from Custodian
    
    
    1,787
    
    
    
    3,059Due from Adviser (Refer to Note 4)
    
    
    
    
    
    
    69Deferred financing fees
    
    
    1,489
    
    
    
    1,230Prepaid assets
    
    
    588
    
    
    
    341Receivable from portfolio companies, less allowance for uncollectible receivables
of $138 and $0 at June 30, 2010 and September 30, 2009, respectively
    
    
    320
    
    
    
    1,528Other assets
    
    
    307
    
    
    
    305TOTAL ASSETS
    
    $
    283,586
    
    
    $
    335,910LIABILITIESAccounts payable
    
    $
    
    
    
    $
    67Interest payable
    
    
    385
    
    
    
    378Fee due to Administrator (Refer to Note 4)
    
    
    186
    
    
    
    216Fees due to Adviser (Refer to Note 4)
    
    
    2,331
    
    
    
    834Borrowings under line of credit at fair value (Cost of $28,900 and $83,000,
respectively)
    
    
    30,656
    
    
    
    83,350Accrued expenses and deferred liabilities
    
    
    1,344
    
    
    
    1,800Funds held in escrow
    
    
    255
    
    
    
    189TOTAL LIABILITIES
    
    
    35,157
    
    
    
    86,834NET ASSETS
    
    $
    248,429
    
    
    $
    249,076ANALYSIS OF NET ASSETSCommon stock, $0.001 par value, 50,000,000 shares authorized and 21,039,242 and
21,087,574 shares issued and outstanding at June 30, 2010 and September 30, 2009,
respectively
    
    $
    21
    
    
    $
    21Capital in excess of par value
    
    
    327,755
    
    
    
    328,203Notes receivable  employees (Refer to Note 4)
    
    
    (8,503
    )
    
    
    (9,019
    )Net unrealized depreciation on investments
    
    
    (39,899
    )
    
    
    (43,425
    )Net unrealized appreciation on borrowings under line of credit
    
    
    (1,756
    )
    
    
    (350
    )Accumulated Net Realized Losses
    
    
    (29,189
    )
    
    
    (26,354
    )TOTAL NET ASSETS
    
    $
    248,429
    
    
    $
    249,076NET ASSETS PER SHARE
    
    $
    11.81
    
    
    $
    11.81
 THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS.
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##### Table of Contents



GLADSTONE CAPITAL CORPORATION
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS  (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)  (UNAUDITED)
 Three Months Ended June 30,
    
    
    Nine Months Ended June 30,2010
    
    
    2009
    
    
    2010
    
    
    2009INVESTMENT INCOMEInterest income  Non-Control/Non-Affiliate investments
    
    $
    7,342
    
    
    $
    9,889
    
    
    $
    24,772
    
    
    $
    31,869Interest income  Control investments
    
    
    375
    
    
    
    591
    
    
    
    1,852
    
    
    
    1,103Interest income  Cash
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    11Interest income  Notes receivable from employees (Refer to Note 4)
    
    
    108
    
    
    
    118
    
    
    
    330
    
    
    
    352Prepayment fees and other income
    
    
    144
    
    
    
    
    
    
    
    632
    
    
    
    Total investment income
    
    
    7,969
    
    
    
    10,598
    
    
    
    27,587
    
    
    
    33,335EXPENSESLoan servicing fee (Refer to Note 4)
    
    
    819
    
    
    
    1,410
    
    
    
    2,600
    
    
    
    4,559Base management fee (Refer to Note 4)
    
    
    658
    
    
    
    457
    
    
    
    2,118
    
    
    
    1,374Incentive fee (Refer to Note 4)
    
    
    153
    
    
    
    1,060
    
    
    
    1,601
    
    
    
    3,326Administration fee (Refer to Note 4)
    
    
    186
    
    
    
    218
    
    
    
    540
    
    
    
    656Interest expense
    
    
    891
    
    
    
    1,811
    
    
    
    3,562
    
    
    
    6,288Amortization of deferred financing fees
    
    
    240
    
    
    
    808
    
    
    
    1,182
    
    
    
    2,253Professional fees
    
    
    501
    
    
    
    266
    
    
    
    1,632
    
    
    
    784Compensation expense (Refer to Note 4)
    
    
    
    
    
    
    
    
    
    
    245
    
    
    
    Other expenses
    
    
    178
    
    
    
    246
    
    
    
    897
    
    
    
    890Expenses before credits from Adviser
    
    
    3,626
    
    
    
    6,276
    
    
    
    14,377
    
    
    
    20,130Credits to fees from Adviser (Refer to Note 4)
    
    
    (86
    )
    
    
    (1,113
    )
    
    
    (120
    )
    
    
    (3,667
    )Total expenses net of credits to fees
    
    
    3,540
    
    
    
    5,163
    
    
    
    14,257
    
    
    
    16,463NET INVESTMENT INCOME
    
    
    4,429
    
    
    
    5,435
    
    
    
    13,330
    
    
    
    16,872REALIZED AND UNREALIZED GAIN (LOSS) ON:Net realized loss on investments
    
    
    (2,865
    )
    
    
    (10,594
    )
    
    
    (2,893
    )
    
    
    (14,325
    )Realized loss on settlement of derivative
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (304
    )Unrealized appreciation on derivative
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    304Net unrealized (depreciation) appreciation on investments
    
    
    (1,556
    )
    
    
    4,371
    
    
    
    3,525
    
    
    
    (2,158
    )Net unrealized appreciation on borrowings under line of credit
    
    
    (1,756
    )
    
    
    
    
    
    
    (1,405
    )
    
    
    Net loss on investments, derivative and borrowings under line of credit
    
    
    (6,177
    )
    
    
    (6,223
    )
    
    
    (773
    )
    
    
    (16,483
    )NET (DECREASE) INCREASE IN NET ASSETS RESULTING FROM OPERATIONS
    
    $
    (1,748
    )
    
    $
    (788
    )
    
    $
    12,557
    
    
    $
    389NET (DECREASE) INCREASE IN NET ASSETS RESULTING FROM OPERATIONS PER COMMON SHARE:Basic and Diluted
    
    $
    (0.08
    )
    
    $
    (0.04
    )
    
    $
    0.60
    
    
    $
    0.02WEIGHTED AVERAGE SHARES OF COMMON STOCK OUTSTANDING:Basic and Diluted
    
    
    21,039,242
    
    
    
    21,087,574
    
    
    
    21,067,465
    
    
    
    21,087,574
 THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS.
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GLADSTONE CAPITAL CORPORATION
 
 CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS  (DOLLAR AMOUNTS IN THOUSANDS)  (UNAUDITED)
 Nine Months Ended June 30,2010
    
    
    2009Operations:Net investment income
    
    $
    13,330
    
    
    $
    16,872Net realized loss on investments
    
    
    (2,893
    )
    
    
    (14,325
    )Realized loss on settlement of derivative
    
    
    
    
    
    
    (304
    )Unrealized appreciation on derivative
    
    
    
    
    
    
    304Net unrealized appreciation (depreciation) on investments
    
    
    3,525
    
    
    
    (2,158
    )Net unrealized appreciation on borrowings under line of credit
    
    
    (1,405
    )
    
    
    Net increase in net assets from operations
    
    
    12,557
    
    
    
    389Capital transactions:Shelf offering costs
    
    
    (28
    )
    
    
    (3
    )Distributions to stockholders
    
    
    (13,271
    )
    
    
    (22,142
    )Repayment of principal on employee notes
    
    
    
    
    
    
    4Conversion of former employee stock option loans from recourse to non-recourse
    
    
    (420
    )
    
    
    Reclassification of principal on employee note
    
    
    515
    
    
    
    Net decrease in net assets from capital transactions
    
    
    (13,204
    )
    
    
    (22,141
    )Total decrease in net assets
    
    
    (647
    )
    
    
    (21,752
    )Net assets at beginning of year
    
    
    249,076
    
    
    
    271,748Net assets at end of period
    
    $
    248,429
    
    
    $
    249,996
 THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS.
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GLADSTONE CAPITAL CORPORATION
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS  (DOLLAR AMOUNTS IN THOUSANDS)  (UNAUDITED)
 Nine Months Ended June 30,2010
    
    
    2009CASH FLOWS FROM OPERATING ACTIVITIESNet increase in net assets resulting from operations
    
    $
    12,557
    
    
    $
    389Adjustments to reconcile net increase in net assets resulting from operations to net cash
provided by operating activities:Purchase of investments
    
    
    (9,565
    )
    
    
    (24,711
    )Principal repayments on investments
    
    
    56,900
    
    
    
    43,419Proceeds from sale of investments
    
    
    3,119
    
    
    
    41,962Repayment of paid in kind interest
    
    
    51
    
    
    
    Increase in investment balance due to paid in kind interest
    
    
    (64
    )
    
    
    (48
    )Net amortization of premiums and discounts
    
    
    479
    
    
    
    (205
    )Loan impairment / contra-investment
    
    
    715
    
    
    
    Net realized loss on investments
    
    
    2,893
    
    
    
    14,325Amortization of deferred financing fees
    
    
    1,182
    
    
    
    2,253Realized loss on settlement of derivative
    
    
    
    
    
    
    304Unrealized appreciation on derivative
    
    
    
    
    
    
    (304
    )Change in net unrealized (depreciation) appreciation on investments
    
    
    (3,525
    )
    
    
    2,158Change in net unrealized appreciation on borrowings under line of credit
    
    
    1,405
    
    
    
    Change in compensation expense from non-recourse notes
    
    
    245
    
    
    
    Decrease (increase) in interest receivable
    
    
    472
    
    
    
    (107
    )Increase in funds due from custodian
    
    
    1,272
    
    
    
    2,913(Increase) decrease in prepaid assets
    
    
    (246
    )
    
    
    90Decrease in due from affiliate
    
    
    69
    
    
    
    Decrease in receivables from portfolio companies
    
    
    1,208
    
    
    
    Decrease (increase) in other assets
    
    
    4
    
    
    
    (501
    )Decrease in accounts payable
    
    
    (67
    )
    
    
    (2
    )Increase (decrease) in interest payable
    
    
    7
    
    
    
    (218
    )Decrease in accrued expenses and deferred liabilities
    
    
    (612
    )
    
    
    (226
    )Increase in fees due to affiliate (Refer to Note 4)
    
    
    1,497
    
    
    
    260Decrease in administration fee due to Gladstone Administration (Refer to Note 4)
    
    
    (30
    )
    
    
    (29
    )Increase (decrease) in funds held in escrow
    
    
    66
    
    
    
    (69
    )Net cash provided by operating activities
    
    
    70,032
    
    
    
    81,653CASH FLOWS FROM FINANCING ACTIVITIES:Shelf offering costs
    
    
    (28
    )
    
    
    (3
    )Borrowings from the line of credit
    
    
    8,400
    
    
    
    46,800Repayments on the line of credit
    
    
    (62,500
    )
    
    
    (106,130
    )Distributions paid
    
    
    (13,271
    )
    
    
    (22,142
    )Receipt of principal on notes receivable  employees (Refer to Note 4)
    
    
    
    
    
    
    4Deferred financing fees
    
    
    (1,441
    )
    
    
    (2,109
    )Net cash used in financing activities
    
    
    (68,840
    )
    
    
    (83,580
    )NET INCREASE (DECREASE) IN CASH
    
    
    1,192
    
    
    
    (1,927
    )CASH, BEGINNING OF PERIOD
    
    
    5,276
    
    
    
    6,493CASH, END OF PERIOD
    
    $
    6,468
    
    
    $
    4,566
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Nine Months Ended June 30,2010
    
    
    2009NON-CASH FINANCING ACTIVITIESPortfolio company payoff proceeds held in escrow (included in other assets and other liabilities)
    
    $
    155
    
    
    $
    Reclassification of principal on employee note (Refer to Note 4)
    
    $
    515
    
    
    $
    Conversion of former employee stock option loans from recourse to non-recourse (Refer to Note 6)
    
    $
    420
    
    
    $
    
 THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS.
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GLADSTONE CAPITAL CORPORATION
 
 CONDENSED CONSOLIDATED SCHEDULE OF INVESTMENTS  AS OF JUNE 30, 2010  (DOLLAR AMOUNTS IN THOUSANDS)  (UNAUDITED)
 Company (1)
    
    Industry
    
    Investment (2)
    
    Cost
    
    
    Fair ValueNON-CONTROL/NON-AFFILIATE
INVESTMENTSNon-syndicated Loans:Access Television Network, Inc.
    
    Service-cable airtime (infomercials)
    
    Senior Term Debt (14.5%, Due 12/2009) (5) (11)
    
    $
    963
    
    
    $
    807Allison Publications, LLC
    
    Service-publisher of consumer oriented magazines
    
    Senior Term Debt (10.5%, Due 9/2012) (5)
    
    
    9,248
    
    
    
    8,661Senior Term Debt (13.0%, Due 12/2010) (5)
    
    
    130
    
    
    
    127Anitox Acquisition Company
    
    Manufacturing-preservatives for animal feed
    
    Line of Credit, $3,000 available (4.6%, Due 1/2011) (13)
    
    
    1,950
    
    
    
    1,950Senior Term Debt (8.5%, Due 1/2012) (13)
    
    
    2,466
    
    
    
    2,466Senior Term Debt (10.5%, Due 1/2012) (3) (13)
    
    
    3,688
    
    
    
    3,691BAS Broadcasting
    
    Service-radio station operator
    
    Senior Term Debt (11.5%, Due 7/2013) (5)
    
    
    7,435
    
    
    
    6,729Chinese Yellow Pages
    
    Service-publisher of Chinese language directories
    
    Line of Credit, $700 available (7.3%, Due 9/2010) (5)
    
    
    450
    
    
    
    432Company
    
    
    
    Senior Term Debt (7.3%, Due 9/2010) (5)
    
    
    379
    
    
    
    363CMI Acquisition, LLC
    
    Service-recycling
    
    Senior Subordinated Term Debt (10.3%, Due 11/2012) (5)
    
    
    5,968
    
    
    
    5,819Doe & Ingalls
    
    Distributor-specialty chemicals
    
    Senior Term Debt (8.0%, Due 11/2010) (14)
    
    
    1,700
    
    
    
    1,700Management LLC
    
    
    
    Senior Term Debt (9.0%, Due 11/2010) (3) (14)
    
    
    4,331
    
    
    
    4,331FedCap Partners, LLC
    
    Private equity fund
    
    Class A Membership Units (8)
    
    
    400
    
    
    
    400Finn Corporation
    
    Manufacturing-landscape equipment
    
    Common Stock Warrants (7) (8)
    
    
    37
    
    
    
    468GFRC Holdings LLC
    
    Manufacturing-glass-fiber reinforced concrete
    
    Senior Term Debt (11.5%, Due 12/2012) (5)
    
    
    6,211
    
    
    
    6,133Senior Subordinated Term Debt (14.0%, Due 12/2012) (3) (5)
    
    
    6,632
    
    
    
    6,491Global Materials
    
    Manufacturing-steel wool products and metal fibers
    
    Senior Term Debt (13.0%, Due 6/2012) (3) (5)
    
    
    3,760
    
    
    
    2,933Technologies, Inc.Heartland Communications
    
    Service-radio station operator
    
    Senior Term Debt (8.5%, Due 3/2013) (5)
    
    
    4,296
    
    
    
    2,497Group
    
    
    
    Common Stock Warrants (7) (8)
    
    
    66
    
    
    
    66Interfilm Holdings, Inc.
    
    Service-slitter and distributor of plastic films
    
    Senior Term Debt (12.3%, Due 10/2012) (5)
    
    
    4,912
    
    
    
    4,790International Junior Golf
    
    Service-golf training
    
    Line of Credit, $1,500 available (9.0%, Due 5/2011) (5)
    
    
    300
    
    
    
    298Training Acquisition
    
    
    
    Senior Term Debt (8.5%, Due 5/2012) (5)
    
    
    1,722
    
    
    
    1,697Company
    
    
    
    Senior Term Debt (10.5%, Due 5/2012) (3) (5)
    
    
    2,500
    
    
    
    2,450KMBQ Corporation
    
    Service-AM/FM radio broadcaster
    
    Line of Credit, $200 available (non-accrual, Due 7/2010) (5) (10)
    
    
    162
    
    
    
    31Senior Term Debt (non-accrual, Due 7/2010) (5) (10)
    
    
    1,921
    
    
    
    375Legend Communications of
    
    Service-operator of radio stations
    
    Senior Term Debt (12.0%, Due 6/2013) (5)
    
    
    9,870
    
    
    
    7,649Wyoming LLCNewhall Holdings, Inc.
    
    Service-distributor of personal care products and supplements
    
    Line of Credit, $1,350 available (5.0%, Due 12/2012) (5)
    
    
    1,000
    
    
    
    935Senior Term Debt (5) (5.0%, Due 12/2012) (5)
    
    
    3,870
    
    
    
    3,618Senior Term Debt (5.0%, Due 12/2012) (3) (5)
    
    
    4,648
    
    
    
    4,300Preferred Equity (7) (8)
    
    
    
    
    
    
    Common Stock (7) (8)
    
    
    
    
    
    
    Northern Contours, Inc.
    
    Manufacturing-veneer and laminate components
    
    Senior Subordinated Term Debt (13.0%, Due 9/2012) (5)
    
    
    6,344
    
    
    
    5,757
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GLADSTONE CAPITAL CORPORATION
CONDENSED CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)
AS OF JUNE 30, 2010
(DOLLAR AMOUNTS IN THOUSANDS)
(UNAUDITED)
 Company (1)
    
    Industry
    
    Investment (2)
    
    Cost
    
    
    Fair ValueNorthstar Broadband, LLC
    
    Service-cable TV franchise owner
    
    Senior Term Debt (0.7%, Due 12/2012) (5)
    
    $
    130
    
    
    $
    111Pinnacle Treatment Centers,
    
    Service-Addiction treatment centers
    
    Line of Credit, $500 available (12.0%, Due 10/2010)
    
    
    150
    
    
    
    149Inc.
    
    
    
    Senior Term Debt (10.5%, Due 12/2011) (5)
    
    
    2,150
    
    
    
    2,139Senior Term Debt (10.5%, Due 12/2011) (3) (5)
    
    
    7,500
    
    
    
    7,387Precision Acquisition Group
    
    Manufacturing-consumable components for the
    
    Equipment Note (13.0%, Due 10/2010) (5)
    
    
    1,000
    
    
    
    978Holdings, Inc.
    
    aluminum industry
    
    Senior Term Debt (13.0%, Due 10/2010) (5)
    
    
    4,125
    
    
    
    4,032Senior Term Debt (13.0%, Due 10/2010) (3) (5)
    
    
    4,053
    
    
    
    3,962PROFITSystems
    
    Service-design and develop ERP software
    
    Line of Credit, $350 available (4.6%, Due 7/2011)
    
    
    
    
    
    
    Acquisition Co.
    
    
    
    Senior Term Debt (8.5%, Due 7/2011) (5)
    
    
    1,150
    
    
    
    1,072Senior Term Debt (10.5%, Due 7/2011) (3) (5)
    
    
    2,900
    
    
    
    2,683RCS Management Holding
    
    Service-healthcare supplies
    
    Senior Term Debt (9.5%, Due 1/2011) (3) (5)
    
    
    2,062
    
    
    
    2,037Co.
    
    
    
    Senior Term Debt (11.5%, Due 1/2011) (4) (5)
    
    
    3,060
    
    
    
    3,022Reliable Biopharmaceutical
    
    Manufacturing-pharmaceutical and biochemical
    
    Line of Credit, $5,000 available (9.0%, Due 10/2010) (5)
    
    
    700
    
    
    
    696Holdings, Inc.
    
    intermediates
    
    Mortgage Note (9.5%, Due 10/2014) (5)
    
    
    7,275
    
    
    
    7,256Senior Term Debt (9.0%, Due 10/2012) (5)
    
    
    1,193
    
    
    
    1,187Senior Term Debt (11.0%, Due 10/2012) (3) (5)
    
    
    11,723
    
    
    
    11,547Senior Subordinated Term Debt (12.0%, Due 10/2013) (5)
    
    
    6,000
    
    
    
    5,835Common Stock Warrants (7) (8)
    
    
    209
    
    
    
    Saunders & Associates
    
    Manufacturing-equipment provider for frequency controldevices
    
    Senior Term Debt (9.8%, Due 5/2013) (5)
    
    
    8,947
    
    
    
    8,913SCI Cable, Inc.
    
    Service-cable, internet, voice provider
    
    Senior Term Debt (non-accrual, Due 10/2012) (5)
    
    
    351
    
    
    
    136Senior Term Debt (non-accrual, Due 10/2012) (5)
    
    
    2,931
    
    
    
    374Sunburst Media  Louisiana, LLC
    
    Service-radio station operator
    
    Senior Term Debt (10.5%, Due 6/2011) (5)
    
    
    6,396
    
    
    
    5,945Sunshine Media Holdings
    
    Service-publisher regional B2B trade magazines
    
    Line of credit, $2,000 available (10.5%, Due 2/2011) (5)
    
    
    999
    
    
    
    934Senior Term Debt (10.5%, Due 5/2012) (5)
    
    
    16,948
    
    
    
    15,846Senior Term Debt (13.3%, Due 5/2012) (3) (5)
    
    
    10,700
    
    
    
    9,844Thibaut Acquisition Co.
    
    Service-design and distribute wall covering
    
    Line of Credit, $1,000 available (9.0%, Due 1/2011) (5)
    
    
    1,000
    
    
    
    960Senior Term Debt (8.5%, Due 1/2011) (5)
    
    
    1,338
    
    
    
    1,284Senior Term Debt (12.0%, Due 1/2011) (3) (5)
    
    
    3,000
    
    
    
    2,843Viapack, Inc.
    
    Manufacturing-polyethylene film
    
    Senior Real Estate Term Debt (10.0%, Due 3/2011) (5)
    
    
    675
    
    
    
    671Senior Term Debt (13.0%, Due 3/2011) (3) (5)
    
    
    4,005
    
    
    
    3,980Westlake Hardware, Inc.
    
    Retail-hardware and variety
    
    Senior Subordinated Term Debt (9.5%, Due 1/2011) (5) (15)
    
    
    15,000
    
    
    
    14,738Senior Subordinated Term Debt (10.8%, Due 1/2011) (5) (15)
    
    
    10,000
    
    
    
    9,725Winchester Electronics
    
    Manufacturing-high bandwidth connectors and cables
    
    Senior Term Debt (5.4%, Due 5/2012) (5)
    
    
    1,250
    
    
    
    1,247Senior Term Debt (5.8%, Due 5/2013) (5)
    
    
    1,686
    
    
    
    1,652Senior Subordinated Term Debt (14.0%, Due 6/2013) (5)
    
    
    9,875
    
    
    
    9,554Subtotal  Non-syndicated loans
    
    
    
    
    
    
    247,840
    
    
    
    230,703
 8




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##### Table of Contents



GLADSTONE CAPITAL CORPORATION
CONDENSED CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)
AS OF JUNE 30, 2010
(DOLLAR AMOUNTS IN THOUSANDS)
(UNAUDITED)
 Company (1)
    
    Industry
    
    Investment (2)
    
    Cost
    
    
    Fair ValueSyndicated Loans:Puerto Rico Cable
    
    Service-telecommunications
    
    Senior Subordinated Term Debt (7.9%, Due 1/2012) (6)
    
    $
    7,163
    
    
    $
    6,284Acquisition Company, Inc.WP Evenflo Group
    
    Manufacturing-infant and juvenile products
    
    Senior Term Debt (8.0%, Due 2/2013) (6)
    
    
    1,886
    
    
    
    1,660Holdings Inc.
    
    
    
    Senior Preferred Equity (7) (8)
    
    
    333
    
    
    
    235Junior Preferred Equity (7) (8)
    
    
    111
    
    
    
    Common Stock (7) (8)
    
    
    
    
    
    
    Subtotal  Syndicated loans
    
    
    
    
    
    
    9,493
    
    
    
    8,179Total Non-Control/Non-
Affiliate Investments
    
    
    
    $
    257,333
    
    
    $
    238,882CONTROL INVESTMENTSBERTL, Inc.
    
    Service-web-based evaluator of digital imaging products
    
    Line of Credit, $1,397 available
(non-accrual, Due 10/2010) (7) (10) (12)
    
    $
    1,071
    
    
    $
    Common Stock (7) (8)
    
    
    423
    
    
    
    Clinton Holdings, LLC
    
    Distribution-aluminum sheets and stainless steel
    
    Senior Subordinated Term Debt (12.0%, Due 1/2013) (5)
    
    
    17,140
    
    
    
    13,369Common Stock Warrants (7) (8)
    
    
    109
    
    
    
    Defiance Integrated
    
    Manufacturing-trucking parts
    
    Senior Term Debt (11.0%, Due 4/2013) (3) (5)
    
    
    8,324
    
    
    
    8,325Technologies, Inc.
    
    
    
    Common Stock (7) (8)
    
    
    1
    
    
    
    Guaranty ($250)Lindmark Acquisition, LLC
    
    Service-advertising
    
    Senior Subordinated Term Debt (non-accrual, Due 10/2012) (5) (9) (10)
    
    
    10,000
    
    
    
    6,000Senior Subordinated Term Debt (non-accrual, Due 12/2010) (5) (9) (10)
    
    
    2,000
    
    
    
    1,200Senior Subordinated Term Debt
(non-accrual, Due Upon Demand) (5)(9)(10)
    
    
    1,644
    
    
    
    986Common Stock (7) (8)
    
    
    1
    
    
    
    LYP Holdings Corp.
    
    Service-yellow pages publishing
    
    Line of credit, $1,850 available (non-accrual, Due 12/2010) (7) (10)
    
    
    1,698
    
    
    
    1,033Senior Term Debt (non-accrual, Due 2/2012) (7) (10)
    
    
    325
    
    
    
    Line of Credit, $3,000 available (non-accrual, Due 6/2011) (7) (10)
    
    
    1,170
    
    
    
    Senior Term Debt (non-accrual, Due 6/2011) (7) (10)
    
    
    2,688
    
    
    
    Senior Term Debt (non-accrual, Due 6/2011) (3) (7) (10)
    
    
    2,750
    
    
    
    Common Stock Warrants (7) (8)
    
    
    
    
    
    
    U.S.
HealthcareCommunications, Inc.
    
    Service-magazine publisher/ operator
    
    Line of credit, $400 available (non-accrual, Due 12/2010) (7) (10)
    
    
    269
    
    
    
    171Line of credit, $450 available (non-accrual, Due 12/2010) (7) (10)
    
    
    450
    
    
    
    Common Stock (7) (8)
    
    
    2,470
    
    
    
    Total Control Investments
    
    
    
    
    
    $
    52,533
    
    
    $
    31,084Total Investments
    
    
    
    
    
    $
    309,866
    
    
    $
    269,966
 9




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##### Table of Contents



GLADSTONE CAPITAL CORPORATION
CONDENSED CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)
AS OF JUNE 30, 2010
(DOLLAR AMOUNTS IN THOUSANDS)
(UNAUDITED)
 
 (1)
    
    Certain of the listed securities are issued by affiliate(s) of the indicated portfolio
company.(2)
    
    Percentage represents interest rates in effect at June 30, 2010 and due date represents the
contractual maturity date.(3)
    
    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.(4)
    
    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, however, the debt is also junior to
another Last Out Tranche.(5)
    
    Fair value was based on opinions of value submitted by Standard & Poors Securities
Evaluations, Inc.(6)
    
    Security valued based on the indicative bid price on or near June 30, 2010, offered by the
respective syndication agents trading desk or secondary desk.(7)
    
    Fair value was based on the total enterprise value of the portfolio company using a liquidity
waterfall approach. The Company also considered discounted cash flow methodologies.(8)
    
    Security is non-income producing.(9)
    
    Lindmarks loan agreement was amended in March 2009 such that any unpaid current interest
accrues at a success fee rate. The success fee is to be paid upon certain conditions being
met and is not recorded until paid. Please refer to Note 2, Summary of Significant
Accounting Policies  Interest Income Recognition. For the three and nine months ended June
30, 2010, the Company recorded $0 of interest income.(10)
    
    BERTL, KMBQ, Lindmark, LYP Holdings, SCI Cable and U.S. Healthcare are currently past due on
interest payments and are on non-accrual.(11)
    
    Access TVs loan matured in December 2009. The Company is actively working to recover
amounts due under this loan, however, there is no assurance that there will be any recovery of
amounts past due.(12)
    
    BERTLs interest includes paid in kind interest. Please refer to Note 2, Summary of
Significant Accounting Policies.(13)
    
    Anitoxs fair value was based on the expected full repayment subsequent to June 30, 2010. In
addition, Anitoxs Last Out Tranche of senior term debt includes a success fee with a fair
value of $3.(14)
    
    Doe & Ingalls fair value was based on the expected full repayment subsequent to June 30,
2010.(15)
    
    Subsequent to June 30, 2010, Westlakes senior subordinated term loans were amended with
revised interest rates of 12.3% and 13.5%, respectively, and the maturity date was extended to
January 2014. THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS.
 10




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##### Table of Contents



GLADSTONE CAPITAL CORPORATION
CONSOLIDATED SCHEDULE OF INVESTMENTS
AS OF SEPTEMBER 30, 2009
(DOLLAR AMOUNTS IN THOUSANDS)
 Company (1)
    
    Industry
    
    Investment (2)
    
    Cost
    
    
    Fair ValueNON-CONTROL/NON-AFFILIATE
INVESTMENTSNon-syndicated Loans:Access Television Network, Inc.
    
    Service-cable airtime (infomercials)
    
    Senior Term Debt (14.5%, Due 12/2009) (5) (9)
    
    $
    963
    
    
    $
    868ACE Expediters, Inc
    
    Service-over-the-ground logistics
    
    Senior Term Debt (13.5%, Due 9/2014) (5) (13)
    
    
    5,106
    
    
    
    4,864Common Stock Warrants (8)
    
    
    200
    
    
    
    564ActivStyle Acquisition Co.
    
    Service-medical products  distribution
    
    Senior Term Debt (13.0%, Due 4/2014) (3) (5)
    
    
    4,000
    
    
    
    3,940Allison Publications,
    
    Service-publisher of consumer
    
    Senior Term Debt (10.0%, Due 9/2012) (5)
    
    
    9,709
    
    
    
    8,746LLC
    
    oriented magazines
    
    Senior Term Debt (13.0%, Due 12/2010) (5)
    
    
    260
    
    
    
    246Anitox Acquisition Company
    
    Manufacturing-preservatives for animal feed
    
    Line of Credit, $3,000 available (4.5%, Due 1/2010) (5)
    
    
    1,700
    
    
    
    1,681Senior Term Debt (8.5%, Due 1/2012) (5)
    
    
    2,877
    
    
    
    2,823Senior Term Debt (10.5%, Due 1/2012) (3) (5)
    
    
    3,688
    
    
    
    3,582BAS Broadcasting
    
    Service-radio station operator
    
    Senior Term Debt (11.5%, Due 7/2013) (5)
    
    
    7,300
    
    
    
    5,840Senior Term Debt (12.0%, Due 7/2009) (3) (5) (12)
    
    
    950
    
    
    
    475CCS, LLC
    
    Service-cable TV franchise owner
    
    Senior Term Debt (non-accrual, Due 8/2008) (5) (10) (12)
    
    
    631
    
    
    
    126Chinese Yellow Pages
    
    Service-publisher of Chinese
    
    Line of Credit, $700 available (7.3%, Due 9/2010) (5)
    
    
    450
    
    
    
    427Company
    
    language directories
    
    Senior Term Debt (7.3%, Due 9/2010) (5)
    
    
    518
    
    
    
    488CMI Acquisition, LLC
    
    Service-recycling
    
    Senior Subordinated Term Debt (10.3%, Due 11/2012) (5)
    
    
    6,233
    
    
    
    5,890Doe & Ingalls
    
    Distributor-specialty chemicals
    
    Senior Term Debt (6.8%, Due 11/2010) (5)
    
    
    2,300
    
    
    
    2,266Management LLC
    
    
    
    Senior Term Debt (7.8%, Due 11/2010) (3) (5)
    
    
    4,365
    
    
    
    4,267Finn Corporation
    
    Manufacturing-landscape equipment
    
    Common Stock Warrants (8)
    
    
    37
    
    
    
    1,223GFRC Holdings LLC
    
    Manufacturing-glass-fiber reinforced
    
    Line of Credit, $2,000 available (4.5%, Due 12/2010)
    
    
    
    
    
    
    concrete
    
    Senior Term Debt (9.0%, Due 12/2012) (5)
    
    
    6,599
    
    
    
    6,450Senior Subordinated Term Debt (11.5%, Due 12/2012) (3) (5)
    
    
    6,665
    
    
    
    6,432Global Materials
    
    Manufacturing-steel wool
    
    Senior Term Debt (13.0%, Due 6/2010) (3) (5)
    
    
    4,410
    
    
    
    3,528Technologies, Inc.
    
    products and metal fibersHeartland Communications Group
    
    Service-radio station operator
    
    Senior Term Debt (10.0%, Due 5/2011) (5)
    
    
    4,567
    
    
    
    2,726Interfilm Holdings, Inc.
    
    Service-slitter and distributor of plastic films
    
    Senior Term Debt (12.3%, Due 10/2012) (5)
    
    
    4,950
    
    
    
    4,715International Junior Golf
    
    Service-golf training
    
    Line of Credit, $1,500 available (9.0%, Due 5/2010) (5)
    
    
    700
    
    
    
    690Training Acquisition
    
    
    
    Senior Term Debt (8.5%, Due 5/2012) (5)
    
    
    2,120
    
    
    
    2,036Company
    
    
    
    Senior Term Debt (10.5%, Due 5/2012) (3) (5)
    
    
    2,500
    
    
    
    2,366KMBQ Corporation
    
    Service-AM/FM radio broadcaster
    
    Line of Credit, $200 available (11.0%, Due 3/2010) (5)
    
    
    153
    
    
    
    69Senior Term Debt (11.0%, Due 3/2010) (5)
    
    
    1,785
    
    
    
    801Legend Communications
    
    Service-operator of radio stations
    
    Line of Credit, $500 available (12.0%, Due 6/2011) (5)
    
    
    497
    
    
    
    450of Wyoming LLC
    
    
    
    Senior Term Debt (12.0%, Due 6/2013) (5)
    
    
    9,373
    
    
    
    8,482Newhall Holdings, Inc.
    
    Service-distributor of personal
    
    Line of Credit, $3,000 available (11.3%, Due 5/2010) (5)
    
    
    1,000
    
    
    
    945care products and supplements
    
    Senior Term Debt (5) (11.3%, Due 5/2012) (5)
    
    
    3,870
    
    
    
    3,657Senior Term Debt (14.3%, Due 5/2012) (3) (5)
    
    
    4,410
    
    
    
    4,112
 11




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##### Table of Contents



GLADSTONE CAPITAL CORPORATION
CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)
SEPTEMBER 30, 2009
(DOLLAR AMOUNTS IN THOUSANDS)
 Company (1)
    
    Industry
    
    Investment (2)
    
    Cost
    
    
    Fair ValueNorthern Contours, Inc.
    
    Manufacturing-veneer andlaminate components
    
    Senior Subordinated Term Debt (10.0%, Due 5/2010) (5)
    
    $
    6,562
    
    
    $
    5,414Pinnacle Treatment Centers, Inc.
    
    Service-Addiction treatment centers
    
    Line of Credit, $500 available (4.5%, Due 12/2009)
    
    
    
    
    
    
    Senior Term Debt (10.5%, Due 12/2011) (5)
    
    
    2,750
    
    
    
    2,633Senior Term Debt (10.5%, Due 12/2011) (3) (5)
    
    
    7,500
    
    
    
    7,059Precision Acquisition
    
    Manufacturing-consumable
    
    Equipment Note (8.5%, Due 10/2011) (5)
    
    
    1,000
    
    
    
    988Group Holdings, Inc.
    
    components for the aluminum industry
    
    Senior Term Debt (8.5%, Due 10/2010) (5)
    
    
    4,250
    
    
    
    4,192Senior Term Debt (11.5%, Due 10/2010) (3) (5)
    
    
    4,074
    
    
    
    4,023PROFITSystems
    
    Service-design and develop
    
    Line of Credit, $350 available (4.5%, Due 7/2010)
    
    
    
    
    
    
    Acquisition Co.
    
    ERP software
    
    Senior Term Debt (8.5%, Due 7/2011) (5)
    
    
    1,600
    
    
    
    1,468Senior Term Debt (10.5%, Due 7/2011) (3) (5)
    
    
    2,900
    
    
    
    2,632RCS Management Holding Co.
    
    Service-healthcare supplies
    
    Senior Term Debt (8.5%, Due 1/2011) (3) (5)
    
    
    2,437
    
    
    
    2,383Senior Term Debt (10.5%, Due 1/2011) (4) (5)
    
    
    3,060
    
    
    
    2,949Reliable Biopharmaceutical
    
    Manufacturing-pharmaceutical
    
    Line of Credit, $5,000 available (9.0%, Due 10/2010) (5)
    
    
    800
    
    
    
    788Holdings,
Inc.
    
    and biochemical intermediates
    
    Mortgage Note (9.5%, Due 10/2014) (5)
    
    
    7,335
    
    
    
    7,261Senior Term Debt (9.0%, Due 10/2012) (5)
    
    
    1,530
    
    
    
    1,507Senior Term Debt (11.0%, Due 10/2012) (3) (5)
    
    
    11,813
    
    
    
    11,518Senior Subordinated Term Debt (12.0%, Due 10/2013) (5)
    
    
    6,000
    
    
    
    5,640Common Stock Warrants (8)
    
    
    209
    
    
    
    282Saunders & Associates
    
    Manufacturing-equipment providerfor frequency control devices
    
    Senior Term Debt (9.8%, Due 5/2013) (5)
    
    
    10,780
    
    
    
    10,618SCI Cable, Inc.
    
    Service-cable, internet, voice provider
    
    Senior Term Debt (9.3%, Due 10/2008) (5) (12)
    
    
    2,881
    
    
    
    576Sunburst Media  Louisiana, LLC
    
    Service-radio station operator
    
    Senior Term Debt (10.5%, Due 6/2011) (5)
    
    
    6,411
    
    
    
    5,817Sunshine Media Holdings
    
    Service-publisher regional B2B trade magazines
    
    Senior Term Debt (11.0%, Due 5/2012) (5)
    
    
    16,948
    
    
    
    15,973Senior Term Debt (13.5%, Due 5/2012) (3) (5)
    
    
    10,700
    
    
    
    9,978Thibaut Acquisition Co.
    
    Service-design and disbribute wall covering
    
    Line of Credit, $1,000 available (9.0%, Due 1/2011) (5)
    
    
    1,000
    
    
    
    933Senior Term Debt (8.5%, Due 1/2011) (5)
    
    
    1,487
    
    
    
    1,387Senior Term Debt (12.0%, Due 1/2011) (3) (5)
    
    
    3,000
    
    
    
    2,745Tulsa Welding School
    
    Service-private welding school
    
    Line of credit, $750 available (9.5%, Due 9/2011)
    
    
    
    
    
    
    Senior Term Debt (9.5%, Due 9/2013) (5)
    
    
    4,144
    
    
    
    4,144Senior Term Debt (12.8%, Due 9/2013) (5)
    
    
    7,960
    
    
    
    7,950VantaCore
    
    Service-acquisition of aggregate quarries
    
    Senior Subordinated Term Debt (12.0%, Due 8/2013) (5)
    
    
    13,726
    
    
    
    13,589Viapack, Inc.
    
    Manufacturing-polyethylene film
    
    Senior Real Estate Term Debt (10.0%, Due 3/2011) (5)
    
    
    775
    
    
    
    743Senior Term Debt (13.0%, Due 3/2011) (3) (5)
    
    
    4,061
    
    
    
    3,893Visual Edge Technology, Inc.
    
    Service-office equipment distribution
    
    Line of credit, $3,000 available (10.8%, Due 9/2011) (5)
    
    
    2,981
    
    
    
    2,340Senior Subordinated Term Debt (15.5%, Due 8/2011) (5)
    
    
    5,000
    
    
    
    3,925Westlake Hardware, Inc.
    
    Retail-hardware and variety
    
    Senior Subordinated Term Debt (9.0%, Due 1/2011) (5)
    
    
    15,000
    
    
    
    14,269Senior Subordinated Term Debt (10.3%, Due 1/2011) (5)
    
    
    10,000
    
    
    
    9,400Winchester Electronics
    
    Manufacturing-high bandwidth connectors and cables
    
    Senior Term Debt (5.3%, Due 5/2013) (5)
    
    
    1,147
    
    
    
    1,136Senior Term Debt (5.7%, Due 5/2013) (5)
    
    
    1,690
    
    
    
    1,642Senior Subordinated Term Debt (14.0%, Due 6/2013) (5)
    
    
    9,925
    
    
    
    9,478Subtotal  Non-syndicated loans
    
    
    
    
    298,322
    
    
    
    277,048
 12




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##### Table of Contents



GLADSTONE CAPITAL CORPORATION
CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)
SEPTEMBER 30, 2009
(DOLLAR AMOUNTS IN THOUSANDS)
 Company (1)
    
    Industry
    
    Investment (2)
    
    Cost
    
    
    Fair ValueSyndicated Loans:GTM Holdings, Inc.
    
    Manufacturing-socks
    
    Senior Subordinated Term Debt (11.8%, Due 4/2014) (6)
    
    $
    500
    
    
    $
    220Kinetek Acquisition
    
    Manufacturing-customCorp.
    
    engineered motors & controls
    
    Senior Term Debt (3.6%, Due 11/2013) (7)
    
    
    1,438
    
    
    
    925Puerto Rico Cable
    
    Service-telecommunications
    
    Senior Subordinated Term Debt (7.8%, Due 1/2012) (6)
    
    
    7,174
    
    
    
    5,713Acquisition Company, Inc.Wesco Holdings, Inc.
    
    Service-aerospace parts and  distribution
    
    Senior Subordinated Term Debt (6.0%, Due 3/2014) (7)
    
    
    2,264
    
    
    
    1,856WP Evenflo Group
    
    Manufacturing-infant and juvenile
    
    Senior Term Debt (8.0%, Due 2/2013) (6)
    
    
    1,901
    
    
    
    1,235Holdings Inc.
    
    products
    
    Senior Preferred Equity (8)
    
    
    333
    
    
    
    Junior Preferred Equity (8)
    
    
    111
    
    
    
    Common Stock (8)
    
    
    
    
    
    
    Subtotal  Syndicated loans
    
    
    
    
    13,721
    
    
    
    9,949Total Non-Control/
Non-Affiliate Investments
    
    
    
    $
    312,043
    
    
    $
    286,997CONTROL INVESTMENTSBERTL, Inc.
    
    Service-web-based evaluator
    
    Line of Credit, $842 available (non-accrual, Due
    
    $
    930
    
    
    $
    of digital imaging products
    
    10/2009) (10)(13)(15) Common Stock (8) (15)
    
    
    424
    
    
    
    Clinton Holdings, LLC
    
    Distribution-aluminum sheets and stainless steel
    
    Senior Subordinated Term Debt (12.0%, Due 1/2013) (5) (14)
    
    
    15,500
    
    
    
    12,013Escrow Funding Note (12.0%, Due 1/2013) (5) (14)
    
    
    640
    
    
    
    496Common Stock Warrants (8) (15)
    
    
    109
    
    
    
    Defiance Integrated
    
    Manufacturing-trucking parts
    
    Senior Term Debt (11.0%, Due 4/2010) (3) (11)
    
    
    6,005
    
    
    
    6,005Technologies, Inc.
    
    
    
    Senior Term Debt (11.0%, Due 4/2010) (3) (11)
    
    
    1,178
    
    
    
    1,178Common Stock (8) (15)
    
    
    1
    
    
    
    816Guaranty ($250)Lindmark Acquisition, LLC
    
    Service-advertising
    
    Senior Subordinated Term Debt (11.3%, Due 10/2012) (5) (16)
    
    
    12,000
    
    
    
    10,410Senior Subordinated Term Debt (13.0%, Due Upon Demand) (5) (16)
    
    
    1,553
    
    
    
    1,049Common Stock (8) (15)
    
    
    1
    
    
    
    LYP Holdings Corp.
    
    Service-yellow pages publishing
    
    Line of credit, $1,250 available (10.0%, Due 7/2010) (15)
    
    
    1,168
    
    
    
    1,168Senior Term Debt (12.5%, Due 2/2012) (15)
    
    
    325
    
    
    
    325Line of Credit, $3,000 available (non-accrual, Due 6/2010) (10) (15)
    
    
    1,170
    
    
    
    421Senior Term Debt (non-accrual, Due 6/2011) (10) (15)
    
    
    2,688
    
    
    
    Senior Term Debt (non-accrual, Due 6/2011) (3) (10) (15)
    
    
    2,750
    
    
    
    Common Stock Warrants (8) (15)
    
    
    
    
    
    
    U.S.
HealthcareCommunications, Inc.
    
    Service-magazine publisher/ operator
    
    Line of credit, $200 available (non-accrual, Due 3/2010) (10) (15)
    
    
    169
    
    
    
    91Line of credit, $450 available (non-accrual, Due 3/2010) (10) (15)
    
    
    450
    
    
    
    Common Stock (8) (15)
    
    
    2,470
    
    
    
    Western Directories, Inc.
    
    Service-directory publisher
    
    Line of credit, $1,250 available (non-accrual, Due 12/2009) (10) (15)
    
    
    1,234
    
    
    
    Preferred Stock (8) (15)
    
    
    1,584
    
    
    
    Common Stock (8) (15)
    
    
    1
    
    
    
    Total Control Investments
    
    
    
    $
    52,350
    
    
    $
    33,972Total Investments
    
    
    
    
    
    $
    364,393
    
    
    $
    320,969
 13




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##### Table of Contents



(1)
    
    Certain of the listed securities are issued by affiliate(s) of the indicated portfolio
company.(2)
    
    Percentage represents interest rates in effect at September 30, 2009 and due date represents
the contractual maturity date.(3)
    
    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.(4)
    
    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, however, the debt is also junior to
another Last Out Tranche.(5)
    
    Fair value was based on opinions of value submitted by Standard & Poors Securities
Evaluations, Inc.(6)
    
    Security valued based on the indicative bid price on or near September 30, 2009, offered by
the respective syndication agents trading desk or secondary desk.(7)
    
    Security valued based on the transaction sale price subsequent to September 30, 2009.(8)
    
    Security is non-income producing.(9)
    
    Access Television includes a success fee with a fair value of $1.(10)
    
    BERTL, CCS, U.S. Healthcare, Western Directories and a portion of LYP Holdings are currently
past due on interest payments and are on non-accrual. BERTLs loan matured in October 2009
and the Company is actively working to recover amounts due under this loan. However, there is
no assurance that there will be any recovery of amounts past due.(11)
    
    Fair value of security estimated to be equal to cost due to recent recapitalization.(12)
    
    BAS Broadcastings loan matured in July 2009, CCS loan matured in August 2008 and SCI
Cables loan matured in October 2008. The Company is actively working to recover amounts due
under these loans, however, there is no assurance that there will be any recovery of amounts
past due.(13)
    
    ACE Expediters interest and BERTLs interest include paid in kind interest. Please refer to
Note 2, Summary of Significant Accounting Policies.(14)
    
    Subsequent to September 30, 2009, Clintons senior subordinated term debt and escrow funding
note were combined into one term note, with an interest rate of 12.0% and maturity date of
January 2013. In addition, a term loan was entered into for $320, with an interest rate of
12.0% and a maturity date of January 2013.(15)
    
    Fair value was based on the total enterprise value of the portfolio company using a liquidity
waterfall approach. The Company also considered discounted cash flow methodologies.(16)
    
    Lindmarks loan agreement was amended in March 2009 such that any unpaid current interest
accrues at a success fee rate. The success fee is to be paid upon certain conditions being
met and is not recorded until paid. Please refer to Note 2, Summary of Significant
Accounting Policies  Interest Income Recognition. For the period from April 2009 through
September 2009, the Company recorded $0 of interest income. THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS.
 14




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##### Table of Contents



GLADSTONE CAPITAL CORPORATION
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 JUNE 30, 2010
 (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA AND AS OTHERWISE INDICATED)
 (UNAUDITED)
 NOTE 1. ORGANIZATION
       NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 Unaudited Interim Financial Statements
   Reclassifications
  15




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##### Table of Contents



Out-of-Period Adjustment
  Investment Valuation Policy
    Publicly-traded securities:
 Securities for which a limited market exists:
  16




---



##### Table of Contents



Securities for which no market exists:
 (1)
    
    Portfolio investments comprised solely of debt securities:Debt securities that are not
publicly-traded on an established securities market, or for which a limited market does not
exist (Non-Public Debt Securities), and that are issued by portfolio companies where the
Company has no equity or equity-like securities, are fair valued in accordance with the terms
of the Policy, which utilizes opinions of value submitted to the Company by Standard & Poors
Securities Evaluations, Inc. (SPSE). The Company may also submit paid in kind (PIK)
interest to SPSE for its evaluation when it is determined that PIK interest is likely to be
received.(2)
    
    Portfolio investments in controlled companies comprised of a bundle of investments, which can
include debt and equity securities:The fair value of these investments is determined based on
the total enterprise value (TEV) of the portfolio company, or issuer, utilizing a liquidity
waterfall approach under ASC 820 for the Companys Non-Public Debt Securities and equity or
equity-like securities (e.g. preferred equity, equity, or other equity-like securities) that
are purchased together as part of a package, where the Company has control or could gain
control through an option or warrant security; both the debt and equity securities of the
portfolio investment would exit in the mergers and acquisition market as the principal market,
generally through a sale or recapitalization of the portfolio company. In accordance with ASC
820, the Company applies the in-use premise of value which assumes the debt and equity
securities are sold together. Under this liquidity waterfall approach, the Company first
calculates the TEV of the issuer by incorporating some or all of the following factors to
determine the TEV of the issuer:
 
    
    the issuers ability to make payments;
    
    the earnings of the issuer;
    
    recent sales to third parties of similar securities;
    
    the comparison to publicly traded securities; and
    
    DCF or other pertinent factors.
 In gathering the sales to third parties of similar securities, the Company may reference
industry statistics and use outside experts. Once the Company has estimated the TEV of the
issuer, the Company will subtract the value of all the debt securities of the issuer, which are
valued at the contractual principal balance. Fair values of these debt securities are discounted
for any shortfall of TEV over the total debt outstanding for the issuer. Once the values for all
outstanding senior securities (which include the debt securities) have been subtracted from the
TEV of the issuer, the remaining amount, if any, is used to determine the value of the issuers
equity or equity-like securities. If, in the Advisers judgment, the liquidity waterfall
approach does not accurately reflect the value of the debt component, the Adviser may recommend
that the Company use a valuation by SPSE, or if that is unavailable, a DCF valuation technique.(3)
    
    Portfolio investments in non-controlled companies comprised of a bundle of investments, which
can include debt and equity securities:The Company values Non-Public Debt Securities that are
purchased together with equity or equity-like securities from the same portfolio company, or
issuer, for which the Company does not control or cannot gain control as of the measurement
date, using a hypothetical secondary market as the Companys principal market. In accordance
with ASC 820, the Company determines its fair value of these debt securities of non-control
investments assuming the sale of an individual debt security using the in-exchange premise of
value. As such, the Company estimates the fair value of the debt component using estimates of
value provided by SPSE and its own assumptions in the absence of observable market data,
including synthetic credit ratings, estimated remaining life, current market yield and
interest rate spreads of similar securities as of the measurement date. Subsequent to June 30,
2009, for equity or equity-like securities of investments for which the Company does not
control or cannot gain control as of the measurement date, the Company estimates the fair
value of the equity using the in-exchange premise of value based on factors such as the
overall value of the issuer, the relative fair value of other units of account including debt,
or other relative value approaches. Consideration is also given to capital structure and other
contractual obligations that may impact the fair value of the equity. Further, the Company may
utilize comparable values of similar companies, recent investments and indices with similar
structures and risk characteristics or its own assumptions in the absence of other observable
market data and may also employ DCF valuation techniques.Due to the uncertainty inherent in the valuation process, such estimates of fair value may
differ significantly from the values that would have been obtained had a ready market for the
securities existed, and the differences could be material. Additionally,
 17




---



##### Table of Contents



changes in the market environment and other events that may occur over the life of the
investments may cause the gains or losses ultimately realized on these investments to be
different than the valuations currently assigned. There is no single standard for determining
fair value in good faith, as fair value depends upon circumstances of each individual case. In
general, fair value is the amount that the Company might reasonably expect to receive upon the
current sale of the security in an arms-length transaction in the securitys principal market.
  Interest Income Recognition
  Paid in Kind Interest and Original Issue Discount
   Services Provided to Portfolio Companies
  Recent Accounting Pronouncements
   18




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##### Table of Contents



NOTE 3. INVESTMENTS
  
    
    Level 1  inputs to the valuation methodology are quoted prices (unadjusted) for
identical assets or liabilities in active markets;
    
    Level 2  inputs to the valuation methodology include quoted prices for similar
assets and liabilities in active markets, and inputs that are observable for the asset or
liability, either directly or indirectly, for substantially the full term of the financial
instrument. Level 2 inputs are in those markets for which there are few transactions, the
prices are not current, little public information exists or instances where prices vary
substantially over time or among brokered market makers; and
    
    Level 3 inputs to the valuation methodology are unobservable and significant to
the fair value measurement. Unobservable inputs are those inputs that reflect the Companys
own assumptions that market participants would use to price the asset or liability based upon
the best available information.
  19




---



##### Table of Contents



As of June 30, 2010Total Fair ValueReported in CondensedConsolidated Statements ofLevel 1
    
    
    Level 2
    
    
    Level 3
    
    
    Assets and LiabilitiesNon-Control/Non-Affiliate InvestmentsSenior Term Debt
    
    $
    
    
    
    $
    
    
    
    $
    173,510
    
    
    $
    173,510Senior Subordinated Term Debt
    
    
    
    
    
    
    
    
    
    
    64,203
    
    
    
    64,203Preferred Equity Securities
    
    
    
    
    
    
    
    
    
    
    235
    
    
    
    235Common Equity Securities
    
    
    
    
    
    
    
    
    
    
    934
    
    
    
    934Total investments at fair value
    
    $
    
    
    
    $
    
    
    
    $
    238,882
    
    
    $
    238,882Control InvestmentsSenior Term Debt
    
    $
    
    
    
    $
    
    
    
    $
    9,528
    
    
    $
    9,528Senior Subordinated Term Debt
    
    
    
    
    
    
    
    
    
    
    21,556
    
    
    
    21,556Total investments at fair value
    
    $
    
    
    
    $
    
    
    
    $
    31,084
    
    
    $
    31,084Total investments at fair value
    
    $
    
    
    
    $
    
    
    
    $
    269,966
    
    
    $
    269,966
 As of September 30, 2009Total Fair ValueReported in CondensedConsolidated Statements ofLevel 1
    
    
    Level 2
    
    
    Level 3
    
    
    Assets and LiabilitiesNon-Control/Non-Affiliate InvestmentsSenior Term Debt
    
    $
    
    
    
    $
    
    
    
    $
    203,102
    
    
    $
    203,102Senior Subordinated Term Debt
    
    
    
    
    
    
    
    
    
    
    81,826
    
    
    
    81,826Common Equity/Equivalents
    
    
    
    
    
    
    
    
    
    
    2,069
    
    
    
    2,069Total investments at fair value
    
    $
    
    
    
    $
    
    
    
    $
    286,997
    
    
    $
    286,997Control InvestmentsSenior Term Debt
    
    $
    
    
    
    $
    
    
    
    $
    9,189
    
    
    $
    9,189Senior Subordinated Term Debt
    
    
    
    
    
    
    
    
    
    
    23,967
    
    
    
    23,967Common Equity/Equivalents
    
    
    
    
    
    
    
    
    
    
    816
    
    
    
    816Total investments at fair value
    
    $
    
    
    
    $
    
    
    
    $
    33,972
    
    
    $
    33,972Total investments at fair value
    
    $
    
    
    
    $
    
    
    
    $
    320,969
    
    
    $
    320,969
 Changes in Level 3 Fair Value Measurements of Investments
  20




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##### Table of Contents



Fair value measurements using unobservable data inputs (Level 3)
 Non-Control/Non-Affiliate
    
    
    ControlInvestments
    
    
    Investments
    
    
    TotalThree months ended June 30, 2010:Fair value at March 31, 2010
    
    $
    256,227
    
    
    $
    35,524
    
    
    $
    291,751Total gains or lossesRealized losses (a)
    
    
    
    
    
    
    (2,865
    )
    
    
    (2,865
    )Reversal of prior period depreciation on realization (b)
    
    
    
    
    
    
    2,865
    
    
    
    2,865Unrealized depreciation (b)
    
    
    (48
    )
    
    
    (4,373
    )
    
    
    (4,421
    )New investments, repayments and settlements (c)Issuances/New investments
    
    
    1,185
    
    
    
    (67
    )
    
    
    1,118Settlements/Repayments
    
    
    (18,482
    )
    
    
    
    
    
    
    (18,482
    )Transfers into/out of Level 3
    
    
    
    
    
    
    
    
    
    
    Fair value as of June 30, 2010
    
    $
    238,882
    
    
    $
    31,084
    
    
    $
    269,966Nine months ended June 30, 2010:Fair value at September 30, 2009
    
    $
    286,997
    
    
    $
    33,972
    
    
    $
    320,969Total gains or lossesRealized losses (a)
    
    
    (28
    )
    
    
    (2,865
    )
    
    
    (2,893
    )Reversal of prior period depreciation on realization (b)
    
    
    3,437
    
    
    
    2,865
    
    
    
    6,302Unrealized appreciation (depreciation) (b)
    
    
    3,162
    
    
    
    (5,939
    )
    
    
    (2,777
    )New investments, repayments and settlements, net (c)Issuances/New investments
    
    
    5,384
    
    
    
    3,051
    
    
    
    8,435Settlements/Repayments
    
    
    (56,951
    )
    
    
    
    
    
    
    (56,951
    )Sales
    
    
    (3,119
    )
    
    
    
    
    
    
    (3,119
    )Transfers into/out of Level 3
    
    
    
    
    
    
    
    
    
    
    Fair value as of June 30, 2010
    
    $
    238,882
    
    
    $
    31,084
    
    
    $
    269,966
 Senior
    
    Senior
    
    
    
    
    
    CommonTerm
    
    Subordinated
    
    Preferred
    
    Equity/Debt
    
    Term Debt
    
    Equity
    
    Equivalents
    
    TotalThree months ended June 30, 2010:Fair value at March 31, 2010
    
    $
    188,348
    
    
    $
    102,752
    
    
    $
    
    
    
    $
    651
    
    
    $
    291,751Total gains or lossesRealized losses (a)
    
    
    (1,280
    )
    
    
    
    
    
    
    (1,584
    )
    
    
    (1
    )
    
    
    (2,865
    )Reversal of prior period depreciation on realization (b)
    
    
    1280
    
    
    
    
    
    
    
    1,584
    
    
    
    1
    
    
    
    2,865Unrealized (depreciation) appreciation (b)
    
    
    (1,575
    )
    
    
    (2,898
    )
    
    
    235
    
    
    
    (183
    )
    
    
    (4,421
    )New investments, repayments, and settlements, net (c)Issuances/New investments
    
    
    793
    
    
    
    (141
    )
    
    
    
    
    
    
    466
    
    
    
    1,118Settlements/Repayments
    
    
    (4,528
    )
    
    
    (13,954
    )
    
    
    
    
    
    
    
    
    
    
    (18,482
    )Sales
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Transfers into/out of Level 3
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Fair value as of June 30, 2010
    
    $
    183,038
    
    
    $
    85,759
    
    
    $
    235
    
    
    $
    934
    
    
    $
    269,966Nine months ended June 30, 2010:Fair value at September 30, 2009
    
    $
    212,290
    
    
    $
    105,794
    
    
    $
    
    
    
    $
    2,885
    
    
    $
    320,969Total gains or lossesRealized losses (a)
    
    
    (2,105
    )
    
    
    (570
    )
    
    
    (1,584
    )
    
    
    1,366
    
    
    
    (2,893
    )Reversal of prior period depreciation (appreciation) on
realization (b)
    
    
    3,344
    
    
    
    1,620
    
    
    
    1,584
    
    
    
    (246
    )
    
    
    6,302Unrealized (depreciation) appreciation (b)
    
    
    (364
    )
    
    
    (678
    )
    
    
    235
    
    
    
    (1,970
    )
    
    
    (2,777
    )New investments, repayments and settlements, net (c)Issuances/New investments
    
    
    6,866
    
    
    
    1,103
    
    
    
    
    
    
    
    466
    
    
    
    8,435Settlements/Repayments
    
    
    (36,068
    )
    
    
    (19,316
    )
    
    
    
    
    
    
    (1,567
    )
    
    
    (56,951
    )Sales
    
    
    (925
    )
    
    
    (2,194
    )
    
    
    
    
    
    
    
    
    
    
    (3,119
    )Transfers into/out of Level 3
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Fair value as of June 30, 2010
    
    $
    183,038
    
    
    $
    85,759
    
    
    $
    235
    
    
    $
    934
    
    
    $
    269,966
 21




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##### Table of Contents



Non-Control/Non-Affiliate
    
    
    ControlInvestments
    
    
    Investments
    
    
    Derivative
    
    
    TotalThree months ended June 30, 2009:Fair value at March 31, 2009
    
    $
    369,595
    
    
    $
    15,502
    
    
    $
    
    
    
    $
    385,097Realized losses (a)
    
    
    (10,594
    )
    
    
    
    
    
    
    
    
    
    
    (10,594
    )Reversal of prior period depreciation on realization (b)
    
    
    9,141
    
    
    
    
    
    
    
    
    
    
    
    9,141Unrealized depreciation (b)
    
    
    (2,067
    )
    
    
    (2,703
    )
    
    
    
    
    
    
    (4,770
    )New investments, repayments and settlements, net (c)
    
    
    (48,574
    )
    
    
    733
    
    
    
    
    
    
    
    (47,841
    )Transfers in (out) of Level 3
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Fair value as of June 30, 2009
    
    $
    317,501
    
    
    $
    13,532
    
    
    $
    
    
    
    $
    331,033Nine months ended June 30, 2009:Fair value at September 30, 2008
    
    $
    407,153
    
    
    $
    780
    
    
    $
    
    
    
    $
    407,933Realized losses (a)
    
    
    (14,325
    )
    
    
    
    
    
    
    (304
    )
    
    
    (14,629
    )Reversal of prior period depreciation on realization (b)
    
    
    12,286
    
    
    
    
    
    
    
    304
    
    
    
    12,590Unrealized (depreciation) appreciation (b)
    
    
    (14,454
    )
    
    
    10
    
    
    
    
    
    
    
    (14,444
    )New investments, repayments, and settlements, net (c)
    
    
    (73,159
    )
    
    
    12,742
    
    
    
    
    
    
    
    (60,417
    )Transfers in (out) of Level 3
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Fair value as of June 30, 2009
    
    $
    317,501
    
    
    $
    13,532
    
    
    $
    
    
    
    $
    331,033
 
 (a)
    
    Included in net realized loss on investments on the accompanying condensed consolidated
statements of operations for the three and nine months ended June 30, 2010 and 2009.(b)
    
    Included in unrealized appreciation (depreciation) on investments on the accompanying
condensed consolidated statements of operations for the three and nine months ended June 30,
2010 and 2009.(c)
    
    Includes increases in the cost basis of investments resulting from new portfolio
investments, the amortization of discounts, premiums and closing fees as well as decreases in
the cost basis of investments resulting from principal repayments or sales. Non-Control/Non-Affiliate Investments
  Control Investments
  
    
    BERTL:The Company originally purchased a past due debt instrument in MCA
Communications, LLC and the Company accepted a deed in lieu of foreclosure in satisfaction
of BERTLs obligations under the debt instrument in September 2007. BERTL is a web-based
evaluator of digital imaging products.
    
    Clinton:In September 2009, the Company took control of certain Clinton entities by
exercising contractual rights under the investment documents. Clinton is a distributor of
aluminum sheets and stainless steel.
    
    Defiance:In July 2009, the Company acquired from the previous owner certain assets of
Defiance Acquisition Corp., consisting of tangible and intangible personal property. The
Company acquired these assets through a newly formed subsidiary, Defiance, and intends to
continue the business under its control. Defiance is a manufacturer of trucking parts.
    
    Lindmark:In March 2009, the Company acquired from the previous owner certain assets of
Lindmark Outdoor Advertising, LLC, consisting of all tangible and intangible personal
property. The Company acquired these assets through a newly formed subsidiary, Lindmark,
and intends to continue the business under its control. Lindmark is a billboard
advertising company.
    
    LYP Holdings:In July 2008, the Company acquired from the previous owner certain assets
of LocalTel, Inc., consisting of all tangible and intangible personal property. The
Company acquired these assets through a newly formed subsidiary, LYP Holdings, and intends
to continue the business under its control. LYP Holdings is a publisher of community
yellow page directories.
    
    U.S. Healthcare:The Company offered at public sale certain assets of U.S. Healthcare
Communications, LLC in January 2008, consisting generally of all fixtures of tangible and
intangible personal property. The Company acquired these assets in
 22




---



##### Table of Contents



the sale through a newly formed subsidiary, U.S. Healthcare, and intends to continue the
business under its control. U.S. Healthcare is a trade magazine operator.
 Investment Concentrations
  June 30, 2010
    
    
    September 30, 2009Cost
    
    
    Fair Value
    
    
    Cost
    
    
    Fair ValueSenior Term Debt
    
    $
    207,940
    
    
    $
    183,038
    
    
    $
    240,172
    
    
    $
    212,290Senior Subordinated Term Debt
    
    
    97,766
    
    
    
    85,759
    
    
    
    118,743
    
    
    
    105,794Preferred Equity Securities
    
    
    445
    
    
    
    235
    
    
    
    2,028
    
    
    
    Common Equity Securities
    
    
    3,715
    
    
    
    934
    
    
    
    3,450
    
    
    
    2,885Total Investments
    
    $
    309,866
    
    
    $
    269,966
    
    
    $
    364,393
    
    
    $
    320,969
  June 30, 2010
    
    
    September 30, 2009Percentage
    
    
    
    
    
    
    PercentageTotal
    
    
    Net
    
    
    
    
    
    
    Total
    
    
    NetIndustry Classification
    
    Fair Value
    
    
    Investments
    
    
    Assets
    
    
    Fair Value
    
    
    Investments
    
    
    AssetsHealthcare, Education & Childcare
    
    $
    41,256
    
    
    
    15.3
    %
    
    
    16.6
    %
    
    $
    58,054
    
    
    
    18.1
    %
    
    
    23.3
    %Broadcast (TV & Radio)
    
    
    39,189
    
    
    
    14.5
    %
    
    
    15.8
    %
    
    
    43,403
    
    
    
    13.5
    %
    
    
    17.4
    %Printing & Publishing
    
    
    37,412
    
    
    
    13.9
    %
    
    
    15.1
    %
    
    
    37,864
    
    
    
    11.8
    %
    
    
    15.2
    %Electronics
    
    
    25,121
    
    
    
    9.3
    %
    
    
    10.1
    %
    
    
    27,899
    
    
    
    8.7
    %
    
    
    11.2
    %Retail Stores
    
    
    24,463
    
    
    
    9.1
    %
    
    
    9.8
    %
    
    
    23,669
    
    
    
    7.4
    %
    
    
    9.5
    %Mining, Steel, Iron &
Non-Precious Metals
    
    
    22,121
    
    
    
    8.2
    %
    
    
    8.9
    %
    
    
    21,926
    
    
    
    6.8
    %
    
    
    8.8
    %Chemicals, Plastics & Rubber
    
    
    15,471
    
    
    
    5.7
    %
    
    
    6.2
    %
    
    
    15,884
    
    
    
    4.9
    %
    
    
    6.4
    %Buildings & Real Estate
    
    
    12,624
    
    
    
    4.7
    %
    
    
    5.1
    %
    
    
    12,882
    
    
    
    4.0
    %
    
    
    5.2
    %Home & Office Furnishings
    
    
    10,844
    
    
    
    4.0
    %
    
    
    4.4
    %
    
    
    16,744
    
    
    
    5.2
    %
    
    
    6.7
    %Machinery
    
    
    8,971
    
    
    
    3.3
    %
    
    
    3.6
    %
    
    
    9,202
    
    
    
    2.9
    %
    
    
    3.7
    %Personal & Non-durable
Consumer Products
    
    
    8,853
    
    
    
    3.3
    %
    
    
    3.6
    %
    
    
    8,714
    
    
    
    2.7
    %
    
    
    3.5
    %Farming & Agriculture
    
    
    8,576
    
    
    
    3.2
    %
    
    
    3.5
    %
    
    
    9,309
    
    
    
    2.9
    %
    
    
    3.7
    %Automobile
    
    
    8,325
    
    
    
    3.1
    %
    
    
    3.4
    %
    
    
    7,999
    
    
    
    2.5
    %
    
    
    3.2
    %Leisure, Amusement, Movies &
Entertainment
    
    
    4,445
    
    
    
    1.6
    %
    
    
    1.8
    %
    
    
    5,091
    
    
    
    1.6
    %
    
    
    2.0
    %Diversified/Conglomerate
Manufacturing
    
    
    1,895
    
    
    
    0.7
    %
    
    
    0.8
    %
    
    
    1,236
    
    
    
    0.4
    %
    
    
    0.5
    %Aerospace & Defense
    
    
    400
    
    
    
    0.1
    %
    
    
    0.2
    %
    
    
    1,857
    
    
    
    0.6
    %
    
    
    0.7
    %Diversified Natural Resources,
Precious Metals & Minerals
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13,589
    
    
    
    4.2
    %
    
    
    5.5
    %Cargo Transport
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,427
    
    
    
    1.7
    %
    
    
    2.2
    %Textiles & Leather
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    220
    
    
    
    0.1
    %
    
    
    0.1
    %Total
    
    $
    269,966
    
    
    
    100.0
    %
    
    
    
    
    
    $
    320,969
    
    
    
    100.0
    %
  June 30, 2010
    
    
    September 30, 2009Percentage
    
    
    
    
    
    
    PercentageTotal
    
    
    Net
    
    
    
    
    
    
    Total
    
    
    NetGeographic Region
    
    Fair Value
    
    
    Investments
    
    
    Assets
    
    
    Fair Value
    
    
    Investments
    
    
    AssetsMidwest
    
    $
    146,363
    
    
    
    54.2
    %
    
    
    58.9
    %
    
    $
    172,263
    
    
    
    53.7
    %
    
    
    69.2
    %West
    
    
    60,477
    
    
    
    22.4
    %
    
    
    24.3
    %
    
    
    65,678
    
    
    
    20.5
    %
    
    
    26.4
    %Southeast
    
    
    28,022
    
    
    
    10.4
    %
    
    
    11.3
    %
    
    
    34,708
    
    
    
    10.8
    %
    
    
    13.9
    %Mid-Atlantic
    
    
    14,934
    
    
    
    5.6
    %
    
    
    6.0
    %
    
    
    28,437
    
    
    
    8.8
    %
    
    
    11.4
    %Northeast
    
    
    13,886
    
    
    
    5.1
    %
    
    
    5.6
    %
    
    
    14,170
    
    
    
    4.4
    %
    
    
    5.7
    %U.S. Territory
    
    
    6,284
    
    
    
    2.3
    %
    
    
    2.5
    %
    
    
    5,713
    
    
    
    1.8
    %
    
    
    2.3
    %$
    269,966
    
    
    
    100.0
    %
    
    
    
    
    
    $
    320,969
    
    
    
    100.0
    %
  23




---



##### Table of Contents



Investment Principal Repayments
  AmountFor the remaining three months ending
September 30:
    
    2010
    
    $
    6,394For the fiscal year ending September 30:
    
    2011
    
    
    88,3602012
    
    
    75,5172013
    
    
    123,1732014
    
    
    6,1162015
    
    
    6,851Total Contractual Repayments
    
    
    306,411Investments in equity securities
    
    
    4,159Adjustments to cost basis on debt securities
    
    
    (704
    )Total
    
    $
    309,866
 NOTE 4. RELATED PARTY TRANSACTIONS
 Loans to Employees
   Compensation Expense
  Investment Advisory and Management Agreement
  24




---



##### Table of Contents



Three Months Ended
    
    
    Nine Months EndedJune 30,
    
    
    June 30,
    
    
    June 30,
    
    
    June 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Average total assets subject to base management fee (1)
    
    $
    295,400
    
    
    $
    373,400
    
    
    $
    314,533
    
    
    $
    395,533Multiplied by pro-rated annual base management fee of 2.0%
    
    
    0.5
    %
    
    
    0.5
    %
    
    
    1.5
    %
    
    
    1.5
    %Unadjusted base management fee
    
    
    1,477
    
    
    
    1,867
    
    
    
    4,718
    
    
    
    5,933Reduction for loan servicing fees (2)
    
    
    (819
    )
    
    
    (1,410
    )
    
    
    (2,600
    )
    
    
    (4,559
    )Base management fee (2)
    
    
    658
    
    
    
    457
    
    
    
    2,118
    
    
    
    1,374Credit for fees received by Adviser from the portfolio companies
    
    
    
    
    
    
    (2
    )
    
    
    
    
    
    
    (87
    )Fee reduction for the voluntary, irrevocable waiver of 2.0% fee
on senior syndicated loans to 0.5% per annum (3)
    
    
    (6
    )
    
    
    (51
    )
    
    
    (19
    )
    
    
    (254
    )Net base management fee
    
    $
    652
    
    
    $
    404
    
    
    $
    2,099
    
    
    $
    1,033Incentive fee
    
    $
    153
    
    
    $
    1,060
    
    
    $
    1,601
    
    
    $
    3,326Credit from voluntary, irrevocable waiver issued by Advisers
board of directors
    
    
    (80
    )
    
    
    (1,060
    )
    
    
    (101
    )
    
    
    (3,326
    )Net incentive fee
    
    $
    73
    
    
    $
    
    
    
    $
    1,500
    
    
    $
    Credit for fees received by Adviser from the portfolio companies
    
    $
    
    
    
    $
    (2
    )
    
    $
    
    
    
    $
    (87
    )Fee reduction for the voluntary, irrevocable waiver of 2.0% fee
on senior syndicated loans to 0.5% per annum
    
    
    (6
    )
    
    
    (51
    )
    
    
    (19
    )
    
    
    (254
    )Incentive fee credit
    
    
    (80
    )
    
    
    (1,060
    )
    
    
    (101
    )
    
    
    (3,326
    )Credit to base management and incentive fees from Adviser
    
    $
    (86
    )
    
    $
    (1,113
    )
    
    $
    (120
    )
    
    $
    (3,667
    )
 
 (1)
    
    Average total assets subject to the base management fee is defined as total assets, including
investments made with proceeds of borrowings, less any uninvested cash and cash equivalents
resulting from borrowings, valued at the end of the four most recently completed quarters and
appropriately adjusted for any share issuances or repurchases during the current year.(2)
    
    Reflected as a line item on the condensed consolidated statement of operations located
elsewhere in this report.(3)
    
    The board of our Adviser voluntarily, irrevocably and unconditionally waived, for the three
and nine months ended June 30, 2010 and 2009, the annual 2.0% base management fee to 0.5% for
senior syndicated loan participations. Fees waived cannot be recouped by the Adviser in the
future. Loan Servicing and Portfolio Company Fees
  Administration Agreement
  Related Party Fees Due
  As of June 30,
    
    
    As of September 30,2010
    
    
    2009Unpaid base management fee to Adviser
    
    $
    652
    
    
    $
    617Unpaid incentive fee to Adviser
    
    
    1,499
    
    
    
    Unpaid loan servicing fees to Adviser
    
    
    180
    
    
    
    217Total Fees due to Adviser
    
    $
    2,331
    
    
    $
    834Unpaid administration fee due to Administrator
    
    
    186
    
    
    
    216Total related party fees due
    
    $
    2,517
    
    
    $
    1,050
 25




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##### Table of Contents



NOTE 5. LINE OF CREDIT
    Fair Value
  As of June 30, 2010Total Fair ValueReported in CondensedConsolidated Statement ofLevel 1
    
    
    Level 2
    
    
    Level 3
    
    
    Assets and LiabilitiesBorrowings under Line of Credit
    
    $
    
    
    
    $
    
    
    
    $
    30,656
    
    
    $
    30,656Total
    
    $
    
    
    
    $
    
    
    
    $
    30,656
    
    
    $
    30,656
 As of September 30, 2009Total Fair ValueReported in CondensedConsolidated Statement ofLevel 1
    
    
    Level 2
    
    
    Level 3
    
    
    Assets and LiabilitiesBorrowings under Line of Credit
    
    $
    
    
    
    $
    
    
    
    $
    83,350
    
    
    $
    83,350Total
    
    $
    
    
    
    $
    
    
    
    $
    83,350
    
    
    $
    83,350
  26




---



##### Table of Contents



Fair value measurements using unobservable data inputs (Level 3)
 Borrowingsunder line ofcreditThree months ended June 30, 2010:Fair value at March 31, 2010
    
    $
    53,000Unrealized depreciation (a)
    
    
    1,756Borrowings
    
    
    2,900Repayments
    
    
    (27,000
    )Transfers into/out of Level 3
    
    
    Fair value as of June 30, 2010
    
    $
    30,656Nine months ended June 30, 2010:Fair value at September 30, 2009
    
    $
    83,350Unrealized depreciation (a)
    
    
    1,406Borrowings
    
    
    8,400Repayments
    
    
    (62,500
    )Transfers into/out of Level 3
    
    
    Fair value as of June 30, 2010
    
    $
    30,656
 Borrowingsunder line ofcreditThree months ended June 30, 2009:Fair value at March 31, 2009 (b)
    
    $
    153,370Unrealized depreciation
    
    
    Borrowings
    
    
    7,500Repayments
    
    
    (69,170
    )Transfers into/out of Level 3
    
    
    Fair value as of June 30, 2009
    
    $
    91,700Nine months ended June 30, 2009:Fair value at September 30, 2008 (b)
    
    $
    151,030Unrealized depreciation
    
    
    Borrowings
    
    
    46,800Repayments
    
    
    (106,130
    )Transfers into/out of Level 3
    
    
    Fair value as of June 30, 2009
    
    $
    91,700
 
 (a)
    
    Included in unrealized depreciation on borrowings under line of credit on the accompanying
condensed consolidated statements of operations for the three and nine months ended June 30,
2010.(b)
    
    ASC 825 was not adopted until the quarter ended June 30, 2009; therefore, the Credit Facility
is shown at its principal balance outstanding at September 30, 2008 and March 31, 2009 in the
table above.  NOTE 6. COMMON STOCK TRANSACTIONS
   27




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##### Table of Contents



Shares
    
    
    Total ValueBalance at September 30, 2009
    
    
    21,087,574
    
    
    $
    328,224Conversion of recourse to non-recourse loans (1)
    
    
    
    
    
    
    (420
    )Retirement of employee loan shares (2)
    
    
    (48,332
    )
    
    
    Shelf offering costs
    
    
    
    
    
    
    (28
    )Balance at June 30, 2010
    
    
    21,039,242
    
    
    $
    327,776
 
 (1)
    
    During the nine months ended June 30, 2010, the employee stock option loans of two former
employees of the Adviser were converted from recourse to non-recourse loans. The conversions
were non-cash transactions and were accounted for as repurchases of the shares previously
received by the employees of the Adviser upon exercise of the stock options in exchange for
the non-recourse notes. The repurchases were accounted for as treasury stock transactions at
the fair value of the shares, which totaled $420.(2)
    
    During the nine months ended June 30, 2010, subsequent to the conversion of the stock option
loans of two former employees of the Adviser from recourse to non-recourse, the loans came due
when the underlying market value for the collateral reached the outstanding loan amount. As
such, and consistent with the loan agreements, the shares pledged as collateral were retired
in March 2010. Since these shares were already accounted for during the conversion to
non-recourse above, these became non-cash events that did not require journal entries to the
financial statements. However, they resulted in a reduction of the number of shares of common
stock outstanding.  OutstandingNumber of
    
    
    Strike Price of
    
    
    Amount of
    
    
    Balance of
    
    
    
    
    InterestIssue
    
    Options
    
    
    Options
    
    
    Promissory Note
    
    
    Employee Loans
    
    
    Maturity
    
    RateDate
    
    Exercised
    
    
    Exercised
    
    
    Issued to Employees
    
    
    at 6/30/10
    
    
    Date
    
    on NoteAug-01
    
    
    93,334
    
    
    $
    15.00
    
    
    $
    1,400
    
    
    $
    1,400
    
    
    Aug-10
    
    
    4.90
    %Aug-01
    
    
    18,334
    
    
    
    15.00
    
    
    
    275
    
    
    
    255
    
    
    Aug-10
    
    
    4.90
    %Sep-04
    
    
    13,332
    
    
    
    15.00
    
    
    
    200
    
    
    
    198
    
    
    Sep-13
    
    
    5.00
    %Aug-01
    
    
    393,334
    
    
    
    15.00
    
    
    
    5,900
    
    
    
    5,900
    
    
    Aug-10
    
    
    4.90
    %Aug-01
    
    
    18,334
    
    
    
    15.00
    
    
    
    275
    
    
    
    275
    
    
    Aug-11
    
    
    4.90
    %Jul-06
    
    
    13,332
    
    
    
    15.00
    
    
    
    200
    
    
    
    200
    
    
    Jul-15
    
    
    8.26
    %Jul-06
    
    
    18,334
    
    
    
    15.00
    
    
    
    275
    
    
    
    275
    
    
    Jul-15
    
    
    8.26
    %568,334
    
    
    
    
    
    
    $
    8,525
    
    
    $
    8,503
  NOTE 7. NET (DECREASE) INCREASE IN NET ASSETS RESULTING FROM OPERATIONS PER COMMON SHARE
  Three months ended June 30,
    
    
    Nine months ended June 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Numerator for basic and diluted net
(decrease) increase in net assets
resulting from operations per share
    
    $
    (1,748
    )
    
    $
    (788
    )
    
    $
    12,557
    
    
    $
    389Denominator for basic and diluted shares
    
    
    21,039,242
    
    
    
    21,087,574
    
    
    
    21,067,465
    
    
    
    21,087,574Basic and diluted net (decrease)
increase in net assets resulting from
operations per common share
    
    $
    (0.08
    )
    
    $
    (0.04
    )
    
    $
    0.60
    
    
    $
    0.02
 28




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##### Table of Contents



NOTE 8. DISTRIBUTIONS
  DistributionFiscal Year
    
    Record Date
    
    Payment Date
    
    per Share2010
    
    October 22, 2009
    
    October 30, 2009
    
    $
    0.07November 19, 2009
    
    November 30, 2009
    
    $
    0.07December 22, 2009
    
    December 31, 2009
    
    $
    0.07January 21, 2010
    
    January 29, 2010
    
    $
    0.07February 18, 2010
    
    February 26, 2010
    
    $
    0.07March 23, 2010
    
    March 31, 2010
    
    $
    0.07April 22, 2010
    
    April 30, 2010
    
    $
    0.07May 20, 2010
    
    May 28, 2010
    
    $
    0.07June 22, 2010
    
    June 30, 2010
    
    $
    0.07Total
    
    $
    0.632009
    
    October 23, 2008
    
    October 31, 2008
    
    $
    0.14November 19, 2008
    
    November 28, 2008
    
    $
    0.14December 22, 2008
    
    December 31, 2008
    
    $
    0.14January 22, 2009
    
    January 31, 2009
    
    $
    0.14February 19, 2009
    
    February 27, 2009
    
    $
    0.14March 23, 2009
    
    March 30, 2009
    
    $
    0.14April 27, 2009
    
    May 8, 2009
    
    $
    0.07May 29, 2009
    
    June 11, 2009
    
    $
    0.07June 22, 2009
    
    June 30, 2009
    
    $
    0.07Total
    
    $
    1.05
   NOTE 9. COMMITMENTS AND CONTINGENCIES
   29




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##### Table of Contents



NOTE 10. FINANCIAL HIGHLIGHTS
 Three Months Ended June 30,
    
    
    Nine Months Ended June 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Per Share Data (1)Net asset value at beginning of period
    
    $
    12.10
    
    
    $
    12.10
    
    
    $
    11.81
    
    
    $
    12.89Income from investment operations:Net investment income (2)
    
    
    0.21
    
    
    
    0.26
    
    
    
    0.63
    
    
    
    0.80Net realized loss on investments (2)
    
    
    (0.14
    )
    
    
    (0.50
    )
    
    
    (0.14
    )
    
    
    (0.68
    )Realized loss on settlement of derivative (2)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (0.01
    )Unrealized appreciation on derivative (2)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.01Net unrealized (depreciation) appreciation on investments (2)
    
    
    (0.07
    )
    
    
    0.21
    
    
    
    0.17
    
    
    
    (0.10
    )Net unrealized depreciation on borrowings under line of credit (2)
    
    
    (0.08
    )
    
    
    
    
    
    
    (0.07
    )
    
    
    Total from investment operations
    
    
    (0.08
    )
    
    
    (0.03
    )
    
    
    0.59
    
    
    
    0.02Distributions to stockholders (3)
    
    
    (0.21
    )
    
    
    (0.21
    )
    
    
    (0.63
    )
    
    
    (1.05
    )Conversion of former employee stock option loans from recourse to non-recourse
    
    
    
    
    
    
    
    
    
    
    (0.02
    )
    
    
    Reclassification of principal on employee note
    
    
    
    
    
    
    
    
    
    
    0.02
    
    
    
    Anti-dilutive effect from retirement of employee loan shares
    
    
    
    
    
    
    
    
    
    
    0.04
    
    
    
    Net asset value at end of period
    
    $
    11.81
    
    
    $
    11.86
    
    
    $
    11.81
    
    
    $
    11.86Per share market value at beginning of period
    
    $
    11.80
    
    
    $
    6.26
    
    
    $
    8.93
    
    
    $
    15.24Per share market value at end of period
    
    
    10.81
    
    
    $
    7.53
    
    
    
    10.81
    
    
    $
    7.53Total return (4)(5)
    
    
    (6.74
    )%
    
    
    23.88
    %
    
    
    29.42
    %
    
    
    (43.15
    )%Shares outstanding at end of period
    
    
    21,039,242
    
    
    
    21,087,574
    
    
    
    21,039,242
    
    
    
    21,087,574Statement of Assets and Liabilities Data:Net assets at end of period
    
    $
    248,429
    
    
    $
    249,996
    
    
    $
    248,429
    
    
    $
    249,996Average net assets (6)
    
    $
    251,463
    
    
    $
    253,130
    
    
    $
    250,483
    
    
    $
    254,886Senior Securities Data:Borrowings under line of credit
    
    $
    30,656
    
    
    $
    91,700
    
    
    $
    30,656
    
    
    $
    91,700Asset coverage ratio (7)(8)
    
    
    893
    %
    
    
    371
    %
    
    
    893
    %
    
    
    371
    %Asset coverage per unit (8)
    
    $
    8,931
    
    
    $
    3,713
    
    
    $
    8,931
    
    
    $
    3,713Ratios/Supplemental Data:Ratio of expenses to average net assets-annualized (9)
    
    
    5.77
    %
    
    
    9.92
    %
    
    
    7.65
    %
    
    
    10.53
    %Ratio of net expenses to average net assets-annualized (10)
    
    
    5.63
    %
    
    
    8.16
    %
    
    
    7.59
    %
    
    
    8.61
    %Ratio of net investment income to average net assets-annualized
    
    
    7.04
    %
    
    
    8.59
    %
    
    
    7.10
    %
    
    
    8.83
    %
 
 (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)
    
    Total return equals the change in the ending market value of the Companys common stock from
the beginning of the period taking into account distributions reinvested in accordance with
the terms of the Companys dividend reinvestment plan. Total return does not take into account
distributions that may be characterized as a return of capital. For further information on the
estimated character of the Companys distributions please refer to Note 8.(5)
    
    Amounts were not annualized.(6)
    
    Average net assets are computed 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 and guaranty commitments.(8)
    
    Asset coverage ratio 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 (including interest payable
and guarantees). Asset coverage per unit is the asset coverage ratio expressed in terms of
dollar amounts per one thousand dollars of indebtedness.(9)
    
    Ratio of expenses to average net assets is computed using expenses before credits from
Adviser to the base management and incentive fees and including income tax expense.(10)
    
    Ratio of net expenses to average net assets is computed using total expenses net of credits
from Adviser to the base management and incentive fees and including income tax expense. 30




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##### Table of Contents



NOTE 11. SUBSEQUENT EVENTS
 Distributions
  Distribution perRecord Date
    
    Payment Date
    
    ShareJuly 22, 2010
    
    July 30, 2010
    
    $
    0.07August 23, 2010
    
    August 31, 2010
    
    $
    0.07September 22, 2010
    
    September 30, 2010
    
    $
    0.07
 Investment Activity
  Employee loans
  Renewal of Advisory Agreement
  31




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##### Table of Contents



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(dollar amounts in thousands, except per share data or unless 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 financial condition. In some cases, you can identify forward-looking statements by
terminology such as estimate, 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 or comparable terminology. These
forward-looking statements involve known and unknown risks, uncertainties and other factors that
may cause our actual results, levels of activity, performance or achievements to be materially
different from any future results, levels of activity, performance or achievements expressed or
implied by such forward-looking statements. We caution readers not to place undue reliance on any
such forward-looking statements. We undertake no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future events or otherwise,
after the date of this Form 10-Q
 The following analysis of our financial condition and results of operations should be read in
conjunction with our condensed consolidated financial statements and the notes thereto contained
elsewhere in this report and our annual report on Form 10-K for the fiscal year ended September 30,
2009.
 OVERVIEW
 General
   Business Environment
   32




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##### Table of Contents



Syndicated Loan Valuations
  Investment Highlights
 Purchases:
 Repayments:
 Sales:
  33




---



##### Table of Contents



Financing Highlights
    Registration Statement
   34




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##### Table of Contents



RESULTS OF OPERATIONS
 Comparison of the Three Months Ended June 30, 2010 to the Three Months Ended June 30, 2009
 A comparison of our operating results for the three months ended June 30, 2010 and June 30,
2009 is shown below:
 For the three months ended June 30,2010
    
    
    2009
    
    
    $ Change
    
    
    % ChangeINVESTMENT INCOMEInterest income  Non-Control/Non-Affiliate investments
    
    $
    7,342
    
    
    $
    9,889
    
    
    $
    (2,547
    )
    
    
    (25.8
    )%Interest income  Control investments
    
    
    375
    
    
    
    591
    
    
    
    (216
    )
    
    
    (36.5
    )%Interest income  notes receivable from employees
    
    
    108
    
    
    
    118
    
    
    
    (10
    )
    
    
    (8.5
    )%Prepayment fees and other income
    
    
    144
    
    
    
    
    
    
    
    144
    
    
    
    Total investment income
    
    
    7,969
    
    
    
    10,598
    
    
    
    (2,629
    )
    
    
    (24.8
    )%EXPENSESLoan servicing fee
    
    
    819
    
    
    
    1,410
    
    
    
    (591
    )
    
    
    (41.9
    )%Base management fee
    
    
    658
    
    
    
    457
    
    
    
    201
    
    
    
    44.0
    %Incentive fee
    
    
    153
    
    
    
    1,060
    
    
    
    (907
    )
    
    
    (85.6
    )%Administration fee
    
    
    186
    
    
    
    218
    
    
    
    (32
    )
    
    
    (14.7
    )%Interest expense
    
    
    891
    
    
    
    1,811
    
    
    
    (920
    )
    
    
    (50.8
    )%Amortization of deferred financing fees
    
    
    240
    
    
    
    808
    
    
    
    (568
    )
    
    
    (70.3
    )%Professional fees
    
    
    501
    
    
    
    266
    
    
    
    235
    
    
    
    88.3
    %Other expenses
    
    
    178
    
    
    
    246
    
    
    
    (68
    )
    
    
    (27.6
    )%Expenses before credit from Adviser
    
    
    3,626
    
    
    
    6,276
    
    
    
    (2,650
    )
    
    
    (42.2
    )%Credit to base management and incentive fees from Adviser
    
    
    (86
    )
    
    
    (1,113
    )
    
    
    1,027
    
    
    
    (92.3
    )%Total expenses net of credit to base management and incentive fees
    
    
    3,540
    
    
    
    5,163
    
    
    
    (1,623
    )
    
    
    (31.4
    )%NET INVESTMENT INCOME
    
    
    4,429
    
    
    
    5,435
    
    
    
    (1,006
    )
    
    
    (18.5
    )%REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS,DERIVATIVE AND BORROWINGS UNDER LINE OF CREDIT:Net realized loss on investments
    
    
    (2,865
    )
    
    
    (10,594
    )
    
    
    7,729
    
    
    
    (73.0
    )%Net unrealized (depreciation) appreciation on investments
    
    
    (1,556
    )
    
    
    4,371
    
    
    
    (5,927
    )
    
    
    (135.6
    )%Net unrealized appreciation on borrowings under line of credit
    
    
    (1,756
    )
    
    
    
    
    
    
    (1,756
    )
    
    
    Net loss on investments, derivative and borrowings
under line of credit
    
    
    (6,177
    )
    
    
    (6,223
    )
    
    
    46
    
    
    
    (0.7
    )%NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS
    
    $
    (1,748
    )
    
    $
    (788
    )
    
    $
    (960
    )
    
    
    121.8
    %
 Investment Income
   35




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##### Table of Contents



Three months ended June 30, 2010
    
    
    Three months ended June 30, 2009Interest
    
    
    % of
    
    
    
    
    Interest
    
    
    % ofCompany
    
    Income
    
    
    Total
    
    
    Company
    
    Income
    
    
    TotalSunshine Media
    
    $
    829
    
    
    
    10.7
    %
    
    Sunshine Media
    
    $
    839
    
    
    
    8.0
    %Reliable Biopharma
    
    
    733
    
    
    
    9.5
    %
    
    Reliable Biopharma
    
    
    768
    
    
    
    7.3
    %Northern Contours
    
    
    590
    
    
    
    7.7
    %
    
    Westlake Hardware
    
    
    600
    
    
    
    5.7
    %Westlake Hardware
    
    
    585
    
    
    
    7.6
    %
    
    Clinton
    
    
    470
    
    
    
    4.5
    %Clinton
    
    
    520
    
    
    
    6.7
    %
    
    VantaCore
    
    
    418
    
    
    
    4.0
    %Subtotal
    
    $
    3,257
    
    
    
    42.2
    %
    
    Subtotal
    
    $
    3,095
    
    
    
    29.5
    %Other companies
    
    
    4,460
    
    
    
    57.8
    %
    
    Other companies
    
    
    7,385
    
    
    
    70.5
    %Total interest income
    
    $
    7,717
    
    
    
    100.0
    %
    
    Total interest income
    
    $
    10,480
    
    
    
    100.0
    %
   Operating Expenses
    Three months endedJune 30, 2010
    
    
    June 30, 2009Loan servicing fee
    
    $
    819
    
    
    $
    1,410Base management fee
    
    
    658
    
    
    
    457Gross management fee
    
    $
    1,477
    
    
    $
    1,867
 Investment
Advisory and Management Agreement
 36




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##### Table of Contents



Three months endedJune 30, 2010
    
    
    June 30, 2009Base management fee (1)
    
    $
    658
    
    
    $
    457Credit for fees received by Adviser from the portfolio companies
    
    
    
    
    
    
    (2
    )Fee reduction for the voluntary, irrevocable waiver of 2.0% fee
on senior syndicated loans to 0.5% per annum (2)
    
    
    (6
    )
    
    
    (51
    )Net base management fee
    
    $
    652
    
    
    $
    404
 
 (1)
    
    Base management fee is net of loan servicing fees per the terms of the Advisory Agreement.(2)
    
    The board of our Adviser voluntarily and irrevocably waived, for the three months ended June
30, 2010 and 2009, the annual 2.0% base management fee to 0.5% for senior syndicated loan
participations. Fees waived cannot be recouped by the Adviser in the future.  Three months endedJune 30, 2010
    
    
    June 30, 2009Incentive fee
    
    $
    153
    
    
    $
    1,060Credit from voluntary, irrevocable waiver issued by Advisers board of directors
    
    
    (80
    )
    
    
    (1,060
    )Net incentive fee
    
    $
    73
    
    
    $
    
 Investment Advisory and Management Agreement
    Net Realized Loss on Investments
  Net Unrealized (Depreciation) Appreciation on Investments
  37




---



##### Table of Contents



 Control investments
    
    $
    (4,373
    ) Non-Control/Non-Affiliate investments
    
    
    (48
    ) Reversal of previously recorded unrealized depreciation upon realization of losses
    
    
    2,865Total
    
    $
    (1,556
    )
  Net Unrealized Appreciation on Borrowings under Line of Credit
  Net Decrease in Net Assets Resulting from Operations
  38




---



##### Table of Contents



Comparison of the Nine Months Ended June 30, 2010 to the Nine Months Ended June 30, 2009
 A comparison of our operating results for the nine months ended June 30, 2010 and June 30, 2009
is shown below:
 For the nine months ended June 30,2010
    
    
    2009
    
    
    $ Change
    
    
    % ChangeINVESTMENT INCOMEInterest income  Non-Control/Non-Affiliate investments
    
    $
    24,772
    
    
    $
    31,869
    
    
    $
    (7,097
    )
    
    
    (22.3
    )%Interest income  Control investments
    
    
    1,852
    
    
    
    1,103
    
    
    
    749
    
    
    
    67.9
    %Interest income  cash
    
    
    1
    
    
    
    11
    
    
    
    (10
    )
    
    
    (90.9
    )%Interest income  notes receivable from employees
    
    
    330
    
    
    
    352
    
    
    
    (22
    )
    
    
    (6.3
    )%Prepayment fees and other income
    
    
    632
    
    
    
    
    
    
    
    632
    
    
    
    Total investment income
    
    
    27,587
    
    
    
    33,335
    
    
    
    (5,748
    )
    
    
    (17.2
    %)EXPENSESLoan servicing fee
    
    
    2,600
    
    
    
    4,559
    
    
    
    (1,959
    )
    
    
    (43.0
    )%Base management fee
    
    
    2,118
    
    
    
    1,374
    
    
    
    744
    
    
    
    54.1
    %Incentive fee
    
    
    1,601
    
    
    
    3,326
    
    
    
    (1,725
    )
    
    
    (51.9
    )%Administration fee
    
    
    540
    
    
    
    656
    
    
    
    (116
    )
    
    
    (17.7
    )%Interest expense
    
    
    3,562
    
    
    
    6,288
    
    
    
    (2,726
    )
    
    
    (43.4
    )%Amortization of deferred financing fees
    
    
    1,182
    
    
    
    2,253
    
    
    
    (1,071
    )
    
    
    (47.5
    )%Professional fees
    
    
    1,632
    
    
    
    784
    
    
    
    848
    
    
    
    108.2
    %Compensation expense
    
    
    245
    
    
    
    
    
    
    
    245
    
    
    
    Other expenses
    
    
    897
    
    
    
    890
    
    
    
    7
    
    
    
    0.8
    %Expenses before credit from Adviser
    
    
    14,377
    
    
    
    20,130
    
    
    
    (5,753
    )
    
    
    (28.6
    )%Credit to base management and incentive fees from Adviser
    
    
    (120
    )
    
    
    (3,667
    )
    
    
    3,547
    
    
    
    (96.7
    )%Total expenses net of credit to base management and incentive fees
    
    
    14,257
    
    
    
    16,463
    
    
    
    (2,206
    )
    
    
    (13.4
    )%NET INVESTMENT INCOME
    
    
    13,330
    
    
    
    16,872
    
    
    
    (3,542
    )
    
    
    (21.0
    )%REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS,DERIVATIVE AND BORROWINGS UNDER LINE OF CREDIT:Net realized loss on investments
    
    
    (2,893
    )
    
    
    (14,325
    )
    
    
    11,432
    
    
    
    (79.8
    )%Realized loss on settlement of derivative
    
    
    
    
    
    
    (304
    )
    
    
    304
    
    
    
    (100.0
    )%Net unrealized appreciation on derivative
    
    
    
    
    
    
    304
    
    
    
    (304
    )
    
    
    (100.0
    )%Net unrealized appreciation (depreciation) on investments
    
    
    3,525
    
    
    
    (2,158
    )
    
    
    5,683
    
    
    
    (263.3
    )%Net unrealized depreciation on borrowings under line of credit
    
    
    (1,405
    )
    
    
    
    
    
    
    (1,405
    )
    
    
    Net loss on investments, derivative and borrowings
under line of credit
    
    
    (773
    )
    
    
    (16,483
    )
    
    
    15,710
    
    
    
    (95.3
    )%NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS
    
    $
    12,557
    
    
    $
    389
    
    
    $
    12,168
    
    
    
    3,128.0
    %
 Investment Income
  39




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##### Table of Contents



Nine months ended June 30, 2010
    
    
    Nine months ended June 30, 2009Interest
    
    
    % of
    
    
    
    
    Interest
    
    
    % ofCompany
    
    Income
    
    
    Total
    
    
    Company
    
    Income
    
    
    TotalSunshine Media
    
    $
    2,367
    
    
    
    8.9
    %
    
    Sunshine Media
    
    $
    2,506
    
    
    
    7.6
    %Reliable Biopharma
    
    
    2,230
    
    
    
    8.4
    %
    
    Reliable Biopharma
    
    
    2,298
    
    
    
    7.0
    %Westlake Hardware
    
    
    2,166
    
    
    
    8.1
    %
    
    Westlake Hardware
    
    
    1,810
    
    
    
    5.4
    %Clinton
    
    
    1,556
    
    
    
    5.8
    %
    
    Clinton
    
    
    1,411
    
    
    
    4.3
    %Visual Edge
    
    
    1,246
    
    
    
    4.7
    %
    
    VantaCore
    
    
    1,276
    
    
    
    3.9
    %Subtotal
    
    
    9,565
    
    
    
    35.9
    %
    
    Subtotal
    
    
    9,301
    
    
    
    28.2
    %Other companies
    
    
    17,059
    
    
    
    64.1
    %
    
    Other companies
    
    
    23,671
    
    
    
    71.8
    %Total interest income
    
    $
    26,624
    
    
    
    100.0
    %
    
    Total interest income
    
    
    32,972
    
    
    
    100.0
    %
    Operating Expenses
    40




---



##### Table of Contents



Nine months endedJune 30, 2010
    
    
    June 30, 2009Loan servicing fee
    
    $
    2,600
    
    
    $
    4,559Base management fee
    
    
    2,118
    
    
    
    1,374Gross management fee
    
    $
    4,718
    
    
    $
    5,933
  Nine months endedJune 30, 2010
    
    
    June 30, 2009Base management fee (1)
    
    $
    2,118
    
    
    $
    1,374Credit for fees received by Adviser from the portfolio companies
    
    
    
    
    
    
    (87
    )Fee reduction for the voluntary, irrevocable waiver of 2.0% fee
on senior syndicated loans to 0.5% per annum (2)
    
    
    (19
    )
    
    
    (254
    )Net base management fee
    
    $
    2,099
    
    
    $
    1,033
 
 (1)
    
    Base management fee is net of loan servicing fees per the terms of the Advisory Agreement.(2)
    
    The board of our Adviser voluntarily and irrevocably waived, for the nine months ended June
30, 2010 and 2009, the annual 2.0% base management fee to 0.5% for senior syndicated loan
participations. Fees waived cannot be recouped by the Adviser in the future.  Nine months endedJune 30, 2010
    
    
    June 30, 2009Incentive fee
    
    $
    1,601
    
    
    $
    3,326Credit from voluntary, irrevocable waiver issued by Advisers board of directors
    
    
    (101
    )
    
    
    (3,326
    )Net incentive fee
    
    $
    1,500
    
    
    $
    
     41




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##### Table of Contents



Net Realized Loss on Investments
  Realized Loss on Settlement of Derivative
  Net Unrealized Appreciation on Derivative
  Net Unrealized Appreciation (Depreciation) on Investments
        Control investments
    
    $
    (5,939
    )      Non-Control/Non-Affiliate investments
    
    
    3,162      Reversal of previously recorded unrealized depreciation upon realization of losses
    
    
    6,302Total
    
    $
    3,525
  Net Unrealized Appreciation on Borrowings under Line of Credit
  Net Increase in Net Assets Resulting from Operations
  42




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##### Table of Contents



LIQUIDITY AND CAPITAL RESOURCES (dollar amounts in thousands, unless otherwise indicated)
 Operating Activities
   Quarter
    
    New
    
    
    Principal
    
    
    Proceeds from
    
    
    Net Gain (Loss) onEnded
    
    Investments (1)
    
    
    Repayments (2)
    
    
    Sales/Exits (3)
    
    
    Sale/ExitJune 30, 2010
    
    $
    2,245
    
    
    $
    18,482
    
    
    $
    
    
    
    $
    (2,865
    )March 31, 2010
    
    
    5,153
    
    
    
    23,065
    
    
    
    337
    
    
    
    892December 31, 2009
    
    
    2,167
    
    
    
    15,404
    
    
    
    2,782
    
    
    
    (920
    )$
    9,565
    
    
    $
    56,951
    
    
    $
    3,119
    
    
    $
    (2,893
    )June 30, 2009
    
    $
    7,582
    
    
    $
    15,439
    
    
    $
    39,750
    
    
    $
    (10,594
    )March 31, 2009
    
    
    8,427
    
    
    
    13,053
    
    
    
    
    
    
    
    (2,000
    )December 31, 2008
    
    
    8,702
    
    
    
    14,927
    
    
    
    2,212
    
    
    
    (1,731
    )$
    24,711
    
    
    $
    43,419
    
    
    $
    41,962
    
    
    $
    (14,325
    )
 (1) New Investments:
 Disbursements toNew Investments
    
    
    Existing PortfolioQuarter Ended
    
    Companies
    
    
    Investments
    
    
    Companies
    
    
    Total DisbursementsJune 30, 2010
    
    
    1
    (a)
    
    $
    400
    
    
    $
    1,845
    
    
    $
    2,245March 31, 2010
    
    
    
    
    
    
    
    
    
    
    5,153
    
    
    
    5,153December 31, 2009
    
    
    1
    (b)
    
    
    180
    
    
    
    1,987
    
    
    
    2,1672
    
    
    $
    580
    
    
    $
    8,985
    
    
    $
    9,565June 30, 2009
    
    
    
    
    
    $
    
    
    
    $
    7,582
    
    
    $
    7,582March 31, 2009
    
    
    
    
    
    
    
    
    
    
    8,427
    
    
    
    8,427December 31, 2008
    
    
    
    
    
    
    
    
    
    
    8,702
    
    
    
    8,702
    
    
    $
    
    
    
    $
    24,711
    
    
    $
    24,711
 
 (a)
    
    FedCap Partners(b)
    
    Northstar Broadband (2) Principal Repayments (including repayment of paid in kind interest previously applied to
principal balance):
 Number of
    
    
    Unscheduled
    
    
    ScheduledCompanies Fully
    
    
    Principal
    
    
    Principal
    
    
    Total Principal
    
    
    Net Gain onQuarter Ended
    
    Exited
    
    
    Repayments (*)
    
    
    Repayments
    
    
    Repayments
    
    
    Sale/Exit (#)June 30, 2010
    
    
    1
    (a)
    
    $
    13,590
    
    
    $
    4,892
    
    
    $
    18,482
    
    
    $
    March 31, 2010
    
    
    4
    (b)
    
    
    18,902
    
    
    
    4,163
    
    
    
    23,065
    
    
    
    1,055December 31, 2009
    
    
    1
    (c)
    
    
    13,054
    
    
    
    2,350
    
    
    
    15,404
    
    
    
    6
    
    
    $
    45,546
    
    
    $
    11,405
    
    
    $
    56,951
    
    
    $
    1,055June 30, 2009
    
    
    1
    (d)
    
    $
    10,449
    
    
    $
    4,990
    
    
    $
    15,439
    
    
    $
    March 31, 2009
    
    
    
    (e)
    
    
    7,813
    
    
    
    5,240
    
    
    
    13,053
    
    
    
    December 31, 2008
    
    
    2
    (f)
    
    
    6,966
    
    
    
    7,961
    
    
    
    14,927
    
    
    
    3
    
    
    $
    25,228
    
    
    $
    18,191
    
    
    $
    43,419
    
    
    $
    
 
 (*)
    
    Includes principal repayments due to excess cash flows, covenant violations, exits,
refinancings, etc.(#)
    
    Net gain on principal repayments of $1,055 plus the net loss on sales/exits of $1,083
(per footnote 3 below) equals net loss of $28, which is included on the condensed
consolidated statement of operations for the nine months ended June 30, 2010.(a)
    
    Full payoff from VantaCore.(b)
    
    Full payoff from ACE Expediters (which resulted in a gain on the warrants), ActivStyle,
CCS and Visual Edge.(c)
    
    Full payoff from Tulsa Welding and partial payoff from BAS Broadcasting senior term
debt (last out tranche).(d)
    
    Full payoff from Multi-Ag media ($1,687), partial payoff from Saunders line of credit
($2,500) and refinancing from ActivStyle ($6,262).(e)
    
    Refinancing from ACE Expediters and Sunburst Media.(f)
    
    Full payoff from Community Media and Country Road. 43




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##### Table of Contents



(3) Proceeds from Sales/Exits:
 Number of
    
    
    
    
    
    
    PositionCompanies Fully
    
    
    Proceeds
    
    
    (Principal)
    
    
    Unamortized
    
    
    Net Loss on ExitQuarter Ended
    
    Exited
    
    
    Received
    
    
    Exited
    
    
    Loan Costs (*)
    
    
    (#)June 30, 2010
    
    
    1
    (a)
    
    $
    
    
    
    $
    (2,865
    )
    
    $
    
    
    
    $
    (2,865
    )March 31, 2010
    
    
    1
    (b)
    
    
    337
    
    
    
    (500
    )
    
    
    
    
    
    
    (163
    )December 31, 2009
    
    
    2
    (c)
    
    
    2,782
    
    
    
    (3,685
    )
    
    
    (17
    )
    
    
    (920
    )4
    
    
    $
    3,119
    
    
    $
    (7,050
    )
    
    $
    (17
    )
    
    $
    (3,948
    )June 30, 2009
    
    
    8
    (d)
    
    $
    39,750
    
    
    $
    (52,295
    )
    
    $
    1,951
    
    
    $
    (10,594
    )March 31, 2009
    
    
    1
    (e)
    
    
    
    
    
    
    (2,000
    )
    
    
    
    
    
    
    (2,000
    )December 31, 2008
    
    
    
    (f)
    
    
    2,212
    
    
    
    (3,950
    )
    
    
    7
    
    
    
    (1,731
    )9
    
    
    $
    41,962
    
    
    $
    (58,245
    )
    
    $
    1,958
    
    
    $
    (14,325
    )
 
 (*)
    
    Includes balance of premiums, discounts and acquisition cost at time of exit.(#)
    
    Net gain on principal repayments of $1,055 (per footnote 2 above) plus the net loss on
sales/exits of $3,948 equals net loss of $2,893, which is included on the condensed
consolidated statement of operations for the nine months ended June 30, 2010.(a)
    
    Write-off of Western Directories line of credit, preferred stock and common stock.(b)
    
    Complete sale of Gold Toe senior subordinated syndicated loan.(c)
    
    Complete sale of Kinetek senior term syndicated loan and Wesco Holdings senior
subordinated syndicated loan.(d)
    
    Full sale of 8 loans (7 syndicated and 1 non-syndicated) and partial sale of CHG, GTM
and Wesco senior syndicated loans.(e)
    
    Write-off of Greatwide Logistics senior subordinated syndicated loan.(f)
    
    Partial sale of Greatwide Logistics senior term syndicated loan.  AmountFor the remaining three months ending
September 30:
    
    2010
    
    $
    6,394For the fiscal year ending September 30:
    
    2011
    
    
    88,3602012
    
    
    75,5172013
    
    
    123,1732014
    
    
    6,1162015
    
    
    6,851Total Contractual Repayments
    
    
    306,411Investments in equity securities
    
    
    4,159Adjustments to cost basis on debt securities
    
    
    (704
    )Total
    
    $
    309,866
 Financing Activities
  Distributions
  Section 19(a) Disclosure
  44




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##### Table of Contents



Month Ended
    
    Ordinary Income
    
    Return of Capital *
    
    Total DistributionApril 30, 2010
    
    $
    0.119
    
    
    $
    (0.049
    )
    
    $
    0.070May 31, 2010
    
    
    0.086
    
    
    
    (0.016
    )
    
    
    0.070June 30, 2010
    
    
    0.028
    
    
    
    0.042
    
    
    
    0.070Because our Board of Directors
declares distributions at the beginning of a quarter, it is
difficult to estimate how much of our monthly distributions, based on GAAP, will come from ordinary
income, capital gains and returns of capital. Subsequent to the quarter ended June 30, 2010, the
following corrections were made to the above listed estimates for that quarter:Month Ended
    
    Ordinary Income
    
    Return of Capital *
    
    Total DistributionApril 30, 2010
    
    $
    0.099
    
    
    $
    (0.029
    )
    
    $
    0.070May 31, 2010
    
    
    0.074
    
    
    
    (0.004
    )
    
    
    0.070June 30, 2010
    
    
    0.038
    
    
    
    0.032
    
    
    
    0.070For distributions declared subsequent to quarter end,
the following estimates, based on GAAP, have been made by our Board of Directors pursuant to Section 19(a) of the 1940 Act:Month Ended
    
    Ordinary Income
    
    Return of Capital *
    
    Total DistributionJuly 31, 2010
    
    $
    0.068
    
    
    $
    0.002
    
    
    $
    0.070August 31, 2010
    
    
    0.069
    
    
    
    0.001
    
    
    
    0.070September 30, 2010
    
    
    0.069
    
    
    
    0.001
    
    
    
    0.070
 
 *
    
    A positive number under Return of Capital indicates a return of capital was estimated whereas
a negative number indicates that a surplus of income above the distribution was estimated. Issuance of Equity
    45




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##### Table of Contents



Revolving Credit Facility
    Fair Value
  As of June 30, 2010Total Fair ValueReported in CondensedConsolidated Statement ofLevel 1
    
    
    Level 2
    
    
    Level 3
    
    
    Assets and LiabilitiesBorrowings under Line of Credit
    
    $
    
    
    
    $
    
    
    
    $
    30,656
    
    
    $
    30,656Total
    
    $
    
    
    
    $
    
    
    
    $
    30,656
    
    
    $
    30,656
 As of September 30, 2009Total Fair ValueReported in CondensedConsolidated Statement ofLevel 1
    
    
    Level 2
    
    
    Level 3
    
    
    Assets and LiabilitiesBorrowings under Line of Credit
    
    $
    
    
    
    $
    
    
    
    $
    83,350
    
    
    $
    83,350Total
    
    $
    
    
    
    $
    
    
    
    $
    83,350
    
    
    $
    83,350
  46




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##### Table of Contents



Fair value measurements using unobservable data inputs (Level 3)
 Borrowingsunder line ofcreditThree months ended June 30, 2010:Fair value at March 31, 2010
    
    $
    53,000Unrealized appreciation (a)
    
    
    1,756Borrowings
    
    
    2,900Repayments
    
    
    (27,000
    )Transfers into/out of Level 3
    
    
    Fair value as of June 30, 2010
    
    $
    30,656Nine months ended June 30, 2010:Fair value at September 30, 2009
    
    $
    83,350Unrealized appreciation (a)
    
    
    1,406Borrowings
    
    
    8,400Repayments
    
    
    (62,500
    )Transfers into/out of Level 3
    
    
    Fair value as of June 30, 2010
    
    $
    30,656
 Borrowingsunder line ofcreditThree months ended June 30, 2009:Fair value at March 31, 2009 (b)
    
    $
    153,370Unrealized depreciation
    
    
    Borrowings
    
    
    7,500Repayments
    
    
    (69,170
    )Transfers into/out of Level 3
    
    
    Fair value as of June 30, 2009
    
    $
    91,700Nine months ended June 30, 2009:Fair value at September 30, 2008 (b)
    
    $
    151,030Unrealized depreciation
    
    
    Borrowings
    
    
    46,800Repayments
    
    
    (106,130
    )Transfers into/out of Level 3
    
    
    Fair value
as of June 30, 2009
    
    $
    91,700
 
 (a)
    
    Included in unrealized depreciation on borrowings under line of credit on the accompanying
condensed consolidated statements of operations for the three and nine months ended June 30,
2010.(b)
    
    ASC 825 was not adopted until the June 30, 2009 quarter; therefore, the Credit Facility is
shown at its principal balance outstanding at September 30, 2008 and March 31, 2009 in the
table above.  Contractual Obligations and Off-Balance Sheet Arrangements
    47




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##### Table of Contents



As of June 30,
    
    As of September 30,2010
    
    2009Unused lines of credit
    
    $
    11,331
    
    
    $
    14,055Guarantees
    
    
    250
    
    
    
    250
  Payments Due by PeriodLess thanContractual Obligations (1)
    
    1 Year
    
    
    1-3 Years
    
    
    4-5 Years
    
    
    After 5 Years
    
    
    TotalLine of credit (2)
    
    
    
    
    
    $
    30,656
    
    
    
    
    
    
    
    
    
    
    $
    30,656
 
 (1)
    
    Excludes the unused commitments to extend credit to our portfolio companies of
$11,331, as discussed above.(2)
    
    Borrowings under the Credit Facility are listed, at fair value, based on the contractual
maturity due to the revolving nature of the facility. Critical Accounting Policies
  Investment Valuation
  General Valuation Policy:
  
    
    Level 1inputs to the valuation methodology are quoted prices (unadjusted) for
identical assets or liabilities in active markets;
    
    Level 2inputs to the valuation methodology include quoted prices for similar
assets and liabilities in active markets, and inputs that are observable for the asset or
liability, either directly or indirectly, for substantially the full term of the financial
instrument. Level 2 inputs are in those markets for which there are few transactions, the
prices are not current, little public information exists or instances where prices vary
substantially over time or among brokered market makers; and
    
    Level 3inputs to the valuation methodology are unobservable and significant
to the fair value measurement. Unobservable inputs are those inputs that reflect our own
assumptions that market participants would use to price the asset or liability based upon
the best available information.
 Investments
  48




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##### Table of Contents




    
    Publicly-traded securities;
    
    Securities for which a limited market exists; and
    
    Securities for which no market exists.
 Valuation Methods:
 Publicly-traded securities:
 Securities for which a limited market exists:
   Securities for which no market exists:
 (1)
    
    Portfolio investments comprised solely of debt securities:Debt securities that are not
publicly traded on an established securities market, or for which a limited market does not
exist (Non-Public Debt Securities), and that are issued by portfolio companies where we have
no equity or equity-like securities, are fair valued in accordance with the terms of the
policy, which utilizes opinions of value submitted to us by Standard & Poors Securities
Evaluations, Inc. (SPSE). We may also submit paid in kind (PIK) interest to SPSE for its
evaluation when it is determined that PIK interest is likely to be received.
 In the case of Non-Public Debt Securities, we have engaged SPSE to submit opinions of value for
our debt securities that are issued by portfolio companies in which we own no equity, or
equity-like securities. SPSEs opinions of value are based on the valuations prepared by our
portfolio management team as described below. We request that SPSE also evaluate and assign
values to success fees when we determine that there is reasonable probability of receiving a
success fee on a given loan. SPSE will only evaluate the debt portion of our investments for
which we specifically request evaluation, and may decline to make requested
 49




---



##### Table of Contents



evaluations for any
reason at its sole discretion. Upon completing our collection of data with respect to the
investments (which may include the information described below under Credit Information,
the risk ratings of the loans described below under Loan Grading and Risk Rating and the factors described hereunder), this valuation data is
forwarded to SPSE for review and analysis. SPSE makes its independent assessment of the data
that we have assembled and assesses its independent data to form an opinion as to what they
consider to be the market values for the securities. With regard to its work, SPSE has issued
the following paragraph:
 SPSE provides evaluated price opinions which are reflective of what SPSE believes the bid
side of the market would be for each loan after careful review and analysis of descriptive,
market and credit information. Each price reflects SPSEs best judgment based upon careful
examination of a variety of market factors. Because of fluctuation in the market and in
other factors beyond its control, SPSE cannot guarantee these evaluations. The evaluations
reflect the market prices, or estimates thereof, on the date specified. The prices are
based on comparable market prices for similar securities. Market information has been
obtained from reputable secondary market sources. Although these sources are considered
reliable, SPSE cannot guarantee their accuracy.
 SPSE opinions of value of our debt securities that are issued by portfolio companies where we
have no equity or equity-like securities are submitted to our Board of Directors along with our
Advisers supplemental assessment and recommendation regarding valuation of each of these
investments. Our Adviser generally accepts the opinion of value given by SPSE, however, in
certain limited circumstances, such as when our Adviser may learn new information regarding an
investment between the time of submission to SPSE and the date of our Board of Directors
assessment our Advisers conclusions as to value may differ from the opinion of value delivered
by SPSE. Our Board of Directors then reviews whether our Adviser has followed its established
procedures for determinations of fair value, and votes to accept or reject the recommended
valuation of our investment portfolio. Our Adviser and our management recommended, and our Board
of Directors voted to accept, the opinions of value delivered by SPSE on the loans in our
portfolio as denoted on the Schedule of Investments included in our accompanying condensed
consolidated financial statements.
 Because there is a delay between when we close an investment and when the investment can be
evaluated by SPSE, new loans are not valued immediately by SPSE; rather, management makes its
own determination about the value of these investments in accordance with our valuation policy
using the methods described herein.
 (2)
    
    Portfolio investments in controlled companies comprised of a bundle of investments, which can
include debt and equity securities:The fair value of these investments is determined based on
the total enterprise value (TEV) of the portfolio company, or issuer, utilizing a liquidity
waterfall approach under ASC 820. For Non-Public Debt Securities and equity or equity-like
securities (e.g. preferred equity, equity, or other equity-like securities) that are purchased
together as part of a package, where we have control or could gain control through an option
or warrant security; both the debt and equity securities of the portfolio investment would
exit in the mergers and acquisitions market as the principal market, generally through a sale
or recapitalization of the portfolio company. In accordance with ASC 820, we apply the in-use
premise of value which assumes the debt and equity securities are sold together. Under this
liquidity waterfall approach, we continue to use the enterprise value methodology utilizing a
liquidity waterfall approach to determine the fair value of these investments under ASC 820 if
we have the ability to initiate a sale of a portfolio company as of the measurement date.
Under this approach, we first calculate the TEV of the issuer by incorporating some or all of
the following factors:
 
    
    the issuers ability to make payments;
    
    the earnings of the issuer;
    
    recent sales to third parties of similar securities;
    
    the comparison to publicly traded securities; and
    
    DCF or other pertinent factors.
 In gathering the sales to third parties of similar securities, we may reference industry
statistics and use outside experts. Once we have estimated the TEV of the issuer, we subtract
the value of all the debt securities of the issuer; which are valued at the contractual
principal balance. Fair values of these debt securities are discounted for any shortfall of TEV
over the total debt outstanding for the issuer. Once the values for all outstanding senior
securities (which include the debt securities) have been subtracted from the TEV of the issuer,
the remaining amount, if any, is used to determine the value of the issuers equity or
equity-like securities. If, in our Advisers judgment, the liquidity waterfall approach does
not accurately reflect the value of the debt component, our Adviser may recommend that we use a
valuation by SPSE or, if that is unavailable, a DCF valuation technique.
 (3)
    
    Portfolio investments in non-controlled companies comprised of a bundle of investments, which
can include debt and equity securities:We value Non-Public Debt Securities that are purchased
together with equity or equity-like securities from the
 50




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##### Table of Contents



same portfolio company, or issuer, for
which we do not control or cannot gain control as of the measurement date, using a
hypothetical secondary market as our principal market. In accordance with ASC 820, we
determine the fair value of these debt
securities of non-control investments assuming the sale of an individual debt security using the
in-exchange premise of value (as defined in ASC 820). As such, we estimate the fair value of the
debt component using estimates of value provided by SPSE and our own assumptions in the absence
of observable market data, including synthetic credit ratings, estimated remaining life, current
market yield and interest rate spreads of similar securities as of the measurement date.
Subsequent to June 30, 2009, for equity or equity-like securities of investments for which we do
not control or cannot gain control as of the measurement date, we estimate the fair value of the
equity using the in-exchange premise of value based on factors such as the overall value of the
issuer, the relative fair value of other units of account including debt, or other relative
value approaches. Consideration also is given to capital structure and other contractual
obligations that may impact the fair value of the equity. Further, we may utilize comparable
values of similar companies, recent investments and indices with similar structures and risk
characteristics or our own assumptions in the absence of other observable market data, and may
also employ DCF valuation techniques.
 Due to the uncertainty inherent in the valuation process, such estimates of fair value may
differ significantly from the values that would have been obtained had a ready market for the
securities existed, and the differences could be material. Additionally, changes in the market
environment and other events that may occur over the life of the investments may cause the gains
or losses ultimately realized on these investments to be different than the valuations currently
assigned. There is no single standard for determining fair value in good faith, as fair value
depends upon circumstances of each individual case. In general, fair value is the amount that we
might reasonably expect to receive upon the current sale of the security in an arms-length
transaction in the securitys principal market.
 Valuation Considerations:
 
    
    the nature and realizable value of the collateral;
    
    the portfolio companys earnings and cash flows and its ability to make payments
on its obligations;
    
    the markets in which the portfolio company does business;
    
    the comparison to publicly traded companies; and
    
    DCF and other relevant factors.
  Credit Information:
 Loan Grading and Risk Rating:
  51




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##### Table of Contents



Companys
    
    First
    
    SecondSystem
    
    NRSRO
    
    NRSRO
    
    Gladstone Capital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 less10
    
    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 default and the EL is greater than 20%
 
 (a)
    
    The default rates set forth are for a ten year term debt security. If a debt security is less
than ten years, then the probability of default is adjusted to a lower percentage for the
shorter period, which may move the security higher on our risk rating scale.   Rating
    
    Jun. 30, 2010
    
    Sept. 30, 2009Highest
    
    
    10.0
    
    
    
    9.0Average
    
    
    6.5
    
    
    
    7.1Weighted Average
    
    
    6.0
    
    
    
    7.2Lowest
    
    
    2.0
    
    
    
    3.0
  Rating
    
    Jun. 30, 2010
    
    Sept. 30, 2009Highest
    
    
    7.0
    
    
    
    7.0Average
    
    
    7.0
    
    
    
    7.0Weighted Average
    
    
    7.0
    
    
    
    7.0Lowest
    
    
    7.0
    
    
    
    7.0
  Rating
    
    Jun. 30, 2010
    
    Sept. 30, 2009Highest
    
    
    B2
    
    
    
    B-/B3Average
    
    
    B2
    
    
    CCC+/Caa1Weighted Average
    
    
    B2
    
    
    CCC+/Caa1Lowest
    
    
    B2
    
    
    
    D/C
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Tax Status
   Revenue Recognition
 Interest Income Recognition
  Paid in Kind Interest and Original Issue Discount
  Services Provided to Portfolio Companies
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Recent Accounting Pronouncements
  
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
  83
    %
    
    variable rates with a floor8
    %
    
    variable rates without a floor or ceiling9
    %
    
    fixed rate100
    %
    
    total
  
 ITEM 4. CONTROLS AND PROCEDURES.
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##### Table of Contents



PART IIOTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS.
  
 ITEM 1A. RISK FACTORS.
  Our portfolio is concentrated in a limited number of companies and industries, which subjects us to
an increased risk of significant loss if any one of these companies does not repay us or if the
industries experience downturns.
  
 ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
  
 ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
  
 ITEM 4. (REMOVED AND RESERVED).
 
 ITEM 5. OTHER INFORMATION.
  
 ITEM 6. EXHIBITS
  55




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##### Table of Contents



SIGNATURE
  GLADSTONE CAPITAL CORPORATIONBy:
    
    /s/ GRESFORD GRAYGresford GrayChief Financial Officer
  56




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##### Table of Contents



EXHIBIT INDEX
 Exhibit
    
    Description3.1
    
    Articles of Amendment and Restatement of the Articles 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. 333-63700), filed July 27, 2001.3.2
    
    By-laws, incorporated by reference to Exhibit b to Pre-Effective Amendment No. 1 to the
Registration Statement on Form N-2 (File No. 333-63700), filed July 27, 2001.3.3
    
    Amendment to By-laws, incorporated by reference to Exhibit 3.3 to the Companys Quarterly Report
on Form 10-Q for the quarter ended December 31, 2003 (File No. 814-00237), filed February 17,
2004.3.4
    
    Second amendment to By-laws, incorporated by reference to Exhibit 99.1 to the Companys Current
Report on Form 8-K (File No. 814-00237), filed July 10, 2007.10.1
    
    Equity Distribution Agreement, dated as of May 17, 2010, by and among Gladstone Capital
Corporation, Gladstone Management Corporation and BB&T Capital Markets, a division of Scott &
Stringfellow, LLC, incorporated by reference to Exhibit 2.h.1 to Post-Effective Amendment No. 1 to
the Registration Statement on Form N-2 (File No. 333-162592), filed on May 17, 2010.11
    
    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.
  57