##### 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 MARCH 31, 2011
 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
(State or other jurisdiction of incorporation or organization)
    
    54-2040781
(I.R.S. Employer Identification No.)
 1521 WESTBRANCH DRIVE, SUITE 200
MCLEAN, VIRGINIA 22102
 (703) 287-5800
 þ o
 o o
  Large accelerated filer oAccelerated filer þNon-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 March 31, 2011 and September 30, 2010
    
    
    3Condensed Consolidated Statements of Operations for the three and six months ended March 31, 2011 and
2010
    
    
    4Condensed Consolidated Statements of Changes in Net Assets for the six months ended March 31, 2011 and
2010
    
    
    5Condensed Consolidated Statements of Cash Flows for the six months ended March 31, 2011 and 2010
    
    
    6Condensed Consolidated Schedules of Investments as of March 31, 2011 and September 30, 2010
    
    
    7Notes to Condensed Consolidated Financial Statements
    
    
    14Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    30Overview
    
    
    30Results of Operations
    
    
    33Liquidity and Capital Resources
    
    
    42Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    51Item 4.
    
    Controls and Procedures
    
    
    51PART II.
    
    OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    52Item 1A.
    
    Risk Factors
    
    
    52Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    52Item 3.
    
    Defaults Upon Senior Securities
    
    
    52Item 4.
    
    Removed and Reserved
    
    
    52Item 5.
    
    Other Information
    
    
    52Item 6.
    
    Exhibits
    
    
    52SIGNATURES
    
    
    53EX-31.1EX-31.2EX-32.1EX-32.2
  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)
 March 31,
    
    
    September 30,2011
    
    
    2010ASSETSCash
    
    $
    8,871
    
    
    $
    7,734Investments at fair valueNon-Control/Non-Affiliate investments (Cost of $229,517and $244,140,
respectively)
    
    
    208,461
    
    
    
    223,737Control investments (Cost of $84,718and $54,076, respectively)
    
    
    48,652
    
    
    
    33,372Total investments at fair value (Cost of $314,235and $298,216, respectively)
    
    
    257,113
    
    
    
    257,109Interest receivable  investments in debt securities
    
    
    2,379
    
    
    
    2,648Interest receivable  employees(1)
    
    
    122
    
    
    
    104Due from custodian
    
    
    1,279
    
    
    
    255Deferred financing fees
    
    
    1,361
    
    
    
    1,266Prepaid assets
    
    
    744
    
    
    
    799Other assets
    
    
    667
    
    
    
    603TOTAL ASSETS
    
    $
    272,536
    
    
    $
    270,518LIABILITIESBorrowings at fair value (Cost of $33,200and $16,800, respectively)
    
    $
    33,646
    
    
    $
    17,940Accounts payable and accrued expenses
    
    
    456
    
    
    
    752Interest payable
    
    
    120
    
    
    
    693Fee due to Administrator(1)
    
    
    175
    
    
    
    267Fees due to Adviser(1)
    
    
    1,791
    
    
    
    673Other liabilities
    
    
    1,133
    
    
    
    947TOTAL LIABILITIES
    
    
    37,321
    
    
    
    21,272NET ASSETS
    
    $
    235,215
    
    
    $
    249,246ANALYSIS OF NET ASSETSCommon stock, $0.001 par value, 50,000,000 shares authorized and 21,039,242 shares
issued and outstanding at March 31, 2011 and September 30, 2010
    
    $
    21
    
    
    $
    21Capital in excess of par value
    
    
    326,935
    
    
    
    326,935Notes receivable  employees(1)
    
    
    (6,049
    )
    
    
    (7,103
    )Net unrealized depreciation on investments
    
    
    (57,121
    )
    
    
    (41,108
    )Net unrealized appreciation on borrowings
    
    
    (446
    )
    
    
    (1,140
    )Overdistributed net investment income
    
    
    
    
    
    
    (1,103
    )Accumulated net realized losses
    
    
    (28,125
    )
    
    
    (27,256
    )TOTAL NET ASSETS
    
    $
    235,215
    
    
    $
    249,246NET ASSETS PER SHARE
    
    $
    11.18
    
    
    $
    11.85
 
 (1)
    
    Refer to Note 4Related Party Transactionsfor additional information. THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
 3




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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 March 31,
    
    
    Six Months Ended March 31,2011
    
    
    2010
    
    
    2011
    
    
    2010INVESTMENT INCOMEInterest incomeNon-Control/Non-Affiliate investments
    
    $
    6,055
    
    
    $
    7,675
    
    
    $
    12,651
    
    
    $
    16,045Control investments
    
    
    1,113
    
    
    
    709
    
    
    
    2,240
    
    
    
    1,477Notes receivable from employees(1)
    
    
    122
    
    
    
    108
    
    
    
    244
    
    
    
    221Total interest income
    
    
    7,290
    
    
    
    8,492
    
    
    
    15,135
    
    
    
    17,743Other income
    
    
    1,108
    
    
    
    1,322
    
    
    
    1,270
    
    
    
    1,875Total investment income
    
    
    8,398
    
    
    
    9,814
    
    
    
    16,405
    
    
    
    19,618EXPENSESLoan servicing fee(1)
    
    
    757
    
    
    
    852
    
    
    
    1,599
    
    
    
    1,781Base management fee(1)
    
    
    608
    
    
    
    739
    
    
    
    1,113
    
    
    
    1,459Incentive fee(1)
    
    
    1,102
    
    
    
    1,072
    
    
    
    2,261
    
    
    
    1,447Administration fee(1)
    
    
    175
    
    
    
    176
    
    
    
    361
    
    
    
    354Interest expense
    
    
    478
    
    
    
    1,136
    
    
    
    358
    
    
    
    2,671Amortization of deferred financing fees
    
    
    368
    
    
    
    449
    
    
    
    664
    
    
    
    943Professional fees
    
    
    201
    
    
    
    219
    
    
    
    534
    
    
    
    1,131Other expenses
    
    
    383
    
    
    
    703
    
    
    
    603
    
    
    
    965Expenses before credits from Adviser
    
    
    4,072
    
    
    
    5,346
    
    
    
    7,493
    
    
    
    10,751Credits to fees from Adviser(1)
    
    
    (102
    )
    
    
    (6
    )
    
    
    (154
    )
    
    
    (35
    )Total expenses net of credits to fees
    
    
    3,970
    
    
    
    5,340
    
    
    
    7,339
    
    
    
    10,716NET INVESTMENT INCOME
    
    
    4,428
    
    
    
    4,474
    
    
    
    9,066
    
    
    
    8,902REALIZED AND UNREALIZED (LOSS) GAIN ON:Net realized gain (loss) on investments
    
    
    5
    
    
    
    892
    
    
    
    5
    
    
    
    (28
    )Net unrealized (depreciation) appreciation on
investments
    
    
    (13,069
    )
    
    
    2,483
    
    
    
    (16,014
    )
    
    
    5,082Net unrealized depreciation on borrowings
    
    
    255
    
    
    
    131
    
    
    
    693
    
    
    
    350Net (loss) gain on investments and borrowings
    
    
    (12,809
    )
    
    
    3,506
    
    
    
    (15,316
    )
    
    
    5,404NET (DECREASE) INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS
    
    $
    (8,381
    )
    
    $
    7,980
    
    
    $
    (6,250
    )
    
    $
    14,306NET (DECREASE) INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS PER SHARE:Basic and Diluted
    
    $
    (0.40
    )
    
    $
    0.38
    
    
    $
    (0.30
    )
    
    $
    0.68WEIGHTED AVERAGE SHARES OF COMMON STOCK OUTSTANDING:Basic and Diluted
    
    
    21,039,242
    
    
    
    21,075,445
    
    
    
    21,039,242
    
    
    
    21,081,576
 
 (1)
    
    Refer to Note 4Related Party Transactionsfor additional information. THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
 4




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##### Table of Contents



GLADSTONE CAPITAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS
(DOLLAR AMOUNTS IN THOUSANDS)
(UNAUDITED)
 Six Months Ended March 31,2011
    
    
    2010Operations:Net investment income
    
    $
    9,066
    
    
    $
    8,902Net realized gain (loss) on investments
    
    
    5
    
    
    
    (28
    )Net unrealized (depreciation) appreciation on investments
    
    
    (16,014
    )
    
    
    5,082Net unrealized depreciation on borrowings
    
    
    693
    
    
    
    350Net (decrease) increase in net assets from operations
    
    
    (6,250
    )
    
    
    14,306Distributions:Distributions to stockholders
    
    
    (8,836
    )
    
    
    (8,853
    )Capital transactions:Shelf offering costs
    
    
    
    
    
    
    (74
    )Conversion of former employee stock option loans from
recourse to non-recourse
    
    
    
    
    
    
    (420
    )Repayment of principal on employee notes
    
    
    1,055
    
    
    
    Reclassification of principal on employee note
    
    
    
    
    
    
    514Net increase in net assets from capital transactions
    
    
    1,055
    
    
    
    20Total (decrease) increase in net assets
    
    
    (14,031
    )
    
    
    5,473Net assets at beginning of period
    
    
    249,246
    
    
    
    249,076Net assets at end of period
    
    $
    235,215
    
    
    $
    254,549
 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 CASH FLOWS
(DOLLAR AMOUNTS IN THOUSANDS)
(UNAUDITED)
 Six Months EndedMarch 31,2011
    
    
    2010CASH FLOWS FROM OPERATING ACTIVITIESNet (decrease) increase in net assets resulting from operations
    
    $
    (6,250
    )
    
    $
    14,306Adjustments to reconcile net (decrease) increase in net assets resulting from
operations to net cash (used in) provided by operating activities:Investments in portfolio companies
    
    
    (52,424
    )
    
    
    (6,880
    )Principal repayments on investments
    
    
    35,227
    
    
    
    38,418Proceeds from sale of investments
    
    
    777
    
    
    
    3,119Increase in investment balance due to paid in kind interest
    
    
    (8
    )
    
    
    (60
    )Repayment of paid in kind interest
    
    
    
    
    
    
    51Increase in investment balance due to transferred interest
    
    
    (204
    )
    
    
    (441
    )Net change in premiums, discounts and amortization
    
    
    776
    
    
    
    63Net realized (gain) loss on investments
    
    
    (163
    )
    
    
    28Net unrealized depreciation (appreciation) on investments
    
    
    16,014
    
    
    
    (5,082
    )Net unrealized depreciation on borrowings
    
    
    (693
    )
    
    
    (349
    )Amortization of deferred financing fees
    
    
    664
    
    
    
    943Change in compensation expense from non-recourse notes
    
    
    
    
    
    
    245Decrease in interest receivable
    
    
    251
    
    
    
    655Increase in due from custodian
    
    
    (1,024
    )
    
    
    (7,512
    )Decrease in prepaid assets
    
    
    55
    
    
    
    53Decrease in due from Adviser(1)
    
    
    
    
    
    
    69(Increase) decrease in other assets
    
    
    (64
    )
    
    
    1,158Decrease in accounts payable and accrued expenses
    
    
    (296
    )
    
    
    (670
    )Decrease in interest payable
    
    
    (573
    )
    
    
    (134
    )Increase in fees due to Adviser(1)
    
    
    1,118
    
    
    
    1,531Decrease in administration fee due to Administrator(1)
    
    
    (92
    )
    
    
    (39
    )Increase (decrease) in other liabilities
    
    
    186
    
    
    
    (237
    )Net cash (used in) provided by operating activities
    
    
    (6,723
    )
    
    
    39,235CASH FLOWS FROM FINANCING ACTIVITIES:Shelf offering costs
    
    
    
    
    
    
    (74
    )Proceeds from borrowings
    
    
    50,800
    
    
    
    5,500Repayments on borrowings
    
    
    (34,400
    )
    
    
    (35,500
    )Distributions paid
    
    
    (8,836
    )
    
    
    (8,853
    )Receipt of principal on employees notes receivable
    
    
    1,055
    
    
    
    Deferred financing fees
    
    
    (759
    )
    
    
    (1,323
    )Net cash provided by (used in) financing activities
    
    
    7,860
    
    
    
    (40,250
    )NET INCREASE (DECREASE) IN CASH
    
    
    1,137
    
    
    
    (1,015
    )CASH, BEGINNING OF PERIOD
    
    
    7,734
    
    
    
    5,276CASH, END OF PERIOD
    
    $
    8,871
    
    
    $
    4,261
 
 (1)
    
    Refer to Note 4Related Party Transactionsfor additional information. 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 SCHEDULE OF INVESTMENTS
AS OF MARCH 31, 2011
(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 (14.0%, Due 2/2011) (4)
    
    $
    918
    
    $
    459Allison Publications, LLC
    
    Service-publisher of consumer
    
    Senior Term Debt (10.5%, Due 9/2012) (4)
    
    
    8,786
    
    
    8,282BAS Broadcasting
    
    Service-radio station operator
    
    Senior Term Debt (11.5%, Due 7/2013) (4)
    
    
    7,465
    
    
    6,495Chinese Yellow Pages Company
    
    Service-publisher of Chinese language directories
    
    Line of Credit, $250 available (7.3%, Due 11/2011) (4)
    
    
    450
    
    
    383Senior Term Debt (7.3%, Due 11/2011) (4)
    
    
    243
    
    
    207CMI Acquisition, LLC
    
    Service-recycling
    
    Senior Subordinated Term Debt (10.3%, Due 11/2012) (4)
    
    
    5,980
    
    
    5,950FedCap Partners, LLC
    
    Private equity fund
    
    Class A Membership Units (7)
    
    
    800
    
    
    800Uncalled Capital Commitment ($1,200)GFRC Holdings LLC
    
    Manufacturing-glass-fiber reinforced concrete
    
    Senior Term Debt (11.5%, Due 12/2012) (4)
    
    
    5,911
    
    
    5,202Senior Subordinated Term Debt (14.0%, Due 12/2012) (3)(4)
    
    
    6,632
    
    
    5,836Global Materials Technologies, Inc.
    
    Manufacturing-steel wool
    
    Senior Term Debt (13.0%, Due 6/2012) (3)(4)
    
    
    3,035
    
    
    2,534products and metal fibersHeartland Communications Group
    
    Service-radio station operator
    
    Line of Credit, $0 available (10.0%, Due 3/2013) (4)
    
    
    100
    
    
    45Line of Credit, $50 available (10.0%, Due 3/2013) (4)
    
    
    50
    
    
    23Senior Term Debt (5.0%, Due 3/2013) (4)
    
    
    4,309
    
    
    1,954Common Stock Warrants (6)(7)
    
    
    66
    
    
    International Junior Golf Training Acquisition Company
    
    Service-golf training
    
    Line of Credit, $0 available (11.0%, Due 5/2012) (4)
    
    
    1,500
    
    
    1,349Line of Credit, $0 available (11.0%, Due 6/2011) (4)
    
    
    200
    
    
    179Senior Term Debt (10.5%, Due 5/2012) (4)
    
    
    1,226
    
    
    1,103Senior Term Debt (12.5%, Due 5/2012) (3)(4)
    
    
    2,500
    
    
    2,250KMBQ Corporation
    
    Service-AM/FM radio broadcaster
    
    Line of Credit, $42 available (non-accrual, Due 7/2010) (4)(7)
    
    
    158
    
    
    13Senior Term Debt (non-accrual, Due 7/2010) (4)(7)
    
    
    2,020
    
    
    172Legend Communications of Wyoming, LLC
    
    Service-operator of radio stations
    
    Senior Term Debt (12.0%, Due 6/2013) (4)
    
    
    9,880
    
    
    5,928Senior Term Debt (14.0%, Due 7/2011) (4)
    
    
    220
    
    
    132Newhall Holdings, Inc.
    
    Service-distributor of personal care products and supplements
    
    Line of Credit, $0 available (8.0%, Due 12/2012) (4)
    
    
    1,985
    
    
    1,878Senior Term Debt Term A (8.5%, Due 12/2012) (4)
    
    
    1,870
    
    
    1,770Senior Term Debt (3.5%, Due 12/2012) (4)
    
    
    2,000
    
    
    1,868Senior Term Debt (3.5%, Due 12/2012) (3)(4)
    
    
    4,648
    
    
    4,294Preferred Equity (6)(7)
    
    
    
    
    
    Common Stock (6)(7)
    
    
    
    
    
    Northern Contours, Inc.
    
    Manufacturing-veneer and laminate components
    
    Senior Subordinated Term Debt (13.0%, Due 9/2012) (4)
    
    
    6,214
    
    
    5,717Northstar Broadband, LLC
    
    Service-cable TV franchise owner
    
    Senior Term Debt (0.7%, Due 12/2012) (4)
    
    
    96
    
    
    85
  7




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GLADSTONE CAPITAL CORPORATION
CONDENSED CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)
AS OF MARCH 31, 2011
(DOLLAR AMOUNTS IN THOUSANDS)
(UNAUDITED)
 Company(1)
    
    Industry
    
    Investment(2)
    
    Cost
    
    Fair ValuePrecision Acquisition Group
    
    Manufacturing-consumable
    
    Equipment Note (13.0%, Due 11/2011) (4)
    
    $
    1,000
    
    $
    943Holdings, Inc.
    
    components for the aluminum
    
    Senior Term Debt (13.0%, Due 11/2011) (4)
    
    
    4,125
    
    
    3,887industry
    
    Senior Term Debt (13.0%, Due 11/2011) (3)(4)
    
    
    4,053
    
    
    3,820PROFITSystems
Acquisition Co.
    
    Service-design and develop ERP software
    
    Line of Credit, $350 available (4.5%, Due 7/2011) (4)
    
    
    
    
    
    Senior Term Debt (8.5%, Due 7/2011) (4)
    
    
    500
    
    
    475Senior Term Debt (10.5%, Due 7/2011) (3)(4)
    
    
    2,900
    
    
    2,737RCS Management Holding Co.
    
    Service-healthcare supplies
    
    Senior Term Debt (9.5%, Due 1/2013) (4)
    
    
    1,687
    
    
    1,658Senior Term Debt (11.5%, Due 1/2013) (3)(4)
    
    
    3,060
    
    
    3,007Reliable Biopharmaceutical Holdings, Inc.
    
    Manufacturing-pharmaceutical and biochemical intermediates
    
    Line of Credit, $2,400 available (9.0%, Due 1/2013) (4)
    
    
    1,600
    
    
    1,580Mortgage Note (9.5%, Due 12/2014) (4)
    
    
    7,210
    
    
    7,120Senior Term Debt (12.0%, Due 12/2014) (3)(4)
    
    
    11,633
    
    
    11,284Senior Subordinated Term Debt (12.5%, Due 12/2014) (4)
    
    
    6,000
    
    
    5,715Common Stock Warrants (6)(7)
    
    
    209
    
    
    Saunders & Associates
    
    Manufacturing-equipment provider for frequency control devices
    
    Line of Credit, $2,500 available (11.25%, Due 5/2013) (4)
    
    
    
    
    
    Senior Term Debt (11.25%, Due 5/2013) (4)
    
    
    8,947
    
    
    8,958SCI Cable, Inc.
    
    Service-cable, internet, voice provider
    
    Senior Term Debt (non-accrual, Due 10/2012) (4)(7)
    
    
    710
    
    
    71Senior Term Debt (non-accrual, Due 10/2012) (4)(7)
    
    
    2,931
    
    
    147Sunburst Media  Louisiana, LLC
    
    Service-radio station operator
    
    Senior Term Debt (10.5%, Due 12/2011) (4)
    
    
    6,255
    
    
    4,844Thibaut Acquisition Co.
    
    Service-design and distribute wall covering
    
    Line of Credit, $250 available (9.0%, Due 1/2014) (4)
    
    
    750
    
    
    728Senior Term Debt (8.5%, Due 1/2014) (4)
    
    
    812
    
    
    789Senior Term Debt (12.0%, Due 1/2014) (3)(4)
    
    
    3,000
    
    
    2,895Viapack, Inc.
    
    Manufacturing-polyethylene film
    
    Senior Real Estate Term Debt
(10.0%, Due 3/2014) (4)
    
    
    625
    
    
    619Senior Term Debt (13.0%, Due 3/2014) (3)(4)
    
    
    3,952
    
    
    3,912Westlake Hardware, Inc.
    
    Retail-hardware and variety
    
    Senior Subordinated Term Debt (12.3%, Due 1/2014) (4)
    
    
    12,000
    
    
    11,790Senior Subordinated Term Debt (13.5%, Due 1/2014) (4)
    
    
    8,000
    
    
    7,780Winchester Electronics
    
    Manufacturing-high bandwidth
    
    Senior Term Debt (5.3%, Due 5/2012) (4)
    
    
    1,250
    
    
    1,249connectors and cables
    
    Senior Term Debt (5.7%, Due 5/2013) (4)
    
    
    1,682
    
    
    1,675Senior Subordinated Term Debt (14.0%, Due 6/2013) (4)
    
    
    9,850
    
    
    9,739Subtotal  Non-syndicated loans
    
    
    
    
    
    
    184,003
    
    
    162,330Syndicated Loans:Airvana Network Solutions, Inc
    
    Service-telecommunications
    
    Senior Term Debt (10.25%, Due 3/2015) (5)
    
    
    7,840
    
    
    7,990Allied Security Holdings LLC
    
    Service - contract
security officer providers
    
    Senior Subordinated Term Debt (8.5%, Due 2/2018) (5)
    
    
    990
    
    
    1,010Allied Specialty Vehicles, Inc
    
    Manufacturing - speciality vechicles
    
    Senior Term Debt (9.5%, Due 2/2016) (5)
    
    
    9,801
    
    
    9,800Ameriqual Group, LLC
    
    Manufacturing - production and
    
    Senior Term Debt (9.8%, Due 3/2016) (5)
    
    
    7,350
    
    
    7,350distribution of food productsApplied Systems, Inc
    
    Service - software for property
& casualty insurance industry
    
    Senior Subordinated Term Debt (9.3%, Due 6/2017) (5)
    
    
    991
    
    
    1,015Ascend Learning, LLC
    
    Service - technology-based learning solutions
    
    Senior Subordinated Term Debt (12.3%, Due 12/2017) (5)
    
    
    971
    
    
    1,000Covad Communications Group, Inc
    
    Service-telecommunications
    
    Senior Term Debt (12.0%, Due 11/2015) (5)
    
    
    1,912
    
    
    1,984
 8




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##### Table of Contents



GLADSTONE CAPITAL CORPORATION
CONDENSED CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)
AS OF MARCH 31, 2011
(DOLLAR AMOUNTS IN THOUSANDS)
(UNAUDITED)
 Company(1)
    
    Industry
    
    Investment(2)
    
    Cost
    
    Fair ValueGlobal Brass and Copper, Inc
    
    Service-telecommunications
    
    Senior Term Debt (10.3%, Due 8/2015) (5)
    
    $
    2,901
    
    $
    3,130HGI Holding, Inc
    
    Service-telecommunications
    
    Senior Term Debt (6.3%, Due 10/2016) (5)
    
    
    1,830
    
    
    1,885Keypoint Government Solutions, Inc
    
    Service - security consulting services
    
    Senior Term Debt (10% Due 12/2015) (5)
    
    
    6,948
    
    
    6,913National Surgical Hospitals, Inc
    
    Service - physician-partnered surgical fa
    
    Senior Term Debt (8.25%, Due 2/2017) (5)
    
    
    1,664
    
    
    1,690WP Evenflo Group Holdings Inc.
    
    Manufacturing-infant and
    
    Senior Term Debt (8.0%, Due 2/2013) (5)
    
    
    1,872
    
    
    1,768juvenile products
    
    Senior Preferred Equity (6)(7)
    
    
    333
    
    
    399Junior Preferred Equity (6)(7)
    
    
    111
    
    
    138Common Stock (6)(7)
    
    
    
    
    
    59Subtotal  Syndicated loans
    
    
    
    
    
    
    45,514
    
    
    46,131Total Non-Control/Non-Affiliate Investments (represents 81.1% of total investments at fair value)
    
    $
    229,517
    
    $
    208,461CONTROL INVESTMENTSBERTL, Inc.
    
    Service-web-based evaluator of digital imaging products
    
    Line of Credit, $81 available (non-accrual, Due 10/2011) (6)(7)
    
    $
    1,249
    
    $
    Common Stock (6)(7)
    
    
    424
    
    
    Defiance Integrated Technologies, Inc.
    
    Manufacturing-trucking parts
    
    Senior Term Debt (11.0%, Due
4/2013) (3)(4)
    
    
    8,165
    
    
    8,165Common Stock (6)(7)
    
    
    1
    
    
    5,515Lindmark Acquisition, LLC
    
    Service-advertising
    
    Senior Subordinated Term Debt
(non-accrual, Due 10/2012) (4)(7)
    
    
    10,000
    
    
    3,500Senior Subordinated Term Debt
(non-accrual, Due 10/2012) (4)(7)
    
    
    2,000
    
    
    700Senior Subordinated Term Debt (non-accrual, Due Upon Demand) (4)(7)
    
    
    1,909
    
    
    668Common Stock (6)(7)
    
    
    317
    
    
    LocalTel, LLC
    
    Service-yellow pages publishing
    
    Line of credit, $77 available (non-accrual, Due 12/2011) (6)(7)
    
    
    1,773
    
    
    764Line of Credit, $1,830 available (non-accrual, Due 6/2011) (6)(7)
    
    
    1,170
    
    
    Senior Term Debt (non-accrual, Due 2/2012) (6)(7)
    
    
    325
    
    
    Senior Term Debt (non-accrual, Due 6/2011) (6)(7)
    
    
    2,687
    
    
    Senior Term Debt (non-accrual, Due 6/2011) (3)(6)(7)
    
    
    2,750
    
    
    Common Stock Warrants (6)(7)
    
    
    
    
    
    Midwest Metal Distribution, Inc.
    
    Distribution-aluminum
sheets and stainless steel
    
    Senior Subordinated Term Debt (12.0%, Due 7/2013) (4)
    
    
    18,258
    
    
    16,179Common Stock (6)(7)
    
    
    138
    
    
    Sunshine Media Holdings (8)
    
    Service-publisher regional B2B trade magazines
    
    Line of credit, $400 available (10.5%, Due 5/2016) (4)
    
    
    1,600
    
    
    719Senior Term Debt (10.5%, Due 5/2012) (4)
    
    
    16,948
    
    
    7,627Senior Term Debt (5%, Due 5/2012) (3)(4)
    
    
    10,700
    
    
    4,815Preferred Equity (6)(7)
    
    
    375
    
    
    Common Stock (6)(7)
    
    
    740
    
    
    U.S. Healthcare Communications, Inc.
    
    Service-magazine publisher/operator
    
    Line of credit, $131 available (non-accrual, Due 12/2010) (6)(7)
    
    
    269
    
    
    Line of credit, $0 available (non-accrual, Due 12/2010) (6)(7)
    
    
    450
    
    
    Common Stock (6)(7)
    
    
    2,470
    
    
    Total Control Investments (represents 18.9% of total investments at fair value)

    
    $
    84,718
    
    $
    48,652Total Investments
    
    
    
    
    
    $
    314,235
    
    $
    257,113
 9




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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 March 31, 2011 and due date represents the
contractual maturity date.(3)
    
    Last Out Tranche (LOT) of senior debt, meaning if the portfolio company is liquidated,
the holder of the LOT is paid after the senior debt.(4)
    
    Fair value was primarily based on opinions of value submitted by Standard & Poors Securities
Evaluations, Inc.(5)
    
    Security valued based on the indicative bid price on or near March 31, 2011, offered by the
respective syndication agents trading desk or
secondary desk.(6)
    
    Fair value was primarily based on the total enterprise value of the portfolio company
using a liquidity waterfall approach. Gladstone Capital Corporation (the Company) also
considered discounted cash flow methodologies.(7)
    
    Security is non-income producing.(8)
    
    During the quarter ended March 31, 2011, the Company purchased a controlling interest in
common stock from existing shareholders of Sunshine Media Holdings. This purchase resulted
in the Company reclassifying the investment from Non-Control/Non-Affiliate to Control. 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
SEPTEMBER 30, 2010
(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 (14.0%, Due 12/2011) (5)
    
    $
    963
    
    $
    809Allison Publications, LLC
    
    Service-publisher of consumer
    
    Senior Term Debt (10.5%, Due 9/2012) (5)
    
    
    9,094
    
    
    8,543oriented magazines
    
    Senior Term Debt (13.0%, Due 12/2010) (5)
    
    
    65
    
    
    64BAS Broadcasting
    
    Service-radio station operator
    
    Senior Term Debt (11.5%, Due 7/2013) (5)
    
    
    7,465
    
    
    6,644Chinese Yellow Pages Company
    
    Service-publisher of
Chinese language directories
    
    Line of Credit, $250 available (7.3%, Due 11/2010) (5)
    
    
    450
    
    
    428Senior Term Debt (7.3%, Due 11/2010) (5)
    
    
    333
    
    
    317CMI Acquisition, LLC
    
    Service-recycling
    
    Senior Subordinated Term Debt (10.3%, Due 11/2012) (5)
    
    
    5,972
    
    
    5,868FedCap Partners, LLC
    
    Private equity fund
    
    Class A Membership Units (8)
    
    
    400
    
    
    400Uncalled Capital Commitment ($1,600)Finn Corporation
    
    Manufacturing-landscape equipment
    
    Common Stock Warrants (7)(8)
    
    
    37
    
    
    284GFRC Holdings LLC
    
    Manufacturing-glass-fiber
    
    Senior Term Debt (11.5%, Due 12/2012) (5)
    
    
    6,111
    
    
    6,004reinforced concrete
    
    Senior Subordinated Term Debt (14.0%, Due 12/2012) (3)(5)
    
    
    6,632
    
    
    6,450Global Materials Technologies, Inc.
    
    Manufacturing-steel wool products and metal fibers
    
    Senior Term Debt (13.0%, Due 6/2012) (3)(5)
    
    
    3,560
    
    
    2,937Heartland Communications Group
    
    Service-radio station operator
    
    Line of Credit, $100 available (8.5%, Due 3/2013)
    
    
    
    
    
    Line of Credit, $100 available (8.5%, Due 3/2013)
    
    
    
    
    
    Senior Term Debt (8.5%, Due 3/2013) (5)
    
    
    4,301
    
    
    2,519Common Stock Warrants (7)(8)
    
    
    66
    
    
    Interfilm Holdings, Inc.
    
    Service-slitter and distributor of
    
    Senior Term Debt (12.3%, Due 10/2012)    (5)
    
    
    2,400
    
    
    2,382plastic filmsInternational Junior Golf
Training Acquisition Company
    
    Service-golf training
    
    Line of Credit, $1,500 available (9.0%, Due 5/2011) (5)
    
    
    
    
    
    Senior Term Debt (8.5%, Due 5/2012) (5)
    
    
    1,557
    
    
    1,537Senior Term Debt (10.5%, Due 5/2012) (3)(5)
    
    
    2,500
    
    
    2,456KMBQ Corporation
    
    Service-AM/FM radio broadcaster
    
    Line of Credit, $39 available (non-accrual, Due 7/2010) (5)(8)(10)
    
    
    161
    
    
    16Senior Term Debt (non-accrual, Due 7/2010) (5)(8)(10)
    
    
    1,921
    
    
    192Legend Communications of Wyoming LLC
    
    Service-operator of radio stations
    
    Senior Term Debt (12.0%, Due 6/2013) (5)
    
    
    9,880
    
    
    6,422Newhall Holdings, Inc.
    
    Service-distributor of personal care products and supplements
    
    Line of Credit, $0 available (5.0%,
Due 12/2012) (5)
    
    
    1,350
    
    
    1,269Senior Term Debt (5) (5.0%, Due 12/2012) (5)
    
    
    3,870
    
    
    3,638Senior Term Debt (5.0%, Due 12/2012) (3)(5)
    
    
    4,648
    
    
    4,323Preferred 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)
    
    
    6,301
    
    
    5,765Northstar Broadband, LLC
    
    Service-cable TV franchise owner
    
    Senior Term Debt (0.7%, Due
12/2012) (5)
    
    
    117
    
    
    102Pinnacle Treatment Centers, Inc.
    
    Service-Addiction treatment centers
    
    Line of Credit, $350 available
(12.0%, Due 10/2010) (5)(12)
    
    
    150
    
    
    150Senior Term Debt (10.5%, Due 12/2011) (5)
    
    
    1,950
    
    
    1,945Senior Term Debt (10.5%, Due 12/2011) (3)(5)
    
    
    7,500
    
    
    7,481Precision Acquisition Group Holdings, Inc.
    
    Manufacturing-consumable
    
    Equipment Note (13.0%, Due 10/2010) (5)(13)
    
    
    1,000
    
    
    950components for the aluminum industry
    
    Senior Term Debt (13.0%, Due 10/2010) (5)(13)
    
    
    4,125
    
    
    3,919Senior Term Debt (13.0%, Due 10/2010) (3)(5)(13)
    
    
    4,053
    
    
    3,850
 11




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##### Table of Contents



GLADSTONE CAPITAL CORPORATION
CONSOLIDATED SCHEDULE OF INVESTMENTS
SEPTEMBER 30, 2010
(DOLLAR AMOUNTS IN THOUSANDS)
 Company(1)
    
    Industry
    
    Investment(2)
    
    Cost
    
    Fair ValuePROFITSystems Acquisition Co.
    
    Service-design and develop ERP software
    
    Line of Credit, $350 available (4.5%, Due 7/2011)
    
    $
    
    
    $
    Senior Term Debt (8.5%, Due 7/2011) (5)
    
    
    1,000
    
    
    940Senior Term Debt (10.5%, Due 7/2011) (3)(5)
    
    
    2,900
    
    
    2,697RCS Management Holding Co.
    
    Service-healthcare supplies
    
    Senior Term Debt (9.5%, Due 1/2011) (3)(5)
    
    
    1,937
    
    
    1,918Senior Term Debt (11.5%, Due 1/2011) (4)(5)
    
    
    3,060
    
    
    3,029Reliable Biopharmaceutical Holdings, Inc.
    
    Manufacturing-pharmaceutical and biochemical intermediates
    
    Line of Credit, $3,800 available (9.0%, Due 10/2010) (5)(14)
    
    
    1,200
    
    
    1,188Mortgage Note (9.5%, Due 10/2014) (5)
    
    
    7,255
    
    
    7,201Senior Term Debt (9.0%, Due 10/2012) (5)
    
    
    1,080
    
    
    1,069Senior Term Debt (11.0%, Due 10/2012) (3)(5)
    
    
    11,693
    
    
    11,386Senior Subordinated Term Debt (12.0%, Due 10/2013) (5)
    
    
    6,000
    
    
    5,730Common Stock Warrants (7)(8)
    
    
    209
    
    
    Saunders & Associates
    
    Manufacturing-equipment provider for frequency control devices
    
    Senior Term Debt (9.8%, Due 5/2013) (5)
    
    
    8,947
    
    
    8,935SCI Cable, Inc.
    
    Service-cable, internet, voice provide
    
    Senior Term Debt (non-accrual, Due 10/2012) (5)(8)(10)
    
    
    450
    
    
    140Senior Term Debt (non-accrual, Due 10/2012) (5)(8)(10)
    
    
    2,931
    
    
    352Sunburst Media  Louisiana, LLC
    
    Service-radio station operator
    
    Senior Term Debt (10.5%, Due 6/2011) (5)
    
    
    6,391
    
    
    5,100Sunshine Media Holdings
    
    Service-publisher regional B2B trade magazines
    
    Line of credit, $401 available (10.5%, Due 2/2011) (5)
    
    
    1,599
    
    
    1,499Senior Term Debt (10.5%, Due 5/2012) (5)
    
    
    16,948
    
    
    15,889Senior Term Debt (13.3%, Due 5/2012) (3)(5)
    
    
    10,700
    
    
    9,898Thibaut Acquisition Co.
    
    Service-design and distribute
    
    Senior Term Debt (8.5%, Due 1/2011) (5)
    
    
    1,000
    
    
    970wall covering
    
    Senior Term Debt (8.5%, Due 1/2011) (5)
    
    
    1,075
    
    
    1,043Senior Term Debt (12.0%, Due 1/2011) (3)(5)
    
    
    3,000
    
    
    2,888Viapack, Inc.
    
    Manufacturing-polyethylene film
    
    Senior Real Estate Term Debt
(10.0%, Due 3/2011) (5)
    
    
    675
    
    
    672Senior Term Debt (13.0%, Due 3/2011) (3)(5)
    
    
    4,005
    
    
    3,990Westlake Hardware, Inc.
    
    Retail-hardware and variety
    
    Senior Subordinated Term Debt (12.3%, Due 1/2014) (5)
    
    
    12,000
    
    
    11,820Senior Subordinated Term Debt (13.5%, Due 1/2014) (5)
    
    
    8,000
    
    
    7,800Winchester Electronics
    
    Manufacturing-high bandwidth
    
    Senior Term Debt (5.3%, Due 5/2012) (5)
    
    
    1,250
    
    
    1,244connectors and cables
    
    Senior Term Debt (6.0%, Due 5/2013) (5)
    
    
    1,686
    
    
    1,661Senior Subordinated Term Debt (14.0%, Due 6/2013) (5)
    
    
    9,875
    
    
    9,603Subtotal  Non-syndicated loans
    
    
    
    
    
    
    225,798
    
    
    206,326Syndicated Loans:Airvana Network Solutions, Inc
    
    Service-telecommunications
    
    Senior Term Debt (11.0%, Due 8/2014) (6)
    
    
    8,858
    
    
    8,942Puerto Rico Cable Acquisition Company, Inc.
    
    Service-telecommunications
    
    Senior Subordinated Term Debt (7.9%, Due 1/2012) (6)
    
    
    7,159
    
    
    6,427WP Evenflo Group Holdings Inc.
    
    Manufacturing-infant and
    
    Senior Term Debt (8.0%, Due 2/2013) (6)
    
    
    1,881
    
    
    1,655juvenile products
    
    Senior Preferred Equity (7)(8)
    
    
    333
    
    
    379Junior Preferred Equity (7)(8)
    
    
    111
    
    
    8Common Stock (7)(8)
    
    
    
    
    
    Subtotal  Syndicated loans
    
    
    
    
    
    
    18,342
    
    
    17,411Total Non-Control/Non-Affiliate Investments (represents 87% of total investments at fair value)
    
    $
    244,140
    
    $
    223,737
 12




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##### Table of Contents



GLADSTONE CAPITAL CORPORATION
CONSOLIDATED SCHEDULE OF INVESTMENTS
SEPTEMBER 30, 2010
(DOLLAR AMOUNTS IN THOUSANDS)
 Company(1)
    
    Industry
    
    Investment(2)
    
    Cost
    
    Fair ValueCONTROL INVESTMENTSBERTL, Inc.
    
    Service-web-based evaluator of digital imaging products
    
    Line of Credit, $302 available (non-accrual, Due 10/2010) (7)(8)(10)(11)
    
    $
    1,319
    
    $
    Common Stock (7)(8)
    
    
    424
    
    
    Defiance Integrated Technologies, Inc.
    
    Manufacturing-trucking parts
    
    Senior Term Debt (11.0%, Due 4/2013) (3)(5)
    
    
    8,325
    
    
    8,325Common Stock (7)(8)
    
    
    1
    
    
    1,543Guaranty ($250)Lindmark Acquisition, LLC
    
    Service-advertising
    
    Senior Subordinated Term Debt (non-accrual, Due 10/2012) (5)(8)(9)(10)
    
    
    10,000
    
    
    5,000Senior Subordinated Term Debt (non-accrual, Due 12/2010) (5)(8)(9)(10)
    
    
    2,000
    
    
    1,000Senior Subordinated Term Debt (non-accrual, Due Upon Demand) (5)(8)(9)(10)
    
    
    1,794
    
    
    897Common Stock (7)(8)
    
    
    1
    
    
    LocalTel, LLC
    
    Service-yellow pages publishing
    
    Line of credit, $152 available (non-accrual, Due 12/2010) (7)(8)(10)
    
    
    1,698
    
    
    1,063Line of Credit, $1,830 available (non-accrual, Due 6/2011) (7)(8)(10)
    
    
    325
    
    
    Senior Term Debt (non-accrual, Due 6/2011) (7)(8)(10)
    
    
    1,170
    
    
    Senior Term Debt (non-accrual, Due 6/2011) (7)(8)(10)
    
    
    2,688
    
    
    Senior Term Debt (non-accrual, Due 6/2011) (3)(7)(8)(10)
    
    
    2,750
    
    
    Common Stock Warrants (7)(8)
    
    
    
    
    
    Midwest Metal Distribution, Inc.
    
    Distribution-aluminum sheets and stainless steel
    
    Senior Subordinated Term Debt (12.0%, Due 7/2013) (5)
    
    
    18,254
    
    
    15,539Common Stock (7)(8)
    
    
    138
    
    
    U.S. Healthcare Communications, Inc.
    
    Service-magazine publisher/operator
    
    Line of credit, $131 available (non-accrual, Due 12/2010) (7)(8)(10)
    
    
    269
    
    
    5Line of credit, $0 available (non-accrual, Due 12/2010) (7)(8)(10)
    
    
    450
    
    
    Common Stock (7)(8)
    
    
    2,470
    
    
    Total Control Investments (represents 13% of total investments at fair value)
    
    $
    54,076
    
    $
    33,372Total Investments(15)
    
    
    
    $
    298,216
    
    $
    257,109
 
 (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, 2010 and due date represents
the contractual maturity date.(3)
    
    Last Out Tranche (LOT) of senior debt, meaning if the portfolio company is liquidated, the
holder of the LOT is paid after the senior debt.(4)
    
    LOT of senior debt, meaning if the portfolio company is liquidated, the holder of the LOT is
paid after the senior debt, however, the debt is also junior to another LOT.(5)
    
    Fair value was primarily 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, 2010, offered by
the respective syndication agents trading desk or secondary desk.(7)
    
    Fair value was primarily 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 as a success fee. The success fee is not recorded until paid (see Note 2, Summary of
Significant Accounting Policies  Investment Income Recognition).(10)
    
    BERTL, KMBQ, Lindmark, LocalTel, SCI Cable and U.S. Healthcare are currently past due on
interest payments and are on non-accrual.(11)
    
    BERTLs interest includes past due interest transferred to principal (see Note 2, Summary of
Significant Accounting Policies  Investment Income Recognition). Subsequent to September 30, 2010, BERTLs line of credit
maturity date was extended to October 2011.(12)
    
    Subsequent to September 30, 2010, Pinnacles line of credit maturity date was extended to
January 2011.(13)
    
    Subsequent to September 30, 2010, Precisions equipment note and senior term loan maturity
dates were extended to November 2010.(14)
    
    Subsequent to September 30, 2010, Reliables line of credit limit was reduced to$3,500, the interest rate floor was increased            to 10.0% and the
maturity date was extended to January 2011.(15)
    
    Aggregate gross unrealized depreciation for federal income tax purposes is $1,919; aggregate
gross unrealized appreciation for federal income tax purposes is $43,023. Net unrealized
depreciation is $41,104 based on a tax cost of $298,186. THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS.
 13




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##### Table of Contents



GLADSTONE CAPITAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 MARCH 31, 2011
 (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA AND AS OTHERWISE INDICATED)
 NOTE 1. ORGANIZATION
       NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 Unaudited Interim Financial Statements and Basis of Presentation
  Condensed Consolidated Statement of Assets and Liabilities
 14




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##### Table of Contents



Reclassifications
  Investment Valuation Policy
    Publicly-traded securities:
 Securities for which a limited market exists:
   15




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##### 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 in which 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, common 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.
 (4)
    
    Portfolio investments comprised of non-publicly traded non-control equity securities of
other funds:The Company values any uninvested capital of the non-control fund at par value
and values any invested capital at the value provided by the non-control fund.
  16




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##### Table of Contents



Investment Income Recognition
     Condensed
Consolidated Statements of Operations
 NOTE 3. INVESTMENTS
  
    
    Level 1  inputs to the valuation methodology are quoted prices (unadjusted)
for identical assets or liabilities in active markets;
 17




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##### Table of Contents




    
    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.
  ondensed Consolidated Statements of Assets
and Liabilities
 Level 3 InvestmentsTotal Fair Value Reported in CondensedConsolidated Statements of Assets and LiabilitiesMarch 31, 2011
    
    
    September 30, 2010Non-Control/Non-Affiliate InvestmentsSenior term debt
    
    $
    151,512
    
    
    $
    163,203Senior subordinated term debt
    
    
    55,552
    
    
    
    59,463Preferred equity
    
    
    538
    
    
    
    387Common equity/equivalents
    
    
    859
    
    
    
    684Total Non-Control/Non-Affiliate
investments at fair value
    
    
    208,461
    
    
    
    223,737Control InvestmentsSenior term debt
    
    $
    22,090
    
    
    $
    9,393Senior subordinated term debt
    
    
    21,047
    
    
    
    22,436Common equity/equivalents
    
    
    5,515
    
    
    
    1,543Total Control investments at fair value
    
    
    48,652
    
    
    
    33,372Total investments at fair value
    
    $
    257,113
    
    
    $
    257,109
 Changes in Level 3 Fair Value Measurements of Investments
  Fair value measurements using unobservable data inputs (Level 3)
 Periods ended March 31, 2011:
 Non-Control/Non-Affiliate
    
    
    ControlInvestments
    
    
    Investments
    
    
    TotalThree months ended March 31, 2011:Fair value at December 31, 2010
    
    $
    216,612
    
    
    $
    35,893
    
    
    $
    252,505Net realized gain
    
    
    163
    
    
    
    
    
    
    
    163Net unrealized depreciation(1)
    
    
    (2,810
    )
    
    
    (10,049
    )
    
    
    (12,859
    )Reversal of prior period net appreciation on realization(1)
    
    
    (210
    )
    
    
    
    
    
    
    (210
    )Issuances/Originations(2)
    
    
    38,829
    
    
    
    2,008
    
    
    
    40,837Settlements/Repayments
    
    
    (21,888
    )
    
    
    (695
    )
    
    
    (22,583
    )Sales
    
    
    
    
    
    
    (740
    )
    
    
    (740
    )Transfer(3)
    
    
    (22,235
    )
    
    
    22,235
    
    
    
    Fair value as of March 31, 2011
    
    $
    208,461
    
    
    $
    48,652
    
    
    $
    257,113
 18




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##### Table of Contents



Non-Control/Non-Affiliate
    
    
    ControlInvestments
    
    
    Investments
    
    
    TotalSix months ended March 31, 2011:Fair value at September 30, 2010
    
    $
    223,737
    
    
    $
    33,372
    
    
    $
    257,109Net realized gain
    
    
    163
    
    
    
    
    
    
    
    163Net unrealized depreciation(1)
    
    
    (8,355
    )
    
    
    (7,952
    )
    
    
    (16,307
    )Reversal of prior period net depreciation on realization(1)
    
    
    293
    
    
    
    
    
    
    
    293Issuances/Originations(2)
    
    
    50,125
    
    
    
    2,511
    
    
    
    52,636Settlements/Repayments
    
    
    (35,230
    )
    
    
    (774
    )
    
    
    (36,004
    )Sales
    
    
    (37
    )
    
    
    (740
    )
    
    
    (777
    )Transfer(3)
    
    
    (22,235
    )
    
    
    22,235
    
    
    
    Fair value as of March 31, 2011
    
    $
    208,461
    
    
    $
    48,652
    
    
    $
    257,113
 Senior
    
    Senior
    
    
    
    
    
    CommonTerm
    
    Subordinated
    
    Preferred
    
    Equity/Debt
    
    Term Debt
    
    Equity
    
    Equivalents
    
    TotalThree months ended March 31, 2011:Fair value at December 31, 2010
    
    $
    169,882
    
    
    $
    76,999
    
    
    $
    523
    
    
    $
    5,101
    
    
    $
    252,505Net realized gain (loss)
    
    
    177
    
    
    
    (14
    )
    
    
    
    
    
    
    
    
    
    
    163Net unrealized (depreciation) appreciation(1)
    
    
    (11,268
    )
    
    
    (1,364
    )
    
    
    (361
    )
    
    
    134
    
    
    
    (12,859
    )Reversal of prior period net appreciation on
realization(1)
    
    
    (210
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (210
    )Issuances/Originations(2)
    
    
    37,544
    
    
    
    1,038
    
    
    
    375
    
    
    
    1,880
    
    
    
    40,837Settlements/Repayments
    
    
    (22,523
    )
    
    
    (60
    )
    
    
    
    
    
    
    
    
    
    
    (22,583
    )Sales
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (740
    )
    
    
    (740
    )Fair value as of March 31, 2011
    
    $
    173,602
    
    
    $
    76,599
    
    
    $
    537
    
    
    $
    6,375
    
    
    $
    257,113
 Senior
    
    Senior
    
    
    
    
    
    CommonTerm
    
    Subordinated
    
    Preferred
    
    Equity/Debt
    
    Term Debt
    
    Equity
    
    Equivalents
    
    TotalSix months ended March 31, 2011:Fair value at September 30, 2010
    
    $
    172,596
    
    
    $
    81,899
    
    
    $
    386
    
    
    $
    2,228
    
    
    $
    257,109Net realized gain (loss)
    
    
    177
    
    
    
    (14
    )
    
    
    
    
    
    
    
    
    
    
    163Net unrealized (depreciation) appreciation(1)
    
    
    (17,218
    )
    
    
    (1,839
    )
    
    
    (224
    )
    
    
    2,974
    
    
    
    (16,307
    )Reversal of prior period net (appreciation)
depreciation on realization(1)
    
    
    (191
    )
    
    
    731
    
    
    
    
    
    
    
    (247
    )
    
    
    293Issuances/Originations(2)
    
    
    46,942
    
    
    
    3,122
    
    
    
    375
    
    
    
    2,197
    
    
    
    52,636Settlements/Repayments
    
    
    (28,704
    )
    
    
    (7,300
    )
    
    
    
    
    
    
    
    
    
    
    (36,004
    )Sales
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (777
    )
    
    
    (777
    )Fair value as of March 31, 2011
    
    $
    173,602
    
    
    $
    76,599
    
    
    $
    537
    
    
    $
    6,375
    
    
    $
    257,113
 Periods ended March 31, 2010:
 Non-Control/Non-Affiliate
    
    
    ControlInvestments
    
    
    Investments
    
    
    TotalThree months ended March 31, 2010:Fair value at December 31, 2009
    
    $
    272,380
    
    
    $
    34,258
    
    
    $
    306,638Net realized gain(2)
    
    
    892
    
    
    
    
    
    
    
    892Net unrealized appreciation (depreciation)(1)
    
    
    1,018
    
    
    
    (566
    )
    
    
    452Reversal of prior period net depreciation on realization(1)
    
    
    2,031
    
    
    
    
    
    
    
    2,031Issuances/Originations(2)
    
    
    3,308
    
    
    
    1,832
    
    
    
    5,140Settlements/Repayments
    
    
    (23,065
    )
    
    
    
    
    
    
    (23,065
    )Sales
    
    
    (337
    )
    
    
    
    
    
    
    (337
    )Fair value as of March 31, 2010
    
    $
    256,227
    
    
    $
    35,524
    
    
    $
    291,751
 19




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##### Table of Contents



Non-Control/Non-Affiliate
    
    
    ControlInvestments
    
    
    Investments
    
    
    TotalSix months ended March 31, 2010:Fair value at September 30, 2009
    
    $
    286,997
    
    
    $
    33,972
    
    
    $
    320,969Net realized loss(2)
    
    
    (28
    )
    
    
    
    
    
    
    (28
    )Net unrealized appreciation (depreciation)(1)
    
    
    3,211
    
    
    
    (1,566
    )
    
    
    1,645Reversal of prior period net depreciation on realization(1)
    
    
    3,437
    
    
    
    
    
    
    
    3,437Issuances/Originations(2)
    
    
    4,202
    
    
    
    3,118
    
    
    
    7,320Settlements/Repayments
    
    
    (38,473
    )
    
    
    
    
    
    
    (38,473
    )Sales
    
    
    (3,119
    )
    
    
    
    
    
    
    (3,119
    )Fair value as of March 31, 2010
    
    $
    256,227
    
    
    $
    35,524
    
    
    $
    291,751
 Senior
    
    Senior
    
    
    
    
    
    CommonTerm
    
    Subordinated
    
    Preferred
    
    Equity/Debt
    
    Term Debt
    
    Equity
    
    Equivalents
    
    TotalThree months ended March 31, 2010:Fair value at December 31, 2009
    
    $
    198,577
    
    
    $
    106,609
    
    
    $
    
    
    
    $
    1,452
    
    
    $
    306,638Net realized (loss) gain
    
    
    (312
    )
    
    
    (163
    )
    
    
    
    
    
    
    1,367
    
    
    
    892Net unrealized appreciation (depreciation)(1)
    
    
    414
    
    
    
    392
    
    
    
    
    
    
    
    (354
    )
    
    
    452Reversal of prior period net depreciation
(appreciation) on realization(1)
    
    
    1,066
    
    
    
    1,212
    
    
    
    
    
    
    
    (247
    )
    
    
    2,031Issuances/Originations(2)
    
    
    4,901
    
    
    
    239
    
    
    
    
    
    
    
    
    
    
    
    5,140Settlements/Repayments
    
    
    (16,298
    )
    
    
    (5,200
    )
    
    
    
    
    
    
    (1,567
    )
    
    
    (23,065
    )Sales
    
    
    
    
    
    
    (337
    )
    
    
    
    
    
    
    
    
    
    
    (337
    )Fair value as of March 31, 2010
    
    $
    188,348
    
    
    $
    102,752
    
    
    $
    
    
    
    $
    651
    
    
    $
    291,751
 Senior
    
    Senior
    
    
    
    
    
    CommonTerm
    
    Subordinated
    
    Preferred
    
    Equity/Debt
    
    Term Debt
    
    Equity
    
    Equivalents
    
    TotalSix months ended March 31, 2010:Fair value at September 30, 2009
    
    $
    212,290
    
    
    $
    105,794
    
    
    $
    
    
    
    $
    2,885
    
    
    $
    320,969Net realized (loss) gain
    
    
    (825
    )
    
    
    (570
    )
    
    
    
    
    
    
    1,367
    
    
    
    (28
    )Net unrealized appreciation (depreciation)(1)
    
    
    2,065
    
    
    
    1,619
    
    
    
    
    
    
    
    (247
    )
    
    
    3,437Reversal of prior period net depreciation
(appreciation) on realization(1)
    
    
    1,210
    
    
    
    2,222
    
    
    
    
    
    
    
    (1,787
    )
    
    
    1,645Issuances/Originations(2)
    
    
    6,078
    
    
    
    1,242
    
    
    
    
    
    
    
    
    
    
    
    7,320Settlements/Repayments
    
    
    (31,545
    )
    
    
    (5,361
    )
    
    
    
    
    
    
    (1,567
    )
    
    
    (38,473
    )Sales
    
    
    (925
    )
    
    
    (2,194
    )
    
    
    
    
    
    
    
    
    
    
    (3,119
    )Fair value as of March 31, 2010
    
    $
    188,348
    
    
    $
    102,752
    
    
    $
    
    
    
    $
    651
    
    
    $
    291,751
 
 (1)
    
    Included in unrealized appreciation (depreciation) on investments on the
accompanying Condensed Consolidated Statements of Operationsfor the three and six months
ended March 31, 2011 and 2010.(2)
    
    Includes PIK, amortization of OID, and other cost basis adjustments.(3)
    
    Transfer represents the fair value of Sunshine Media Holdings as of December 31,
2010, which was reclassified from a Non-Control/Non-Affiliate investment to a Control
investment during the three months ended March 31, 2011. Non-Control/Non-Affiliate Investments
  20




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##### Table of Contents



Control Investments
  Investment Concentrations
  March 31, 2011
    
    
    September 30, 2010Cost
    
    
    Fair Value
    
    
    Cost
    
    
    Fair ValueSenior term debt
    
    $
    218,457
    
    
    $
    173,602
    
    
    $
    200,041
    
    
    $
    172,596Senior subordinated term debt
    
    
    89,794
    
    
    
    76,599
    
    
    
    93,987
    
    
    
    81,899Preferred equity
    
    
    1,185
    
    
    
    537
    
    
    
    444
    
    
    
    387Common equity/equivalents
    
    
    4,799
    
    
    
    6,375
    
    
    
    3,744
    
    
    
    2,227Total investments
    
    $
    314,235
    
    
    $
    257,113
    
    
    $
    298,216
    
    
    $
    257,109
  March 31, 2011
    
    
    September 30, 2010Percentage
    
    
    
    
    
    
    Percentageof Total
    
    
    
    
    
    
    of TotalIndustry Classification
    
    Fair Value
    
    
    Investments
    
    
    Fair Value
    
    
    InvestmentsBroadcast (TV & radio)
    
    $
    33,226
    
    
    
    12.9
    %
    
    $
    44,562
    
    
    
    17.3
    %Healthcare, education & childcare
    
    
    33,053
    
    
    
    12.8
    
    
    
    41,098
    
    
    
    16.0Electronics
    
    
    24,833
    
    
    
    9.7
    
    
    
    25,080
    
    
    
    9.8Mining, steel, iron & non-precious metals
    
    
    24,663
    
    
    
    9.6
    
    
    
    24,343
    
    
    
    9.5Automobile
    
    
    23,480
    
    
    
    9.1
    
    
    
    9,868
    
    
    
    3.8Printing & publishing
    
    
    22,796
    
    
    
    8.9
    
    
    
    37,705
    
    
    
    14.7Retail stores
    
    
    19,570
    
    
    
    7.6
    
    
    
    19,620
    
    
    
    7.6Personal & non-durable consumer products
    
    
    11,693
    
    
    
    4.5
    
    
    
    9,230
    
    
    
    3.6Buildings & real estate
    
    
    11,038
    
    
    
    4.3
    
    
    
    12,454
    
    
    
    4.8Home & office furnishings
    
    
    10,130
    
    
    
    3.9
    
    
    
    10,666
    
    
    
    4.1Machinery
    
    
    8,650
    
    
    
    3.4
    
    
    
    8,719
    
    
    
    3.4Personal, food and miscellaneous services
    
    
    7,923
    
    
    
    3.1
    
    
    
    
    
    
    
    Beverage, food & tobacco
    
    
    7,350
    
    
    
    2.9
    
    
    
    
    
    
    
    Leisure, amusement, movies & entertainment
    
    
    4,883
    
    
    
    1.9
    
    
    
    3,994
    
    
    
    1.6Chemicals, plastics & rubber
    
    
    4,531
    
    
    
    1.8
    
    
    
    7,044
    
    
    
    2.7Diversified natural resources, precious
metals & minerals
    
    
    3,130
    
    
    
    1.2
    
    
    
    
    
    
    
    Diversified/conglomerate manufacturing
    
    
    2,365
    
    
    
    0.9
    
    
    
    2,042
    
    
    
    0.8Telecommunications
    
    
    1,984
    
    
    
    0.8
    
    
    
    
    
    
    
    Insurance
    
    
    1,015
    
    
    
    0.4
    
    
    
    
    
    
    
    Aerospace & defense
    
    
    800
    
    
    
    0.3
    
    
    
    400
    
    
    
    0.2Farming & agriculture
    
    
    
    
    
    
    
    
    
    
    284
    
    
    
    0.1Total investments
    
    $
    257,113
    
    
    
    100.0
    %
    
    $
    257,109
    
    
    
    100.0
    %
 21




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##### Table of Contents



March 31, 2011
    
    
    September 30, 2010Percent of
    
    
    
    
    
    
    Percentage ofTotal
    
    
    
    
    
    
    TotalGeographic Region
    
    Fair Value
    
    
    Investments
    
    
    Fair Value
    
    
    InvestmentsMidwest
    
    $
    127,790
    
    
    
    49.7
    %
    
    $
    109,299
    
    
    
    42.5
    %South
    
    
    52,592
    
    
    
    20.5
    
    
    
    44,704
    
    
    
    17.4West
    
    
    49,891
    
    
    
    19.4
    
    
    
    59,684
    
    
    
    23.2Northeast
    
    
    26,840
    
    
    
    10.4
    
    
    
    36,995
    
    
    
    14.4U.S. Territory
    
    
    
    
    
    
    
    
    
    
    6,427
    
    
    
    2.5Total Investments
    
    $
    257,113
    
    
    
    100.0
    %
    
    $
    257,109
    
    
    
    100.0
    %
  Investment Principal Repayments
  AmountFor the remaining six months ending
September 30:
    
    2011
    
    $
    18,295For the fiscal year ending September 30:
    
    2012
    
    
    76,6462013
    
    
    122,9812014
    
    
    28,8632015
    
    
    32,0882016 and thereafter
    
    
    30,926Total contractual repayments
    
    $
    309,799Investments in equity securities
    
    
    5,984Adjustments to cost basis on debt securities
    
    
    (1,548
    )Total cost basis of investments held at March 31, 2011:
    
    $
    314,235
 Receivables from Portfolio Companies
  NOTE 4. RELATED PARTY TRANSACTIONS
 Loans to Former Employees
  22




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##### Table of Contents



Investment Advisory and Management Agreement
  Condensed Consolidated Statements of Operations
 Three Months Ended March 31,
    
    
    Six Months Ended March 31,2011
    
    
    2010
    
    
    2011
    
    
    2010Average total assets subject to base management fee(1)
    
    $
    273,000
    
    
    $
    318,200
    
    
    $
    271,200
    
    
    $
    324,000Multiplied by pro-rated annual base management fee of 2.0%
    
    
    0.5
    %
    
    
    0.5
    %
    
    
    1.0
    %
    
    
    1.0
    %Unadjusted base management fee
    
    $
    1,365
    
    
    $
    1,591
    
    
    $
    2,712
    
    
    
    3,240Reduction for loan servicing fees(2)
    
    
    (757
    )
    
    
    (852
    )
    
    
    (1,599
    )
    
    
    (1,781
    )Base management fee(2)
    
    
    608
    
    
    
    739
    
    
    
    1,113
    
    
    
    1,459Fee reduction for the voluntary, irrevocable waiver of 2.0% fee
on senior syndicated loans to 0.5% per annum
    
    
    (81
    )
    
    
    (6
    )
    
    
    (133
    )
    
    
    (13
    )Net base management fee
    
    $
    527
    
    
    $
    733
    
    
    $
    980
    
    
    $
    1,446Incentive fee(2)
    
    $
    1,102
    
    
    $
    1,072
    
    
    $
    2,261
    
    
    $
    1,447Credit from voluntary, irrevocable waiver issued by Advisers
board of directors
    
    
    (21
    )
    
    
    
    
    
    
    (21
    )
    
    
    (22
    )Net incentive fee
    
    $
    1,081
    
    
    $
    1,072
    
    
    $
    2,240
    
    
    $
    1,425Fee reduction for the voluntary, irrevocable waiver of 2.0% fee
on senior syndicated loans to 0.5% per annum
    
    $
    (81
    )
    
    $
    (6
    )
    
    $
    (133
    )
    
    $
    (13
    )Incentive fee credit
    
    
    (21
    )
    
    
    
    
    
    
    (21
    )
    
    
    (22
    )Credit to base management and incentive fees from Adviser
(2)
    
    $
    (102
    )
    
    $
    (6
    )
    
    $
    (154
    )
    
    $
    (35
    )
 
 (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 applicable quarters
within the respective periods and appropriately adjusted for any share issuances or
repurchases during the periods.(2)
    
    Reflected as a line item on the Condensed Consolidated Statement of Operations
located elsewhere in this report. Base Management Fee
  
    
    Loan Servicing FeesThe Adviser also services the loans held by Business Loan, in return for which it receives a
2.0% annual fee based on the monthly aggregate outstanding balance of loans pledged under the
Companys line of credit. Since the Company owns these loans, all loan servicing fees paid to
the Adviser are treated as reductions directly against the 2.0% base management fee under the
Advisory Agreement.
    
    Senior Syndicated Loan Fee WaiverThe Companys Board of Directors accepted an unconditional and irrevocable voluntary waiver from
the Adviser to reduce the annual 2.0% base management fee on senior syndicated loan
participations to 0.5%, to the extent that proceeds resulting from borrowings were used to
purchase such syndicated loan participations, for the six months ended March 31, 2011 and 2010.
    
    Portfolio Company FeesUnder the Advisory Agreement, the Adviser has also provided, and continues to provide,
managerial assistance and other services to the Companys portfolio companies and may receive
fees for services other than managerial assistance. 50% of certain of these fees and 100% of
others are credited against the base management fee that the Company would otherwise be required
to pay to the Adviser.
 23




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##### Table of Contents



Incentive Fee
  
    
    no incentive fee in any calendar quarter in which the Companys pre-incentive fee net
investment income does not exceed the hurdle rate (7% annualized);
    
    100% of the Companys pre-incentive fee net investment income with respect to that portion
of such pre-incentive fee net investment income, if any, that exceeds the hurdle rate but is
less than 2.1875% in any calendar quarter (8.75% annualized); and
    
    20% of the amount of the Companys pre-incentive fee net investment income, if any, that
exceeds 2.1875% in any calendar quarter (8.75% annualized).
  Administration Agreement
  Related Party Fees Due
 Condensed Consolidated Statements of Assets and
Liabilities
 March 31, 2011
    
    
    September 30, 2010Unpaid base management fee to Adviser
    
    $
    515
    
    
    $
    319Unpaid incentive fee to Adviser
    
    
    1,081
    
    
    
    158Unpaid loan servicing fees to Adviser
    
    
    195
    
    
    
    196Total fees due to Adviser
    
    
    1,791
    
    
    
    673Unpaid administration fee due to Administrator
    
    
    175
    
    
    
    267Total related party fees due
    
    $
    1,966
    
    
    $
    940
 24




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##### Table of Contents



NOTE 5. BORROWINGS
    Fair Value
 Condensed
Consolidated Statements of Assets and Liabilities
 Borrowings under Credit FacilityTotal Fair ValueReported in CondensedConsolidated Statements ofLevel 1
    
    Level 2
    
    Level 3
    
    Assets and LiabilitiesMarch 31, 2011
    
    $
    
    
    
    $
    
    
    
    $
    33,646
    
    
    $
    33,646September 30, 2010
    
    $
    
    
    
    $
    
    
    
    $
    17,940
    
    
    $
    17,940
 Fair value measurements using unobservable data inputs (Level 3)
 Three Months Ended March 31,2011
    
    
    2010Fair value as of December 31, 2010 and 2009, respectively
    
    $
    25,301
    
    
    $
    73,531Unrealized depreciation(1)
    
    
    (255
    )
    
    
    (131
    )Borrowings
    
    
    40,800
    
    
    
    2,600Repayments
    
    
    (32,200
    )
    
    
    (23,000
    )Fair value as of March 31, 2011 and 2010, respectively
    
    $
    33,646
    
    
    $
    53,000
 25




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##### Table of Contents



Six Months Ended March 31,2011
    
    
    2010Fair value as of September 30, 2010 and 2009, respectively
    
    $
    17,940
    
    
    $
    83,350Unrealized depreciation(1)
    
    
    (694
    )
    
    
    (350
    )Borrowings
    
    
    50,800
    
    
    
    5,500Repayments
    
    
    (34,400
    )
    
    
    (35,500
    )Fair value as of March 31, 2011 and 2010, respectively
    
    $
    33,646
    
    
    $
    53,000
 
 (1)
    
    Included in unrealized depreciation on borrowings
on the accompanying Condensed Consolidated Statements of
Operationsfor the three and six months ended March 31, 2011
and 2010.  NOTE 6. COMMON STOCK
 Registration Statement
 .
  Employee Notes
  OutstandingNumber of
    
    
    Strike Price of
    
    
    Amount of
    
    
    Balance of
    
    
    
    
    InterestIssue
    
    Options
    
    
    Options
    
    
    Promissory Note
    
    
    Employee Loans
    
    
    Maturity
    
    RateDate
    
    Exercised
    
    
    Exercised
    
    
    Issued to Employees
    
    
    at 3/31/11
    
    
    Date
    
    on NoteAug-01
    
    
    393,334
    
    
    
    15.00
    
    
    $
5,900
    (1)
    
    $
    4,850
    
    
    Aug-10
    
    
    4.90
    %(2)Aug-01
    
    
    18,334
    
    
    
    15.00
    
    
    
    275
    (1)
    
    
    251
    
    
    Aug-10
    
    
    4.90
    (2)Aug-01
    
    
    18,334
    
    
    
    15.00
    
    
    
    275
    
    
    
    275
    
    
    Aug-11
    
    
    4.90Sep-04
    
    
    13,332
    
    
    
    15.00
    
    
    
    200
    
    
    
    198
    
    
    Sep-13
    
    
    5.00Jul-06
    
    
    13,332
    
    
    
    15.00
    
    
    
    200
    
    
    
    200
    
    
    Jul-15
    
    
    8.26Jul-06
    
    
    18,334
    
    
    
    15.00
    
    
    
    275
    
    
    
    275
    
    
    Jul-15
    
    
    8.26475,000
    
    
    
    
    
    
    $
    7,125
    
    
    $
    6,049
 
 (1)
    
    On September 7, 2010, the Company entered into redemption agreements (the
Redemption Agreements) with David Gladstone, the Companys Chairman and Chief Executive
Officer, and Laura Gladstone, the daughter of Mr. Gladstone, in connection with the maturity
of secured promissory notes executed by Mr. Gladstone and Ms. Gladstone in favor of the
Company on August 23, 2001, in the principal amounts of $5.9 million and $0.3 million,
respectively (collectively, the Notes). Mr. and Ms. Gladstone executed the Notes in payment
of the exercise price of certain stock options (the Options) to acquire shares of the
Companys common stock. Concurrently with the execution of the Notes, the Company and Mr. and
Ms. Gladstone entered into a stock pledge agreements (collectively, the Pledge Agreements),
pursuant to which Mr. and Ms. Gladstone granted to the Company a first priority security
interest in the Pledged Collateral (as defined in the respective Pledge Agreements), which
includes 393,334 and 18,334 shares, respectively, of the Companys common stock that Mr. and
Ms. Gladstone acquired pursuant to the exercise of the Options (collectively, the Pledged
Shares). An event of default was 26




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##### Table of Contents



triggered under the Notes by virtue of Mr. and Ms. Gladstones failure to repay the amounts
outstanding under the Notes within five business days of August 23, 2010. The Redemption
Agreements provide that, pursuant to the terms and conditions thereof, the Company will
automatically accept and retire the Pledged Shares in partial or full satisfaction, as
applicable, of Mr. and Ms. Gladstones obligations to the Company under the Notes at such time,
if ever, that the trading price of the Companys common stock reaches $15 per share. In entering
into the Redemption Agreements, the Company reserved all of its existing rights under the Notes
and the Pledge Agreements, including, but not limited, to the ability to foreclose on the Pledged
Collateral at any time. On March 30, 2011, Mr. Gladstone paid down $1.1 million of the principal
balance of his Note, leaving a principal balance of $4.8 million outstanding. In connection with
this payment, the Company released its first priority security interest on 70,000 shares of Mr.
Gladstones Pledged Shares, leaving a balance of 323,334 shares in Pledged Collateral from Mr.
Gladstone.(2)
    
    An event of default was triggered under the Note by virtue of the employees failure
to repay the amounts outstanding within five business days of August 23, 2010. As such, the
Company charged a default rate of 2% per annum under the Note for periods following the date
of default. ondensed
Consolidated Statements of Assets and Liabilities
 NOTE 7. NET (DECREASE) INCREASE IN NET ASSETS RESULTING FROM OPERATIONS PER SHARE
  Three Months Ended March 31,
    
    
    Six Months Ended March 31,2011
    
    
    2010
    
    
    2011
    
    
    2010Numerator for basic and diluted net (decrease)
increase in net assets resulting from operations per
share
    
    $
    (8,381
    )
    
    $
    7,980
    
    
    $
    (6,250
    )
    
    $
    14,306Denominator for basic and diluted weighted average shares
    
    
    21,039,242
    
    
    
    21,075,445
    
    
    
    21,039,242
    
    
    
    21,081,576Basic and diluted net (decrease) increase in net assets
resulting from operations per share
    
    $
    (0.40
    )
    
    $
    0.38
    
    
    $
    (0.30
    )
    
    $
    0.68
 NOTE 8. DISTRIBUTIONS
  DistributionFiscal Year
    
    Record Date
    
    Payment Date
    
    per Share2011
    
    October 21, 2010
    
    October 29, 2010
    
    $
    0.07November 19, 2010
    
    November 30, 2010
    
    
    0.07December 23, 2010
    
    December 31, 2010
    
    
    0.07January 21, 2011
    
    January 31, 2011
    
    
    0.07February 21, 2011
    
    February 28, 2011
    
    
    0.07March 21, 2011
    
    March 31, 2011
    
    
    0.07Total
    
    $
    0.422010
    
    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
    
    
    0.07Total
    
    $
    0.42
   27




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##### Table of Contents



NOTE 9. COMMITMENTS AND CONTINGENCIES
   NOTE 10. FINANCIAL HIGHLIGHTS
 Three Months Ended March 31,
    
    
    Six Months Ended March 312011
    
    
    2010
    
    
    2011
    
    
    2010Per Share Data(1)Net asset value at beginning of period
    
    $
    11.74
    
    
    $
    11.92
    
    
    $
    11.85
    
    
    $
    11.81Income from investment operations:Net investment income(2)
    
    
    0.21
    
    
    
    0.21
    
    
    
    0.43
    
    
    
    0.42Net realized gain on investments(2)
    
    
    
    
    
    
    0.04
    
    
    
    
    
    
    
    Net unrealized (depreciation) appreciation on
investments(2)
    
    
    (0.62
    )
    
    
    0.12
    
    
    
    (0.76
    )
    
    
    0.24Net unrealized appreciation on borrowings(2)
    
    
    0.01
    
    
    
    0.01
    
    
    
    0.03
    
    
    
    0.02Total from investment operations
    
    
    (0.40
    )
    
    
    0.38
    
    
    
    (0.30
    )
    
    
    0.68Distributions to stockholders(3)
    
    
    (0.21
    )
    
    
    (0.21
    )
    
    
    (0.42
    )
    
    
    (0.42
    )Conversion of former employee stock option loans from recourse to
non-recourse
    
    
    
    
    
    
    (0.02
    )
    
    
    
    
    
    
    (0.02
    )Reclassification of principal on employee note
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.02Repayment of principal on employee note
    
    
    0.05
    
    
    
    
    
    
    
    0.05
    
    
    
    Anti-dilutive effect from retirement of employee loan shares
    
    
    
    
    
    
    0.03
    
    
    
    
    
    
    
    0.03Net asset value at end of period
    
    $
    11.18
    
    
    $
    12.10
    
    
    $
    11.18
    
    
    $
    12.10Per share market value at beginning of period
    
    $
    11.52
    
    
    $
    7.96
    
    
    $
    11.27
    
    
    $
    8.93Per share market value at end of period
    
    
    11.31
    
    
    
    11.80
    
    
    
    11.31
    
    
    
    11.80Total return(4)(5)
    
    
    1.86
    %
    
    
    56.94
    %
    
    
    4.12
    %
    
    
    38.77
    %Shares outstanding at end of period
    
    
    21,039,242
    
    
    
    21,039,242
    
    
    
    21,039,242
    
    
    
    21,039,242Statement of Assets and Liabilities Data:Net assets at end of period
    
    $
    235,215
    
    
    $
    254,549
    
    
    $
    235,215
    
    
    $
    254,549Average net assets(6)
    
    
    252,457
    
    
    
    251,111
    
    
    
    249,985
    
    
    
    249,993Senior Securities Data:Total borrowings
    
    
    33,646
    
    
    
    53,000
    
    
    
    33,646
    
    
    
    53,000Asset coverage ratio(7)(8)
    
    
    797
    %
    
    
    575
    %
    
    
    797
    %
    
    
    575
    %Asset coverage per unit(8)
    
    $
    7,966
    
    
    $
    5,754
    
    
    $
    7,966
    
    
    $
    5,754Ratios/Supplemental Data:Ratio of expenses to average net assets-annualized(9)
    
    
    6.43
    %
    
    
    8.52
    %
    
    
    6.00
    %
    
    
    8.60
    %Ratio of net expenses to average net assets-annualized(10)
    
    
    6.27
    
    
    
    8.51
    
    
    
    5.87
    
    
    
    8.57Ratio of net investment income to average net assets-annualized
    
    
    7.04
    
    
    
    7.13
    
    
    
    7.25
    
    
    
    7.12
 
 (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. 28




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##### Table of Contents



(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 but
includes 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 but includes income tax expense. NOTE 11. SUBSEQUENT EVENTS
 Distributions
  DistributionRecord Date
    
    Payment Date
    
    
    per ShareApril 22, 2011
    
    April 29, 2011
    
    $
    0.07May 20, 2011
    
    May 31, 2011
    
    
    0.07June 20, 2011
    
    June 30, 2011
    
    
    0.07Total
    
    
    
    
    
    $
    0.21
 Investment Activity
  29




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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 and as otherwise indicated)
 All statements contained herein, other than historical facts, may constitute forward-looking
statements. These statements may relate to, among other things, future events or our future
performance or 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 in our annual report on Form 10-K for the fiscal year ended September
30, 2010.
 
 OVERVIEW
 General
   Business Environment
   30




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##### Table of Contents



Investment Highlights
 Purchases:
 Repayments:
 Sales:
  Recent Developments
 Credit Facility Amendment
  31




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32




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##### Table of Contents



RESULTS OF OPERATIONS
 Comparison of the Three Months Ended March 31, 2011 to the Three Months Ended March 31, 2010
 A comparison of our operating results for the three months ended March 31, 2011 and 2010 is below:
 For the Three Months Ended March 31,%2011
    
    
    2010
    
    
    $ Change
    
    
    ChangeINVESTMENT INCOMEInterest income
    
    $
    7,290
    
    
    $
    8,492
    
    
    $
    (1,202
    )
    
    
    (14.2
    )%Other income
    
    
    1,108
    
    
    
    1,322
    
    
    
    (214
    )
    
    
    (16.2
    )Total investment income
    
    
    8,398
    
    
    
    9,814
    
    
    
    (1,416
    )
    
    
    (14.4
    )EXPENSESLoan servicing fee
    
    
    757
    
    
    
    852
    
    
    
    (95
    )
    
    
    (11.2
    )Base management fee
    
    
    608
    
    
    
    739
    
    
    
    (131
    )
    
    
    (17.7
    )Incentive fee
    
    
    1,102
    
    
    
    1,072
    
    
    
    30
    
    
    
    2.8Administration fee
    
    
    175
    
    
    
    176
    
    
    
    (1
    )
    
    
    (0.6
    )Interest expense
    
    
    478
    
    
    
    1,136
    
    
    
    (658
    )
    
    
    (57.9
    )Amortization of deferred financing fees
    
    
    368
    
    
    
    449
    
    
    
    (81
    )
    
    
    (18.0
    )Professional fees
    
    
    201
    
    
    
    219
    
    
    
    (18
    )
    
    
    (8.2
    )Other expenses
    
    
    383
    
    
    
    703
    
    
    
    (320
    )
    
    
    (45.5
    )Expenses before credit from Adviser
    
    
    4,072
    
    
    
    5,346
    
    
    
    (1,274
    )
    
    
    (23.8
    )Credit to base management and incentive fees from Adviser
    
    
    (102
    )
    
    
    (6
    )
    
    
    (96
    )
    
    
    1,600.0Total expenses net of credit to base management and
incentive fees
    
    
    3,970
    
    
    
    5,340
    
    
    
    (1,370
    )
    
    
    (25.7
    )NET INVESTMENT INCOME
    
    
    4,428
    
    
    
    4,474
    
    
    
    (46
    )
    
    
    (1.0
    )REALIZED AND UNREALIZED (LOSS) GAIN ON:Net realized gain on investments
    
    
    5
    
    
    
    892
    
    
    
    (887
    )
    
    
    (99.4
    )Net unrealized (depreciation) appreciation on investments
    
    
    (13,069
    )
    
    
    2,483
    
    
    
    (15,552
    )
    
    NMNet unrealized appreciation on borrowings
    
    
    255
    
    
    
    131
    
    
    
    124
    
    
    
    94.7Net (loss) gain on investments and borrowings
    
    
    (12,809
    )
    
    
    3,506
    
    
    
    (16,315
    )
    
    NMNET (DECREASE) INCREASE IN NET ASSETS RESULTING FROM OPERATIONS
    
    $
    (8,381
    )
    
    $
    7,980
    
    
    $
    (16,361
    )
    
    NM
 
 NM = Not Meaningful
 Investment Income
   33




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##### Table of Contents



As of March 31, 2011
    
    
    Three Months Ended March 31, 2011Company
    
    Fair Value
    
    % of Portfolio
    
    
    Interest Income
    
    % of Total RevenuesReliable Biopharmaceutical Holding Inc.
    
    $
    25,699
    
    
    
    10.0
    %
    
    
    $
    755
    
    
    
    10.4
    %Westlake Hardware, Inc.
    
    
    19,570
    
    
    
    7.6
    
    
    
    
    638
    
    
    
    8.7Midwest Metal Distribution, Inc.
(formerly Clinton Holdings, LLC)
    
    
    16,179
    
    
    
    6.3
    
    
    
    
    548
    
    
    
    7.5Defiance Integrated Technologies, Inc.
    
    
    13,680
    
    
    
    5.3
    
    
    
    
    225
    
    
    
    3.1Sunshine Media Holdings
    
    
    13,161
    
    
    
    5.1
    
    
    
    
    704
    
    
    
    9.7Subtotalfive largest investments
    
    
    88,289
    
    
    
    34.3
    
    
    
    
    2,870
    
    
    
    39.4Other portfolio companies
    
    
    168,824
    
    
    
    65.7
    
    
    
    
    4,298
    
    
    
    58.9Other non-portfolio company revenue
    
    
    
    
    
    
    
    
    
    
    
    122
    
    
    
    1.7Total
    
    $
    257,113
    
    
    
    100.0
    %
    
    
    $
    7,290
    
    
    
    100.0
    %
 As of March 31, 2010
    
    
    Three Months Ended March 31, 2010Company
    
    Fair Value
    
    % of Portfolio
    
    
    Interest Income
    
    % of Total RevenuesReliable Biopharmaceutical Holding Inc.
    
    $
    26,792
    
    
    
    9.2
    %
    
    
    $
    738
    
    
    
    8.7
    %Sunshine Media Holdings
    
    
    26,580
    
    
    
    9.1
    
    
    
    
    693
    
    
    
    8.1Westlake Hardware, Inc.
    
    
    24,400
    
    
    
    8.4
    
    
    
    
    672
    
    
    
    7.9VantaCore
    
    
    13,590
    
    
    
    4.7
    
    
    
    
    408
    
    
    
    4.8Midwest Metal Distribution, Inc.
    
    
    12,855
    
    
    
    4.4
    
    
    
    
    514
    
    
    
    6.1Subtotalfive largest investments
    
    
    104,217
    
    
    
    35.8
    
    
    
    
    3,025
    
    
    
    35.6Other portfolio companies
    
    
    187,534
    
    
    
    64.2
    
    
    
    
    5,359
    
    
    
    63.1Other non-portfolio company revenue
    
    
    
    
    
    
    
    
    
    
    
    108
    
    
    
    1.3Total
    
    $
    291,751
    
    
    
    100.0
    %
    
    
    $
    8,492
    
    
    
    100.0
    %
 Operating Expenses
     34




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##### Table of Contents



Investment Advisory and
Management Agreement Condensed Consolidated Financial
Statements
 Three Months Ended March 31,2011
    
    
    2010Average total assets subject to base management fee(1)
    
    $
    273,000
    
    
    $
    318,200Multiplied by pro-rated annual base management fee of 2.0%
    
    
    0.5
    %
    
    
    0.5
    %Unadjusted base management fee
    
    $
    1,365
    
    
    $
    1,591Reduction for loan servicing fees(2)
    
    
    (757
    )
    
    
    (852
    )Base management fee(2)
    
    
    608
    
    
    
    739Fee reduction for the voluntary, irrevocable waiver of 2.0% fee on senior
syndicated loans to 0.5% per annum
    
    
    (81
    )
    
    
    (6
    )Net base management fee
    
    $
    527
    
    
    $
    733Incentive fee(2)
    
    $
    1,102
    
    
    $
    1,072Credit from voluntary, irrevocable waiver issued by Advisers board of
directors
    
    
    (21
    )
    
    
    Net incentive fee
    
    $
    1,081
    
    
    $
    1,072Fee reduction for the voluntary, irrevocable waiver of 2.0% fee on senior
syndicated loans to 0.5% per annum
    
    $
    (81
    )
    
    
    (6
    )Incentive fee credit
    
    
    (21
    )
    
    
    Credit to base management and incentive fees from Adviser (2)
    
    $
    (102
    )
    
    $
    (6
    )
 
 (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 applicable quarters within the respective periods and appropriately adjusted for any share issuances or repurchases during the periods.(2)
    
    Reflected as a line item on the Condensed Consolidated Statement of Operationslocated elsewhere in this report. Net Realized Gain on Investments
  Net Unrealized (Depreciation) Appreciation on Investments
  35




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##### Table of Contents



Three Months Ended March 31, 2011Net UnrealizedAppreciationPortfolio Company
    
    Investment Classification
    
    
    (Depreciation)Defiance Integrated Technologies, Inc.
    
    Control
    
    $
    1,003Midwest Metal Distribution, Inc.
    
    Non-Control / Non-Affiliate
    
    
    364Sunshine Media Holdings
    
    Control
    
    
    (9,790
    )Lindmark Acquisition, LLC
    
    Control
    
    
    (1,410
    )GFRC Holdings LLC
    
    Non-Control / Non-Affiliate
    
    
    (810
    )Heartland Communications Group
    
    Non-Control / Non-Affiliate
    
    
    (598
    )Legend Communications of Wyoming, LLC
    
    Non-Control / Non-Affiliate
    
    
    (434
    )International Junior Golf Training
Acquisition Company
    
    Non-Control / Non-Affiliate
    
    
    (408
    )LocalTel, LLC
    
    Control
    
    
    (361
    )Reliable Biopharmaceutical Holdings, Inc.
    
    Non-Control / Non-Affiliate
    
    
    (340
    )SCI Cable, Inc.
    
    Non-Control / Non-Affiliate
    
    
    (316
    )Other, net (<$250)
    
    
    
    
    
    
    31Total:
    
    $
    (13,069
    )
   Three Months Ended March 31, 2010Net UnrealizedAppreciationPortfolio Company
    
    Investment Classification
    
    
    (Depreciation)Visual Edge Technology, Inc.
    
    Non-Control / Non-Affiliate
    
    $
    1,662
    (1)Northern Contours, Inc.
    
    Non-Control / Non-Affiliate
    
    
    429CCS, LLC
    
    Non-Control / Non-Affiliate
    
    
    312
    (2)Puerto Rico Cable Acquisition Company, Inc.
    
    Non-Control / Non-Affiliate
    
    
    289Midwest Metal Distribution, Inc.
    
    Control
    
    
    (857
    )Sunshine Media Holdings
    
    Non-Control / Non-Affiliate
    
    
    (447
    )Finn Corporation
    
    Non-Control / Non-Affiliate
    
    
    (354
    )Other, net (<$250)
    
    
    
    
    
    
    1,449Total:
    
    $
    2,483
 
 (1)
    
    Reflects the reversal of $1.7 million in unrealized depreciation in connection with payoff of the line of credit and senior subordinated term loan of Visual Edge Technology, Inc.(2)
    
    Reflects the reversal of the unrealized depreciation in connection with the $0.3 million realized loss on the sale of CCS, LLC.   36




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##### Table of Contents



Net Unrealized Appreciation on Borrowings
  Net Decrease (Increase) in Net Assets Resulting from Operations
  37




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##### Table of Contents



Comparison of the Six Months Ended March 31, 2011 to the Six Months Ended March 31, 2010
 A comparison of our operating results for the six months ended March 31, 2011 and 2010 is below:
 For the Six Months Ended March 31,2011
    
    
    2010
    
    
    $ Change
    
    
    % ChangeINVESTMENT INCOMEInterest income
    
    $
    15,135
    
    
    $
    17,743
    
    
    $
    (2,608
    )
    
    
    (14.7
    )%Other income
    
    
    1,270
    
    
    
    1,875
    
    
    
    (605
    )
    
    
    (32.3
    )Total investment income
    
    
    16,405
    
    
    
    19,618
    
    
    
    (3,213
    )
    
    
    (16.4
    )EXPENSESLoan servicing fee
    
    
    1,599
    
    
    
    1,781
    
    
    
    (182
    )
    
    
    (10.2
    )Base management fee
    
    
    1,113
    
    
    
    1,459
    
    
    
    (346
    )
    
    
    (23.7
    )Incentive fee
    
    
    2,261
    
    
    
    1,447
    
    
    
    814
    
    
    
    56.3Administration fee
    
    
    361
    
    
    
    354
    
    
    
    7
    
    
    
    2.0Interest expense
    
    
    358
    
    
    
    2,671
    
    
    
    (2,313
    )
    
    
    (86.6
    )Amortization of deferred financing fees
    
    
    664
    
    
    
    943
    
    
    
    (279
    )
    
    
    (29.6
    )Professional fees
    
    
    534
    
    
    
    1,131
    
    
    
    (597
    )
    
    
    (52.8
    )Other expenses
    
    
    603
    
    
    
    965
    
    
    
    (362
    )
    
    
    (37.5
    )Expenses before credit from Adviser
    
    
    7,493
    
    
    
    10,751
    
    
    
    (3,258
    )
    
    
    (30.3
    )Credit to base management and incentive fees from Adviser
    
    
    (154
    )
    
    
    (35
    )
    
    
    (119
    )
    
    
    340.0Total expenses net of credit to base management and
incentive fees
    
    
    7,339
    
    
    
    10,716
    
    
    
    (3,377
    )
    
    
    (31.5
    )NET INVESTMENT INCOME
    
    
    9,066
    
    
    
    8,902
    
    
    
    164
    
    
    
    1.8REALIZED AND UNREALIZED (LOSS) GAIN ON:Net realized gain (loss) on investments
    
    
    5
    
    
    
    (28
    )
    
    
    33
    
    
    NMNet unrealized (depreciation) appreciation on investments
    
    
    (16,014
    )
    
    
    5,082
    
    
    
    (21,096
    )
    
    NMNet unrealized appreciation on borrowings
    
    
    693
    
    
    
    350
    
    
    
    343
    
    
    
    98.0Net (loss) gain on investments and borrowings
    
    
    (15,316
    )
    
    
    5,404
    
    
    
    (20,720
    )
    
    NMNET (DECREASE) INCREASE IN NET ASSETS RESULTING FROM OPERATIONS
    
    $
    (6,250
    )
    
    $
    14,306
    
    
    $
    (20,556
    )
    
    NM
 
 NM = Not Meaningful Investment Income
   38




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##### Table of Contents



As of March 31, 2011
    
    
    Six Months Ended March 31, 2011Company
    
    Fair Value
    
    % of Portfolio
    
    
    Interest Income
    
    % of Total RevenuesReliable Biopharmaceutical Holdings, Inc.
    
    $
    25,699
    
    
    
    10.0
    %
    
    
    $
    1,508
    
    
    
    10.0
    %Westlake Hardware, Inc.
    
    
    19,570
    
    
    
    7.6
    
    
    
    
    1,289
    
    
    
    8.5Midwest Metal Distribution, Inc.
    
    
    16,179
    
    
    
    6.3
    
    
    
    
    1,109
    
    
    
    7.3Defiance Acquisition Corp.
    
    
    13,680
    
    
    
    5.3
    
    
    
    
    457
    
    
    
    3.0Sunshine Media Holdings
    
    
    13,161
    
    
    
    5.1
    
    
    
    
    1,568
    
    
    
    10.4Subtotalfive largest investments
    
    
    88,289
    
    
    
    34.3
    
    
    
    
    5,931
    
    
    
    39.2Other portfolio companies
    
    
    168,824
    
    
    
    65.7
    
    
    
    
    8,960
    
    
    
    59.2Other non-portfolio company revenue
    
    
    
    
    
    
    
    
    
    
    
    244
    
    
    
    1.6Total
    
    $
    257,113
    
    
    
    100.0
    %
    
    
    $
    15,135
    
    
    
    100.0
    %
 As of March 31, 2010
    
    
    Six Months Ended March 31, 2010Company
    
    Fair Value
    
    % of Portfolio
    
    
    Interest Income
    
    % of Total RevenuesReliable Biopharmaceutical Holdings, Inc.
    
    $
    26,792
    
    
    
    9.2
    %
    
    
    $
    1,497
    
    
    
    8.5
    %Sunshine Media Holdings
    
    
    26,580
    
    
    
    9.1
    
    
    
    
    1,539
    
    
    
    8.7Westlake Hardware, Inc.
    
    
    24,400
    
    
    
    8.4
    
    
    
    
    1,596
    
    
    
    9.0VantaCore
    
    
    13,590
    
    
    
    4.7
    
    
    
    
    827
    
    
    
    4.7Midwest Metal Distribution, Inc.
    
    
    12,855
    
    
    
    4.4
    
    
    
    
    1,037
    
    
    
    5.8Subtotalfive largest investments
    
    
    104,217
    
    
    
    35.8
    
    
    
    
    6,496
    
    
    
    36.7Other portfolio companies
    
    
    187,534
    
    
    
    64.2
    
    
    
    
    11,026
    
    
    
    62.1Other non-portfolio company revenue
    
    
    
    
    
    
    
    
    
    
    
    221
    
    
    
    1.2Total
    
    $
    291,751
    
    
    
    100.0
    %
    
    
    $
    17,743
    
    
    
    100.0
    %
 Operating Expenses
    39




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##### Table of Contents



Investment Advisory and
Management Agreement Condensed Consolidated Financial
Statements
 Six Months Ended March 31,2011
    
    
    2010Average total assets subject to base management fee(1)
    
    $
    271,200
    
    
    $
    324,000Multiplied by pro-rated annual base management fee of 2.0%
    
    
    1.0
    %
    
    
    1.0
    %Unadjusted base management fee
    
    $
    2,712
    
    
    $
    3,240Reduction for loan servicing fees(2)
    
    
    (1,599
    )
    
    
    (1,781
    )Base management fee(2)
    
    
    1,113
    
    
    
    1,459Credit for fees received by Adviser from the portfolio companies
    
    
    
    
    
    
    Fee reduction for the voluntary, irrevocable waiver of 2.0% fee on senior
syndicated loans to 0.5% per annum
    
    
    (133
    )
    
    
    (13
    )Net base management fee
    
    $
    980
    
    
    $
    1,446Incentive fee(2)
    
    $
    2,261
    
    
    $
    1,447Credit from voluntary, irrevocable waiver issued by Advisers board of
directors
    
    
    (21
    )
    
    
    (22
    )Net incentive fee
    
    $
    2,240
    
    
    $
    1,425Fee reduction for the voluntary, irrevocable waiver of 2.0% fee on senior
syndicated loans to 0.5% per annum
    
    $
    (133
    )
    
    $
    (13
    )Incentive fee credit
    
    
    (21
    )
    
    
    (22
    )Credit to base management and incentive fees from Adviser (2)
    
    $
    (154
    )
    
    $
    (35
    )
 
 (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 applicable quarters within the
respective periods and appropriately adjusted for any share issuances or
repurchases during the periods.(2)
    
    Reflected as a line item on the Condensed Consolidated
Statement of Operationslocated elsewhere in this report. Net Realized Gain (Loss) on Investments
  Net Unrealized (Depreciation) Appreciation on Investments
  40




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##### Table of Contents



Six Months Ended March 31, 2011Net UnrealizedAppreciationPortfolio Company
    
    Investment Classification
    
    (Depreciation)Defiance Integrated Technologies, Inc.
    
    Control
    
    $
    3,972Puerto Rico Cable Acquisition Company, Inc.
    
    Non-Control / Non-Affiliate
    
    
    732Midwest Metal Distribution, Inc.
    
    Control
    
    
    636WP Evenflo Group Holdings, Inc.
    
    Non-Control / Non-Affiliate
    
    
    333Sunshine Media Holdings
    
    Non-Control / Non-Affiliate
    
    
    (15,240
    )Lindmark Acquisition, LLC
    
    Control
    
    
    (2,461
    )GFRC Holdings LLC
    
    Non-Control / Non-Affiliate
    
    
    (1,216
    )Heartland Communications Group
    
    Non-Control / Non-Affiliate
    
    
    (654
    )Legend Communications of Wyoming LLC
    
    Non-Control / Non-Affiliate
    
    
    (582
    )SCI Cable, Inc.
    
    Non-Control / Non-Affiliate
    
    
    (533
    )International Junior Golf Training
Acquisition Company
    
    Non-Control / Non-Affiliate
    
    
    (479
    )LocalTel, LLC
    
    Control
    
    
    (374
    )Access Television Network, Inc.
    
    Non-Control / Non-Affiliate
    
    
    (305
    )Other, net (<$250)
    
    
    
    
    157Total:
    
    $
    (16,014
    )
   Six Months Ended March 31, 2010Net UnrealizedAppreciationPortfolio Company
    
    Investment Classification
    
    (Depreciation)Visual Edge Technology, Inc.
    
    Non-Control / Non-Affiliate
    
    $
    1,716
    (1)BAS Broadcasting
    
    Non-Control / Non-Affiliate
    
    
    1,266Westlake Hardware, Inc.
    
    Non-Control / Non-Affiliate
    
    
    731Puerto Rico Cable Acquisition Company, Inc.
    
    Non-Control / Non-Affiliate
    
    
    579Northern Contours, Inc.
    
    Non-Control / Non-Affiliate
    
    
    542Kinetek Acquisition Corp.
    
    Non-Control / Non-Affiliate
    
    
    513CCS, LLC
    
    Non-Control / Non-Affiliate
    
    
    505
    (1)Wesco Holdings, Inc.
    
    Non-Control / Non-Affiliate
    
    
    408Pinnacle Treatment Centers, Inc.
    
    Non-Control / Non-Affiliate
    
    
    399WP Evenflo Group Holdings, Inc.
    
    Non-Control / Non-Affiliate
    
    
    353Allison Publications, LLC
    
    Non-Control / Non-Affiliate
    
    
    353Gold Toe Investment Corp
    
    Non-Control / Non-Affiliate
    
    
    280Defiance Integrated Technologies, Inc.
    
    Control
    
    
    (816
    )Midwest Metal Distribution, Inc. (formerly
Clinton Holdings, LLC)
    
    Control
    
    
    (654
    )KMBQ Corporation
    
    Non-Control / Non-Affiliate
    
    
    (598
    )Finn Corporation
    
    Non-Control / Non-Affiliate
    
    
    (573
    )Heartland Communications Group
    
    Non-Control / Non-Affiliate
    
    
    (447
    )Legend Communications of Wyoming LLC
    
    Non-Control / Non-Affiliate
    
    
    (395
    )LocalTel, LLC
    
    Control
    
    
    (357
    )SCI Cable, Inc.
    
    Non-Control / Non-Affiliate
    
    
    (346
    )Other, net (<$250)
    
    
    
    
    1,623Total:
    
    $
    5,082
 
 (1)
    
    Reflects the reversal of $1.7 million in unrealized depreciation in
connection with payoff of the line of credit and senior subordinated term loan of
Visual Edge Technology, Inc.(2)
    
    Reflects the reversal of the unrealized depreciation in connection with
the $0.3 million realized loss on the sale of CCS, LLC.  41




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##### Table of Contents



Net Unrealized Appreciation on Borrowings
  Net (Decrease) Increase in Net Assets Resulting from Operations
  
 LIQUIDITY AND CAPITAL RESOURCES (dollar amounts in thousands, unless otherwise indicated)
 Operating Activities
   Six Months Ended March 31,2011
    
    
    2010Beginning investment portfolio at fair value
    
    $
    257,109
    
    
    $
    320,969New investments
    
    
    44,203
    
    
    
    180Disbursements to existing portfolio companies
    
    
    8,220
    
    
    
    6,700Principal repayments
    
    
    (35,227
    )
    
    
    (38,471
    )Proceeds from sales
    
    
    (777
    )
    
    
    (3,119
    )Increase in investment balance due to PIK
    
    
    8
    
    
    
    60Increase in investment balance due to transferred interest
    
    
    204
    
    
    
    441Unrealized (depreciation) appreciation
    
    
    (16,014
    )
    
    
    1,645Reversal of prior period depreciation on realization
    
    
    
    
    
    
    3,437Net realized gain (loss)
    
    
    163
    
    
    
    (28
    )Net change in premiums, discounts and amortization
    
    
    (776
    )
    
    
    (63
    )Ending investment portfolio at fair value
    
    $
    257,113
    
    
    $
    291,751
 42




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##### Table of Contents



AmountFor the remaining six months ending
September 30:
    
    2011
    
    $
    18,295For the fiscal year ending September 30:
    
    2012
    
    
    76,6462013
    
    
    122,9812014
    
    
    28,8632015
    
    
    32,0882016 and thereafter
    
    
    30,926Total contractual repayments
    
    $
    309,799Investments in equity securities
    
    
    5,984Adjustments to cost basis on debt securities
    
    
    (1,548
    )Total cost basis of investments held at March 31, 2011:
    
    $
    314,235
 Financing Activities
  Distributions
  Section 19(a) Disclosure
 Section 19(a) Disclosure
  Issuance of Equity
  43




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.
    Revolving Credit Facility
   44




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##### Table of Contents



Contractual Obligations and Off-Balance Sheet Arrangements
   Condensed Consolidated Statements of Assets and Liabilities
 As of March 31,
    
    As of September 30,2011
    
    2010Unused line of credit commitments
    
    $
    7,361
    
    
    $
    9,304Uncalled capital commitment
    
    
    1,200
    
    
    
    1,600Guarantees
    
    
    
    
    
    
    250
  Payments Due by PeriodLess thanContractual Obligations(1)
    
    1 Year
    
    
    1-3 Years
    
    
    4-5 Years
    
    
    After 5 Years
    
    
    TotalCredit Facility(2)
    
    $
    33,200
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    33,200
 
 (1)
    
    Excludes the unused commitments to extend credit or capital to our
portfolio companies for an aggregate amount of $8.6 million, as discussed above.(2)
    
    Principal balance of borrowings under the Credit Facility, based on the
contractual maturity due to the revolving nature of the facility. Critical Accounting Policies
  Investment Valuation
 Condensed
Consolidated Financial Statements
 General Valuation Policy:
  45




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##### Table of Contents




    
    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
    
    
    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:
  46




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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 in which 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 a 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 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 opinions of the value of our debt securities that are issued by portfolio companies in
which we do not own 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
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equity or equity-like securities (e.g. preferred equity, common equity, or other equity-like securities) that are purchased
together as part of a package, where we have control or could gain control through an option or
warrant security, both the debt and equity securities of the portfolio investment would exit in
the mergers and acquisitions market as the principal market, generally through a sale or
recapitalization of the portfolio company. 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 gather and analyze
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 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 that 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.
 (4)
    
    Portfolio investments comprised of non-publicly traded non-control equity securities of other
funds:We value any uninvested capital of the non-control fund at par value and value any
invested capital at the value provided by the non-control fund.
  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.
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Credit Information:
 Loan Grading and Risk Rating:
  Companys
    
    First
    
    SecondSystem
    
    NRSRO
    
    NRSRO
    
    Gladstone Capitals Description(1)>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%
 
 (1)
    
    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.  49




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##### Table of Contents



Rating
    
    March 31, 2011
    
    September 30, 2010Highest
    
    
    10.0
    
    
    
    10.0Average
    
    
    5.9
    
    
    
    6.1Weighted Average
    
    
    5.7
    
    
    
    5.9Lowest
    
    
    1.0
    
    
    
    1.0
  Rating
    
    March 31, 2011
    
    September 30, 2010Highest
    
    B+/B2
    
    B+/B2Average
    
    B/B2
    
    B+/B2Weighted Average
    
    B/B1
    
    B+/B2Lowest
    
    Caa1/B-
    
    B2
  Tax Status
 Federal Income Taxes
    Investment Income Recognition
  50




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Condensed
Consolidated Statements of Operations
 
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
  85.4%

    
    
    variable rates with a floor5.2%

    
    
    variable rates without a floor or ceiling9.4%

    
    
    fixed rate100.0%

    
    
    total
  
 ITEM 4. CONTROLS AND PROCEDURES.
     51




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PART IIOTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS.
  
 ITEM 1A. RISK FACTORS.
  
 ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
  
 ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
  
 ITEM 4. (REMOVED AND RESERVED).
 
 ITEM 5. OTHER INFORMATION.
  
 ITEM 6. EXHIBITS
  52




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SIGNATURE
  GLADSTONE CAPITAL CORPORATIONBy:
    /s/ David WatsonDavid WatsonChief Financial Officer  53




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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, 2007.11
    
    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.
  54